SEC HOT TOPICS INSTITUTE

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SEC HOT TOPICS INSTITUTE

• SEC Reporting/Disclosure Issues Panel

May 15, 2008
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SEC Trends Affecting 33 34 Act Filings

• Recent rulemaking and guidance from the SEC
• Revisions to eligibility requirements for primary
  Form S-3 offerings
• Revisions to Rules 144 and 145
• Smaller reporting company regulatory relief
• Revised Form 8-K guidance
• Exclusion of shareholder director nominations
  from issuer proxy statements
• Exemption of electronic shareholder forums from
  proxy rules

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SEC Trends Affecting 33 34 Act Filings

• Outlook for further rulemaking per Director John
  White, Division of Corporation Finance
• Interactive data (XBRL)
• International financial reporting standards
  (IFRS) and other rulemaking related to
  international issues
• Updated guidance on use of corporate websites for
  disclosure of information
• Revisions to the limited offering exemptions in
  Regulation D
• Recommendations of the Advisory Committee on
  Improvements to Financial Reporting (CIFiR)
  regarding materiality and the correction of
  accounting errors

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Assessing Materiality in Current Environment

• Current materiality standards
• U.S. Supreme Court TSC Industries v. Northway,
  Inc.
• There must be a substantial likelihood that
  the disclosure of the omitted fact would have
  been viewed by the reasonable investor as having
  significantly altered the total mix of
  information made available.
• SEC Staff Accounting Bulletins
• SAB 99
• the Staffs views on using quantitative
  benchmarks to assess materiality in preparing
  financial statements
• SAB 108
• The Staffs views regarding the process of
  quantifying financial statement misstatements

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Assessing Materiality in Current Environment

• Recent scrutiny
• Former Acting Chief Accountant Scott Taub
• When the error is large, the presumption is that
  it is material. Confirming that the SAB 99
  qualitative indicators of materiality dont exist
  merely confirms that there isnt additional
  evidence that the error is material other than
  its size. Its important to recognize that
  factors that might suggest that a large error is
  immaterial are likely to be specific to the
  situation in question.
• Associate Chief Accountant Todd Hardiman,
  Division of Corporation Finance
• The analysis that needs to be done on the
  qualitative side is to identify the factors that
  indicate that the error is not important to
  investors despite its significant size. So ask
  yourself Why doesnt the size of the error
  matter to the reasonable investor? What is it
  about your individual facts and circumstances
  that supports your conclusion? Or in accounting
  parlance, what qualitative factors exist that
  make the size of the error unimportant to the
  reasonable investor? A high hurdle to climb?
  Perhaps, but with the right facts and
  circumstances, a surmountable one.

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Assessing Materiality in Current Environment

• Recent scrutiny
• Commissioner Paul Atkins
• When the SEC takes up this issue, we must
  approach it by returning to first principles
  that materiality is determined based upon the
  objective reasonable investor standard. The
  Commission itself after proceeding with public
  notice and comment should clear up this issue
  with the full input of the investor, legal,
  accounting, academic, and business communities.

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Assessing Materiality in Current Environment

• Selected CIFiR recommendations for additional
  guidance
• Evaluation of errors should be on a sliding
  scale (e.g., quantitatively large errors can be
  immaterial due to qualitative factors)
• How an error is corrected should be based on
  needs of current investors
• Only restate prior-period financial statements
  for errors material to those periods
• May not be necessary to amend previous reports to
  restate financial statements if the next report
  is being filed soon and will contain all relevant
  information
• Interim-period restatements do not need to result
  in annual-period restatements
• Application of materiality of errors identified
  in prior interim periods and correction of such
  errors

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Assessing Materiality in Current Environment

• How should we evaluate the materiality of errors?
• Today under SAB 99 and SAB 108?
• Under a sliding scale?

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Trends in Comment Letters

• MDA - Overview
• We note much of your disclosure in this section
  is very similar to the summary on page X and
  the business section on page Y. Please revise
  to avoid repeating disclosure. The overview in
  this section should be a balanced,
  executive-level discussion that identifies the
  most important themes or other significant matter
  with which management is concerned primarily in
  evaluating the companys financial condition and
  operating results. Discuss material business
  opportunities, challenges and risks, such as
  those presented by known material trends and
  uncertainties, on which the companys executives
  are most focused, and the actions they are taking
  in response to them. For further guidance on the
  content and purpose of the Overview, see
  Commission Guidance Regarding Managements
  Discussion and Analysis of Financial Condition
  and Results of Operations Interpretive Release
  No. 33-8350 (December 19, 2003) on our website.

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Trends in Comment Letters

• MDA contributing factors
• Throughout this section, you refer to two or
  more factors that contributed to the reported
  financial result or material changes over the
  reported periods. Revise to quantify the amount
  of the financial result or changes contributed by
  each of the factors or events that you identify
  as they relate to revenues, cost of revenues and
  gross profit, sales and marketing, research and
  development and general and administrative.
  Rather than simply using the term primarily in
  describing changes, quantify the amount of the
  financial result or change that is attributable
  to the primary source you identify. See Section
  III.D of SEC Release 33-6835. In addition to
  quantifying the dollar effect of the various
  contributing factors, ensure that you describe
  the significant developments in the marketplace
  or at your company that led to the changes.

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Trends in Comment Letters

• MDA research and development projects
• Please disclose the following information for
  each of your major research and development
  projects
• a. The costs incurred during each period
  presented and to date on the project
• b. The period in which material net cash inflows
  from significant projects are expected to
  commence.
• Regarding a., if you do not maintain any
  research and development costs by project,
  disclose that fact and explain why management
  does not maintain and evaluate research and
  development costs by project. Provide other
  quantitative or qualitative disclosure that
  indicates the amount of the company's resources
  being used on the project.

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Trends in Comment Letters

• MDA liquidity and capital resources
• On page X you disclose that you expect to
  spend substantial amounts of capital to continue
  your growth and provide some disclosure about how
  you will spend the net proceeds of this offering.
  In all appropriate sections, please revise to
  further discuss these plans, and indicate the
  impact that it will have on your liquidity and
  capital resources. Also, revise to indicate
  whether the company currently anticipates having
  to raise additional capital to effectuate its
  growth strategy.
• Please revise to disclose when you expect you
  will need additional funding and how much you
  expect you will need.

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Trends in Comment Letters

• Segment reporting
• We note your disclosure of revenues by
  geographic region. It is not clear from this
  disclosure whether the Company has determined
  that it operates in more than one segment. Tell
  us the number of operating segments, the nature
  of discrete financial information the Chief
  Operating Decision maker reviews on a periodic
  basis (operating results by product, services,
  geographic region etc.) and how you considered
  paragraphs 10 through 17 of SFAS 131 in
  determining the number of operating segments.
• You describe several product lines including
  W, X, Y and Z. Please provide product
  line disclosure under paragraph 37 to SFAS 131.

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Trends in Comment Letters

• Stock-based compensation
• Progressively bridge managements fair market
  value determinations to the current estimated IPO
  price range. Reconcile and explain the
  differences between the mid-point of your
  estimated offering price range and the fair
  values included in your analysis. Provide us with
  a chronology of events leading to the filing of
  your IPO, including when discussions began with
  potential underwriters. We are deferring final
  evaluation of stock-based compensation until your
  estimated offering price is specified and may
  have further comment in this regard.

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Trends in Comment Letters

• Stock-based compensation
• We note that on page X you refer to using the
  valuation of an independent third party when
  determining fair value of your common stock.
  While management may elect to take full
  responsibility for valuing the equity
  instruments, if you choose to continue to refer
  to the expert in any capacity, please revise the
  filing to name the independent valuation expert
  and include its consent as an exhibit.
• You state that our board directors from time
  to time has also relied upon valuations. We
  believe that this disclosure constitutes
  reference to reliance upon an independent
  valuation consultant. Please either name this
  independent valuation consultant here and in your
  Experts section and provide their consent in the
  registration statement or remove this reference.

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References and Resources

• Materials referenced in presentation
• Director Whites speech at the Securities
  Regulation Institute in January 2008 can be found
  at http//www.sec.gov/news/speech/2008/spch012308j
  ww.htm
• TSC Industries v. Northway, Inc., 426 U.S. 438,
  449 (1976)
• SAB 99 can be found at http//www.sec.gov/interps/
  account/sab99.htm
• SAB 108 can be found at http//www.sec.gov/interps
  /account/sab108.htm
• Former Acting Chief Accountant Taub in an article
  entitled Avoiding Unnecessary Restatements in
  Compliance Week (May 8, 2007)
• Associate Chief Accountant Hardimans remarks
  before the 2007 AICPA National Conference on
  Current SEC and PCAOB Developments in December
  2007 can be found at http//www.sec.gov/news/speec
  h/2007/spch121107teh.htm
• Commissioner Atkins remarks to the SEC Speaks in
  2008 Program of the Practicing Law Institute in
  February 2008 can be found at http//www.sec.gov/n
  ews/speech/2008/spch020808psa.htm
• The CIFiR Progress Report (February 2008) can be
  found at http//www.sec.gov/rules/other/2008/33-88
  96.pdf
• Commission Guidance Regarding Managements
  Discussion and Analysis of Financial Condition
  and Results of Operations Interpretive Release
  No. 33-8350 (December 19, 2003) can be found at
  http//www.sec.gov./rules/interp/33-8350.htm
• SEC Interpretation Management's Discussion and
  Analysis of Financial Condition and Results of
  Operations Certain Investment Company
  Disclosures Release No. 33-6835 (May 18, 1989)
  can be found at http//www.sec.gov./rules/interp/3
  3-6835.htm

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References and Resources

• Division of Corporation Finance Current Issues
  and Rulemaking Projects Quarterly Update,
  Section VIIIIndustry Specific IssuesAccounting
  and Disclosure by Companies Engaged in Research
  and Development Activities (March 31, 2001) can
  be found at http//www.sec.gov/divisions/corpfin/c
  fcrq032001.htmsecviii
• SFAS 131, Disclosures about Segments of an
  Enterprise and Related Information, can be found
  at http//www.fasb.org/pdf/fas131.pdf
• Additional resource materials included in binder
• Ernst Young Hot Topic Allowing Smaller Public
  Companies to use Form S-3 and Shelf Registration
• Cooley Alert! SEC Approves Major Changes to Rule
  144 and Rule 145
• Ernst Young Hot Topic Smaller Reporting
  Company Relief Simplification
• Exchange Act Form 8-K interpretations updated
  April 10, 2008
• Ernst Young Hot Topic Summary of SEC Proposal
  Revised Regulation D Offering Exemptions
• Ernst Young Hot Topic Compendium of
  Significant Accounting and Reporting Issues
  discussed at 2007 AICPA National Conference on
  Current SEC and PCAOB Developments
• The Changing Nature and Consequences of Public
  Company Financial Restatements 1997-2006, a study
  for the Department of the Treasury
• Ernst Young SEC Comments and Trends
• Ernst Young SEC Comments and Trends for
  Technology Companies