American Society of Corporate Secretaries
Securities Law Committee


December 12, 2002

Mr. Jonathan Katz
U.S. Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549

Re: Release No. 33-8145, Proposed Rule: Conditions for Use of Non-GAAP Financial Measures, File No. S7-43-02

Dear Mr. Katz:

The following comments are submitted on behalf of the Securities Law Committee of the American Society of Corporate Secretaries. The Society has over 3,800 members representing approximately 2,400 public companies.

We appreciate the opportunity to provide our views on the Commission's proposed rules regarding use of non-GAAP financial measures and the related rule proposal regarding filing of 8-Ks in connection with earnings releases. We support the Commission's efforts to enhance transparency in the use of non-GAAP financial measures and to provide for reconciliation to comparable GAAP measures, and we support most elements of the proposed rule. We are concerned, however, that certain restrictions on the use of non-GAAP financial information extend beyond the mandate of the Sarbanes-Oxley Act and would inhibit disclosure of valuable information.

The Importance of Non-GAAP Financial Measures

Non-GAAP financial measures - properly used and reconciled with GAAP - can provide investors with valuable information and bring greater meaning to complex financial statements. Non-GAAP financial measures are often critical tools used by management in assessing a company's past performance and future prospects. For example, companies in certain industries commonly use EBITDA or earnings excluding unusual items to measure their core financial performance on a periodic basis. These measures help management focus on true operating performance and assist in period-to-period comparability. Disclosure of these measures, in their proper context, furthers the Commission's goal of allowing investors an opportunity to look at company performance "through the eyes of management." Investors in certain industries take special note of non-GAAP financial measures. For example, several of our member companies in the insurance industry advise us that their investors view operating income (commonly defined as net income less realized investment results) as more a meaningful financial measure than net income, because of the large and unpredictable impact on net income of capital gains and losses from these companies' investment portfolios. Accordingly, absent the reporting of operating income, investors may be unable to make meaningful period-to-period comparisons in this industry. We believe that similar examples exist in a variety of industries.

We strongly support Sarbanes-Oxley's two mandates with respect to non-GAAP financial measures: to eliminate misleading use of non-GAAP financials and require reconciliation to GAAP. However, as explained below, we believe the proposal goes beyond these mandates in a way that would impede the flow of valuable information to investors.

Non-GAAP Per Share Measures

We strongly believe that companies should be permitted to disclose non-GAAP per-share measures in both press releases and Commission filings, so long as

  • GAAP measures are also provided and are clearly identified; and

  • the non-GAAP measures are reconciled with comparable GAAP measures.

We would not object to specific rules or guidelines about formatting, order of presentation, etc., to help eliminate any chance of investor confusion.

Per-share measures are frequently used by management, investors and analysts in a variety of industries. Investors should be permitted to assess and evaluate such information and to make their own decisions as to whether they agree with the per-share measures presented.

We understand that the SEC staff would permit disclosure of a non-GAAP financial measure (e.g., net income adjusted for an unusual event) to be followed immediately by a statement of the number of primary or fully diluted shares outstanding. To determine the per-share number, the investor is left to "do the arithmetic" on his or her own. Providing the per-share figures directly would be much more straightforward and convenient to the investor.

Adjustments for Unusual / Non-recurring Items

The proposed rule would prohibit a company from adjusting a non-GAAP performance measure to eliminate 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." We believe this rule, as drafted, would harm investors. When management views an operation on the basis of "core earnings," operating income, or another non-GAAP financial measure, we believe that investors should also be given access to and an understanding of that measurement. For example, when a company incurs a large gain or loss on the purchase or sale of a business or investment, management will typically exclude the gain or loss in order to better understand its "core" or operating earnings. Under the proposed rule, however, the company could not share this very useful information with the public because it cannot say that a similar gain or loss is not reasonably likely to recur at some time in the future. This result seems contrary to the Commission's stated views in its December 2001 release on the subject of pro forma [non-GAAP] measures:

...Pro forma financial information can serve useful purposes. Public companies 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.

We recognize that some companies have inappropriately attempted to "eliminate" items that recur so frequently as to be considered normal operating items; however, we believe there is an equal risk of abuse in the other direction - that is, companies attempting to "bury" unusual, non-recurring gains that are included in the GAAP results without bringing attention to the non-recurring nature of the gains. We believe that such abuses can be adequately addressed under the existing MD&A regulations and the anti-fraud provisions. And again, we would not object to rules or guidelines on format and order of presentation. But we believe the proposed prohibition on adjusting items that "are reasonably likely to recur" is too restrictive and would inhibit valuable disclosures.

If, however, this proposed rule is adopted, we believe that companies would benefit from greater definition and narrowing of the term "reasonably likely to recur," including excepting certain events from the definition (such as the purchase and sale of a business and restructuring charges0 that are not reflective of a company's core business.

Forward Looking Non-GAAP Measures

We are concerned that the requirement to provide a quantitative reconciliation to GAAP for forward-looking non-GAAP financial measures will chill the provision of useful forward-looking information. In many cases, the reconciliation of forward-looking data may be very difficult, if not impossible. Earnings guidance provides a simple and common example. A typical statement of guidance might be, "we expect net income of $500 - 600 million next year, excluding unusual items." At the time the company provides the guidance, it may have no idea whether any unusual items will occur next year or what their impact may be; it merely adds the exclusion to caution the investor that the amounts could be subject to change if an unusual item occurs. It is difficult to conceive how a company could reconcile its forecast to account for an event that is unknown.

8-K Filings for Earnings Releases

Generally, we support the proposed 8-K filing requirement for earnings releases. However, we are very concerned that the restrictions on non-GAAP measurements described above will be applied to earnings releases required to be filed with the Commission under this proposal. We agree that, when non-GAAP measurements are cited in such communications, the GAAP measures must also be clearly presented, the non-GAAP measures should be reconciled to GAAP, and consistency with other periods should be explained. Yet, we strongly believe that it is not in the interests of informed markets to prohibit disclosure of particular categories of non-GAAP financial information.

Some practitioners have suggested that if a company is announcing earnings and also wishes to provide non-GAAP financial measures that would not be permitted in SEC filings under Item 10, it could issue a separate press release containing the items that are permitted by Regulation G but prohibited by Item 10 (e.g., per-share data, forward-looking data that cannot be easily reconciled). This seems to us an awkward and confusing approach to financial disclosure. And many of our companies think best practice is to include all relevant data in SEC filings, but if this requirement were to be adopted, they would be prohibited from doing so.

We appreciate your consideration of these comments, and we would be happy to discuss these matters further or to meet with you if it would be helpful.


James B. Lootens
Assistant Secretary and
Assistant General Counsel
Eli Lilly and Company

For the Securities Law Committee of the American Society of Corporate Secretaries,
Subcommittee on non-GAAP financial measures

cc: David Smith
Thomas Sanger
Peggy Foran
Susan Wolf