December 13, 2002


Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
ATTN: Jonathan G. Katz, Secretary

Re: Comments to File S7-43-02
      Release No. 33-8145; 34-46768

Dear Mr. Katz:

We are responding to the Commission's request for comments on its proposed rules concerning disclosure of non-GAAP financial measures.

We support the Commission's efforts to make reforms in this area, because profit reporting has long been subject to abuse, and there is a need for greater clarity. However, we think the proposed rules go too far in precluding issuers that use non-GAAP performance measures from adjusting those measures by excluding certain items from the measure whenever those items are "reasonably likely" to recur. An absolute ban on alternative financial measures is unnecessary and, we believe, undesirable.

Analysts and Investors May Expect an Alternative Measure. In some industries, conventions have developed whereby analysts and investors examine issuer performance ignoring the effects of certain items that do not relate directly to the core business of the issuer. Sometimes these items are generally non-recurring in nature yet have a reasonable possibility of recurring. In some cases, issuers and analysts may even expect these items to recur on a sporadic basis. Nonetheless, analysts often desire an analysis of earnings potential that excludes these relatively isolated or sporadic items because, as others have stated, this provides an "apples-to-apples look." We do not believe that it is accurate to say that using such measures is inherently misleading, or often misleading.

Non-GAAP Financial Measures Can Help Give a Fair Presentation of the Issuer's Financial Results. The certification required under Section 906 of the Sarbanes-Oxley Act specifically does not refer to GAAP. Instead, it requires a representation that the report "fairly presents, in all material respects, the financial condition and results of operations of the issuer." One reason for the omission of GAAP in this certification, we believe, is that issuers accused of wrongdoing have asserted that their financial statements technically complied with GAAP. Congress apparently felt that GAAP statements can also be abused. Rules which discourage the use of alternative measures could make it more difficult to comply with the requirements of Sarbanes-Oxley.

The Combined Effect of the Proposed Rules and FD. Because Regulation FD prohibits any discussions with analysts unless any material content of those discussions is made publicly available, the proposed rules could effectively preclude issuers from discussing financial measures prohibited by the proposed rules with analysts altogether. If the proposed regulations are implemented in current form, issuers will have no forum to discuss the measures that may be used in the industry to analyze performance.

Consistent Use of an Alternate Measure Is Not Cherry Picking. The main abuse that Congress and investors are seeking to have remedied in this area is cherry picking-i.e., cases where management simply picks and chooses the "bad" items for exclusion and leaves in the "good" items. When an issuer's disclosure is governed by a set of consistent principles, which it discloses and explains, there is no cherry picking. Further, full reconciliation to comparable GAAP measures adequately addresses analyst and investor concerns, which are based on understanding the adjustments made to reach the measure. As Chuck Hill, research director for Thompson First Call, has stated:

There's nothing wrong with adjusting GAAP numbers. A lot of times it's desirable. But when you leave the trail from GAAP to pro forma, it's your obligation to show exactly how you got from Point A to Point B.

It seems to us that issuers that use non-GAAP measures should be allowed to exclude items, even if they have a reasonable likelihood of recurring, under the following circumstances:

  • There are "standard" items that tend to be analyzed this way in the industry, as evidenced by analysts' research reports, industry publications or the like.

  • Management is consistent in its application, and bases its inclusion/exclusion on a set of principles that are clearly described in the disclosure.

  • The disclosure includes a complete description and analysis of the excluded items and their effect on past periods as well as anticipated effects on future periods.

Contractual Provisions Keyed to Alternate Measures. A separate but similar issue is the presence of debt covenants that are tied to non-GAAP measures. The proposed rules appear to prohibit disclosure of such measures. We think there should be an exception when the issuer has such a covenant and compliance with the covenant is material to the issuer. In such cases, the non-GAAP measures ought to be disclosed, with a caveat that they are disclosed for the purpose of describing the issuer's status under the covenants.

On some of your specific questions we have the following comments:

Questions regarding proposed Regulation G

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?

No, please see discussion above.

As an alternative to requiring reconciliation to the most directly comparable financial measure calculated and presented in accordance with GAAP, should we require reconciliation to specific GAAP financial measures in all cases, such as net income and cash flow from operating activities?

We think that the issuer should choose the most comparable measure. However, in the final release, the Commission should give guidance to the effect that, in most cases, this should be GAAP net income or income from continuing operations (for performance measures) and cash flow from operations for liquidity, and that the issuer should explain why other measures it presents are better or of additional utility, if it desires to use other measures. It may be helpful to tie use of an alternative measure to whether it is actually used by management, in a manner comparable to the disclosure of operating segment information.

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. Should we require that information in all communications that are subject to Regulation G? If so, why? If not, why not?

This discussion is an important adjunct to the use of the non-GAAP measure. However, it may be unwieldy to include a full discussion in the context of a press release. Therefore, although the information should be required in all Regulation G communications, management should be allowed to satisfy that requirement by cross-referencing to its SEC filings, to the extent a prior SEC filing includes the discussion.

Questions regarding amendments to Item 10 of Regulation S-K, Item 10 of Regulation S-B and Form 20-F

Should the non-GAAP financial measures be presented in a separate section of a Commission filing?

We think this disclosure should be made in a separate section of Management's Discussion and Analysis (MD&A). MD&A is the best place for this disclosure for two reasons:

  1. The non-GAAP measures are best understood in the context of a full discussion of the issuer's financial condition and results of operations.

  2. To the extent the measures address liquidity, they should be in proximity to the Liquidity discussion within MD&A.

It would be helpful for the investor if the reconciliation were highlighted by being in a separate section. On the other hand, reference to the measure in the other portions of MD&A may be useful.

Should the requirement that a quantitative reconciliation of prospective measures be included in the filing have an exception similar to that proposed in Regulation G where the necessary information cannot be obtained without unreasonable effort?

We think that the reconciliation is such an important part of the disclosure that it should never be excluded.

Very truly yours,



Robert F. Dow
B. Joseph Alley, Jr.
T. Clark Fitzgerald III
Stephen D. Fox