August 23, 2002

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

Additional Form 8-K Disclosure Requirements and
Acceleration of Filing Date
(Release Nos. 33-8106; 34-46084)
Commission File No. S7-22-02

Dear Mr. Katz:

We are pleased to comment on the proposed rule that would significantly increase the number of corporate events that public companies must report in a Form 8-K and require Form 8-K reports to be filed within two business days of most reportable events. Overall, we support the SEC's proposal and believe that it would benefit investors and the capital markets, without undue burdens or costs. While we support the thrust of the SEC's proposal, we are providing a number of suggestions to make the proposed rule more focused and operational. Our comments and suggestions are discussed below.

Entry into a Material Agreement

Under proposed Item 1.01, Entry into a Material Agreement, the definition of a "material agreement" would include letters of intent and other non-binding agreements. We recommend that the Commission reconsider the proposed scope of Item 1.01 and exclude any disclosure of non-binding agreements. Instead, we believe that the scope of Item 1.01 should be limited to legally enforceable contracts. Often, there is significant uncertainty whether letters of intent and other non-binding agreements will progress to legally enforceable contracts. Accordingly, we question whether investors and issuers would be well served by a requirement to report non-binding agreements. Instead, issuers should be encouraged, but not required, to report material business developments, including the progress of contract negotiations, under Item 7.01, Other Events.

Termination or Reduction of a Business Relationship with a Customer

Under proposed Item 1.03, Termination or Reduction of a Business Relationship with a Customer, disclosure would be required if a customer terminates, or reduces the scope of, a business relationship with the registrant and the amount of the associated loss of revenues exceeds 10% or more of the registrant's consolidated revenues for the most recent fiscal year. Further, disclosure would be required when an executive officer of the registrant becomes aware of the reportable event, but disclosure would not necessarily be required during negotiations or discussions with the customer or upon a reduction or suspension of customer orders.

While we agree with the underlying objective of the proposed Item 1.03, we are concerned that the reporting requirement as proposed would be difficult to implement consistently and reliably in practice. For example, the "awareness" of an executive officer regarding the potential finality of a customer's express or implied actions is not an objectively determinable reportable event. Also, changes in the nature and composition of various "business relationships" with a particular customer are common. In some cases, one aspect of a company's business with a customer may be terminated or reduced, but another aspect is initiated or increased. The proposed rule is ambiguous as to whether a significant change in a customer relationships (e.g., non-renewal of a material contract) must be reported if the registrant either has or expects to obtain different sources of revenue from that customer, such that total revenue from the customer is not likely to decrease in an amount that exceeds the reporting threshold.

As an alternative, we recommend that a more objective reporting standard would be specific to those customers that were reported under Item 101(c)(vii) of Regulation S-K in the registrant's most recent Form 10-K. Item 101(c)(vii) requires that "the name of any customer and its relationship, if any, with the registrant or its subsidiaries shall be disclosed if sales to the customer by one or more segments are made in an aggregate amount equal to 10 percent or more of the registrant's consolidated revenues and the loss of such customer would have a material adverse effect on the registrant and its subsidiaries taken as a whole." This group of customers would appear to coincide with those intended to be reported under proposed Item 1.03 - customers where a loss or decline in sales to that customer could exceed 10% of consolidated revenues for the most recent fiscal year. In addition, we recommend that the Commission reconsider the proposed trigger for Form 8-K reporting in order to provide a more objective reporting requirement (e.g., the conclusion by management that it is probable that the current fiscal year revenue from the previously disclosed customer will be less than that for the prior fiscal year by an amount exceeding 10% of consolidated revenues for the previous fiscal year).

Completion of Acquisition or Disposition of Assets

Currently, following the consummation of a business combination, issuers have 15 days to report the event and an additional 60 days to provide the financial statements of the acquired business. Under the proposed rule, Item 2.01 filings to report a business combination would be due within two business days. As a result, the timing of the financial statement requirements for acquired businesses will be reduced from 75 calendar days to as few as 62 calendar days (2 business days to report the event plus 60 calendar days to file the financial statements of the acquired business). We believe that the timeframe to provide financial statements of acquired businesses should remain consistent with the current 75-day requirement.

In our letter dated May 21, 2002 to the Commission on its proposed rule "Acceleration of Periodic Report Filing Dates and Disclosure Concerning Website Access to Reports," we commented that we do not believe any change should be made to the due date for providing audited financial statements of an acquired business under Rule 3-05. In our view, the ability to obtain the audited financial statements of a significant acquired business generally is unrelated to any circumstances of the issuer. Often, the financial statements of the acquired business have not been previously audited, and even the existing 75-day timeframe can be challenging, especially when three years of audited financial statements are required. As a result, we recommend that the Commission maintain the existing 75-day requirement to provide audited financial statements of significant acquired businesses. That is, we suggest that the instructions to Item 8.01 be amended to require filing of audited financial statements of the acquired business within 75 calendar days of consummation of the acquisition.

Exit Activities Including Material Write-Offs and Restructuring Charges

We believe that the Commission should reconsider and clarify the provisions of proposed Item 2.05, Exit Activities Including Material Write-Offs and Restructuring Charges. As proposed, it is unclear whether a commitment to a course of action would require disclosure in the absence of a sufficiently detailed plan that would allow reasonably reliable estimates of the associated costs. If disclosure is to be required in that event, we recommend that the specified disclosures be required only to the extent practicable, subject to updating by amendment as the specifics of the plan are approved.

As a more practical alternative, the SEC should consider requiring a Form 8-K report under Item 2.05 when the determination is made of the amount of material future charges for employee severance (or early retirement) benefits, idle lease costs, or costs associated with an exit or disposal activity. In this regard, we note that the FASB recently issued FASB Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which upon adoption will supersede EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). Statement 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, whereas under Issue 94-3, a liability for an exit cost may be recognized at the date of an entity's commitment to an exit plan. Since under Statement 146, the "commitment" to a plan, by itself, does not create an obligation that meets the definition of a liability, we question whether such commitment should be the basis for a Form 8-K report.

Also, we suggest that the Commission reconsider the use of the terms "restructuring" and "write-offs" in proposed Item 2.05. The term "restructuring" is not subject to precise definition or usage in practice. The term "write-off" has the connotation of a full, rather than partial, impairment. Accordingly, we suggest that Commission avoid using these terms in any final rule. Also, we question whether the scope of Item 2.05 should include any asset impairments, because as proposed, material impairments would be reported under Item 2.06.

Material Impairments

Item 2.06, Material Impairments, would require a company to report when the board of directors or authorized officer concludes that the company must record a material impairment charge to one or more of its assets. We believe that the Commission should clarify that the triggering event is the determination of the actual amount of the impairment charge. In many cases, the accounting for asset impairments is a two-step process involving recognition and measurement. In our view, measurement of the amount of the asset impairment charge must occur before there can be a conclusion that such a charge is "required."

Unregistered Sales of Equity Securities

Under proposed Item 3.03, Unregistered Sales of Equity Securities, a company would be required to disclose information required by Item 701 of Regulation S-K regarding the company's sale of equity securities that are not registered under the Securities Act of 1933. Currently, such information is required to be provided for the most recently completed quarter in a company's annual report on Form 10-K and quarterly reports on 10-Q. While we agree that more timely disclosure of such information is appropriate, we believe that the Commission should not require a Form 8-K to be filed for unregistered sales below a specified threshold. Instead, when the aggregate amount of unreported sales exceeds the specified threshold, a Form 8-K report should be required. We believe that an appropriate reporting threshold would be one based on a percentage (e.g., .5%) of the company's outstanding common equity shares as of its most recent fiscal year end.

Changes in Registrant's Certifying Accountant

We note in the proposing release that the Commission intends to delete the existing disclosure requirement of Item 9 of Form 10-K, Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Following a change in auditors, Item 9 of Form 10-K currently requires the disclosures specified in Item 304(b) of Regulation S-K, if they apply. Disclosure is required if there were disagreements (or reportable events) involving the former auditor and the financial statements include transactions or events that are accounted for or disclosed in a manner with which the former auditor would have taken exception. The required disclosures include the existence and nature of the disagreement or reportable event and the effect on the financial statements of applying the accounting method that would have been required by the former auditors. (These disclosures are not required if the method asserted by the former auditors has been superseded by subsequently issued accounting standards or interpretations and is no longer generally accepted.) In our view, the disclosures required under Item 9 are important and substantive, and the Item's deletion would not be required to "conform" to the proposed Form 8-K amendments. We note that the proposing release does not otherwise explain why Item 9 should be deleted. Accordingly, we believe that Item 9 of Form 10-K should be retained.

Non-reliance on Previously Issued Financial Statements or a Related Audit Report

Under proposed Item 4.02, Non-reliance on Previously Issued Financial Statements or a Related Audit Report, a company would report when the audit committee, board of directors, or other authorized officer(s) concludes that any previously issued annual financial statements should no longer be relied upon or when a company receives notice from its current or former independent auditor that action should be taken to prevent future reliance on a previously issued audit report. The company would have to provide the independent auditor with the disclosures within one business day after it files the Form 8-K. The company also would have to request, and file as an amendment within two business days of receipt, a letter from the independent auditor stating whether it agrees with the Form 8-K disclosures, and if not, why it disagrees. We agree that the proposed Form 8-K reporting of such events is appropriate, and we recommend that the Commission extend the reporting requirements of Item 4.02 to include conclusions relating to a company's quarterly financial statements.

In addition, while the text of the proposed amendment to Form 8-K clearly requires review of the disclosures by the independent auditor in both instances, the language of the proposing release suggests that such a process would occur only in the latter case, when the auditor provides notice to the company. We recommend that the Commission clarify in the final rules that the issuer must provide the independent auditor with the Form 8-K disclosures, and be required to file by amendment any responding letter from the auditor, in all cases when an Item 4.02 report is filed. That is, we believe that the auditor should be provided the opportunity to comment on the Item 4.02 disclosures whether the company concluded that the previously issued financial statements should not longer be relied upon or whether the auditor notified the company of the need for action.

Change in Critical Accounting Policy

The proposing release indicates that the Commission is evaluating whether to require Form 8-K disclosure of a material change in a critical accounting policy. We believe that it would be more appropriate for an issuer to report such a change in its annual report on Form 10-K or quarterly report on Form 10-Q. We believe that investors would be in the best position to understand and evaluate the implications of a material change in a critical accounting policy in the context of the financial statements and other disclosures provided in these reports. Accordingly, we believe that periodic reports, not Form 8-K, are the appropriate place to report a material change in a critical accounting policy, as well as other accounting changes.

Safe Harbor

Under the proposed rule, current reports on Form 8-K would be due within two business days for most reportable events. This would significantly shorten the current deadlines of five business days or 15 calendar days, depending on the nature of the event. In addition, the number of potentially reportable events would increase significantly. While issuers could obtain a two-business day extension by making appropriate representations in a Form 12b-25, Notification of Late Filing, within one business day after the Form 8-K was due, a company that fails to file a Form 8-K timely would lose its Form S-3 eligibility for one year. Although the SEC has proposed a safe harbor from liability for a non-timely filing of Form 8-K, with which we agree, the loss of short form eligibility due to a single event of non-timely filing could represent a significant penalty.

Given the shorter filing deadline, the increased number of items that would require disclosure, and the need for registrants and their advisors to become conversant with the new reporting obligations, it would be appropriate for the Commission to provide, at least during a transitional period, that a non-timely Form 8-K would not result in the loss of short form eligibility, provided the issuer also satisfied the conditions of the proposed safe harbor.

* * * * *

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

Very truly yours,

/s/ Ernst & Young LLP