Latham & Watkins

December 16, 2002

Via E-mail -

Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Attention: Jonathan G. Katz, Secretary

Re: File No. S7-43-02
Release Nos. 33-8145; 34-46788
Conditions for Use of Non-GAAP Financial Measures

Ladies and Gentlemen:

This letter is submitted in response to the request of the Securities and Exchange Commission (the "Commission") for comments on its November 13, 2002 release entitled Conditions for Use of Non-GAAP Financial Measures, Release Nos. 33-8145; 34-46788 (the "Release").1 This letter responds to one specific question raised by the Commission in the Release: "Consistent with current staff policy, our proposals would prohibit specified types of disclosures. Is such a prohibition necessary and appropriate?"

In response to this question, we will limit our comments to the proposed changes to Item 10 of Regulation S-K that would prohibit issuers from:

  • 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; and

  • 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 (together, the "adjustment prohibitions").

Section 401(b) of the Sarbanes-Oxley Act of 20022 (the "Act") directed the Commission to adopt rules requiring all issuers (except registered investment companies) filing reports under Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), to make any public disclosure or release of "pro forma financial information" in a manner that is not misleading and that includes a reconciliation of the disclosed non-GAAP measure to the most comparable GAAP financial measure. The Release addresses this mandate by introducing the term "non-GAAP financial measures"3 and proposing Regulation G and, in tandem, amendments to Item 10 of Regulation S-K, Item 10 of Regulation S-B and Form 20-F to govern disclosure of non-GAAP financial measures by public companies. Independently, the Release also proposes a requirement that registrants file on Form 8-K within two business days any public announcement or release disclosing material non-public information regarding such registrant's results of operations or financial condition for an annual or quarterly fiscal period that has ended.

We support the Commission's rulemaking efforts both to implement the provisions of the Act, itself a monumental task, and to improve and modernize corporate disclosure and financial reporting. To the extent that the proposals in the Release promote "best practices" in order to make the use of non-GAAP financial measures more reliable, we support them. However, we do not believe the Act mandates the proposed Item 10 adjustment prohibitions, and we are concerned that the strict rules-based approach of these prohibitions will limit flexibility and have the unintended effect of restraining the flow of useful supplemental information in our dynamic securities markets. In particular, the prohibitions would prevent issuers from discussing their operating results in the vocabulary routinely used by management and analysts and would deprive investors and analysts of important supplemental information that is regularly used to understand a variety of industries and companies (particularly debt issuers). We believe this could adversely affect the capital formation process.

Moreover, we expect that investors and analysts will continue to demand the supplemental information that the proposal would ban from filings with the Commission. As a result, the proposal would have the perverse effect of forcing these continuing discussions out of the disciplined spotlight of public filings, which are reviewed by the Commission's Division of Corporation Finance and have the most serious liability implications for issuers, and into the less inclusive domain of conference calls and investor presentations. To us, this result would directly contradict the Commission's insistence on expanded, widely dispersed disclosure in the era of Regulation FD4 and substantially more extensive requirements for Management's Discussion and Analysis5. Furthermore, equipping issuers with a disclosure toolbox that contains only GAAP line items runs counter to the principles-based approach now under serious consideration for GAAP revisions pursuant to the Act.6 Plainly, strict compliance with GAAP is no assurance of investor protection.7 Importantly, when Section 302 of the Act requires certification that financial statements and other financial information included in a periodic report "fairly present in all material respects the financial condition and results of operations of the issuer", the words "in accordance with GAAP" are conspicuously missing. The proposed Item 10 prohibitions, by contrast, seem to make GAAP the be-all and end-all.

If adopted as proposed, these prohibitions would force hundreds of companies to change the way they present themselves to investors and analysts. Non-GAAP financial measures are widely used in specific industries, including virtually all publicly traded real estate investment trusts (REITs), which disclose "funds from operations" (FFO)8; retailers which often disclose EBITDAR (EBITDA before rental expense)9; broadcasters and media companies, which often disclose "broadcast cash flow"10 ; lodging companies, which often disclose "revenue per available room" (RevPAR)11; and energy companies, which often disclose EBITDAX (EBITDA before depletion and exploration costs)12. We see no reason why the investors and analysts who follow these industries should be denied access to this information from the issuers themselves, disclosed within the rigorous discipline of the public filing process. Measures such as these have become commonplace because GAAP line items do not, by themselves, tell "the whole story" necessary to understand specific businesses and industries. In short, the marketplace for financial analysis has determined that this non-GAAP information is material to an understanding of these businesses.

EBITDA. By far the most widely used non-GAAP financial measure is EBITDA (earnings before interest, taxes, depreciation and amortization), which is routinely reported by hundreds of public companies and widely used by analysts. Textbooks on corporate finance teach EBITDA as a tool in financial analysis.13 In analyzing companies' abilities to incur and service debt for rating purposes, the major rating agencies include EBITDA- based ratios for all of the companies they cover, from investment grade to high yield rating categories.14 Equity analysts and mutual funds often use EBITDA as a tool in valuing businesses15. Private equity firms and their financing sources routinely value issuers on the basis of EBITDA multiples. Lending sources analyze their willingness to lend based on maximum "leverage ratios" (total debt/ EBITDA) and "coverage ratios" (EBITDA/interest expense). Many management compensation plans are based on achieving targeted levels of EBITDA.

In the high yield debt market, EBITDA has become a universally used and accepted tool for evaluation of an issuer's capacity to service debt. Virtually all high yield issuers disclose EBITDA, and analysts covering high yield issuers present EBITDA analysis for virtually every issuer.16 This is hardly surprising, since high yield issuers are party to credit agreements and bond indentures in which their ability to take any significant corporate action is governed by ratios tied to non-GAAP measures such as EBITDA. In some cases, the most heavily negotiated provision of the credit agreement or indenture is the definition of "EBITDA," which is used in many of the critical financial covenants. Many sub-investment grade credit agreements even have "grid pricing" mechanisms where interest rates are tied to the borrower's level of EBITDA or a related non-GAAP measure. For these reasons, investors and analysts have demanded that issuers of high yield bonds provide EBITDA data to supplement their GAAP financial statements.

Literally read, the proposed Item 10 revisions would prohibit inclusion of EBITDA in Commission filings17 if EBITDA is used as a "liquidity measure" since interest and taxes (both cash items) are added back to earnings to calculate EBITDA. Proposed Item 10, consistent with comments our clients have recently received from the Staff during the registration process and published Staff accounting guidance,18 seems to force what we consider to be a false distinction as to whether EBITDA is a "liquidity measure" or a "performance measure." Ironically, a forced categorization as one or the other contradicts a disclosure that the Staff has required for years - namely that EBITDA should not be considered as a substitute for GAAP income or cash flow measures.

Simply put, EBITDA is EBITDA. EBITDA is a hybrid that cannot generally be categorized as a "liquidity measure" or a "performance measure." On the one hand, all of its elements are derived from (and easily reconciled to) the income statement and it is a carefully watched "performance measure" for management, investors and analysts, and serves as a common covenant compliance test and valuation tool. On the other hand, it serves an important function as an indicator of a company's ability to generate "free cash flow"19 and cash available for debt service, and is therefore something of a "liquidity measure." Indeed, the ubiquitous use of EBITDA for this purpose (compared to the use of GAAP line items) makes it clear that many investors and analysts consider EBITDA to be a more useful measure of a company's ability to generate "free cash flow" than the much broader GAAP cash flow measures, which reflect a variety of trends on the balance sheet such as changes in working capital and financing transactions.

We expect that other non-GAAP financial measures also serve multiple purposes, and we believe it is unwise to build a regulatory scheme that forces issuers to make an arbitrary distinction between "performance measure" and "liquidity measure" to determine whether the non-GAAP measure can be used at all, or what calculations may be included. We suspect that in many cases the categorization would conveniently be defined by the type of adjustments the issuer is seeking to make rather than any real classification. Nevertheless, if the proposed rule stands as written and issuers are forced to artificially pigeonhole EBITDA into one category or the other, it should still be permitted as a "liquidity measure" because it is primarily measuring the availability of cash to service debt. In that context, interest expense and taxes (which are paid after interest expense is deducted) are cash add-backs that are generally available to service debt.

We believe proposed Item 10 fundamentally misunderstands the use of EBITDA by analysts and investors, and that banning EBITDA from Commission filings (except for issuers who arbitrarily label it as a "performance measure"), would serve no useful purpose for companies or investors. Instead, because EBITDA is such a widely used measure, we believe that any rulemaking focused on non-GAAP financial measures should squarely address EBITDA. We suggest that, in the final rulemaking, the Commission acknowledge that EBITDA is a permitted non-GAAP financial measure (without any categorization requirement) and expressly clarify the type of reconciliation to GAAP measures that should be used for EBITDA. In that regard, we believe that the most logical GAAP measures are net income or operating income, since EBITDA is derived directly from income statement line items.20 Further, we believe that issuers should be permitted to start with either GAAP net income (before extraordinary items, if applicable) and add back interest, taxes, depreciation and amortization, or with operating income and add back depreciation and amortization.

Adjusted EBITDA. The utility of EBITDA as an analytical tool would be severely limited by the proposed Item 10 prohibitions, which would effectively eliminate most common adjustments used by companies and analysts. For example, in presenting credit ratios that include a number of EBITDA-based measures, Standard & Poor's eliminates non-recurring gains and losses such as gains and losses on asset sales, significant transitory income items, unusual losses, charges due to asset write-downs, plant shutdowns and retirement programs.21 In our review of research coverage of approximately 150 high yield issuers, a clear majority included Adjusted EBITDA presentations.

Adjusted EBITDA is a commonly used non-GAAP measure in high yield debt offerings, because sub-investment grade companies are often undergoing fundamental changes in their businesses, such as major acquisitions or recapitalizations. In this context, many companies have taken the view that historical GAAP financial statements and EBITDA derived therefrom do not alone provide investors with a basis for understanding their ability to service debt on a "normalized" basis. In many cases, it is "Adjusted EBITDA" that is used in compensation plans, in financial covenants, in setting maximum debt levels in the "pricing grids" in credit agreements and indeed in setting values in enterprise sale transactions. Whenever an issuer's operating results are disclosed, understanding the impact of particular events is often necessary to allow investors to better see those results through the eyes of management.22 Issuers may quite appropriately wish to focus investors' attention on critical components of quarterly or annual financial results in order to provide a meaningful comparison to results for the same period of prior years or to emphasize the results of core operations. Many high yield issuers (and the analysts that cover them) routinely disclose EBITDA as adjusted for a variety of items such as:

  • gains and losses from asset sales outside the ordinary course of business;

  • restructuring charges and planned cost savings such as

      - acquisition or restructuring-related severance costs

      - operating costs of facilities to be closed following a merger

      - executive compensation and perquisites of prior executives whose positions are to be eliminated or revised

      - changes in management fees payable to private equity sponsors following an initial public offering

      - improved purchasing power based on a new contract or bid;

  • unusual litigation settlements paid or received;

  • write-offs of assets in connection with a change of strategic focus or discontinuation of a product line;

  • losses attributable to natural disasters, and related insurance recoveries;

  • unusual costs associated with failed acquisition attempts;

  • the impact of unusual work stoppages;

  • reserves established for contingencies such as unusual environmental cleanups or unusual litigation;

  • unusual plant start-up and shutdown costs;

  • "extraordinary" items such as write-offs of debt issuance costs at the time of a refinancing; and

  • elimination or revisions of payments made and received pursuant to material contracts that are being terminated or materially amended.

Because many of these items "required, or will require, cash settlement," proposed Item 10 would flatly prohibit adjustments for them in any presentation of non-GAAP financial measures. In effect, the Commission seems to be saying that such adjustments are never appropriate and are misleading per se. We do not believe such an outright ban is necessary or appropriate to implement Section 401(b) of the Act. We believe that this common practice by which many issuers, analysts and investors seek to supplement their analysis of GAAP financial performance and EBITDA by "backing out" the effect of certain items that management feels are not illustrative of expected future results should be permitted within appropriate guidelines, so that investors can be allowed to look at the company's results the same way management and its lenders do.23 This approach is inherently company-specific and transaction-specific and does not lend itself to rigid rules or prohibitions. We suggest that adjustments to non-GAAP measures should instead be governed by principles-based guidelines (such as those specified elsewhere in the proposal) and the overriding influence of potential liability for material misstatements or omissions.

Presentation. We agree with many of the presentation requirements suggested in the Release. We agree that EBITDA should not be presented as part of an income statement, should not be given priority over GAAP cash flow, net income or operating income. We believe EBITDA should be reconciled to net income or operating income as suggested above. Adjustments to EBITDA should be balanced, should reflect only transactions outside the ordinary course of business and should be itemized, quantified, explained and justified under a clearly labeled caption, with the resulting adjusted number clearly labeled "Adjusted EBITDA." A requirement for explanations of this kind would impose greater discipline and uniformity on the content and presentation of EBITDA and Adjusted EBITDA. Within these parameters, we believe EBITDA and Adjusted EBITDA presentations by issuers as "Other Data" within an offering document, periodic report or press release are helpful to investors and analysts and should be permitted.

The excesses that Congress and the Commission are responding to arose from bad disclosure about "pro forma" results. In our view, better disclosure is the appropriate response, not less disclosure. We believe that requiring more discussion and improved disclosure will better serve the intent of Section 401(b) of the Act than a strict prohibition of these non-GAAP measures.

Differential Disclosure Issues. We think it is clear that institutional investors24 and analysts will continue to demand non-GAAP measures such as EBITDA and Adjusted EBITDA. This would raise differential disclosure concerns if they are only permitted to be discussed within the investment community and prohibited in filings with the Commission.

It remains to be seen whether Item 10 would spawn a dual track disclosure model in which only strict GAAP information is filed with the Commission while tabular non-GAAP measures are made available in private (subject to Regulation FD disclosure when appropriate). It is inconceivable, for example, that EBITDA and Adjusted EBITDA will not be discussed among high yield issuers, investors and analysts at investor conferences, in "road shows" for offerings of high yield securities, and in any other meaningful forum for review of the issuers' results and prospects. We assume other industries will find a way to discuss the non-GAAP measures that their investors and analysts care about. Perhaps issuers will discuss the non-GAAP measures and adjustments they consider meaningful in the Management's Discussion and Analysis portion of their public filings, and leave the tabular presentations that investors and analysts have come to expect to private forums. In those circumstances, the tabular presentations that are now routinely vetted in public disclosure documents might never see the public light of day. We question how investors will benefit from a regime that restricts access to supplemental information that is now routinely available and useful.

In conclusion, we respectfully submit that inasmuch as measures such as EBITDA and Adjusted EBITDA are routinely used by management, lenders, bondholders, rating agencies, compensation committees, investors and analysts as well as in the valuation of equity securities and companies in M&A transactions, these measures are material and, consequently, have become ubiquitous. The proposed prohibitions in Item 10 would take most of these non-GAAP disclosures, which have evolved over time in the free flow of information surrounding our dynamic capital markets, and throw them out of the most important forum for full and fair disclosure: Commission filings. In our view, it cannot be the case that disclosure documents would be improved by eliminating this material supplemental information. Improving the presentation of non-GAAP financial measures is a goal we support. Any flat prohibition on properly explained supplemental information would be inappropriate.

To assist the Commission with this rulemaking, we have attached as Appendix A a blackline of the proposed amendments to Item 10 consistent with the suggestions contained in this letter and, we submit, the Commission's approach to principles-based changes to MD&A and other disclosure requirements.

* * *

We appreciate the opportunity to submit comments. We are available to meet with the Commission or the Staff and to respond to any questions. Please call Mark Stegemoeller at (213) 891-8948, John Huber at (202) 637-2242 or Kirk Davenport at (212) 906-1284 if you would like to discuss any of our comments.

Respectfully submitted,

s/ Mark A. Stegemoeller
of Latham & Watkins

cc: Hon. Harvey L. Pitt
Chairman of the Securities
and Exchange Commission

Hon. Paul Atkins

Hon. Roel Campos

Hon. Cynthia A. Glassman

Hon. Harvey Goldschmid

Alan L. Beller
Director, Division of Corporation Finance

Giovanni P. Prezioso
General Counsel

Appendix A

§229.10 (Item 10) General.

* * * * *

(e) Use of non-GAAP financial measures in Commission filings. (1) Whenever one or more non-GAAP financial measures are included in a filing with the Commission:

(i) The registrant must include the following in the filing:

(A) A presentation of the most directly comparable financial measure or measures calculated and presented in accordance with Generally Accepted Accounting Principles (GAAP);

(B) A quantitative reconciliation (by schedule or other clearly understandable method) of the differences between the non-GAAP financial measure disclosed with the financial measure or measures calculated and presented in accordance with GAAP identified in paragraph (e)(1)(i)(A) of this section;

(C) A statement disclosing the purposes for which the registrant's management uses the non-GAAP financial measure; and

(D) A statement disclosing the reasons why the registrant's management believes that presentation of the non-GAAP financial measure provides useful information to investors regarding the registrant's financial condition and, results of operations or cash flow; and

(ii) A registrant must not:

(A) Present the non-GAAP financial measure in a manner that would give it greater authority or prominence than the comparable GAAP financial measure or measures;

Instructions to clause (e)(i):

1. Certain non-GAAP measures serve more than one purpose and may have no single GAAP financial measure that is "most directly comparable." In such cases, more than one GAAP financial measure may need to be presented with equal or greater prominence to the non-GAAP financial measure. For example, "EBITDA" (generally defined as earnings before interest, taxes, depreciation and amortization) is used in a variety of ways and should be presented, for purposes of clause (e)(i)(A), together with both (i) GAAP operating income or net income and (ii) GAAP cash flow from operations, cash flow from investing activities, and cash flow from financing activities, and ratios of EBITDA to interest expense or fixed charges should be presented together with ratios of earnings to fixed charges prepared in accordance with Item 503(d) of Regulation S-K. EBITDA should be reconciled either to GAAP operating income by adding GAAP depreciation and amortization or to GAAP net income (before extraordinary items, if applicable) by adding GAAP interest expense, taxes, depreciation and amortization. A similar approach should be used in presenting other non-GAAP financial measures for which no single GAAP financial measure is "most directly comparable."

(B) Exclude2. Any adjustment (including without limitation any adjustment that (i) excludes 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;(C) Adjust a non-GAAP performance measure to eliminate or smooth(ii) eliminates or smooths items identified as non-recurring, infrequent or unusual, when) to either (a) any non-GAAP financial measure reconciled to a GAAP financial measure pursuant to clause (e)(i)(B) or (b) a GAAP financial measure that cannot be reconciled to GAAP by addition or subtraction of a line item from the nature of the charge or gain isregistrant's GAAP financial statements shall include an explanation of why management considers such that it is reasonably likely to recur; adjustment to be useful to investors and shall be reconciled to such non-GAAP financial measure or GAAP financial measure, as the case may be, and presented in a tabular or other presentation clearly captioned as an adjusted non-GAAP financial measure. To the extent any such adjustments are based upon estimates, the explanation shall describe those estimates and the registrant's bases for the estimates. Registrants are cautioned that any such adjustments should be balanced and presented on a consistent basis. See in the Matter of Trump Hotels & Casino Resorts, Inc., Release No. 34-45287 (Jan. 16, 2002).

(ii) A registrant must not:

(A) Present the non-GAAP financial measure in a manner that would give it greater authority or prominence than the comparable GAAP financial measure or measures;

(DB) Present non-GAAP financial measures on the face of the registrant's financial statements prepared in accordance with GAAP or in the accompanying notes;

(EC) Present non-GAAP financial measures on the face of any pro forma financial information required to be disclosed by Article 11 of Regulation S-X (17 CFR 210.11-01 through 210.11-03); or

(FD) Use titles or descriptions of non-GAAP financial measures that are the same as, or confusingly similar to, titles or descriptions used for GAAP financial measures; or(G) Present a non-GAAP per share measure; and

(iii) If the filing is not an annual report on Form 10-K or Form 20-F (17 CFR 249.220f), a registrant need not include the information required by paragraphs (e)(1)(i)(C) and (e)(1)(i)(D) of this section if that information was included in its most recent annual report on Form 10-K or Form 20-F or a more recent filing, provided that the required information is updated to the extent necessary to meet the requirements of paragraphs (e)(1)(i)(C) and (e)(1)(i)(D) of this section at the time of the registrant's current filing.

(2) For purposes of this paragraph (e), a non-GAAP financial measure is a numerical measure of a registrant's historical or future financial performance, financial position or cash flows that:

(i) Excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the comparable measure calculated and presented in accordance with GAAP in the statement of income, balance sheet or statement of cash flows (or equivalent statements) of the issuer; or

(ii) Includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the comparable measure so calculated and presented.

(3) For purposes of this paragraph (e), "GAAP" refers to generally accepted accounting principles in the United States, except that in the case of foreign private issuers whose primary financial statements are prepared in accordance with other generally accepted accounting principles, references to GAAP also include the principles under which those primary financial statements are prepared.

(4) For purposes of this paragraph (e), non-GAAP financial measures exclude operating and other financial measures and ratios or measures calculated using only:

(i) Financial measures calculated in accordance with GAAP ; and

(ii) Operating measures or other measures that are not non-GAAP financial measures.

(5) This paragraph (e) is not applicable to investment companies registered under Section 8 of the Investment Company Act of 1940 (15 U.S.C. 80a-8).

Note to paragraph (e). A non-GAAP financial measure that would otherwise be prohibited by paragraph (e)(1)(ii) of this section is permitted in a filing of a foreign private issuer if:

  1. The non-GAAP financial measure is expressly permitted under the GAAP used in the registrant's primary financial statements included in the filing with the Commission; and

  2. The non-GAAP financial measure is included in the annual report prepared by the registrant for use in the jurisdiction in which it is domiciled, incorporated or organized or for distribution to its security holders.

1 Proposed Rule: Conditions for Use of Non-GAAP Financial Measures, Release Nos. 33-8145; 34-46788, 67 Fed. Reg. 219 (Nov. 13, 2002).
2 Pub. L. No. 107-204, 116 Stat. 745 (2002).
3 Proposed §244.101(a) defines a non-GAAP financial measure as:
(1) a numerical measure of a registrant's historical or future financial performance, financial position or cash flows that: (i) excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the comparable measure calculated and presented in accordance with GAAP in the statement of income, balance sheet or statement of cash flows (or equivalent statements) of the issuer; or (ii) includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the comparable measure so calculated and presented.

(2) A non-GAAP financial measure would not include operating and other financial measures and ratios or measures calculated using only: (i) financial measures calculated in accordance with GAAP; and (ii) operating measures or other measures that are not non-GAAP financial measures.

4 17 CFR §243.
5 See Release No. 33-8056 (January 22, 2002) ("Commission Statement about Management's Discussion and Analysis of Financial Condition and Results of Operations"); Release No. 33-8144 ("Proposed Rule: Disclosure in Management's Discussion and Analysis About Off-Balance Sheet Arrangements, Contractual Obligations and Contingent Liabilities and Commitments").
6 See Section 108(d) of the Act and the Financial Accounting Standards Board's October 21, 2002 proposal "Principles-Based Approach to U.S. Standard Setting," available at
7 In United States v. Carl J. Simon, et al, 425 F.2d 796 (1969) (Friendly, J.), the Second Circuit affirmed the conviction of accountants for drawing up and certifying a misleading financial statement for a company, even though the financial statement was (other than an immaterial error with respect to netting) "in no way inconsistent with generally accepted accounting principles or generally accepted auditing standards." (425 F.2d 796, 805).
8 REITs routinely and universally use funds from operations, or FFO, and FFO per share as supplemental performance measures. FFO adds back GAAP depreciation of real estate assets to net income, among other adjustments. See "White Paper on Funds from Operations," published by the National Association of Real Estate Investment Trusts, Inc. (NAREIT), and available on the NAREIT website at FFO is also commonly used to measure compliance with covenants in REIT credit agreements and indentures. We understand that NAREIT is commenting separately on the impact of the Release on FFO.
9 See, e.g., Buckhead America Corporation, in its Form 10-Q for the fiscal quarter ended June 30, 2002 defined EBITDAR as earnings before interest, taxes, depreciation, amortization and rent.
10 See, e.g., Salem Communications Corporation, in its Form 10-K for the fiscal year ended December 31, 2001 defined broadcast cash flow as net operating income, excluding other media revenue and media operating expenses, before depreciation and amortization and corporate expenses.
11 See, e.g., Hilton Hotels Corporation, in its Form 10-K for the fiscal year ended December 31, 2001 defined RevPAR as equal to rooms revenue divided by the number of available rooms.
12 See, e.g., Nuevo Energy Co., in its Form 10-K for the fiscal year ended December 31, 2001 defined EBITDAX as earnings before interest, taxes, depreciation, depletion, amortization and exploration expenses.
13 See, e.g., a discussion of the use of EBITDA to measure enterprise value by Professor Aswath Damodaran of the Stern School of Business, New York University (from a forthcoming book on investment philosophies, extract available on Professor Damodaran discusses Graham & Dodd's classical formula of determining price earnings ratio determined from earnings per share, which he notes is "both volatile and subject to measurement error" and notes that in seeking "a more stable, cash-based measure of pre-debt earnings" investors look at the ratio of enterprise value to EBITDA . See also "Equity Finance: Venture Capital, Buyouts, Restructurings and Reorganizations", Joseph W. Bartlett (February, 1995), §12.5: "In buyout financing, the key variable is usually EBIT or EBITDA, or earnings before interest, taxes, depreciation and amortization. Since the company is expected to refinance its debt in the course of the transaction and the exercise is designed to figure out how much debt can be serviced, it is the custom of analysts to value it debt-free on a pro forma basis... Income taxes are often disregarded in leveraged transactions on the theory that interest deductions will eat up taxable earnings in the near term."
14 See "Financial Ratio Medians for Global Investment Grade Corporates", Moody's Investors Services Global Credit Research, January 2001, where Moody's analysis includes EBITDA-based ratios for companies in a broad range of industries. See also "Corporate Ratings Criteria", Standard & Poor's, 2002 in which Standard & Poor's provides a similar explanation relating its ratings to "key ratio medians for U.S. corporates by median category", which include EBITDA interest coverage ratios. See also "CreditStats: Adjusted Key U.S. Industrial Financial Ratios", Standard & Poor's, August 13, 2002, where Standard & Poor's summarizes its ratings of key industrial financial ratios including EBITDA to interest plus dividends, total debt to EBITDA and EBITDA to total assets.
15 In a recent discussion at Columbia Business School, noted value investor Mario Gabelli of Gabelli Asset Management Inc. stated that "there is no substitute for basic analysis. Read companies' financial statements, look at the fundamentals, FCF (free cash flow), EBITDA (earnings before interest and taxes, depreciation and amortization) and PMV (private market value)." (reported by Charles Whitfield, spring97/4_17/MARIO.html)
16 We surveyed the research published by analysts for one of the market leaders in high yield debt, and confirmed that they present EBITDA for nearly all of the high yield issuers covered.
17 The proposal in this Release to amend Form 8-K to require earnings releases to be filed with the Commission, "with those filings subject to the guidance in amended Item 10 of Regulation S-K" would also have the effect of excluding EBITDA and most non-GAAP financial measures from earnings releases.
18 See "Division of Corporation Finance: Frequently Asked Accounting and Financial Reporting Interpretations and Guidance" at Item II.C ("Disclosure of Non-GAAP Measures Such as EBITDA"), released by the Division of Corporation Finance March 31, 2001.
19 Commonly defined as EBITDA less capital expenditures.
20 By contrast, reconciliation of EBITDA to operating cash flow is rarely presented and does not seem particularly helpful to us, and would not be practicable on a pro forma basis because GAAP cash flows are not presented on a pro forma basis.
21 See "Corporate Ratings Criteria" and "CreditStats: Adjusted Key U.S. Industrial Financial Ratios", note 14, supra.
22 On April 26, 2001, National Investor Relations Institute ("NIRI") published guidelines for the use of "pro forma" earnings information providing that press releases containing such information should include "reported" results for the period presented under GAAP and that pro forma results should always be accompanied by clearly described reconciliation to GAAP results. The guidelines noted that pro forma results are provided to clarify both a period's performance as well as future prospects. In a survey conducted by NIRI of 233 NIRI member companies ("An Analysis of Corporate Use of Pro Forma Reporting," released January 17, 2002 on, 11.3% disclosed EBITDA or a variation of EBITDA (such as earnings before depreciation, amortization and deferred taxes), and 133 companies (57%) showed pro forma adjustments to GAAP earnings. Only two companies did not provide a clear reconciliation of the "pro forma" financials to GAAP. In Accounting Series Release No. 142, Release No. 33-8039 (December 4, 2001), the Commission cautioned investors against reliance on "pro forma" earnings in press releases but acknowledged that "pro-forma" financial information can be useful in some cases. We agree with the Commission's introduction of the term "non-GAAP financial measures" in an attempt to eliminate confusion between the use of the term "pro forma" in prior studies and discussions of non-GAAP adjustments and the "pro forma" requirements of Article 11 of Regulation S-X.
23 We also suggest that, if the proposed prohibitions are included in any final rule, the Commission clarify that the proposal to ban adjustments for expenses that are "reasonably likely to recur" is intended to address expenses that are tied to specific events, such as a particular litigation, restructuring or labor dispute. It is unlikely that any issuer can predict that it will not have other significant incidents in these categories at some point in the future, but that does not invalidate the rationale for making the adjustment. As long as adjustments are clearly presented and explained we believe they provide valuable supplemental information.
24 It is important to remember, when balancing the protection of investors against the impact on capital formation, that the investor base for publicly traded high yield debt securities is almost entirely comprised of institutions. As detailed in a study accompanying our September 9, 1999 comment letter to the Commission on the "Aircraft Carrier" proposal (File No. S-7-30-98), less than 1% of outstanding registered high yield debt securities find their way to retail investors.