BDO Seidman, LLP
Accountants and Consultants
330 Madison Avenue
New York, NY 10017
December 10, 2002
Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-0609
Re: Release No. 33-8145
Conditions for Use of Non-GAAP Financial Measures
File No. S7-43-02
Dear Mr. Katz:
This letter is the response of BDO Seidman, LLP to your request for comments regarding the above-captioned proposal.
Given the number, breadth, and complexity of the Commission's recent proposals, we are concerned that issuers, auditors, and others have not had sufficient time to fully consider and comment on them. We recognize that the short comment periods for this and other Commission proposals are necessary to meet Congressionally mandated final rule adoption dates. Unfortunately, we feel that this creates a significant risk that the rules the Commission adopts could have unintended or inappropriate consequences. We urge the Commission and its staff to be sensitive to this concern in considering the possible need to modify these rules in the future if such consequences become evident.
We support the Commission's efforts to ensure that non-GAAP financial information is accompanied by sufficient disclosures to make it clear and prevent it from being misleading. Our comments on the Commission's proposal focus on two issues:
- Ensuring that the required change in some registrants' practices for including non-GAAP financial information in earnings releases is clearly communicated.
- Making the proposed rules that define prohibited non-GAAP financial measures more clear and operational.
Our specific comments and recommendations are set forth below.
Change in Earnings Release Practices
Some registrants include in earnings releases non-GAAP financial measures that, under the proposed rules, could not be presented in an SEC filing. The proposed amendments to Form 8-K would (1) require a company to file the text of its earnings release and (2) prohibit it from presenting in the Form 8-K a prohibited non-GAAP financial measure. Thus, as we understand it, these rules will have the effect of prohibiting companies from including prohibited non-GAAP financial measures in earnings releases.
We believe that this may be a major change in practice for some companies. This effect of the proposed rules was not articulated in the proposing release. In order to ensure that registrants comply with the new rules, we encourage the Commission to prominently communicate this point in the release covering the final rules.
Prohibited Non-GAAP Financial Measures
Our comments below focus on making the proposed rules that define prohibited non-GAAP financial measures (Item 10(h)(1)(ii) of Regulation S-B and Item 10(e)(1)(ii) of Regulation S-K) more clear and operational.
Clarify the Rules
We encourage the Commission to clarify these proposed rules. We tested them by applying them to a common non-GAAP financial measure - EBITDA (earnings before interest, taxes, depreciation and amortization). The result of our test makes us doubt that these rules are sufficiently clear.
We understand that the measure EBITDA is frequently presented in Commission filings currently and that the Commission staff does not object to registrants presenting it provided they do not give it undue prominence and they provide sufficient disclosures. We also understand that the intent of the proposed amendments to Item 10 of Regulations S-B and S-K is largely to codify current practice. Therefore, it appears that the Commission does not intend to prohibit registrants from presenting EBITDA in Commission filings.
However, the proposed rules do appear to prohibit registrants from presenting EBITDA. Item 10(h)(1)(ii)(B) of Regulation S-B and Item 10(e)(1)(ii)(B) of Regulation S-K prohibit a registrant from excluding charges that required or will require cash settlement from a non-GAAP liquidity measure. Since EBITDA is typically viewed as a liquidity measure, interest and taxes typically require cash settlement, and interest and taxes are excluded in calculating EBITDA, the proposed rules appear to prohibit a registrant from presenting EBITDA.
We suggest that the Commission test how the proposed rules prohibiting certain non-GAAP financial measures would apply to other measures the Commission staff has seen in filings and modify the rules to the extent necessary to achieve the desired result.
Resolve Conflicts with Other Rules
These proposed rules appear to conflict with other Commission rules. The conflicts we have identified are discussed below. There may be others. We believe the Commission should modify the proposed rules to resolve these apparent conflicts.
The instructions to Form S-4 and other Commission filings require registrants to present historical and pro forma book value per share information. However, GAAP does not address computing the denominator for or presenting a book value per share calculation. Therefore, book value per share appears to be a non-GAAP per share measure. The rules would prohibit registrants from presenting non-GAAP per share measures. Thus, the rules appear to conflict.
Item 506 of Regulations S-B and S-K require information about net tangible book value per share. In this case, the numerator, which excludes intangible assets, is clearly a non-GAAP measure. As discussed above, the denominator is also not computed based on GAAP. Therefore, this also appears to be a non-GAAP per share measure. The rules would prohibit registrants from presenting non-GAAP per share measures. Thus, the rules appear to conflict.
Item 503 of Regulation S-K requires registrants to present a ratio of earnings to fixed charges or a ratio of earnings to combined fixed charges and preferred stock dividends in certain filings. The rules require numerous adjustments to GAAP amounts to arrive at the numbers used to compute the ratio. Thus, the amounts used to compute the ratio appear to be non-GAAP measures, and the ratio appears to be a non-GAAP financial measure. The numerator excludes items (interest and taxes) that typically require cash settlement. For the same reasons as discussed in the EBITDA example above, this would appear to make the numerator a measure that would be prohibited by proposed Item 10(e)(1)(ii) of Regulation S-K. Accordingly, the ratio appears to be a prohibited non-GAAP financial measure. Thus, the rules appear to conflict. In addition, proposed Items 10(e)(1)(i)(C) and (D) of Regulation S-K require registrants to disclose how management uses non-GAAP financial measures and why management believes they provide useful information to investors. Item 503 does not require these disclosures. It is not clear whether registrants will need to provide them as part of their Item 503 disclosures in the future. Since management may provide the ratio of earnings to fixed charges to comply with Item 503 but not believe it provides useful information, it appears that these disclosures should not be required when a registrant provides a ratio of earnings to fixed charges.
Item 303(a) of Regulation S-K requires registrants to discuss the operating results of segments of its business in certain circumstances. A registrant might present an otherwise prohibited non-GAAP financial measure in its segments disclosures in the notes to its financial statements. It appears that Item 303(a) would encourage or require the registrant to discuss that measure in MD&A. However, proposed Item 10(e)(1)(ii) of Regulation S-K appears to prohibit this. Thus, the rules appear to conflict.
* * * * * * * *
We appreciate this opportunity to express our views to the Commission. We would be pleased to answer any questions the Commission or its staff might have about our comments. Please contact Wayne Kolins (at (212) 885-8595 or via electronic mail at email@example.com) or Lee Graul (at (312) 616-4667 or via electronic mail at firstname.lastname@example.org).
Very truly yours,
/s/ BDO Seidman, LLP