Thomas J. Kloc
6603 Hunter Trail Way
Frederick, MD 21702

December 11, 2002

Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549

Release 33-8145 (File No. S7-43-02) (Non-GAAP Financial Measures)

Dear Mr. Katz:

The Commission's addressing of the use of Non-GAAP Financial Measures in Release 33-8145, is an important step towards improving communications with the investing public. It's essential to get this right and to improve, rather than further dilute, standards which result from Commission action in this matter.

Any proposed standards for financial reporting must be judged within the context of today's methods of financial communications with investors. Those include a combination of methods: press releases, internet broadcasts, Commission filings, webcasts, conference calls, etc. The common feature of all these methods, save Commission filings, is that they tend to get summarized and boiled down to the available space or tabular comparisons (with implied comparability) that publishers (newspapers, analysts, internet services) choose. While issuers of earnings releases cannot control how their information is used, they often are aware of normal reporting practices and thus should be expected to take due care to improve the probability of quality communications with investors.

Regrettably, since the late 1990's, if not earlier, investors have too often been subjected to what I term "My dog ate my homework" earnings releases. While I do not suggest that this is the norm, investors in ALL companies subject to SEC jurisdiction are entitled to better than that.

Proposed Regulation G is an opportunity for the Commission to further advance reporting standards in favor of investors, as required by Sarbanes-Oxley. A real danger exists, however, that the Commission in this matter will act to implicitly or explicitly sanction non-GAAP financial measures rather than enforce standards that are working (or capable of working if enforced) and fix or improve those which are not. That would be a step backwards and inconsistent with the Commission's recent initiatives. And for that reason I advocate, as my first choice, that the Commission not adopt Regulation G as proposed which would endorse non-GAAP financial measures.

If Generally Accepted Accounting Principles are broken, fix them; don't sanction work-arounds.

An example of a non-GAAP financial measure (as defined in this File No. S7-43-02) is earnings before "non-recurring" charges, e.g., write-off of a failed investment. Corporate America is in the business of taking risks. Write-offs will not recur ONLY if business stops taking risks. The notion of "non-recurring" charges being appropriate for most failed investments is nonsense! GAAP already provides a clear framework of when and how to report truly discontinued operations.

Earnings releases, by their nature, are brief. They are condensed statements of results which typically get further condensed by print and electronic news services. If the Commission chooses to permit, rather than prohibit, financial measures which are not "generally accepted" by standard setters, it is choosing to increase the risk that communicated financial results will not be comparable among companies and of less value to investors. But if it so chooses, it should require that GAAP financial measures precede all non-GAAP measures in the order of presentation. Failure to do that would equate to failure to meet the objective of Sarbanes-Oxley to "enhance the financial disclosures of public companies."

Implicit in arguments that non-GAAP financial measures are more relevant is the type of thinking witnessed in the .com bubble, i.e., the old measures don't matter. To the contrary, time has proved that ALL of GAAP's basic financial statements - the income statement, the balance sheet (leverage and working capital), and the statement of cash flows (are operations generating or using cash?) - are necessary and remain relevant to adequate investor evaluation of companies. GAAP financial measures, adapted as necessary through time for changes in business practices, business models, and financial markets, continue to be sound measures for sustainability of a business when all three primary financial statements are accurate and considered for their defined purpose.

Responses to certain of the Commission's questions regarding proposed Regulation G:

  • Should Regulation G apply to disclosures of material information including any financial measure calculated and presented otherwise than in accordance with GAAP?

  • Response - Yes.

  • Should we exclude non-GAAP financial measures communicated orally from the proposed regulation? Would such an exclusion be consistent with the terms of the Sarbanes-Oxley Act?

  • Response - No to both questions.

  • In this release, we propose to require companies that include non-GAAP financial measures in filings to also include a discussion of the purposes for which the company's management uses the non-GAAP financial measure and why management believes the presentation of the non-GAAP financial measure provides useful information to investors.37 Should we require that information in all communications that are subject to Regulation G? If so, why? If not, why not?

  • Response - Yes. This helps ensure that common measures are used for all audiences whether internal or external to the company. It mitigates the potential for confusion on company objectives. And it is an opportunity for management to highlight its strategy and measures of success.

  • Should we allow registrants greater latitude to satisfy the requirements of proposed Regulation G by posting the non-GAAP financial measure's components and the comparative GAAP financial measure on their website or in their Commission filings?

  • Response - No. The definitions of non-GAAP financial measures are, by definition, not standard. Thus, companies should be required to disclose to investors those definitions in close and convenient proximity to the measures used. Selectivity breeds abuse.

  • As proposed below, and consistent with staff practice, the Commission generally has more detailed disclosure requirements where non-GAAP financial measures are included in Commission filings. Should we require these additional disclosure requirements in all cases, even in documents not filed with the Commission?

  • Response - Yes.

  • Should we prohibit the presentation, whether or not included in filings with the Commission, of certain non-GAAP financial measures (for example, certain per-share measures or liquidity measures that exclude cash items)? If so, which measures?

  • Response - Yes. Preferably, all non-GAAP measures. Fix GAAP where required. Don't sanction non-GAAP financial measures.

  • Should Regulation G be enforceable by the Commission only or also by private plaintiffs? Resonse - By the Commission only. Should language be included in Regulation G that makes explicit the manner in which it is to be enforced? Response - Yes. One such method could be the loss of expedited filings and approvals for sales of securities. Expedited registration statements such as short forms for the sale of securities are a privilege not a right. They should be reserved for those registrants with the highest quality reporting standards.

In addition to these mandated disclosure requirements, we propose to amend Item 10 of Regulation S-K and Item 10 of Regulation S-B to prohibit the following:

  • presenting a non-GAAP per-share measure. Comment - I generally concur but suggest that it is time to re-examine and update GAAP regarding the presentation of cash flow per share in light of SFAS No. 133 - Accounting for Derivative Instruments.


If there are "non-GAAP" financial measures that have universal currency and enable investors to better assess results on both an absolute to the firm and relative to other firms basis, the Commission should not endorse them via a back-door, reconcile-them-to-GAAP approach. That will leave investors wondering, "Which measures really matter?" Instead of creating or endorsing such a situation, the Commission should fix GAAP.


Thomas J. Kloc