Altheimer & Gray
and Danka Business Systems PLC
December 13, 2002
Mr. Jonathan Katz
U.S. Securities and Exchange Commission
450 Fifth Street NW
Washington, DC 20549-0609
Re: File No: S7-43-02
Comments on Proposed Rule - Conditions for Use of Non-GAAP Financial Measures
Dear Mr. Katz:
This submission contains comments regarding the application of the proposed rules regarding the use of non-GAAP financial measures to foreign private issuers and other non-governmental foreign issuers and the application of proposed Item 1.04 of Form 8-K to foreign issuers.
The authors of this submission are practising securities lawyers with the firm of Altheimer & Gray. One of the authors, Jonathan Baird, is also a solicitor of the Supreme Court of England and Wales. This submission is also supported by Keith J. Nelsen, senior vice president and general counsel of Danka Business Systems PLC, and Richard Russell, Director of External Reporting of Danka Business Systems PLC. Danka Business Systems PLC is an English public listed company, with listings on the Nasdaq SmallCap Market and the London Stock Exchange. It is a foreign issuer, but not a "foreign private issuer" for the purposes of the U.S. securities laws.
1. Treatment of non-governmental foreign issuers under the proposed rules
We note that the Commission has included various provisions under the proposed rules regarding their application to foreign private issuers. We submit that these provisions should be modified so that they extend to all non-governmental foreign issuers.
There are a number of foreign issuers with Securities Exchange Act registrations or that are required to file reports under Section 15(d) of the Securities Exchange Act that are not "foreign private issuers" because they do not satisfy the definition contained in Rule 405 under the Securities Act and Rule 3b-4 under the Securities Exchange Act. Therefore, these foreign issuers are generally subject to the same reporting requirements as domestic issuers, including that they are required to include financial statements prepared in accordance with U.S. GAAP in their U.S. filings. In addition, many such foreign issuers are required to comply with home country financial reporting requirements.
For instance, a foreign issuer incorporated in England is required by English law to prepare audited annual financial statements, which must comply with UK general accepted accounting principles. The UK GAAP financial statements must be filed and made available for public inspection with the English registrar of companies. An English company with a listing on the London Stock Exchange is also required to publish half-yearly or quarterly financial results. An English company would also be required to include its UK GAAP financial statements in any UK prospectus that it publishes. Similar requirements apply to other European issuers.
We submit that each of proposed Regulation G and proposed Item 1.04 of Form 8-K should be modified to recognize that foreign issuers that are not foreign private issuers are required by home country laws publicly to announce and/or file financial information prepared in accordance with the generally accepted accounting principles of their home country and/or international accounting standards.
(a) Proposed Regulation G
As proposed, Regulation G could be read to indicate that all or part of a foreign issuer's non-U.S. financial statements may be regarded as "non-GAAP financial measures". We believe that it should be made clear that information published outside the U.S. by a foreign issuer containing financial information prepared in accordance with generally accepted accounting principles other than U.S. GAAP should not be deemed "non-GAAP" for the purposes of the proposed regulation. Otherwise, Regulation G could require that the non-U.S. financial statements would have to be accompanied by the additional disclosures specified by Regulation G. There is no apparent justification for such a requirement in Section 401(b) of the Sarbanes-Oxley Act; information that is presented in accordance with generally accepted accounting principles other than U.S. GAAP is hardly "pro forma financial information" as that phrase is used in Section 401(b).
Further, imposing an obligation of this nature on foreign issuers appears without merit, given that:
- foreign issuers are already generally required to prepare financial statements in accordance with U.S. GAAP for inclusion in U.S. filings, including periodic reports and registration statements;
- the foreign issuer's home country GAAP financial statements are generally not prepared for the specific purpose of circulation in the U.S. and are unlikely to circulate widely in the U.S.; and
- proposed Regulation G would apply in any event to any publicly disclosed non-GAAP financial measures disclosed by the issuer in the U.S., whether such measure was a non-U.S. GAAP financial measure or a non-home country GAAP financial measure.
In addition, it is unclear to us why the relaxation in respect of non-U.S. disclosures afforded by paragraph 100(c) of proposed Regulation G should apply to foreign private issuers with a non-U.S. listing, but not to foreign issuers that do not meet the definition of "foreign private issuers" or foreign private issuers without a non-U.S. listing. We submit that this exception should be broadened to include all foreign issuers.
Therefore, we propose that:
(i) The definition of "GAAP" in proposed Regulation G be amended so that the expansion of the definition for foreign private issuers to include generally accepted accounting principles under which their "primary" financial statements are prepared applies to all foreign issuers. In addition, the reference to "primary" financial statements should also be broadened to include a reference to "home country financial statements or financial statements prepared in accordance with international accounting standards" or similar. The "primary" financial statements of a non-U.S. issuer that is not a foreign private issuer may not be its home country financial statements.
(ii) Paragraph 100(c) of proposed Regulation G be amended to substitute references to "foreign issuers" for the references to "foreign private issuers".
(iii) The requirement set forth in paragraph 100(c)(1) that the foreign private issuer (or, as amended as contemplated in (ii) above, the foreign issuer) have a non-U.S. listing be deleted. It is unclear to us why foreign private issuers or foreign issuers should benefit from the relaxation to the requirements of proposed Regulation G for non-U.S. disclosures only if they have a non-US listing. This distinction would arbitrarily impose more onerous requirements on certain foreign issuers than on others.
(b) Item 1.04 of Form 8-K
Foreign issuers that are not "foreign private issuers" are required to file current reports on Form 8-K.
As drafted, proposed Item 1.04 of Form 8-K would require that any public announcement by such a foreign issuer of its results of operations or financial condition for completed quarterly or annual periods must be filed on Form 8-K pursuant to Item 1.04. Such filings would be required to comply with proposed amended Item 10 of Regulation 8-K.
Therefore, in addition to filing public announcements of results of operations or financial condition prepared in accordance with U.S. GAAP, a foreign issuer would be required to file public announcements of results of operations or financial condition prepared in accordance with home country or other non-U.S. GAAP, notwithstanding that such announcements may not be made publicly in or into the U.S. This may include annual reports and the like, as well as earnings releases, published outside the U.S.
The obligation to file home country or other non-U.S. GAAP financial information may be particularly burdensome if proposed amended Item 10 is read to require a reconciliation of home country GAAP information to U.S. GAAP on the basis that the non-U.S. GAAP financial information may constitute "non-GAAP financial measures".
In fact, the combined effect of the filing requirements of proposed Item 1.04 and the content requirements of proposed amended Item 10 of Regulation S-K may have the effect of limiting unnecessarily (and, we would submit, inadvisedly) the content of home country, or other non-U.S., announcements by a foreign issuer, and may conceivably conflict with the foreign issuer's home country obligations.
In addition, the filing by the foreign issuer of two sets of publicly announced financial information, one prepared in accordance with U.S. GAAP and the other prepared in accordance with another set of accounting principles would not seem to provide any additional benefit to U.S. investors and, indeed, would likely generate confusion.
Further, we note that there is currently no obligation imposed on a foreign issuer which provides financial information prepared in accordance with U.S. GAAP in the United States also to provide a reconciliation of its non-U.S. GAAP financial statements to U.S. GAAP and, to the extent that proposed Item 1.04 in conjunction with proposed amended Item 10 of Regulation S-K would have this effect, it would not seem a necessary or appropriate use of resources.
Therefore, we propose that an exception along the lines of the following is added to the proposed Item 1.04 to provide that public announcements of results of operations or financial condition for periods that are made by foreign issuers outside the U.S. need not be filed on Form 8-K:
"(d) A registrant that is a foreign issuer shall not be required to file under this Item any announcement or release disclosing material non-public information regarding the registrant's results of operations or financial condition for any completed fiscal period which is made by or behalf of the registrant only outside the United States.
4. The provisions of paragraph (d) of this Item shall apply notwithstanding the existence of one or both of the following circumstances:
(i) Foreign or U.S. journalists or other third parties have access to the information, so long as the information is disclosed or released by or on behalf of the registrant only outside the United States; and/or
(ii) Following its release or disclosure, the information appears on one or more web sites maintained by the registrant, so long as the web sites, taken together, are not available exclusively to, or targeted at, persons located in the United States."
The reference to "any completed fiscal period", rather than "a completed quarterly or annual fiscal period" is deliberate, because the foreign issuer may be required by home country rules to make half-yearly, rather than quarterly, disclosures.
(c) Proposed Amended Item 10 of Regulation S-K
Provided that they are not required to file non-U.S. public disclosures pursuant to proposed Item 1.04 of Regulation 8-K, proposed amended Item 10 of Regulation S-K ought generally not present difficulties for a foreign issuer which is required to include U.S. GAAP financial information in its filings with the Commission that are not also shared by domestic issuers.
However, in order to recognize that a foreign issuer's filings with the Commission may in some circumstances include certain home country GAAP financial information (for instance, an earnings release that contains both U.S. GAAP and home country GAAP financial information filed under proposed Item 1.04 of Form 8-K), we propose that:
(i) The definition of "GAAP" in paragraph (e)(3) be amended as described above in respect of proposed Regulation G.
(ii) The proposed instruction to paragraph (e) be expanded to apply to all foreign issuers, not only foreign private issuers. Further, we submit that the exception contained in the proposed instruction for "non-GAAP financial measures" that are "expressly permitted" by non-U.S. GAAP is of little utility, given that it is unlikely that "non-GAAP financial measures" will generally be permitted under non-U.S. GAAP used in the issuer's financial statements. Instead, we propose that the relevant test be changed from "expressly permitted" to "not prohibited by law" or similar.
(iii) The reference to "primary" financial statements in the proposed Instruction be amended to correspond to our proposal with respect to proposed Regulation G.
(iv) The reference to "annual report" be changed to "any public announcement required by law or regulation". At the very least, the reference should be expanded to include "annual financial statements" and/or "annual accounts" or changed to a reference to "annual report or equivalent document", as the term "annual report" is very restrictive and may not have exactly the same meaning in foreign jurisdictions as in the United States.
2. Treatment of foreign private issuers under the proposed rules
(a) Proposed Regulation G
We believe that the requirement set forth in paragraph 100(c)(1) of proposed Regulation G that the foreign private issuer have a non-U.S. listing should be deleted. It is unclear to us why foreign private issuers should benefit from the relaxation to the requirements of proposed Regulation G only if they have a non-US listing. This distinction may arbitrarily impose more onerous requirements on certain foreign private issuers than on others.
(b) Proposed Amendments to Item 10 of Regulation S-K
We suggest that the reference to "annual report" be changed to "any public announcement required by law or regulation." At the very least, the reference should be expanded to include "annual financial statements" and/or "annual accounts" or changed to a reference to "annual report or equivalent document", as the term "annual report" is very restrictive and may not have exactly the same meaning in foreign jurisdictions as in the United States.
We thank the Commission for the opportunity to comment on the proposal. Please contact any of the undersigned with any questions regarding this submission.
Jonathan Baird and John E. Lowe
Altheimer & Gray
10 South Wacker Drive
Chicago, Illinois, 60606
Tel: (312) 715-4000
Email: firstname.lastname@example.org and email@example.com
Keith J. Nelsen and Richard Russell
Danka Business Systems PLC
11201 Danka Circle North
St. Petersburg, FL 33716
Tel: (727) 576-6003