Ernst & Young LLP

December 13, 2002

Mr. Jonathan Katz
Securities and Exchange Commission
450 5th Street, NW
Washington, D.C. 20549-0609

Proposed Rule: Conditions for Use of
Non-GAAP Financial Measures
(File No. S7-43-02)

Dear Mr. Katz:

Ernst & Young LLP is pleased to comment on the proposed rules to implement the requirements of Section 401(b) of the Sarbanes-Oxley Act of 2002 (the "Act"). Given the absence of uniform definitions and consistent practice, we agree that non-GAAP financial measures should always be reconciled to the corresponding financial measure under GAAP. However, we are concerned that the proposed rules, in going beyond the requirements of the Act, might have the unintended consequence of curtailing disclosure, and deterring innovative development, of financial measures that investors and others would otherwise find useful and informative.

Item 10 of Regulations S-K and S-B

The Commission has proposed conditions and restrictions on the use of non-GAAP financial measures in SEC filings that would go beyond the requirements of the Act and the conditions that proposed Regulation G would impose in other circumstances. It seems clear that the intent of the proposed amendments to Item 10 of Regulations S-K and S-B is to significantly curtail the use of non-GAAP measures in SEC filings, as well as in earnings releases that would be filed under the proposals. Generally, we agree with the proposed conditions and limitations; however, we are concerned that certain aspects of the proposed amendments could have unintended consequences and should be revised.

Justification of Usefulness

Among other things, the SEC has proposed that non-GAAP financial measures in SEC filed documents must be accompanied by a statement of the basis for management's belief that the measure provides useful information to investors. Further, the proposing release states that the justification for presenting a non-GAAP financial measure cannot be based solely on its use by, or usefulness to, financial analysts. We believe that this proposed condition should not extend to the use of non-GAAP financial measures in Management's Discussion and Analysis ("MD&A") or, to a lesser extent, filed earnings releases. Through MD&A (and earnings releases to the extent their analysis and commentary are consistent with MD&A), management should be able to provide investors with an analysis of the company and its prospects "through the eyes of management" using measures management considers appropriate subject, or course, to the provisions of Exchange Act Rule 10b-5 (and the proposed provisions of Regulation G), which prohibit making an untrue statement of a material fact or omitting to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading. In our view, the proposed requirement to justify the usefulness to investors of a non-GAAP financial measure could deny investors the opportunity to fully understand the business through the eyes of management. Accordingly, we recommend that this proposed condition (i.e., Item 10(e)(1)(i)(D) of Regulation S-K and Item 10(h)(1)(i)(D) of Regulation S-B) not extend to MD&A (or to filed press releases, to the extent that non-GAAP financial measures in the press release previously have been disclosed in MD&A and are reasonably expected to be included in MD&A for the fiscal period, when filed).

To the extent that an issuer includes non-GAAP financial measures elsewhere in a filing (e.g., tables of summary and selected financial data), we agree with the proposed condition that management justify the measures' usefulness to investors. In addition, we agree with the other proposed conditions and restrictions on the presentation of non-GAAP financial measures in SEC filings, except as discussed below.


We are concerned that the proposed amendments could be interpreted to prohibit disclosures of EBITDA (earnings before interest, taxes, depreciation, and amortization), and similar measures. In our experience, EBITDA has become a widely used non-GAAP financial measure of both operating performance (i.e., income) and liquidity (i.e., cash flow). EBITDA in many ways serves as a comparable measure among companies because it eliminates differences in GAAP results that arise from differences in financial leverage, tax regimes, and the historical cost bases of assets. However, the proposed rules (i.e., Item 10(e)(1)(ii)(B) of Regulation S-K and Item 10(h)(1)(ii)(B) of Regulation S-B) would prohibit excluding "charges or liabilities that required, or will require, cash settlement, or would have required cash settlement absent an ability to settle in another manner, from non-GAAP liquidity measures." Because EBITDA may be considered a non-GAAP liquidity measure, and because interest and taxes generally ultimately require cash settlement, it is unclear whether EBITDA could continue to be disclosed in SEC filings. We believe that the final rules should make clear that EBITDA, and similar measures, could continue to be presented in SEC filings, subject to the proposed conditions on the use of non-GAAP financial measures.

Non-recurring, Infrequent and Unusual Items

The proposed rules (i.e., Item 10(e)(1)(ii)(C) of Regulation S-K and Item 10(h)(1)(ii)(C) of Regulation S-B) also would prohibit adjusting a non-GAAP performance measure "to eliminate or smooth items identified as non-recurring, infrequent or unusual, when the nature of the charge or gain is such that it is reasonably likely to recur." The Commission should provide additional interpretive guidance so that any such prohibition can be consistently applied.

Under APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions ("APB 30"), extraordinary items are events and transactions that are both unusual and infrequent. Since APB 30 provides guidance for determining whether an item is either unusual or infrequent, we recommend that the final SEC rule refer to APB 30 and prohibit the labeling of any item excluded from a non-GAAP financial measure as "unusual" or "infrequent" unless the item satisfies the respective conditions of APB 30.

In addition, the Commission should provide more objective guidance for the use of the term "non-recurring." In assessing the likelihood of recurrence, the proposed rule suggests that the item cannot be reasonably likely to recur, without consideration of any time horizon. In contrast, APB 30 provides that an infrequent item "should be of a type that would not reasonably be expected to recur in the foreseeable future, taking into account the environment in which the entity operates." Thus, as proposed, "non-recurring" would be even more rare than "infrequent." If that is the Commission's intent, we suggest that it simply forbid the use of the term "non-recurring" because, in the fullness of time, another occurrence of any item is possible. However, there may be valid purposes for excluding from a non-GAAP financial measure items that do not regularly recur, whether called "non-recurring" or other terms such as "irregular," "abnormal" or "special." To distinguish such "non-recurring" items from "infrequent" items under APB 30, we recommend that the assessment of the reasonable likelihood of recurrence should be limited to a reasonably defined period that is shorter than "the foreseeable future" (e.g., five years, the period for which selected financial data are required to be presented by Item 301 of Regulation S-K).

Pro Forma Non-GAAP Financial Measures

The proposed rules would prohibit the presentation of non-GAAP financial measures on the face of any Article 11 pro forma financial information. Presumably a company could still provide a "pro forma" non-GAAP financial measure in the notes to the Article 11 pro forma presentation (or perhaps in a table of summary data that includes pro forma amounts from an Article 11 presentation) subject to the other proposed conditions. When an issuer presents such a "pro forma" non-GAAP financial measure, we recommend that the required reconciliation be made to the corresponding Article 11 pro forma amount, rather than to the corresponding historical GAAP amount.

Regulation G

The Commission specifically requested comment on whether Regulation G should require companies to disclose whether the reconciliation of any non-GAAP financial measure to the corresponding GAAP measure has been reviewed or audited by the issuer's independent accountants. We do not believe that Regulation G should include any such requirement. We do not believe that investors would expect the issuer's independent accountant to have had any responsibility for, or any involvement with, the reconciliation, or for that matter any other content in communications to which Regulation G would apply. Therefore, we do not believe that issuers should be required to disclaim auditor association with the reconciliation or, more broadly, disclaim auditor association with the entire communication.

Form 8-K

We agree that the public release of the results of operations for quarterly and annual periods should be filed in a Form 8-K.

Transition Period

The Commission's proposing release is silent regarding the proposed effective date for the final rules. We believe that the provisions of proposed Regulation G should become effective shortly after issuance of the final rule, because Regulation G incorporates current best practices and should not present significant transition challenges to issuers. However, with respect to certain of the proposed amendments to Form 8-K and Item 10 of Regulations S-K and S-B, which go beyond the requirements of the Act, we recommend that the Commission provide for a delayed effective date.

The amendments to Item 10 could prohibit the disclosure in SEC filings and earnings releases of certain non-GAAP financial measures that some issuers have been disclosing on a routine basis. Moreover, while likely not pervasive, some issuers might have debt covenants, bond indentures, contractual agreements and the like, which require them to disclose specified non-GAAP financial measures in their periodic SEC reports. Should the proposed amendments to Item 10 become effective immediately, compliance with the new rules could cause those issuers to violate existing covenants and incur a technical default on certain obligations. Accordingly, we recommend that the Commission specify a delayed effective date for the proposed restrictions on the disclosure of certain non-GAAP financial measures in SEC filings (i.e., Item 10(e)(1)(ii) of Regulation S-K and Item 10(h)(1)(ii) of Regulation S-B), in order to provide issuers adequate time to obtain any necessary modifications to existing agreements in advance.

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We would be pleased to discuss our comments with the Commission or its staff at your convenience.

Very truly yours,

/s/ Ernst & Young LLP