[Federal Register Volume 68, Number 20 (Thursday, January 30, 2003)]
[Rules and Regulations]
[Pages 4820-4833]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-1977]
[[Page 4819]]
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Part II
Securities and Exchange Commission
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17 CFR Parts 228, 229, et al.
Conditions for Use of Non-GAAP Financial Measures; Final Rule
Federal Register / Vol. 68, No. 20 / Thursday, January 30, 2003 /
Rules and Regulations
[[Page 4820]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR PARTS 228, 229, 244 and 249
[RELEASE NO. 33-8176; 34-47226; FR-65; FILE NO. S7-43-02]
RIN 3235-A169
Conditions for Use of Non-GAAP Financial Measures
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: As directed by the Sarbanes-Oxley Act of 2002, we are adopting
new rules and amendments to address public companies' disclosure or
release of certain financial information that is calculated and
presented on the basis of methodologies other than in accordance with
generally accepted accounting principles (GAAP). We are adopting a new
disclosure regulation, Regulation G, which will require public
companies that disclose or release such non-GAAP financial measures to
include, in that disclosure or release, a presentation of the most
directly comparable GAAP financial measure and a reconciliation of the
disclosed non-GAAP financial measure to the most directly comparable
GAAP financial measure. We also are adopting amendments to Item 10 of
Regulation S-K and Item 10 of Regulation S-B to provide additional
guidance to those registrants that include non-GAAP financial measures
in Commission filings. Additionally, we are adopting amendments to Form
20-F to incorporate into that form the amendments to Item 10 of
Regulation S-K. Finally, we are adopting amendments that require
registrants to furnish to the Commission, on Form 8-K, earnings
releases or similar announcements.
DATES: Effective Date: March 28, 2003. Compliance Dates: Regulation G
will apply to all subject disclosures as of March 28, 2003. The
requirement to furnish earnings releases and similar materials to the
Commission on Form 8-K will apply to earnings releases and similar
announcements made after March 28, 2003. The amendments to Item 10 of
Regulation S-K, Item 10 of Regulation S-B and Form 20-F will apply to
any annual or quarterly report filed with respect to a fiscal period
ending after March 28, 2003.
FOR FURTHER INFORMATION CONTACT: Joseph P. Babits or Craig Olinger, at
(202) 942-2910, Division of Corporation Finance, U.S. Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0402.
SUPPLEMENTARY INFORMATION: We are adopting new Regulation G.\1\ We also
are adopting amendments to Item 10 of Regulation S-K,\2\ Item 10 of
Regulation S-B,\3\ and Securities Exchange Act of 1934 \4\ Forms 8-K
\5\ and 20-F.\6\
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\1\ 17 CFR 244.100-244.102.
\2\ 17 CFR 229.10.
\3\ 17 CFR 228.10.
\4\ 15 U.S.C. Sec. Sec. 78a et seq.
\5\ 17 CFR 249.308.
\6\ 17 CFR 249.220.
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I. Background
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley
Act of 2002 (Sarbanes-Oxley Act).\7\ As directed by Section 401(b) of
the Sarbanes-Oxley Act, we published for comment a number of new rules
and amendments to address the use of ``non-GAAP financial measures'' on
November 4, 2002.\8\ As discussed in that proposing release, the
Commission has expressed concerns regarding the improper use of non-
GAAP financial measures during the past 30 years.\9\ The rules we adopt
today reflect the letter and spirit of the Sarbanes-Oxley Act, our
history in regulating non-GAAP financial measures, and the comments we
received on the proposals.
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\7\ Pub. L. No. 107-204, 116 Stat. 745 (2002).
\8\ See Release No. 33-8145 (Nov. 4, 2002) [67 FR 68490].
\9\ See Accounting Series Release No. 142, Release No. 33-5337
(Mar. 15, 1973); Cautionary Advice Regarding the Use of ``Pro
Forma'' Financial Information, Release No. 33-8039 (Dec. 4, 2001);
and In the Matter of Trump Hotels & Casino Resorts, Inc., Release
No. 34-45287 (Jan. 16, 2002). We also note that the Financial
Accounting Standards Board (FASB) has initiated a project called
Financial Performance Reporting by Business Enterprises. The
objective of the project is to ensure that users of financial
statements have sufficient quality information in order to evaluate
a company's performance. The project's focus includes the
presentation of key performance measures, or information necessary
to permit calculation of key financial measures, used by investors
and creditors. However, it will not address non-GAAP measures in
press releases or other communications outside financial statements.
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We are adopting the proposals relating to the use of non-GAAP
financial measures substantially as proposed.\10\ The rules we adopt
today, however, reflect the following changes from those proposals:
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\10\ Regulation G and the amendments to our rules are intended
to ensure that investors receive adequate information in evaluating
a company's use of non-GAAP financial measures. In addition, having
earnings announcements furnished on Form 8-K would provide the
public a source of reference for obtaining a company's most recent
statements regarding its financial condition. Therefore, we believe
that the new rules and amendments are in the public interest and
consistent with the protection of investors.
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[sbull] Regulation G--
[sbull] Regulation G will not apply to a non-GAAP financial
measure included in disclosure relating to a proposed business
combination, the entity resulting therefrom or an entity that is a
party thereto if the disclosure is contained in a communication that
is subject to the communications rules applicable to business
combination transactions;
[sbull] The safe harbor from the application of Regulation G for
disclosure of non-GAAP financial measures by foreign private issuers
outside of the United States will make clearer that Regulation G
does not apply to written communications released in the United
States, as well as outside the United States, so long as the
communication is released in the United States contemporaneously
with or after its release outside the United States and is not
otherwise targeted at persons located in the United States;
[sbull] The reference to ``comparable [GAAP] financial measure
or measures'' will read ``most directly comparable [GAAP] financial
measure or measures''; and
[sbull] The definition of GAAP for purposes of financial
measures prepared by foreign private issuers will be further
clarified.
[sbull] Item 10 of Regulation S-K and Item 10 of Regulation S-
B--
[sbull] These items will not include a prohibition on ``non-GAAP
per share measures'' in documents filed with the Commission; \11\
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\11\ While we have not included a prohibition on per share non-
GAAP financial measures in Item 10 of Regulation S-K or Item 10 of
Regulation S-B, per share measures that are prohibited specifically
under GAAP or Commission rules continue to be prohibited in
materials filed with or furnished to the Commission. See, for
example, the prohibition on cash flow per share in paragraph 33 of
FASB Statement No. 95, Statement of Cash Flows.
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[sbull] These items will not apply to a non-GAAP financial
measure included in disclosure relating to a proposed business
combination, the entity resulting therefrom or an entity that is a
party thereto if the disclosure is contained in a communication that
is subject to the communications rules applicable to business
combination transactions;
[sbull] The reference to ``comparable [GAAP] financial measure
or measures'' will read ``most directly comparable [GAAP] financial
measure or measures'';
[sbull] The required quantitative reconciliation will include
the same exception for forward-looking non-GAAP financial measures
as in Regulation G;
[sbull] The measures EBIT (earnings before interest and taxes)
and EBITDA (earnings before interest, taxes, depreciation, and
amortization) will be exempted specifically from the prohibition on
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;
[sbull] The prohibition on 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 will make clear that such an
adjustment is prohibited only when (1) the nature of the charge or
gain is such that it is reasonably likely to recur within two years,
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or (2) there was a similar charge or gain within the prior two
years; and
[sbull] The definition of GAAP for purposes of financial
measures prepared by foreign private issuers will be further
clarified.
[sbull] Definition of non-GAAP financial measures--
[sbull] ``Non-GAAP financial measures'' will not include
financial measures that are required to be disclosed by GAAP,
Commission rules or a system of regulation that is applicable to a
registrant.
[sbull] Form 8-K--
[sbull] The Form 8-K requirement with respect to earnings
releases and similar announcements will require that those materials
be ``furnished to,'' rather than ``filed with,'' the Commission.
II. The Rules and Amendments
A. Regulation G
We are adopting new Regulation G substantially as proposed.
Regulation G will apply whenever a company publicly discloses or
releases material information that includes a non-GAAP financial
measure.\12\
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\12\ Section 401(b) of the Sarbanes-Oxley Act directs the
Commission to adopt rules concerning the public disclosure or
release of ``pro forma financial information'' by a company filing
reports under Section 13(a) [15 U.S.C. Sec. 78m(a)] or 15(d) [15
U.S.C. Sec. 780(d)]. Because the Commission's rules and regulations
address the use of ``pro forma financial information'' in other
contexts, particularly in Regulation S-X, and use that term
differently from its use in the Sarbanes-Oxley Act, we are adopting
the term ``non-GAAP financial measures'' to identify the types of
information targeted by Section 401(b) of the Sarbanes-Oxley Act.
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1.Application
a. General Standard
Regulation G applies to any entity that is required to file reports
pursuant to Sections 13(a) or 15(d) of the Exchange Act, other than a
registered investment company.\13\ Regulation G applies whenever such a
registrant, or a person acting on its behalf, discloses publicly or
releases publicly any material information that includes a non-GAAP
financial measure.
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\13\ See Rule 101(c) of Regulation G [17 CFR 244.101(c)].
Registered investment companies are excluded from the definition of
``registrant'' for purposes of Regulation G, as Section 405 of the
Sarbanes-Oxley Act exempts investment companies registered under
Section 8 of the Investment Company Act of 1940 (15 U.S.C. Sec.
80a-8) from Section 401 of the Sarbanes-Oxley Act and any rules
adopted by the Commission under Section 401.
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b. Foreign Private Issuers
Regulation G applies to registrants that are foreign private
issuers,\14\ subject to a limited exception. Specifically, Regulation G
does not apply to public disclosure of a non-GAAP financial measure by,
or on behalf of, a registrant that is a foreign private issuer if:
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\14\ ``Foreign private issuer'' is defined in Rule 405 [17 CFR
230.405] under the Securities Act 1933 [15 U.S.C. Sec. Sec. 77a et
seq.].
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[sbull] The securities of the foreign private issuer are listed or
quoted on a securities exchange or inter-dealer quotation system
outside the United States;
[sbull] The non-GAAP financial measure is not derived from or based
on a measure calculated and presented in accordance with generally
accepted accounting principles in the United States; and
[sbull] The disclosure is made by or on behalf of the foreign
private issuer outside the United States, or is included in a written
communication that is released by or on behalf of the foreign private
issuer outside the United States.
These conditions focus on whether the financial measure relates to
U.S. GAAP and whether the disclosure is made by or on behalf of the
foreign private issuer outside of the United States. We believe these
conditions appropriately take into account the interests of U.S.
investors (including both the interests reflected in the Sarbanes-Oxley
Act and the interest of receiving information that is communicated
globally) and the interests of foreign private issuers in communicating
globally, including in their home markets.
Therefore, we believe that the worldwide availability of
information properly disclosed outside the United States and the
interests of U.S. investors in information communicated by, or on
behalf of, the issuer outside the United States dictate that the
exception for foreign private issuers should continue to apply even
where any one or more of the following circumstances are present:
[sbull] A written communication is released in the United States as
well as outside the United States, so long as the communication is
released in the United States contemporaneously with or after the
release outside the United States and is not otherwise targeted at
persons located in the United States;
[sbull] Foreign journalists, U.S. journalists or other third
parties have access to the information;
[sbull] The information appears on one or more web sites maintained
by the registrant, so long as the web sites, taken together, are not
available exclusively to, or targeted at, persons located in the United
States; or
[sbull] Following the disclosure or release of the information
outside the United States, the information is included in a submission
to the Commission made under cover of a Form 6-K.\15\
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\15\ 17 CFR 249.306.
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c. Disclosures Relating to Business Combination Transactions
As proposed, Regulation G would have applied to disclosures of non-
GAAP financial measures that represent projections or forecasts of
results of proposed business combination transactions. We sought
comment specifically on this point, and several of the comment letters
we received in response to the proposal argued strongly that Regulation
G should not apply to these measures.\16\ After consideration of the
comments regarding the application of Regulation G to these
disclosures, we are including in Regulation G an exception for non-GAAP
financial measures included in disclosure relating to a proposed
business combination transaction, the entity resulting from the
business combination transaction, or an entity that is a party to the
business combination transaction if the disclosure is contained in a
communication that is subject to the Commission's communications rules
applicable to business combination transactions.\17\
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\16\ See, for example, the comment letters of the Association of
the Bar of the City of New York, Special Committee on Mergers,
Acquisitions, and Corporate Control Contests; Association of the Bar
of the City of New York, Committee on Securities Regulation;
Deloitte & Touche, LLP; and Cleary, Gottlieb, Steen & Hamilton.
\17\ See Exchange Act Rules 14a-12 (17 CFR 240.14a-12) and 14d-2
(17 CFR 240.14d-2), Securities Act Rules 165 (17 CFR 230.165) and
425 (17 CFR 230.425), and Item 1015 of Regulation M-A (17 CFR
229.1015).
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2. Non-GAAP Financial Measures
a. Definition
For purposes of Regulation G, a non-GAAP financial measure is a
numerical measure of a registrant's historical or future financial
performance, financial position or cash flows that:
[sbull] Excludes amounts, or is subject to adjustments that have
the effect of excluding amounts, that are included in the most
directly 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
[sbull] Includes amounts, or is subject to adjustments that have
the effect of including amounts, that are excluded from the most
directly comparable measure so calculated and presented.
In this regard, GAAP refers to generally accepted accounting principles
in the United States.
The proposed version of Regulation G indicated that, with respect
to foreign private issuers whose primary financial statements are
prepared in accordance with non-U.S. generally accepted accounting
principles, references to
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GAAP would ``also include'' the principles under which those primary
financial statements are prepared. Commenters expressed the concern
that the words ``also include'' meant that foreign private issuers
would have to reconcile the non-GAAP financial measure to both GAAP in
their home country and U.S. GAAP.\18\ As adopted, Regulation G
clarifies this issue. First, in the case of foreign private issuers
whose primary financial statements are prepared in accordance with non-
U.S. generally accepted accounting principles, Regulation G makes clear
that GAAP refers to the principles under which those primary financial
statements are prepared. Second, in the case of foreign private issuers
that include a non-GAAP financial measure derived from or based on a
measure calculated in accordance with U.S. generally accepted
accounting principles, Regulation G makes clear that GAAP refers to
U.S. generally accepted accounting principles for purposes of the
application of the requirements of Regulation G to the disclosure of
that measure.
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\18\ See, for example, the comment letters of Deloitte & Touche,
LLP and the Association of Private French Enterprises-Association of
Large French Enterprises.
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b. Discussion of the Definition
We do not intend the definition of ``non-GAAP financial measures''
to capture measures of operating performance or statistical measures
that fall outside the scope of the definition set forth above. As such,
non-GAAP financial measures do not include:
[sbull] Operating and other statistical measures (such as unit
sales, numbers of employees, numbers of subscribers, or numbers of
advertisers); and
[sbull] Ratios or statistical measures that are calculated using
exclusively one or both of:
[sbull] Financial measures calculated in accordance with GAAP; and
[sbull] Operating measures or other measures that are not non-GAAP
financial measures.
Non-GAAP financial measures do not include financial information
that does not have the effect of providing numerical measures that are
different from the comparable GAAP measure. Examples of measures to
which Regulation G does not apply include the following:
[sbull] Disclosure of amounts of expected indebtedness, including
contracted and anticipated amounts;
[sbull] Disclosure of amounts of repayments that have been planned
or decided upon but not yet made;
[sbull] Disclosure of estimated revenues or expenses of a new
product line, so long as such amounts were estimated in the same manner
as would be computed under GAAP; and
[sbull] Measures of profit or loss and total assets for each
segment required to be disclosed in accordance with GAAP.\19\
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\19\ FASB Statement No. 131, Disclosures About Segments of an
Enterprise and Related Information, requires that companies report a
measure of profit or loss and total assets for each reportable
segment. This tabular information is presented in a note to the
audited financial statements and is required to be reconciled to the
GAAP measures, with all significant reconciling items separately
identified and described. A registrant is required to provide a
Management's Discussion & Analysis of segment information if such a
discussion is necessary to an understanding of the business. Such
discussion would generally include the measures reported under FASB
Statement No. 131.
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We do intend that the definition of non-GAAP financial measure
capture all measures that have the effect of depicting either:
[sbull] A measure of performance that is different from that
presented in the financial statements, such as income or loss before
taxes or net income or loss, as calculated in accordance with GAAP; or
[sbull] A measure of liquidity that is different from cash flow or
cash flow from operations computed in accordance with GAAP.
An example of a non-GAAP financial measure would be a measure of
operating income \20\ that excludes one or more expense or revenue
items that are identified as ``non-recurring.'' Another example would
be EBITDA, which could be calculated using elements derived from GAAP
financial presentations but, in any event, is not presented in
accordance with GAAP. Examples of ratios and measures that would not be
non-GAAP financial measures would include sales per square foot
(assuming that the sales figure was calculated in accordance with GAAP)
or same store sales (again assuming the sales figures for the stores
were calculated in accordance with GAAP).
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\20\ Rule 5-03(b)(1) through Rule 503(b)(7) of Regulation S-X
[17 CFR 210.5-03(b)(1) through 17 CFR 210.5-03(b)(7)] includes
guidance on the components of operating income (loss).
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An example of a ratio that would not be a non-GAAP financial
measure would be a measure of operating margin that is calculated by
dividing revenues into operating income, where both revenue and
operating income are calculated in accordance with GAAP. Conversely, an
example of a ratio that would be a non-GAAP financial measure would be
a measure of operating margin that is calculated by dividing revenues
into operating income, where either revenue or operating income, or
both, were not calculated in accordance with GAAP.
We received comment regarding the exclusion of financial measures
used for regulatory purposes from the definition.\21\ In response to
these comments, we have provided an exclusion from the definition of
``non-GAAP financial measure'' for financial measures required to be
disclosed by GAAP, Commission rules, or a system of regulation of a
government or governmental authority or self-regulatory organization
that is applicable to the registrant. Examples of such financial
measures would include measures of capital or reserves calculated for
such a regulatory purpose.
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\21\ See, for example, the comment letters of America's
Community Bankers and the American Bankers Association.
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3. Requirements of Regulation G
Regulation G contains a general disclosure requirement and a
specific requirement of a reconciliation of the non-GAAP financial
measure to the most directly comparable GAAP financial measure.
a. General Disclosure Requirement \22\
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\22\ 17 CFR 244.100(b).
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Regulation G includes the general disclosure requirement that a
registrant, or a person acting on its behalf, shall not make public a
non-GAAP financial measure that, taken together with the information
accompanying that measure, contains an untrue statement of a material
fact or omits to state a material fact necessary in order to make the
presentation of the non-GAAP financial measure, in light of the
circumstances under which it is presented, not misleading.\23\
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\23\ In its comment letter, the Association for Investment
Management and Research expressed concern regarding the presentation
of non-GAAP financial measures that appear to have been calculated
and presented in a manner consistent with prior presentations of
that measure when, in fact, the method of calculating or presenting
the measure has changed since prior periods. We agree with this
concern. As such, registrants should consider whether a change in
the method of calculating or presenting a non-GAAP financial measure
from one period to another, without a complete description of the
change in that methodology, complies with the requirement of
Regulation G that a registrant, or a person acting on its behalf,
shall not make public a non-GAAP financial measure that, taken
together with the information accompanying that measure, contains an
untrue statement of a material fact or omits to state a material
fact necessary in order to make the presentation of the non-GAAP
financial measure, in light of the circumstances under which it is
presented, not misleading.
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b. Reconciliation Requirement \24\
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\24\ 17 CFR 244.100(a).
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Whenever a company that is subject to Regulation G, or a person
acting on its behalf, publicly discloses any material information that
includes a non-GAAP financial measure, Regulation G requires the
registrant to provide the following information as part of the
disclosure or release of the non-GAAP financial measure:\25\
\25\ A registrant's failure to include all of the information
required to be included in a public disclosure or release by
Regulation G would not affect that registrant's form eligibility
under the Securities Act or whether there is adequate current public
information regarding the registrant for purposes of Securities Act
Rule 144(c) (17 CFR 230.144(c)).
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[sbull] A presentation of the most directly comparable financial
measure calculated and presented in accordance with GAAP;\26\ and
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\26\ Examples of financial measures calculated and presented in
accordance with GAAP would include, but not be limited to, earnings
or cash flows as reported in the GAAP financial statements. We
believe that it is most appropriate to provide registrants with the
flexibility to best make the determination as to which is the ``most
directly comparable financial measure calculated and presented in
accordance with GAAP.'' We, therefore, do not believe that it is
appropriate to provide a specific definition of that term. As
general guidance, however, we note that our staff has been, and
continues to be, of the view that (1) non-GAAP financial measures
that measure cash or ``funds'' generated from operations (liquidity)
should be balanced with disclosure of amounts from the statement of
cash flows (cash flows from operating, investing and financing
activities); and (2) non-GAAP financial measures that depict
performance should be balanced with net income, or income from
continuing operations, taken from the statement of operations.
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[sbull] A reconciliation (by schedule or other clearly
understandable method), which shall be quantitative for historic
measures and quantitative, to the extent available without
unreasonable efforts, for prospective measures, of the differences
between the non-GAAP financial measure presented and the most
directly comparable financial measure or measures calculated and
presented in accordance with GAAP.\27\
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\27\ In the case of ratios or measures where a non-GAAP
financial measure is the numerator and/or the denominator in the
calculation of that ratio or measure, the registrant must provide a
reconciliation with regard to each non-GAAP financial measure used
in the calculation. The registrant must also show the ratio or
measure as calculated using the most directly comparable GAAP
financial measure(s).
If a non-GAAP financial measure is released orally, telephonically,
by webcast, by broadcast, or by similar means, the registrant may
provide the accompanying information required by Regulation G by: (1)
Posting that information on the registrant's web site; and (2)
disclosing the location and availability of the required accompanying
information during its presentation.\28\
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\28\ Note 1 to Rule 100 of Regulation G [17 CFR 244.100]. While
Note 1 to Regulation G does not state how long a company must keep
this information available on its web site, we encourage companies
to provide ongoing web site access to this information. At a
minimum, we suggest that companies provide web site access to this
information for at least a 12-month period.
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With regard to the quantitative reconciliation of non-GAAP
financial measures that are forward-looking, Regulation G requires a
schedule or other presentation detailing the differences between the
forward-looking non-GAAP financial measure and the appropriate forward-
looking GAAP financial measure. If the GAAP financial measure is not
accessible on a forward-looking basis, the registrant must disclose
that fact and provide reconciling information that is available without
an unreasonable effort. Furthermore, the registrant must identify
information that is unavailable and disclose its probable significance.
Some commenters suggested that we define ``public'' disclosure and
persons acting ``on behalf of'' a registrant.\29\ In both cases, the
commenters made reference to Regulation FD \30\ as a precedent. We
believe that the precedent of Regulation FD is largely inapposite in
this regard and, therefore, have not added these definitions. Under
Regulation FD, broad ``public'' disclosure is the requirement, not the
triggering event. The perceived need for exclusions from the triggering
disclosures and the specified list of company officials that are acting
for the company under Regulation FD was the concern that any
disclosure--private or otherwise--would trigger a public disclosure
requirement. There should be no such concerns with Regulation G. Only
``public'' disclosure triggers Regulation G, and an issuer is properly
responsible for any person making ``public'' disclosures on its
behalf.\31\
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\29\ See, for example, the comment letter of the American Bar
Association Committee on Federal Regulation of Securities and the
American Bar Association Committee on Law and Accounting.
\30\ 17 CFR 243.100-243.103.
\31\ Whether disclosure is ``public'' will, of course, depend on
all of the facts and circumstances surrounding that disclosure.
Whether disclosure is ``on behalf of'' the registrant also will
depend on all of the facts surrounding that disclosure. However,
consistent with Regulation FD, we intend that a person who discloses
material non-public information in breach of a duty of trust or
confidence to the registrant should not be considered to be acting
``on behalf of'' the registrant.
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We understand, and indeed intend, that Regulation FD and Regulation
G will operate in tandem. A ``private'' communication of material, non-
public information to, for example, an analyst or a shareholder
triggers a requirement for broad public disclosure under Regulation FD.
If that public disclosure is of material information containing a non-
GAAP financial measure, Regulation G will apply to that disclosure.
4. Liability Matters
Rule 102 of Regulation G \32\ expressly provides that neither the
requirements of Regulation G nor a person's compliance or non-
compliance with the requirements of Regulation G shall in itself affect
any person's liability under Exchange Act Section 10(b) \33\ or Rule
10b-5 thereunder.\34\ Disclosure pursuant to Regulation G that is
materially deficient may, in addition to violating Regulation G, give
rise to a violation of Section 10(b) or Rule 10b-5 thereunder if all
the elements for such a violation are present. In this regard, we
reminded companies in December 2001 that, under certain circumstances,
non-GAAP financial measures could mislead investors if they obscure the
company's GAAP results.\35\ We continue to be of the view that some
disclosures of non-GAAP financial measures could give rise to actions
under Rule 10b-5.\36\
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\32\ 17 CFR 244.102
\33\ 15 U.S.C. Sec. 78j.
\34\ 17 CFR 240.10b-5.
\35\ See Release No. 33-8039 (Dec. 4, 2001) [59 FR 63731].
\36\ See Release No. 33-8039 (Dec. 4, 2001) [59 FR 63731] and In
the Matter of Trump Hotels & Casino, Inc., Release No. 34-45287
(Jan. 16, 2002).
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Section 3(b) of the Sarbanes-Oxley Act provides that a violation of
that Act or the Commission's rules thereunder shall be treated for all
purposes as a violation of the Exchange Act. Therefore, if an issuer,
or any person acting on its behalf, fails to comply with Regulation G,
the issuer and/or the person acting on its behalf could be subject to a
Commission enforcement action alleging violations of Regulation G.
Additionally, if the facts and circumstances warrant, we could bring an
action under both Regulation G and Rule 10b-5.
B. Non-GAAP Financial Measures in Filings With the Commission--
Amendments to Item 10 of Regulation S-K, Item 10 of Regulation S-B and
Form 20-F
1. Application
a. General Standard
We are amending Item 10 of Regulation S-K and Item 10 of Regulation
S-B to include a statement concerning the use of non-GAAP financial
measures in filings with the Commission. The amendments do not apply to
registered investment
[[Page 4824]]
companies.\37\ The non-GAAP financial measures provisions in amended
Item 10 of Regulation S-K and Item 10 of Regulation S-B apply to the
same categories of non-GAAP financial measures as are covered by
Regulation G.\38\
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\37\ Regulation S-B does not apply to registered investment
companies, as they are excluded from the definition of ``small
business issuer'' [17 CFR 228.10(a)(1)(iii)]. The amendments to
Regulation S-K include a specific exemption for registered
investment companies [17 CFR 229.10(e)(7)].
\38\ These amendments apply only to non-GAAP financial measures
in filings with the Commission. Regulation G applies to any public
disclosure of material information that includes a non-GAAP
financial measure, regardless of whether it is in a filing with the
Commission. Accordingly, the requirement of Regulation G that the
presentation of a non-GAAP financial measure, taken together with
the information accompanying the measure and any other accompanying
discussion, not contain a material misstatement or material omission
necessary in order to make the presentation not misleading, in light
of the circumstances in which the presentation is made, also applies
to disclosures in documents filed with the Commission.
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b. Foreign Private Issuers
We are amending Exchange Act Form 20-F to incorporate Item 10 of
Regulation S-K. Accordingly, foreign private issuers will be subject to
the same requirements as domestic issuers with respect to the use of
non-GAAP financial measures in filings with the Commission on Form 20-
F.\39\ Consistent with the proposal, filers on Form 40-F under the
Multi-Jurisdictional Disclosure System are not subject to those
requirements.\40\
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\39\ Item 10 of Regulation S-K will not apply to materials
submitted to the Commission on Form 6-K. However, if the information
in the Form 6-K is incorporated by reference into a registration
statement, prospectus or annual report, Item 10 of Regulation S-K
would then apply to that information.
\40\ Any public disclosure by these issuers that is not covered
by the exclusion for foreign private issuers would, however, be
subject to Regulation G.
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As noted above, the definition of ``non-GAAP financial measure'' is
the same for purposes of these amendments as for Regulation G. However,
a non-GAAP financial measure that would otherwise be prohibited will be
permitted in a Form 20-F filing of a foreign private issuer if the
measure is (1) required or expressly permitted by the standard-setter
that establishes the generally accepted accounting principles used in
the foreign private issuer's primary financial statements and (2)
included in the foreign private issuer's annual report or financial
statements used in its home country jurisdiction or market.\41\ We have
modified the language of this provision to clarify its application. We
intended, however, that this exception cover only situations where the
foreign organization affirmatively acts to require or permit the
measure, and not situations where the measure was merely not
prohibited. We have, therefore, maintained the requirement of
``express'' permission, notwithstanding certain comments we
received.\42\
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\41\ While such a non-GAAP financial measure would not be
prohibited in a Form 20-F, the remaining requirements of Item 10 of
Regulation S-K would, of course, continue to apply.
\42\ See, for example, the comment letters of the American
Institute of Certified Public Accountants; Deloitte & Touche, LLP;
and Cleary, Gottlieb, Steen & Hamilton.
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2. Requirements of Amended Item 10 of Regulation S-K and Item 10 of
Regulation S-B
The amendments to Item 10 of Regulation S-K and Item 10 of
Regulation S-B require registrants using non-GAAP financial measures in
filings with the Commission to provide: \43\
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\43\ As with Regulation G, the requirements of Item 10 of
Regulation [chyph]S-K and Item 10 of Regulation S-B will not apply
to non-GAAP financial measures included in disclosure relating to a
proposed business combination transaction, the entity resulting from
the business combination transaction, or an entity that is a party
to the business combination transaction if the disclosure is
contained in a communication that is subject to the Commission's
communications rules applicable to business combination
transactions.
[sbull] A presentation, with equal or greater prominence, of the
most directly comparable financial measure calculated and presented
in accordance with GAAP;
[sbull] A reconciliation (by schedule or other clearly
understandable method), which shall be quantitative for historical
non-GAAP measures presented, and quantitative, to the extent
available without unreasonable efforts, for forward-looking
information, of the differences between the non-GAAP financial
measure disclosed or released with the most directly comparable
financial measure or measures calculated and presented in accordance
with GAAP;
[sbull] 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;\44\ and
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\44\ With regard to the issuer's statement as to why management
believes the non-GAAP financial measure provides useful information
to investors, the fact that the non-GAAP financial measure is used
by or useful to analysts cannot be the sole support for presenting
the non-GAAP financial measure. Rather, the justification for the
use of the measure must be substantive; it can, of course, be a
substantive justification that causes a measure to be used by or
useful to analysts.
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[sbull] To the extent material, a statement disclosing the
additional purposes, if any, for which the registrant's management
uses the non-GAAP financial measure that are not otherwise
disclosed.
In addition to these mandated disclosure requirements, amended Item
10 of Regulation S-K and Item 10 of Regulation S-B prohibit the
following:
[sbull] 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, other than the measures EBIT and EBITDA;
[sbull] Adjusting a non-GAAP performance measure to eliminate or
smooth items identified as non-recurring, infrequent or unusual,
when (1) the nature of the charge or gain is such that it is
reasonably likely to recur within two years, or (2) there was a
similar charge or gain within the prior two years;\45\
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\45\ Permitted adjustments (including those permitted because
they satisfy the two-year condition) would, of course, be subject to
the reconciliation requirement.
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[sbull] Presenting non-GAAP financial measures on the face of
the registrant's financial statements prepared in accordance with
GAAP or in the accompanying notes;
[sbull] Presenting non-GAAP financial measures on the face of
any pro forma financial information required to be disclosed by
Article 11 of Regulation S-X; and
[sbull] Using 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.
The requirements and prohibitions for filed information are more
extensive and detailed than those of Regulation G. The additional
requirements and prohibitions are generally consistent with the staff's
historical practice in situations where it has reviewed filings
containing non-GAAP financial measures.
Commenters expressed the concern that the prohibition on excluding
from non-GAAP liquidity measures charges or liabilities that required,
or will require, cash settlement, or would have required cash
settlement absent an ability to settle in another manner, would
prohibit the use of the non-GAAP financial measure EBITDA.\46\ We are
exempting EBIT and EBITDA from this provision because of their wide and
recognized existing use. However, registrants must reconcile these
measures to their most directly comparable GAAP financial measure.
Also, in the discussion of why the measure is useful to investors,
registrants must discuss why investors would find it valuable in the
context in which it is presented, given the excluded items.
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\46\ See, for example, the comment letters of Latham & Watkins;
Intel Corporation; the Association of the Bar of the City of New
York, Committee on Securities Regulation; BDO Seidman, LLP; and
Ernst & Young LLP.
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We had proposed that the requirements for a reconciliation to the
most directly comparable GAAP financial measure be slightly more
stringent than those set forth under Regulation G. In particular, in
filings
[[Page 4825]]
with the Commission, it was proposed that there not be an
``unreasonable effort'' exception for forward-looking information to
the requirement for a quantitative reconciliation between the non-GAAP
financial measure and the comparable GAAP financial measure. Commenters
expressed the view that the need for such an exception was present
equally in disclosure that was filed with the Commission and disclosure
that was not filed.\47\ In response to these comments, we have revised
the requirement for filed documents to include the same exception as in
Regulation G. Accordingly, with regard to the quantitative
reconciliation of non-GAAP financial measures that are forward-looking,
Item 10 of Regulation S-K and Item 10 of Regulation S-B require a
schedule or other presentation detailing the differences between the
forward-looking non-GAAP financial measure and the appropriate forward-
looking GAAP financial measure. If the GAAP financial measure is not
accessible on a forward-looking basis, the registrant must disclose
that fact and provide reconciling information that is available without
an unreasonable effort. Furthermore, the registrant must identify
information that is unavailable and disclose its probable significance.
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\47\ See, for example, the comment letters of the Securities Law
Committee of the American Society of Corporation Secretaries and
Deloitte & Touche, LLP.
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As proposed, Item 10 of Regulation [chyph]S-K and Item 10 of
Regulation S-B would have included a prohibition on the use of ``non-
GAAP per share financial measures.'' We received significant comment
expressing concern with this part of the proposal.\48\ The commenters
were of the view that the proposed prohibition would deprive investors
of useful information and that the other requirements of Regulation G
and Item 10 would provide adequate protections with regard to the use
of such financial measures.\49\ In response to those comments, we have
not included a prohibition on ``non-GAAP per share financial measures''
in the amendments to Item 10 of Regulation S-K or Item 10 of Regulation
S-B.\50\
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\48\ See, for example, the comment letters of Fannie Mae; the
Securities Law Committee of the American Society of Corporate
Secretaries; the American Council of Life Insurers; the American
Institute of Certified Public Accountants; the National Association
of Real Estate Investment Trusts; the Real Estate Roundtable; the
New York Clearing House Association; and the Committee on Corporate
Reporting of Financial Executives International.
\49\ See footnote 11 for additional information regarding the
use of ``non-GAAP per share financial measures.'' Further, despite
the absence of a prohibition against the use of ``non-GAAP per share
financial measures'' in Item 10 of Regulation S-K and Item 10 of
Regulation S-B, registrants should consider whether the use of any
per share measure that is not calculated using a share figure that
is presented on a diluted basis complies with (1) the requirement of
Regulation G that a registrant, or a person acting on its behalf,
shall not make public a non-GAAP financial measure that, taken
together with the information accompanying that measure, contains an
untrue statement of a material fact or omits to state a material
fact necessary in order to make the presentation of the non-GAAP
financial measure, in light of the circumstances under which it is
presented, not misleading; and (2) generally accepted accounting
principles (see, for example, FASB Statement No. 128, Earnings Per
Share).
\50\ A number of commenters in the real estate industry
expressed concern regarding the use of the non-GAAP financial
measure ``funds from operations per share'' in earnings releases and
materials that are filed with or furnished to the Commission.
Because amended Item 10 of Regulation S-K and amended Item 10 of
Regulation S-B do not include a prohibition on ``non-GAAP per share
financial measures,'' registrants may use the ``funds from
operations per share'' measure, subject to the requirements of
Regulation G, amended Item 10 of Regulation S-K and amended Item 10
of Regulation S-B.
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Some commenters were of the view that the proposed requirements of
(1) a statement regarding the purposes for which management uses the
non-GAAP financial measure and (2) a statement of the utility of the
non-GAAP financial measure to investors would likely result in
duplicative disclosure.\51\ In response to these comments, we have
revised the requirement of a statement of the purposes for which
management uses the non-GAAP financial measure to apply only to the
extent that the information is material and is not presented in the
statement of the utility of the non-GAAP financial measure to
investors. Consistent with the proposal, the requirement for these
statements may be satisfied by including the statements in the most
recent annual report filed with the Commission (or a more recent
filing) and by updating those statements, as necessary, no later than
the time of the filing containing the non-GAAP financial measure.
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\51\ See, for example, the comment letter of the American Bar
Association Committee on Federal Regulation of Securities and the
American Bar Association Committee on Law and Accounting.
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The required statements of the purposes for which management uses
the non-GAAP financial measure and the utility of the information to
investors should not be boilerplate. We intend these statements to be
clear and understandable. We also intend these statements to be
specific to the non-GAAP financial measure used, the registrant, the
nature of the registrant's business and industry, and the manner in
which management assesses the non-GAAP financial measure and applies it
to management decisions.
C. New Item 12 of Form 8-K
We are amending Form 8-K to add new Item 12, ``Disclosure of
Results of Operations and Financial Condition.'' \52\ The addition of
Item 12 to Form 8-K will bring earnings information within our current
reporting system by requiring registrants to furnish to the Commission
all releases or announcements disclosing material non-public financial
information about completed annual or quarterly fiscal periods. New
Item 12 does not require that companies issue earnings releases or
similar announcements. However, such releases and announcements will
trigger the requirements of Item 12.
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\52\ In Release No. 33-8106 (June 17, 2002) [67 FR 42913], we
proposed significant amendments to Form 8-K. We intend to address
those proposals in the near future. As we have not yet revised Form
8-K as proposed in Release No. 33-8106, we have adopted the proposed
requirement regarding earnings releases and similar disclosures
without using the new numbering system proposed for Form 8-K. At the
time we address the proposals in Release No. 33-8106, we will
consider the need to renumber all of the items in Form 8-K,
including new Item 12.
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1. General Requirement
Item 12 requires registrants to furnish to the Commission a Form 8-
K within five business days of any public announcement or release
disclosing material non-public information regarding a registrant's
results of operations or financial condition for an annual or quarterly
fiscal period that has ended.\53\ The requirements of Item 12 will
apply regardless of whether the release or announcement includes
disclosure of a non-GAAP financial measure. Item 12 requires the
registrant to identify briefly the announcement or release and include
the announcement or release as an exhibit to the Form 8-K.
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\53\ The proposing release would have required a registrant to
file the Form 8-K under Item 12 within two business days after the
earnings release or similar disclosure. We had proposed this
deadline in anticipation of the adoption of our proposal, in Release
No. 33-8106, to shorten the filing deadline for all reports on Form
8-K. As we have not yet addressed those proposals, we believe it is
appropriate to adopt a temporary deadline for furnishing a report on
Form 8-K under Item 12 of five business days, the shorter of the two
existing Form 8-K deadlines. When we address the Form 8-K proposals,
we may then shorten the Item 12 deadline. At that time, we will
consider the comments received in response to the proposing release
and our proposal therein to set a two-business day deadline for
earnings releases or similar disclosures on Form 8-K.
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Repetition of information that was publicly disclosed previously or
the release of the same information in a different form (for example in
an interim or annual report to shareholders) would not trigger the Item
12 requirement. This result would not
[[Page 4826]]
change if the repeated information were accompanied by information that
was not material, whether or not already public. However, release of
additional or updated material non-public information regarding the
registrant's results of operations or financial condition for a
completed fiscal year or quarter would trigger an additional Item 12
obligation. Issuers that make earnings announcements or other
disclosures of material non-public information regarding a completed
fiscal quarter or year in an interim or annual report to shareholders
would be permitted to specify in the Form 8-K which portion of that
report contains the information required to be furnished under Item 12.
In addition, the requirement to furnish a Form 8-K under Item 12 would
not apply to issuers that make these announcements and disclosures only
in their quarterly reports filed with the Commission on Form 10-Q \54\
(or 10-QSB \55\) or their annual reports filed with the Commission on
Form 10-K \56\ (or 10-KSB\57\).
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\54\ 17 CFR 249.308a.
\55\ 17 CFR 249.308b.
\56\ 17 CFR 249.310.
\57\ 17 CFR 249.310b.
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Item 12 includes an exception from its requirements where non-
public information is disclosed orally, telephonically, by webcast, by
broadcast, or by similar means in a presentation that is complementary
to, and occurs within 48 hours after, a related, written release or
announcement that triggers the requirements of Item 12.\58\ In this
situation, Item 12 would not require the registrant to furnish an
additional Form 8-K with regard to the information that is disclosed
orally, telephonically, by webcast, by broadcast, or by similar means
if: \59\
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\58\ We intend this exception to permit current practices where
these presentations include information that, although not already
included in the related, written release or announcement, is
complementary thereto. We do not intend this exception to foster
changes in practice whereby disclosure is shifted from the written
release or announcement to the complementary presentation.
\59\ In its comment letter, the American Bar Association
Committee on Federal Regulation of Securities asked whether the
phrase ``similar means'' in proposed Item 1.04(b) related to the
entire preceding list (as proposed, this list read ``orally,
telephonically, webcast, or by similar means'') or whether it merely
related to ``webcast.'' We intend the phrase ``similar means'' to
relate to the entire preceding list. We have revised Item 12 to be
clearer in this regard.
[sbull] The related, written release or announcement has been
furnished to the Commission on Form 8-K pursuant to Item 12 prior to
the presentation; \60\
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\60\ As the deadline for furnishing the Form 8-K to the
Commission is five business days, this exception would be available
only to registrants that furnish that Form 8-K to the Commission in
advance of the deadline specified in Item 12.
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[sbull] The presentation is broadly accessible to the public by
dial-in conference call, webcast or similar technology;
[sbull] The financial and statistical information contained in
the presentation is provided on the registrant's web site, together
with any information that would be required under Regulation G; \61\
and
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\61\ While Item 12 does not state how long a company must keep
this information available on its web site, we encourage companies
to provide ongoing web site access to this information. At a
minimum, we suggest that companies provide web site access to this
information for at least a 12-month period. Further, we understand
that a company may have multiple web sites that it uses for various
purposes, such as investor relations, product information and
business-to-business activities. We interpret this requirement to
mean that the information is provided on the web site or page that
the company normally uses for its investor relations functions.
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[sbull] The presentation was announced by a widely disseminated
press release that included instructions as to when and how to
access the presentation and the location on the registrant's web
site where the information would be available.
Item 12 of Form 8-K will apply only to publicly disclosed or
released material non-public information concerning an annual or
quarterly fiscal period that has ended. While such disclosure may also
include forward-looking information, it is the material information
about the completed fiscal period that triggers Item 12. Accordingly,
Item 12 will not apply to public disclosure of earnings estimates for
future or ongoing fiscal periods, unless those estimates are included
in the public announcement or release of material non-public
information regarding an annual or quarterly fiscal period that has
ended.\62\
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\62\ Of course, Regulation FD would continue to apply to
disclosure of such forward-looking information if it were material.
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2. Filing Versus Furnishing--Liability and Incorporation by Reference
As proposed, Item 12 would have required registrants to ``file'' a
Form 8-K meeting the requirements of Item 12. This proposal was in
contrast to Item 9 of Form 8-K, which permits registrants to
``furnish'' a Form 8-K to the Commission. The most significant
implications of ``furnishing'' a Form 8-K to the Commission, rather
than ``filing'' a Form 8-K with the Commission are clear:
[sbull] Information that is ``furnished to the Commission'' in
such a Form 8-K is not subject to Section 18 \63\ of the Exchange
Act unless the registrant specifically states that the information
is to be considered ``filed'';
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\63\ 15 U.S.C. Sec. 78r.
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[sbull] Information that is ``furnished to the Commission'' in
such a Form 8-K is not incorporated by reference into a registration
statement, proxy statement or other report unless the registrant
specifically incorporates that information into those documents by
reference; and
[sbull] Information that is ``furnished to the Commission'' in
such a Form 8-K is not subject to the requirements of amended Item
10 of Regulation S-K or Item 10 of Regulation S-B, while ``filed''
information would be subject to those requirements.
We have considered the views of commenters that requiring earnings
releases to be filed would have a detrimental effect on the level and
quality of information that is provided to investors.\64\ These
commenters expressed the concern that the enhanced liability may
preclude registrants from making earnings releases or similar
disclosures. Further, the commenters were concerned that the need to
satisfy the more stringent requirements in amended Item 10 of
Regulation S-K and Item 10 of Regulation S-B within the required
timeframe of Form 8-K would cause registrants to limit their
publication of earnings releases or similar disclosures.
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\64\ See, for example, the comment letters of the American Bar
Association Committee on Federal Regulation of Securities; the
American Bar Association Committee on Law and Accounting; the
American Council of Life Insurers; and the Association of the Bar of
the City of New York, Committee on Securities Regulation.
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After consideration of these comments, Item 12 of Form 8-K, as
adopted, requires that earnings releases or similar disclosures be
furnished to the Commission rather than filed. Regulation G would, of
course, apply to these releases and disclosures. In addition, to
provide certain of the protections provided by the amendments to Item
10 of Regulation S-K and Item 10 of Regulation S-B to earnings
releases, even if they are not filed, we have included in Item 12 of
Form 8-K the requirements of paragraph (e)(1)(i) of Item 10 of
Regulation S-K and paragraph (h)(1)(i) of Item 10 of Regulation S-B. As
a result, in addition to the requirements already imposed by Regulation
G, registrants would be required to disclose:
[sbull] 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; \65\ and
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\65\ See footnote 44 and the related discussion of the
amendments to Item 10 of Regulation S-K and Item 10 of Regulation S-
B for additional information with regard to this requirement.
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[sbull] to the extent material, the additional purposes, if any,
for which the registrant's management uses the non-GAAP financial
measure that are not otherwise disclosed.
Registrants may satisfy this requirement by including the
disclosure
[[Page 4827]]
in the Form 8-K or in the release or announcement that is included as
an exhibit to the Form 8-K. As indicated above, registrants also may
satisfy the requirement to provide these additional two statements by
including the disclosure in their most recent annual report filed with
the Commission (or a more recent filing) and by updating those
statements, as necessary, no later than the time the Form 8-K is
furnished to the Commission. The other amendments to Item 10 of
Regulation S-K and Item 10 of Regulation S-B would not apply.
3. Relationship of Item 12 to Regulation FD
Earnings releases and similar disclosures that trigger the
requirements of Item 12 are also subject to Regulation FD. The
application of Item 12 would differ from Regulation FD, however, in
that the requirements of Item 12 would always implicate Form 8-K for
those disclosures, while Regulation FD provides that Form 8-K is an
alternative means of satisfying its requirements. Further, a Form 8-K
furnished to the Commission pursuant to Item 9 would satisfy an
issuer's obligation under Regulation FD only if the Form 8-K were
furnished to the Commission within the time frame required by
Regulation FD. Regulation FD could, of course, be satisfied by public
disclosure other than through the filing of a Form 8-K meeting
Regulation FD's requirements; in that case, Item 12 would require that
a Form 8-K be furnished to the Commission within the five business day
timeframe of Item 12. A Form 8-K furnished within the timeframe
required by Regulation FD and otherwise satisfying the requirements of
both Item 9 and Item 12 could be furnished to the Commission once,
indicating that it is being furnished under both Item 9 and Item 12,
and satisfy both requirements.
III. Paperwork Reduction Act
Regulation G and related amendments to Regulation S-K, Regulation
S-B, Form 8-K and Form 20-F contain ``collections of information''
requirements within the meaning of the Paperwork Reduction Act of 1995
(``PRA''),\66\ and the Commission has submitted the proposals to the
Office of Management and Budget (``OMB'') for review in accordance with
44 U.S.C. 3507(d) and 5 CFR 1320.11. The titles for the information
collections are: Regulation G, Regulation [chyph]S-K, Regulation S-B,
Form 8-K and Form 20-F. The Commission did not receive any comments on
the paperwork burden. OMB has approved all but one of the collections
of information. OMB has not yet approved the changes to Form 8-K. We
will announce the approval by separate release.
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\66\ 44 U.S.C. Sec. 3501 et seq.
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The Commission is adopting Regulation G pursuant to Section 401 of
the Sarbanes-Oxley Act. Regulation G will require registrants that
publicly disclose material information that includes non-GAAP financial
measures to provide a reconciliation to the most directly comparable
GAAP financial measures. Regulation G is intended to implement the
requirements of the Sarbanes-Oxley Act. Specifically, Regulation G is
intended to provide investors with balanced financial disclosure when
non-GAAP financial measures are presented. Regulation G defines a non-
GAAP financial measure as a numerical measure of an issuer's historical
or future financial performance, financial position or cash flow that:
[sbull] Excludes amounts, or is subject to adjustments that have
the effect of excluding amounts, that are included in the most
directly 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
[sbull] Includes amounts, or is subject to adjustments that have
the effect of including amounts, that are excluded from the most
directly comparable measure calculated and presented in accordance
with GAAP.
Accordingly, by definition, a non-GAAP financial measure that triggers
the application of Regulation G would have been derived from a GAAP
measure. We continue to expect the cost of obtaining the additional
disclosure required by Regulation G to be minimal. Accordingly, we have
estimated for purposes of the PRA that it will take .5 burden hour for
each time a respondent complies with Regulation G. We anticipate that
on average a company will have to comply with Regulation G roughly six
times a year. Since there are approximately 14,000 public companies
that would be subject to Regulation G we have estimated that there will
be 84,000 disclosures made in accordance with Regulation G for a total
of 42,000 burden hours. We would expect that an in-house junior
accountant would prepare the actual reconciliation.
Regulation S-K (OMB Control No. 3235-0071) and Regulation S-B (OMB
Control No. 3235-0417) prescribe disclosure requirements that
registrants must follow when filing registration statements, reports
and schedules with the Commission. Our amendments to Item 10 of
Regulation S-K and Item 10 of Regulation S-B incorporate the
requirements of Regulation G and codify existing staff interpretations.
Because the collection of information regarding the reconciliation is
already being accounted for in Regulation G, we do not believe that
adding the same requirement to Item 10 of Regulation [chyph]S-K and
Item 10 of Regulation S-B creates an additional collection of
information within the meaning of the PRA. To account for the
reconciliation in both Regulation G and Item 10 or Regulation S-K and
Item 10 of Regulation S-B would result in double counting.
Additionally, companies already, usually and customarily, disclose the
purposes for which the registrant's management uses the non-GAAP
financial measure and why it believes that its presentation of the non-
GAAP financial measure provides useful information to investors.
Accordingly, we continue to believe that our amendments to Item 10 of
Regulation [chyph]S-K and Item 10 of Regulation S-B do not contain a
new ``collection of information'' or alter the existing burden of these
collections of information within the meaning of the PRA.
Form 8-K (OMB Control No. 3235-0060) prescribes information, such
as material events or corporate changes that a registrant must
disclose. Item 12 of Form 8-K requires a company that publicly
discloses material information regarding its actual or expected
quarterly or annual results of operations or financial condition for a
completed fiscal period to furnish the text of the public disclosure
and any accompanying analysis. Item 12 of Form 8-K does not require
companies to actually issue an earnings announcement or release but
only requires that it be furnished if they choose to issue an earnings
announcement or release. Item 12 will bring earnings announcements and
releases into the formal disclosure system although they would not be
deemed filed or, absent additional action by the registrant,
incorporated into registration statements or proxy statements filed
with the Commission. The Forms 8-K would be available to investors on a
widespread basis on our Internet Web site.
Item 12 of Form 8-K was modified from our proposing release in that
the Form 8-K is no longer considered to be filed with the Commission
but, rather, it would be considered furnished to the Commission. This
change does not, however, alter the paperwork burden. We estimate, for
purposes of the PRA, the burden associated with actually furnishing the
Form 8-K to be minimal.
[[Page 4828]]
We believe that complying with Item 12 of Form 8-K would require
approximately .5 of a burden hour. We estimate that approximately
14,000 public companies would make an average of four filings per year.
We believe the total burden hours associated with Item 12 would be
28,000 hours. We would expect that companies would use in-house
personnel to file the Form 8-K.
We have amended Form 20-F (OMB Control Number 3235-0288) to
incorporate our amendments to Item 10 of Regulation S-K. While
Regulation G provides a limited exception for foreign private issuers,
this exception would not apply to their Form 20-F filings or any
disclosure of non-GAAP financial measures made in the United States.
Accordingly, we do not believe our amendment to Form 20-F would result
in an additional collection of information as any burden is already
accounted for in Regulation G.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a
currently valid OMB control number. Compliance with the disclosure
requirements is mandatory. There is no mandatory retention period for
the information disclosed, and responses to the disclosure requirements
will not be kept confidential.
IV. Cost-Benefit Analysis
The Sarbanes-Oxley Act seeks to enhance the financial disclosure of
public companies. In furtherance of this goal, the Sarbanes-Oxley Act
has required the Commission, among other things, to adopt rules
requiring that if a company publicly discloses non-GAAP financial
measures or includes them in a Commission filing, the company must
reconcile those non-GAAP financial measures to a company's financial
condition and results of operations under GAAP. Moreover, the Sarbanes-
Oxley Act requires that any public disclosure of a non-GAAP financial
measure not contain an untrue statement of a material fact or omit to
state a material fact necessary in order to make the non-GAAP financial
measure, in light of circumstances under which it is presented, not
misleading. Additionally, the Sarbanes-Oxley Act seeks to have
companies that report under Sections 13(a) and 15(d) of the Exchange
Act disclose to the public on a rapid and current basis information
concerning material changes in their financial condition or operations.
New Regulation G and the amendments to Item 10 of Regulation S-K,
Item 10 of Regulation S-B and Form 20-F will fulfill the statutory
directive under Section 401(b) of the Sarbanes-Oxley Act. We recognize
that any implementation of the Sarbanes-Oxley Act would likely result
in costs as well as benefits and have an effect on the economy. We are
sensitive to the costs and benefits. While our proposals received
significant public comment, no commenter provided any quantitative data
on costs or benefits.
A. Benefits
Regulation G and the amendments to our rules are intended to ensure
that investors and others are not misled by the use of non-GAAP
financial measures. Additionally, the amendments to Form 8-K are
intended to create a central depository where investors and other
market participants can look to find the latest earnings announcements
and releases by public companies and provide enhanced attention to
those announcements and releases.
Regulation G and amendments to Item 10 of Regulations S-K and S-B
require that any non-GAAP financial measure presented be reconciled
with its most directly comparable financial measure prepared in
accordance with GAAP. We anticipate that this reconciliation will help
investors and market professionals to better evaluate the non-GAAP
financial measures presented. We continue to believe that the
reconciliation will provide the securities markets with additional
information to more accurately evaluate companies' securities and, in
turn, result in a more accurate pricing of securities.
B. Costs
We believe that the costs associated with the Regulation G and
amendments will be minimal. As noted earlier, no commenter provided any
quantitative data in their comment letters to the Commission. We
contacted a sample of commenters to gather additional data about the
costs associated with reconciling a non-GAAP financial measure with the
most directly comparable GAAP financial measure. The commenters stated
that, in most cases, for historical measures, registrants have the most
directly comparable GAAP financial measure available at the time they
prepare or release a non-GAAP financial measure.\67\ In addition, the
commenters stated that the cost of reconciling a non-GAAP financial
measure with the most directly comparable GAAP financial measure is not
significant for historical measures. Most of the commenters that
responded to our inquiries already prepare a reconciliation (either for
internal use, external release, or both) between a non-GAAP financial
measure and the most directly comparable GAAP financial measure when a
non-GAAP financial measure, on an historical basis, is presented.
Accordingly, those companies do not expect to incur any significant
incremental costs in complying with the proposal in this particular
area.\68\
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\67\ We continue to believe that, in cases where the GAAP
financial measure is not available for historical measures, any
costs associated with obtaining the GAAP financial measure would
reduce future costs associated with filing other forms, such as the
Form 10-Q and Form 10-K where the GAAP measure must be presented.
See also footnote 68.
\68\ One company indicated that, for a performance-based non-
GAAP financial measure, the company already prepares a
reconciliation to net income determined in accordance with GAAP by
the date of the earnings release. However, for non-GAAP measures
that are liquidity measures, the company does not currently prepare
a reconciliation to the most comparable GAAP measure by the date of
the company's earnings release because the statement of cash flows
is not prepared until later in the financial reporting process. This
company estimated that, under the proposal, the company would not
necessarily incur significant additional costs to reconcile its non-
GAAP liquidity financial measures to GAAP-based cash flow measures,
but some salaried employees would be required to work additional
hours earlier in the financial reporting process to complete the
preparation of the statement of cash flows by the date of the
earnings release.
---------------------------------------------------------------------------
Three commenters in the group that we contacted indicated that they
present forward-looking non-GAAP financial measures in earnings
releases. Those companies indicated that they do not have the most
directly comparable GAAP financial measure available at the time they
prepare their non-GAAP measure because they are unable to quantify
certain amounts that would be required to be included in the GAAP
measure.\69\ However, those companies would be able to explain, at the
date the forward-looking non-GAAP financial measure is released, the
types of gains, losses, revenues or expenses that would need to be
added to or subtracted from the non-GAAP financial measure to arrive at
the most directly comparable GAAP measure, even though they cannot
quantify all of those items. The companies indicated that if they were
to be required to quantify the reconciling items between the non-GAAP
forward-looking financial measure and the most directly comparable GAAP
financial
[[Page 4829]]
measure, it would be very difficult and may result in the company
deciding not to provide the non-GAAP financial measure to the public.
Regulation G requires that, for forward-looking measures, the
reconciliation between non-GAAP and GAAP financial measures must be
quantitative ``to the extent available and without unreasonable
efforts.'' Accordingly, we do not believe Regulation G will impose
significant additional costs on registrants with respect to reconciling
forward-looking non-GAAP and GAAP financial measures.
---------------------------------------------------------------------------
\69\ For example, one company that uses a non-GAAP financial
measure derived from net income told us that it excludes realized
capital gains and losses, gains and/or losses on dispositions of
operations, and accounting changes in preparing its non-GAAP
financial measure, because it is unable to forecast with any degree
of comfort the amounts that would be recorded under GAAP for these
items.
---------------------------------------------------------------------------
We continue to estimate that public companies would have to comply
with Regulation G six times a year. There are roughly 14,000 public
companies. Using our estimates from the Paperwork Reduction Act
section, we would expect that it would take a junior accountant roughly
.5 hours to complete the required reconciliation and ensure there are
no material misstatements. Accordingly, we have estimated that the
total burden hours needed to comply with Regulation G would be 42,000
hours. Using cost data from the Securities Industry Association's
Report on Management & Professional Earnings in the Securities Industry
2001 (SIA Report) \70\ and adding an additional 35% for costs
associated with overhead, we find that, on average, a junior accountant
would earn $26 an hour. We believe the salary of a junior accountant is
appropriate for our estimates because, in most cases, we would expect
the most directly comparable GAAP measure to be available. Therefore,
we have estimated the total costs associated with complying with
Regulation G to be $1,092,000.
---------------------------------------------------------------------------
\70\ The cost estimates are based on the SIA Report for
employees based outside the New York City metropolitan area.
---------------------------------------------------------------------------
Most commenters had concerns with our amendments to Item 10 of
Regulation S-K and Item 10 of Regulation S-B and our requirement to
file their earnings release, if any, on Form 8-K. Commenters generally
opposed the prohibitions of Item 10 as they would apply to their
earnings release. Commenters particularly opposed the prohibition
against presenting a non-GAAP per share measure. Accordingly, we have
made two modifications to our proposals. First, Item 10 would no longer
prohibit the presentation of a non-GAAP per share measure.\71\ Second,
the earnings release would no longer be required to be filed on Form 8-
K but, rather, it would be required to be furnished to the Commission
under Form 8-K. The change from filing to furnishing has two
consequences. First, a company's earnings releases would no longer be
subject to Item 10 prohibitions. Second, the earnings release would no
longer be subject to Section 18 of the Exchange Act.
---------------------------------------------------------------------------
\71\ However, see the guidance on the use of per share measures
in footnote 11.
---------------------------------------------------------------------------
With regard to other filings with the Commission, Item 10 would
continue to apply. Because the costs associated with providing a
reconciliation are already being accounted for in Regulation G, we do
not believe adding the same requirement to Item 10 of Regulation S-K
and Item 10 of Regulation S-B incurs any incremental cost to the
registrant. To account for the required reconciliation in both
Regulation G and Item 10 of Regulation S-K and Item 10 of Regulation S-
B would result in double counting. Additionally, because companies
currently are expected to disclose the purposes for which the
registrant's management uses the non-GAAP financial measure and why it
believes that presentation of the non-GAAP financial measure provides
useful information to investors, this aspect of the rule would not
increase costs already properly being borne by registrants.
Accordingly, we do not believe our amendments to Item 10 of Regulation
S-K and Item 10 of Regulation S-B would result in any additional costs
not already included in Regulation G or current filing requirements.
With regard to the required submission on Form 8-K, we continue to
believe that personnel in finance, investor relations or corporate
communications departments would most likely submit the earnings
announcements or releases, as most earnings announcements are
disseminated via press release. We have estimated that the actual time
required to submit an earnings announcement or release on Form 8-K to
be .5 hour. In estimating this time burden we note that most press
releases are fairly short in length, making the actual process of
filing easier. We also note that the software necessary to file a Form
8-K is available free of charge from the Commission. We have estimated
that public companies would be required to comply with the required
submission on Form 8-K roughly four times a year. Assuming 14,000
public companies and a total burden of .5 hour for the filing, we
estimate that companies will spend 28,000 hours complying with our Form
8-K amendment. Again using the SIA Report, and adding an additional 35%
for costs associated with overhead, we find that a Corporate
Communications Manager, on average, earns $56.00 an hour. Accordingly,
we have estimated the total salary cost associated with our amendments
to Form 8-K to be $1,568,000.
Finally, our amendments to Form 20-F would incorporate Item 10 of
Regulation S-K. While Regulation G provides a limited exception for
foreign private issuers, this exception would not apply to their Form
20-F filing or any disclosure of non-GAAP financial measures made in
the United States. Accordingly, the costs associated with our amendment
to Form 20-F are already accounted for in our cost estimates for
Regulation G.
V. Regulatory Flexibility Act Certification
Pursuant to 5 U.S.C. Sec. 605(b), the Commission has certified
that Regulation G and our amendments to Item 10 of Regulation S-B, Item
10 of Regulation S-K and Form 8-K under the Securities Act and the
Exchange Act will not have a significant economic impact on a
substantial number of small entities. This certification, including the
basis for the certification, was included in the proposing release. We
solicited comments on the potential impact of the amendments on small
entities, but received none.
VI. Consideration of Impact on the Economy, Burden on Competition and
Promotion of Efficiency, Competition and Capital Formation
Section 23(a)(2) of the Exchange Act \72\ requires us to consider
the anti-competitive effects of any rules that we adopt under the
Exchange Act. Section 23(a)(2) prohibits us from adopting any rule that
would impose a burden on competition not necessary or appropriate in
furtherance of the purposes of the Exchange Act. Furthermore, Section
2(b) of the Securities Act \73\ and Section 3(f) of the Exchange Act
\74\ require us, when engaging in rulemaking, to consider or determine
whether an action is necessary or appropriate in the public interest,
and consider whether the action will promote efficiency, competition,
and capital formation.
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\72\ 15 U.S.C. Sec. 78w(a)(2).
\73\ 15 U.S.C Sec. 77b(b).
\74\ 15 U.S.C. Sec. 78c(f).
---------------------------------------------------------------------------
We requested comment on any anti-competitive effects of the
proposals. We did not receive any comments regarding any anti-
competitive effects of the proposal. We do not believe that Regulation
G or our amendments to Item 10 of Regulation S-K, Item 10 of Regulation
S-B, Form 8-K or Form 20-F will have a quantifiable effect on
[[Page 4830]]
efficiency, competition, and capital formation.
VII. Statutory Basis
New Regulation G, new Item 12 to Form 8-K and the amendments to the
General Instructions to Form 8-K, Item 10 of Regulation S-K, Item 10 of
Regulation S-B and Form 20-F are being adopted pursuant to Sections
2(b), 6, 7, 8, 19(a), and 28 of the Securities Act of 1933, as amended,
Sections 3, 4, 10, 12, 13, 15, 23, and 36 of the Securities Exchange
Act of 1934, as amended, and Sections 3(a), 401, and 409 of the
Sarbanes-Oxley Act.
List of Subjects
17 CFR Part 228
Reporting and recordkeeping requirements, Securities, Small
businesses.
17 CFR Parts 229, 244 and 249
Reporting and recordkeeping requirements, Securities.
Text of the Amendments
In accordance with the foregoing, the Securities and Exchange
Commission amends Title 17, chapter II of the Code of Federal
Regulations as follows:
PART 228--INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS ISSUERS
1. The general authority citation for Part 228 is revised to read
as follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2,
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn,
77sss, 78l, 78m, 78n, 78o, 78u-5, 78w, 78ll, 78mm, 80a-8, 80a-29,
80a-30, 80a-37 and 80b-11.
* * * * *
2. Amend Sec. 228.10 by adding paragraph (h) to read as follows:
Sec. 228.10 (Item 10) General.
* * * * *
(h) 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, with equal or greater prominence, of the most
directly comparable financial measure or measures calculated and
presented in accordance with Generally Accepted Accounting Principles
(GAAP);
(B) A reconciliation (by schedule or other clearly understandable
method), which shall be quantitative for historical non-GAAP measures
presented, and quantitative, to the extent available without
unreasonable efforts, for forward-looking information, of the
differences between the non-GAAP financial measure disclosed or
released with the most directly comparable financial measure or
measures calculated and presented in accordance with GAAP identified in
paragraph (h)(1)(i)(A) of this section;
(C) 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; and
(D) To the extent material, a statement disclosing the additional
purposes, if any, for which the registrant's management uses the non-
GAAP financial measure that are not disclosed pursuant to paragraph
(h)(1)(i)(C) of this section; and
(ii) A registrant must not:
(A) Exclude 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,
other than the measures earnings before interest and taxes (EBIT) and
earnings before interest, taxes, depreciation, and amortization
(EBITDA);
(B) Adjust 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 within two years or there was a similar charge or gain within the
prior two years;
(C) Present non-GAAP financial measures on the face of the
registrant's financial statements prepared in accordance with GAAP or
in the accompanying notes;
(D) 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
(E) Use titles or descriptions of non-GAAP financial measures that
are the same as, or confusingly similar to, titles or descriptions used
for GAAP measures; and
(iii) If the filing is not an annual report on Form 10-KSB (17 CFR
249.310b), a registrant need not include the information required by
paragraphs (h)(1)(i)(C) and (h)(1)(i)(D) of this section if that
information was included in its most recent annual report on Form 10-
KSB or a more recent filing, provided that the required information is
updated to the extent necessary to meet the requirements of paragraphs
(h)(1)(i)(C) and (h)(1)(i)(D) of this section at the time of the
registrant's current filing.
(2) For purposes of this paragraph (h), a non-GAAP financial
measure is a numerical measure of a registrant's historical or future
financial performance, financial position or cash flow that:
(i) Excludes amounts, or is subject to adjustments that have the
effect of excluding amounts, that are included in the most directly
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 most directly
comparable measure so calculated and presented.
(3) For purposes of this paragraph (h), GAAP refers to generally
accepted accounting principles in the United States.
(4) For purposes of this paragraph (h), non-GAAP financial measures
exclude:
(i) Operating and other statistical measures; and
(ii) Ratios or statistical measures calculated using exclusively
one or both of:
(A) Financial measures calculated in accordance with GAAP; and
(B) Operating measures or other measures that are not non-GAAP
financial measures.
(5) For purposes of this paragraph (h), non-GAAP financial measures
exclude financial measures required to be disclosed by GAAP, Commission
rules, or a system of regulation of a government or governmental
authority or self-regulatory organization that is applicable to the
registrant. However, the financial measure should be presented outside
of the financial statements unless the financial measure is required or
expressly permitted by the standard setter that is responsible for
establishing the GAAP used in such financial statements.
(6) The requirements of paragraph (h) of this section shall not
apply to a non-GAAP financial measure included in disclosure relating
to a proposed business combination, the entity resulting therefrom or
an entity that is a party thereto, if the disclosure is contained in a
communication that is subject to Sec. 230.425 of this chapter, Sec.
240.14a-12 or Sec. 240.14d-2(b)(2) of this chapter or Sec. 229.1015
of this chapter.
[[Page 4831]]
PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND
CONSERVATION ACT OF 1975--REGULATION S-K
3. The general authority citation for part 229 is revised to read
as follows:
Authority: 15 U.S.C. 7261, 77e, 77f, 77g, 77h, 77j, 77k, 77s,
77z-2, 77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii,
77jjj, 77nnn, 77sss, 78c, 78i, 78j, 78l, 78m, 78n, 78o, 78u-5, 78w,
78ll(d), 78mm, 79e, 79n, 79t, 80a-8, 80a-29, 80a-30, 80a-31(c), 80a-
37, 80a-38(a) and 80b-11, unless otherwise noted.
* * * * *
4. Amend Sec. 229.10 by revising the section heading and adding
paragraph (e) to read as follows:
Sec. 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, with equal or greater prominence, of the most
directly comparable financial measure or measures calculated and
presented in accordance with Generally Accepted Accounting Principles
(GAAP);
(B) A reconciliation (by schedule or other clearly understandable
method), which shall be quantitative for historical non-GAAP measures
presented, and quantitative, to the extent available without
unreasonable efforts, for forward-looking information, of the
differences between the non-GAAP financial measure disclosed or
released with the most directly comparable 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 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; and
(D) To the extent material, a statement disclosing the additional
purposes, if any, for which the registrant's management uses the non-
GAAP financial measure that are not disclosed pursuant to paragraph
(e)(1)(i)(C) of this section; and
(ii) A registrant must not:
(A) Exclude 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,
other than the measures earnings before interest and taxes (EBIT) and
earnings before interest, taxes, depreciation, and amortization
(EBITDA);
(B) Adjust 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 within two years or there was a similar charge or gain within the
prior two years;
(C) Present non-GAAP financial measures on the face of the
registrant's financial statements prepared in accordance with GAAP or
in the accompanying notes;
(D) 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
(E) 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; 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 most directly
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 most directly
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:
(i) In the case of foreign private issuers whose primary financial
statements are prepared in accordance with non-U.S. generally accepted
accounting principles, GAAP refers to the principles under which those
primary financial statements are prepared; and
(ii) In the case of foreign private issuers that include a non-GAAP
financial measure derived from or based on a measure calculated in
accordance with U.S. generally accepted accounting principles, GAAP
refers to U.S. generally accepted accounting principles for purposes of
the application of the requirements of this paragraph (e) to the
disclosure of that measure.
(4) For purposes of this paragraph (e), non-GAAP financial measures
exclude:
(i) Operating and other statistical measures; and
(ii) Ratios or statistical measures calculated using exclusively
one or both of:
(A) Financial measures calculated in accordance with GAAP; and
(B) Operating measures or other measures that are not non-GAAP
financial measures.
(5) For purposes of this paragraph (e), non-GAAP financial measures
exclude financial measures required to be disclosed by GAAP, Commission
rules, or a system of regulation of a government or governmental
authority or self-regulatory organization that is applicable to the
registrant. However, the financial measure should be presented outside
of the financial statements unless the financial measure is required or
expressly permitted by the standard-setter that is responsible for
establishing the GAAP used in such financial statements.
(6) The requirements of paragraph (e) of this section shall not
apply to a non-GAAP financial measure included in disclosure relating
to a proposed business combination, the entity resulting therefrom or
an entity that is a party thereto, if the disclosure is contained in a
communication that is subject to Sec. 230.425 of this chapter, Sec.
240.14a-12 or Sec. 240.14d-2(b)(2) of this chapter or Sec. 229.1015
of this chapter.
(7) The requirements of paragraph (e) of this section shall not
apply 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
[[Page 4832]]
this section is permitted in a filing of a foreign private issuer if:
1. The non-GAAP financial measure relates to the GAAP used in the
registrant's primary financial statements included in its filing with
the Commission;
2. The non-GAAP financial measure is required or expressly
permitted by the standard-setter that is responsible for establishing
the GAAP used in such financial statements; and
3. 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.
5. Part 244 is added to read as follows:
PART 244--REGULATION G
Sec.
244.100 General rules regarding disclosure of non-GAAP financial
measures.
244.101 Definitions.
244.102 No effect on antifraud liability.
Authority: 15 U.S.C. 7261, 78c, 78i, 78j, 78m, 78o, 78w, 78mm,
and 80a-29
Sec. 244.100 General rules regarding disclosure of non-GAAP financial
measures.
(a) Whenever a registrant, or person acting on its behalf, publicly
discloses material information that includes a non-GAAP financial
measure, the registrant must accompany that non-GAAP financial measure
with:
(1) A presentation of the most directly comparable financial
measure calculated and presented in accordance with Generally Accepted
Accounting Principles (GAAP); and
(2) A reconciliation (by schedule or other clearly understandable
method), which shall be quantitative for historical non-GAAP measures
presented, and quantitative, to the extent available without
unreasonable efforts, for forward-looking information, of the
differences between the non-GAAP financial measure disclosed or
released with the most comparable financial measure or measures
calculated and presented in accordance with GAAP identified in
paragraph (a)(1) of this section.
(b) A registrant, or a person acting on its behalf, shall not make
public a non-GAAP financial measure that, taken together with the
information accompanying that measure and any other accompanying
discussion of that measure, contains an untrue statement of a material
fact or omits to state a material fact necessary in order to make the
presentation of the non-GAAP financial measure, in light of the
circumstances under which it is presented, not misleading.
(c) This section shall not apply to a disclosure of a non-GAAP
financial measure that is made by or on behalf of a registrant that is
a foreign private issuer if the following conditions are satisfied:
(1) The securities of the registrant are listed or quoted on a
securities exchange or inter-dealer quotation system outside the United
States;
(2) The non-GAAP financial measure is not derived from or based on
a measure calculated and presented in accordance with generally
accepted accounting principles in the United States; and
(3) The disclosure is made by or on behalf of the registrant
outside the United States, or is included in a written communication
that is released by or on behalf of the registrant outside the United
States.
(d) This section shall not apply to a non-GAAP financial measure
included in disclosure relating to a proposed business combination, the
entity resulting therefrom or an entity that is a party thereto, if the
disclosure is contained in a communication that is subject to Sec.
230.425 of this chapter, Sec. 240.14a-12 or Sec. 240.14d-2(b)(2) of
this chapter or Sec. 229.1015 of this chapter.
Notes to Sec. 244.100: 1.If a non-GAAP financial measure is made
public orally, telephonically, by Web cast, by broadcast, or by similar
means, the requirements of paragraphs (a)(1)(i) and (a)(1)(ii) of this
section will be satisfied if:
(i) The required information in those paragraphs is provided on the
registrant's Web site at the time the non-GAAP financial measure is
made public; and
(ii) The location of the web site is made public in the same
presentation in which the non-GAAP financial measure is made public.
2. The provisions of paragraph (c) of this section shall apply
notwithstanding the existence of one or more of the following
circumstances:
(i) A written communication is released in the United States as
well as outside the United States, so long as the communication is
released in the United States contemporaneously with or after the
release outside the United States and is not otherwise targeted at
persons located in the United States;
(ii) Foreign journalists, U.S. journalists or other third parties
have access to the information;
(iii) The information appears on one or more web sites maintained
by the registrant, so long as the web sites, taken together, are not
available exclusively to, or targeted at, persons located in the United
States; or
(iv) Following the disclosure or release of the information outside
the United States, the information is included in a submission by the
registrant to the Commission made under cover of a Form 6-K.
Sec. 244.101 Definitions.
This section defines certain terms as used in Regulation G
(Sec. Sec. 244.100 through 244.102).
(a)(1) Non-GAAP financial measure. 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 most directly
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 most directly
comparable measure so calculated and presented.
(2) A non-GAAP financial measure does not include operating and
other financial measures and ratios or statistical measures calculated
using exclusively one or both of:
(i) Financial measures calculated in accordance with GAAP; and
(ii) Operating measures or other measures that are not non-GAAP
financial measures.
(3) A non-GAAP financial measure does not include financial
measures required to be disclosed by GAAP, Commission rules, or a
system of regulation of a government or governmental authority or self-
regulatory organization that is applicable to the registrant.
(b) GAAP. GAAP refers to generally accepted accounting principles
in the United States, except that:
(1) In the case of foreign private issuers whose primary financial
statements are prepared in accordance with non-U.S. generally accepted
accounting principles, GAAP refers to the principles under which those
primary financial statements are prepared; and
(2) In the case of foreign private issuers that include a non-GAAP
financial measure derived from a measure calculated in accordance with
U.S. generally accepted accounting principles, GAAP refers to U.S.
generally accepted accounting
[[Page 4833]]
principles for purposes of the application of the requirements of
Regulation G to the disclosure of that measure.
(c) Registrant. A registrant subject to this regulation is one that
has a class of securities registered under Section 12 of the Securities
Exchange Act of 1934 (15 U.S.C. 78l), or is required to file reports
under Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C.
78o(d)), excluding any investment company registered under Section 8 of
the Investment Company Act of 1940 (15 U.S.C. 80a-8).
(d) United States. United States means the United States of
America, its territories and possessions, any State of the United
States, and the District of Columbia.
Sec. 244.102 No effect on antifraud liability.
Neither the requirements of this Regulation G (17 CFR 244.100
through 244.102) nor a person's compliance or non-compliance with the
requirements of this Regulation shall in itself affect any person's
liability under Section 10(b) (15 U.S.C. 78j(b)) of the Securities
Exchange Act of 1934 or Sec. 240.10b-5 of this chapter.
PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
7. The authority citation for part 249 continues to read in part as
follows:
Authority: 15 U.S.C. 78a, et seq., unless otherwise noted.
* * * * *
8. Amend Form 8-K (referenced in Sec. 249.308) by adding General
Instruction B.6., revising Item 9 and adding Item 12.
Note--The text of Form 8-K does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form 8-K
Current Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
* * * * *
General Instructions
* * * * *
B. Events To Be Reported and Time of Filing for Reports
* * * * *
6. A report on this form is required to be furnished upon the
occurrence of any of the events specified in Item 12 of this form. A
report of an event specified in Item 12 is to be furnished within 5
business days after the occurrence of the event; if the event occurs on
a Saturday, Sunday or holiday on which the Commission is not open for
business, the 5 business day period shall begin to run on and include
the first business day thereafter. The information in a report
furnished pursuant to Item 12 shall not be deemed to be ``filed'' for
purposes of Section 18 of the Exchange Act or otherwise subject to the
liability of that section, except if the registrant specifically states
that the information is to be considered ``filed'' under the Exchange
Act or incorporates it by reference into a filing under the Securities
Act or the Exchange Act.
* * * * *
Information To Be Included in the Report
* * * * *
Item 12. Results of Operations and Financial Condition
(a) If a registrant, or any person acting on its behalf, makes any
public announcement or release (including any update of an earlier
announcement or release) disclosing material non-public information
regarding the registrant's results of operations or financial condition
for a completed quarterly or annual fiscal period, the registrant shall
briefly identify the announcement or release and include the text of
that announcement or release as an exhibit;
(b) A Form 8-K is not required to be furnished to the Commission
under this Item 12 in the case of disclosure of material non-public
information that is disclosed orally, telephonically, by webcast, by
broadcast, or by similar means if:
(1) The information is provided as part of a presentation that is
complementary to, and initially occurs within 48 hours after, a
related, written announcement or release that has been furnished on
Form 8-K pursuant to this Item 12 prior to the presentation;
(2) The presentation is broadly accessible to the public by dial-in
conference call, by webcast, by broadcast, or by similar means;
(3) The financial and other statistical information contained in
the presentation is provided on the registrant's web site, together
with any information that would be required under Sec. 244.100 of
Regulation G; and
(4) The presentation was announced by a widely disseminated press
release, that included instructions as to when and how to access the
presentation and the location on the registrant's web site where the
information would be available.
Instructions
1. The requirements of this Item 12 are triggered by the disclosure
of material non-public information regarding a completed fiscal year or
quarter. Release of additional or updated material non-public
information regarding a completed fiscal year or quarter would trigger
an additional Item 12 requirement.
2. The requirements of paragraph (e)(1)(i) of Item 10 of Regulation
S-K (or paragraph (h)(1)(i) of Item 10 of Regulation S-B in the case of
a small business issuer) shall apply to disclosures under this Item 12.
3. Issuers that make earnings announcements or other disclosures of
material non-public information regarding a completed fiscal year or
quarter in an interim or annual report to shareholders, are permitted
to specify which portion of the report contains the information
required to be furnished under Item 12.
4. This Item 12 does not apply in the case of a disclosure that is
made in a quarterly report filed with the Commission on Form 10-Q (or
10-QSB) or an annual report filed with the Commission on Form 10-K (or
10-KSB).
* * * * *
9. By amending Form 20-F (referenced in Sec. 249.220) by removing
in General Instruction C.(e) the words ``performance and the
Commission's policy on securities ratings'' and adding, in their place,
the words ``performance, the Commission's policy on securities ratings,
and the Commission's policy on use of non-GAAP financial measures in
Commission filings''.
By the Commission.
Dated: January 22, 2003.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-1977 Filed 1-29-03; 8:45 am]
BILLING CODE 8010-01-P