Frequently Asked Questions Regarding the Use of Non-GAAP Financial
Measures
Prepared by Staff Members in the Division of Corporation Finance,
U.S. Securities and Exchange Commission, Washington, D.C.
June 13, 2003
 Table of Contents
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The answers to these frequently asked questions
represent the views of the Division of Corporation Finance. They are not
rules, regulations or statements of the Securities and Exchange
Commission. Further, the Commission has neither approved nor disapproved
them.
Note: Since the Commission's publication of
Release No.
34-47226, Conditions for Use of Non-GAAP Financial Measures, we have
received questions regarding the implementation and interpretation of
the rules adopted in that release. Our responses to 33 of these
frequently asked questions are set forth below. Unless otherwise
indicated, all references to
Item 10(e) of Regulation S-K also apply to
Item 10(h) of Regulation S-B and General Instruction C(e) of Form 20-F.
Question 1: An annual report or quarterly report is filed with
the Commission before March 28, 2003. If that annual report or quarterly
report is incorporated by reference into a Securities Act registration
statement that is filed after March 28, 2003, must any non-GAAP
financial measures included in the annual report or quarterly report
comply with Regulation G?
Answer 1: Any registration statement filed after March 28,
2003 must comply with Regulation G if it includes non-GAAP financial
measures. As such, a registration statement filed after March 28,
2003 that incorporates by reference any non-GAAP financial measures
must comply with Regulation G with respect to those non-GAAP
financial measures. Compliance with Regulation G requires, in part,
a reconciliation of each non-GAAP financial measure to the most
directly comparable financial measure calculated and presented in
accordance with GAAP. Where such a reconciliation is required in a
Securities Act registration statement because that registration
statement has incorporated by reference a non-GAAP financial
measure, the company may provide the required reconciliation in one
or more of the following ways:
- amend the previously filed report (with that amendment
incorporated by reference into the Securities Act registration
statement);
- include a section within the Securities Act registration
statement that identifies the non-GAAP financial measures that
are contained in the incorporated reports and provides the
required reconciliation(s); or
- file a current report on Form 8-K or a periodic report that
identifies the non-GAAP financial measures that are contained in
the incorporated reports and provides the required
reconciliation(s) (with that Form 8-K or periodic report
incorporated by reference into the Securities Act registration
statement).
To ease transition to the new requirements, we will not object
where a registration statement on Form S-8 filed after March 28,
2003 does not include the required reconciliation of non-GAAP
financial measures included in a document filed before March 28,
2003 and incorporated by reference into that registration statement
on Form S-8. Question 2: If an annual report or quarterly report filed with
the Commission before March 28, 2003 is incorporated by reference into a
Securities Act registration statement filed after March 28, 2003, must
any non-GAAP financial measures included in the annual report or
quarterly report comply with
Item 10(e) of Regulation S-K?
Answer 2: Only non-GAAP financial measures
calculated for a fiscal period ended after March 28, 2003 are subject to
Item 10(e) of Regulation S-K. Unless the annual report or quarterly
report filed before March 28, 2003 included a non-GAAP financial measure
calculated for a fiscal period ended after March 28, 2003 (for example,
a projection), Item 10(e) of Regulation S-K would not apply. If measures
for a period ended after March 28, 2003 were included, Item 10(e) would
apply only to those measures. Companies should note, however, that the
provisions included in Item 10(e) generally codified existing staff
practice. Therefore, the annual report or quarterly report previously
filed and incorporated by reference into the registration statement
already should have conformed to those provisions.
Question 3: If a company filed a Securities Act registration
statement prior to March 28, 2003 and amends that registration statement
(either before or after effectiveness) after March 28, 2003, must the
company comply with Regulation G?
Answer 3: To ease transition to the new
requirements, if a non-GAAP financial measure is included (either
directly or through incorporation by reference) in a registration
statement that was filed before March 28, 2003 and an amendment to the
registration statement is filed after March 28, 2003, we would not
object if the use of that non-GAAP financial measure does not comply
with Regulation G, even where a pre-effective or post-effective
amendment to the registration statement was made after March 28, 2003.
Nonetheless, any non-GAAP financial measure added to, revised, amended
or updated directly in the amendment to the registration statement must
comply with Regulation G. Regardless of this position, a company must
consider whether its disclosure is rendered misleading if it does not
comply with Regulation G with regard to other non-GAAP financial
measures in the registration statement, particularly where a non-GAAP
financial measure is the same as, or similar to, a non-GAAP financial
measure that is in the registration statement and subject to Regulation
G.
Question 4: Company XYZ amends its Form 10-K after March 28,
2003. The Company's Form 10-K was originally filed before March 28,
2003. At the time the Company's Form 10-K was filed, compliance with
Regulation G was not required. Must Company XYZ's amendment to Form 10-K
comply with Regulation G?
Answer 4: Yes. Any filing made after March 28,
2003 must comply with Regulation G. Accordingly any non-GAAP financial
measure included in Company XYZ's amendment to its Form 10-K would have
to comply with Regulation G. However, Company XYZ would not have to
comply with Regulation G for any other portion of its Form 10-K.
Regardless of this position, a company must consider whether its
disclosure is rendered misleading if it does not comply with Regulation
G with regard to other non-GAAP financial measures in the Form 10-K,
particularly where a non-GAAP financial measure is the same as, or
similar to, a non-GAAP financial measure that is in the amendment to the
Form 10-K and subject to Regulation G.
Question 5: If a company posted a document containing a
non-GAAP financial measure on its website prior to March 28, 2003, must
the company remove that document on or after March 28, 2003 if it does
not contain the Regulation G reconciliation?
Answer 5: A company would not be required to
remove such a document from its website on or after March 28, 2003.
However, if a non-GAAP financial measure that would be subject to
Regulation G is added to, amended, revised or updated and posted on the
website on or after March 28, 2003, the company would have to include
the Regulation G-required reconciliation of that measure at that time.
Question 6: Does the exemption from Regulation G and Item
10(e) of Regulation S-K for disclosure of non-GAAP financial measures
made in connection with a business combination transaction extend to
non-GAAP financial measures contained in registration statements, proxy
statements, and tender offer materials?
Answer 6: There is an exemption from Regulation G
and Item 10(e) of Regulation S-K for disclosure of non-GAAP financial
measures made in communications that are subject to Rules 425, 14a-12 or
14d-2(b)(2). This exemption also is intended to apply to communications
subject to Rule 14d-9(a)(2). This exemption does not extend beyond
communications that are subject to those rules. Accordingly, if the same
non-GAAP financial measure that was included in a communication filed
under one of those rules is also disclosed in a Securities Act
registration statement or an Exchange Act proxy statement or tender
offer statement, the exemption would be inapplicable to that disclosure.
There also is an exemption from Regulation G and Item
10(e) of Regulation S-K for disclosure of non-GAAP financial measures
made in any disclosure that is subject to Item 1015 of Regulation M-A.
In contrast to the exemption discussed in the previous paragraph, the
exemption for disclosure of non-GAAP financial measures subject to
Item 1015 of Regulation M-A is not limited to
pre-commencement communications and, accordingly, the exemption would
also be available for Item 1015 disclosure found in registration
statements, proxy statements and tender offer statements.
Further, where reconciliation of a non-GAAP financial
measure is required and the most directly comparable measure is a "pro
forma" measure prepared and presented in accordance with Article 11 of
Regulation S-X, companies may use that measure for reconciliation
purposes, in lieu of a GAAP financial measure.
Question 7: What measure was contemplated by "funds from
operations" in footnote 50 to the adopting release, which indicates that
companies may use "funds from operations per share" in earnings releases
and materials that are filed or furnished to the Commission, subject to
the requirements of Regulation G and Item 10(e) of Regulation S-K?
Answer 7: Footnote 50 contemplated only the
measure "funds from operations" defined and clarified, as of January 1,
2000, by the National Association of Real Estate Investment Trusts.
Footnote 50 did not contemplate measures that contain modifications from
the measure "funds from operations" as so defined and clarified.
Accordingly, the use of such a modified measure, or a per share amount
based on such a modified measure, in materials filed with the Commission
would be subject to all of the provisions of Item 10(e) of Regulation
S-K.
Question 8: Item 10(e) of Regulation S-K prohibits adjusting a
non-GAAP financial 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. Is it appropriate to eliminate or smooth an item that is
identified as "recurring"?
Answer 8: Companies should never use a non-GAAP
financial measure in an attempt to smooth earnings. Further, while there
is no per se prohibition against removing a recurring item,
companies must meet the burden of demonstrating the usefulness of any
measure that excludes recurring items, especially if the non-GAAP
financial measure is used to evaluate performance.
It is permissible and may well be necessary to identify, discuss,
and analyze material restructuring charges and other items, whether
they are recurring or non-recurring, in Management's Discussion and
Analysis of Financial Condition and Results of Operations. Depending
on the nature and materiality of the charge or other item, it will
likely be necessary to discuss the nature of such charges or other
items, their recurring or non-recurring nature, their significance
to an investor in evaluating the company's financial condition
and/or results of operations and whether they relate to material
known trends, events or uncertainties that must be disclosed.
Whether an item may, or indeed must, be discussed in MD&A is a
different question from whether it may be eliminated or adjusted in
connection with a non-GAAP financial measure. Whether a non-GAAP
financial measure that eliminates a recurring item or items from the
most directly comparable GAAP financial measure is acceptable
depends on all of the facts and circumstances. Such measures more
likely would be permissible if management reasonably believes it is
probable that the financial impact of the item will disappear or
become immaterial within a near-term finite period. In addition,
inclusion of such a measure may be misleading absent the following
disclosure:
- the manner in which management uses the non-GAAP measure to
conduct or evaluate its business;
- the economic substance behind management's decision to use
such a measure;
- the material limitations associated with use of the non-GAAP
financial measure as compared to the use of the most directly
comparable GAAP financial measure;
- the manner in which management compensates for these
limitations when using the non-GAAP financial measure; and
- the substantive reasons why management believes the non-GAAP
financial measure provides useful information to investors.
Similar considerations may apply under Item 12 of Form 8-K. Question 9: Is it permissible to use non-GAAP financial
measures that eliminate recurring restructuring charges or other
recurring items if those charges or items are not labeled as
non-recurring?
Answer 9: For many years, staff practice has been
to object to the use of non-GAAP financial measures that eliminate the
effect of recurring items by describing them as non-recurring.
Management should consider the substantive nature of the item when
determining whether to classify it as recurring or non-recurring. Merely
labeling an item as non-recurring does not make it so.
Whether a company can present a non-GAAP financial
measure that eliminates recurring restructuring charges will depend on
all the facts and circumstances. However, if there is a past pattern of
restructuring charges, no articulated demonstration that such charges
will not continue and no other unusual reason that a company can
substantiate to identify the special nature of the restructuring
charges, it would be difficult for a company to meet the burden of
disclosing why such a non-GAAP financial measure is useful to investors.
In such circumstances, Item 10(e) of Regulation S-K would not permit the
use of the non-GAAP financial measure. Similar considerations may apply
under Item 12 of Form 8-K.
Question 10: Item 10(e) of Regulation S-K prohibits "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 earnings before interest and taxes (EBIT) and earnings before
interest, taxes, depreciation and amortization (EBITDA)." A company's
credit agreement contains a material covenant regarding the non-GAAP
financial measure "Adjusted EBITDA." If presented in a Commission
filing, the non-GAAP financial measure "Adjusted EBITDA" would violate
the referenced prohibition, as it excludes charges that are required to
be cash settled. May the company present the "Adjusted EBITDA" financial
measure in its periodic reports?
Answer 10: MD&A requires disclosure of material items
affecting liquidity. Despite the prohibition in Item 10(e), if
management believes that the credit agreement is a material
agreement, that the covenant is a material term of the credit
agreement and that information about the covenant is material to an
investor's understanding of the company's financial condition and/or
liquidity, the company may be required to disclose the measure as
calculated by the debt covenant as part of its MD&A. In this
situation, disclosure regarding the covenant may be misleading
absent a discussion of the following:
- the materiality of the credit agreement and the covenant;
- the amount or limit required for compliance with the
covenant; and
- the actual or reasonably likely effects of compliance or
non-compliance with the covenant on the company's financial
condition and liquidity.
Discussion of the non-GAAP financial measure for other purposes
would not be permitted unless otherwise allowable under Item 10(e)
of Regulation S-K. Question 11: While Item 10(e) of Regulation S-K does not
include a prohibition on the use of per share non-GAAP financial
measures, footnote 11 of the release adopting that Item states that "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." In light of Commission guidance, specifically
Accounting Series Release No. 142 (which states "per share data other
than that relating to net income, net assets and dividends should be
avoided in reporting financial results") and FASB Statement 95 (which
prohibits cash flow per share), are non-GAAP earnings per share numbers
prohibited or has Item 10(e) of Regulation S-K overruled or superseded
ASR No. 142?
Answer 11: ASR No. 142, Reporting Cash Flow and
Other Related Data, was issued in 1973 primarily to address the
confusion over the use of cash flow per share and the basis of
presentation of other non-GAAP data. In ASR No. 142, the Commission
noted that significant questions arise as to the relevance of per share
data presented on any basis other than earnings. The Commission also
noted that certain figures cannot logically be related to the common
shareholder without adjustment and that certain aggregate financial
data, while of importance to analysts and management, are not items that
accrue directly to the benefit of the owner of a part of the common
equity. While those same concerns continue to be present, the new Item
recognizes, consistent with the view of many commenters regarding the
proposal, that certain non-GAAP per share measures may be meaningful
from an operating viewpoint. However, the disclosure that explains how
these measures are used by management and in what way they provide
meaningful information to investors (as the per share measure would not
depict the amount that accrues directly to shareholders' benefit) is
critical to addressing these concerns. Also critical is a reconciliation
of the measure to the GAAP financial measure of earnings per share.
Finally, the GAAP prohibition on presenting cash flow per share is
maintained and per share measures of liquidity continue to be
prohibited.
Question 12: Are the requirements in Item 10(e)(1)(i) of
Regulation S-K for the prominent presentation of, and reconciliation to,
the most directly comparable GAAP financial measure or measures intended
to change the staff's historical practice of requiring the prominent
presentation of amounts for the three major categories of the statement
of cash flows when a non-GAAP liquidity measure is presented?
Answer 12: No. The requirements in Item
10(e)(1)(i) are consistent with the staff's historical practice. The
three major categories of the statement of cash flows should be
presented when a non-GAAP liquidity measure is presented.
Question 13: Some companies present a measure of "free cash
flow," typically calculated as cash flows from operating activities as
presented in the statement of cash flows under GAAP less capital
expenditures. Does Item 10(e) of Regulation S-K permit this measure?
Answer 13: The deduction of cash flows for capital
expenditures from the GAAP financial measure of cash flows from
operating activities would not ordinarily violate the prohibitions in
Item 10(e)(1)(ii). However, companies should be cautious when using such
a measure. "Free cash flow" does not have a uniform definition and its
title does not describe how it is calculated. Accordingly, a clear
description of its calculation, as well as the necessary reconciliation,
should accompany the measure where it is used. Companies should also be
careful to avoid inappropriate or potentially misleading inferences
about its usefulness. All material limitations of the measure should be
disclosed. For example, "free cash flow" should not be used in a manner
that inappropriately implies that the measure represents the residual
cash flow available for discretionary expenditures, since many companies
have mandatory debt service requirements or other non-discretionary
expenditures that are not deducted from the measure.
Question 14: Section I of the adopting release describes EBIT
as "earnings before interest and taxes" and EBITDA as "earnings before
interest, taxes, depreciation and amortization." What GAAP measure is
intended by the term "earnings"? May measures other than those intended
by the description in the release be characterized as "EBIT" or
"EBITDA"? Does the exception for EBIT and EBITDA from the prohibition in
Item 10(e)(1)(ii)(A) of Regulation S-K apply to these other measures?
Answer 14: "Earnings" is intended to mean net
income as presented in the statement of operations under GAAP. Measures
that are calculated differently than those described as EBIT and EBITDA
in the adopting release should not be characterized as "EBIT" or
"EBIDTA." Instead, the titles of these measures should clearly identify
the earnings measure being used and all adjustments. These measures are
not exempt from the prohibition in Item 10(e)(1)(ii)(A) of Regulation
S-K.
Question 15: If EBIT or EBITDA is presented as a performance
measure, to which GAAP financial measure should it be reconciled?
Answer 15: Because EBIT and EBITDA exclude
recurring charges, companies should consider the answer to Question 8 if
they intend to use EBIT or EBITDA as a performance measure. If a company
is able to justify such use, EBIT or EBITDA should be reconciled to net
income as presented in the statement of operations under GAAP. Operating
income would not be considered the most directly comparable GAAP
financial measure because EBIT and EBITDA make adjustments for items
that are not included in operating income.
Question 16: Company XYZ presents a table illustrating a
breakdown of revenues by product. Is such a breakdown considered a
non-GAAP financial measure under Regulation G and Item 10(e) of
Regulation S-K?
Answer 16: If the aggregate revenues presented for
each product sum to the revenue amount presented on Company XYZ's
financial statements, such a table would not be considered a non-GAAP
financial measure. In fact, FASB Statement 131, Disclosures about
Segments of an Enterprise and Related Information, requires
disclosure of revenues from external customers for each product and
service, based on the revenue amounts reported in the financial
statements. The presentation would be considered a non-GAAP financial
measure under Regulation G and Item 10(e) of Regulation S-K, however, if
the revenue is adjusted in any manner.
Question 17: Company XYZ includes a table illustrating a
breakdown of revenues by geographic location. In this table, Company XYZ
adjusts its GAAP revenue measure for its international operations to
exclude the effects of changes in foreign exchange rates associated with
the current fiscal period. The table also presents the related foreign
currency effect for the period. Company XYZ presents revenue in this
manner to show changes in revenue derived from increases in sales
volumes, prices, and exchange rates from period to period as part of its
MD&A discussion. Is this table considered a non-GAAP financial measure
under Regulation G and Item 10(e) of Regulation S-K?
Answer 17: If the aggregate revenues presented for
each geographic location sum to the revenue amount presented on Company
XYZ's financial statements, such a table would not be considered a
non-GAAP financial measure. However, if Company XYZ presents the
foreign exchange adjusted measure by itself, it has presented a non-GAAP
financial measure under Regulation G and Item 10(e) of Regulation S-K.
Question 18: Is segment information presented in conformity
with FASB Statement 131 a non-GAAP financial measure under Regulation G
and Item 10(e) of Regulation S-K?
Answer 18: No. Non-GAAP financial measures do not
include financial measures that are required to be disclosed by GAAP.
Section II.A.2.b of the adopting release lists "measures of profit or
loss and total assets for each segment required to be disclosed in
accordance with GAAP" as an example of such a measure. The measure of
segment profit or loss and segment total assets under FASB Statement 131
is the measure reported to the chief operating decision maker for
purposes of making decisions about allocating resources to the segment
and assessing its performance.
The example in the adopting release was not intended to
be all-inclusive. As an additional example, because FASB Statement 131
requires or expressly permits the footnotes to the company's
consolidated financial statements to include specific additional
financial information for each segment, that information also would be
excluded from the definition of non-GAAP financial measures.
Question 19: Does Item 10(e) of Regulation S-K prohibit the
discussion in MD&A of segment information determined in conformity with
FASB Statement 131?
Answer 19: No. A company may discuss segments or
other subdivisions of its business in the MD&A, and may be required to
do so if such a discussion is necessary to an understanding of the
business. Such a discussion generally would include the measures
reported in the footnotes to the company's consolidated financial
statements in accordance with FASB Statement 131.
FASB Statement 131 requires footnote disclosure of
segment profit or loss, segment total assets, and other specified
segment measures. FASB Statement 131 also requires the footnote to
include a reconciliation of those segment measures to consolidated
amounts determined in accordance with GAAP. In a company's disclosure
document, if the first discussion of the segment profit or loss measure
precedes the financial statements for example, in the MD&A the
company should either: (1) present the FASB Statement 131-required
information in the MD&A; or (2) include a cross reference in the MD&A to
the FASB Statement 131-required information in the footnote to the
company's consolidated financial statements.
Under FASB Statement 131, a company may determine segment
profitability on a basis that differs from consolidated operating profit
as defined by GAAP or excludes the effects of items attributable to that
segment. In this situation, FASB Statement 131 requires that a footnote
to the company's consolidated financial statements provide a
reconciliation. Where a company includes in its MD&A a discussion of
segment profitability determined in such a manner, the company also
should include in the segment discussion in the MD&A a complete
discussion of the reconciling items that apply to the particular segment
being discussed. In this regard, see Financial Reporting Codification
Section 501.01.a, footnote 28, as added by Commission Release 33-7620,
Segment Reporting.
Question 20: Is a measure of segment profit/loss or liquidity
that is not in conformity with FASB Statement 131 a non-GAAP financial
measure under Regulation G and Item 10(e) of Regulation S-K? Does Item
10(e) of Regulation S-K prohibit such a presentation?
Answer 20: Segment measures that are adjusted to
include amounts excluded from, or to exclude amounts included in, the
measure reported to the chief operating decision maker for purposes of
making decisions about allocating resources to the segment and assessing
its performance do not comply with FASB Statement 131. Such measures
are, therefore, non-GAAP financial measures.
Such measures are subject to all of the provisions of
Regulation G and Item 10(e) of Regulation S-K. Further, the staff
believes it would be difficult to demonstrate that segment measures that
are not reported to or used by the chief operating decision
maker, or otherwise are not in conformity with FASB Statement 131, are
useful for investors.
Question 21: In the footnote that reconciles the segment
measures to the consolidated financial statements, a company may total
the profit or loss for the individual segments as part of the FASB
Statement 131-required reconciliation. Would the presentation of such a
"consolidated" segment profit or loss measure in any context other than
the FASB Statement 131-required reconciliation in the footnote be the
presentation of a non-GAAP financial measure?
Answer 21: Yes. The presentation of such a
"consolidated" segment profit or loss measure in any context other than
the FASB Statement 131-required reconciliation in the footnote would be
the presentation of a non-GAAP financial measure. We believe that this
interpretation is appropriate, as such a "consolidated" segment profit
or loss measure has no authoritative meaning outside of the FASB
Statement 131-required reconciliation in the footnotes to the company's
consolidated financial statements.
Question 22: Item 12 contains a conditional exemption from its
requirement to furnish a Form 8-K where earnings information is
presented orally, telephonically, by webcast, by broadcast or by similar
means. Among other conditions, the company must provide on its website
any financial and other statistical information contained in the
presentation, together with any information that would be required by
Regulation G. Would an audio file of the initial webcast satisfy this
condition to the exemption?
Answer 22: Yes, provided that: (1) the audio file
contains all material financial and other statistical information
included in the presentation that was not previously disclosed, and (2)
investors can access it and replay it through the company's website.
Alternatively, slides or a similar presentation posted on the website at
the time of the presentation containing the required, previously
undisclosed, material financial and other statistical information would
satisfy the condition. In each case, the company must provide all
previously undisclosed material financial and other statistical
information, including information provided in connection with any
questions and answers. Regulation FD also may impose disclosure
requirements in these circumstances.
Question 23: A company issues its earnings release after the
close of the market and holds a properly noticed conference call to
discuss its earnings two hours later. That conference call contains
material, previously undisclosed, information of the type described
under Item 12 of Form 8-K. Because of this timing, the company is unable
to furnish its earnings release on a Form 8-K before its conference
call. Accordingly, the company cannot rely on the exemption from the
requirement to furnish the information in the conference call on a Form
8-K. What must the company file with regard to its conference call?
Answer 23: The company must furnish the material,
previously non-public, financial and other statistical information
required to be furnished on Item 12 of Form 8-K as an exhibit to a Form
8-K and satisfy the other requirements of Item 12 of Form 8-K. A
transcript of the portion of the conference call or slides or a similar
presentation including such information will satisfy this requirement.
In each case, all material, previously undisclosed, financial and other
statistical information, including that provided in connection with any
questions and answers, must be provided. Regulation FD also may impose
disclosure requirements in these circumstances.
Question 24: Item 12 contains a conditional exemption from its
requirement to furnish a Form 8-K where earnings information is
presented orally, telephonically, by webcast, by broadcast or by similar
means. Among other conditions, the company must provide on its website
any material financial and other statistical information not previously
disclosed and contained in the presentation, together with any
information that would be required by Regulation G. When must all of
this information appear on the company's website?
Answer 24: The required information must appear on
the company's website at the time the oral presentation is made. In the
case of information that is not provided in a presentation itself but,
rather, is disclosed unexpectedly in connection with the question and
answer session that was part of that oral presentation, the information
must be posted on the company's website promptly after it is disclosed.
Any requirements of Regulation FD also must be satisfied. A webcast of
the oral presentation would be sufficient to meet this requirement. See,
also, the answer to Question 22.
Question 25: Company XYZ issues its earnings release after the
close of the market on Tuesday. Company XYZ then files its earning
release as an exhibit to its Form 10-Q on Wednesday morning, prior to
holding its conference call Wednesday afternoon. Must Company XYZ also
furnish a Form 8-K under Item 12 in order to rely on the Item 12
exemption for its conference call?
Answer 25: No. Assuming that all of the other
conditions are met, Company XYZ's filing of the earnings release as an
exhibit to its Form 10-Q before the conference call takes place would be
sufficient for it to rely on the Item 12 exemption for the conference
call.
Question 26: Does a company's failure to furnish to the
Commission the Form 8-K required by Item 12 in a timely manner affect
the company's eligibility to use Form S-3?
Answer 26: No. Form S-3 requires the company to
have filed in "a timely manner all reports required to be filed in
twelve calendar months and any portion of a month immediately preceding
the filing of the registration statement . . ." Because an Item 12 Form
8-K is furnished to the Commission, rather than filed with the
Commission, failure to furnish such a Form 8-K in a timely manner would
not affect a company's eligibility to use Form S-3. While not affecting
a company's Form S-3 eligibility, failure to comply with Item 12 of Form
8-K would, of course, be a violation of Section 13(a) of the Exchange
Act and the rules thereunder.
Question 27: Company ABC issued a press release on April 3,
2003 that contained previously non-public material information.
Specifically, Company ABC announced that it would not meet its previous
earnings estimates for the fiscal period ended March 31, 2003. The press
release also stated that it expected its adjusted earnings (a non-GAAP
financial measure) for the fiscal period ended March 31, 2003 to be in
the range of $1.20 to $1.25. Does Company ABC have to furnish its press
release pursuant to Item 12 of Form 8-K and satisfy the requirements of
Item 12 applicable to non-GAAP financial measures?
Answer 27: Company ABC's press release would be
subject to Item 12 of Form 8-K because it contained non-public material
information regarding its results of operations for a completed fiscal
period. The adjusted earnings range presented also would be subject to
the requirements of Item 12 applicable to non-GAAP financial measures.
Question 28: The Note to Item 10(e) of Regulation S-K permits
a foreign private issuer to include in its filings a non-GAAP financial
measure that otherwise would be prohibited by Item 10(e)(1)(ii) if,
among other things, the non-GAAP financial measure is required or
expressly permitted by the standard setter that is responsible for
establishing the GAAP used in the company's primary financial statements
included in its filing with the Commission. What does "expressly
permitted" mean?
Answer 28: A measure is expressly permitted if the
particular measure is clearly and specifically identified as an
acceptable measure by the standard setter that is responsible for
establishing the GAAP used in the company's primary financial statements
included in its filing with the Commission.
Some non-US GAAP standard setters specify a minimum level
of caption detail for financial statement presentation, but require or
permit additional caption detail. In some cases, the standard setter
does not specify the particular additional captions to be presented. The
staff believes that additional detail of the components of the financial
statements determined in conformity with the GAAP used in the primary
financial statements will generally be useful to US investors. The
"expressly permitted" condition is not intended to prohibit the
inclusion of those captions.
Some non-US GAAP standard setters permit or require
subtotals in financial statements that are not calculated consistently
with those permitted or required by US GAAP. Provided that the subtotal
is clearly derived from the appropriately classified financial statement
captions that precede it, the "expressly permitted" condition is not
intended to prohibit inclusion of those subtotals.
Although additional detail of the components of the
primary financial statements is acceptable as discussed above, measures
that are prohibited by Item 10(e) of Regulation S-K should not be added
to the face of the primary financial statements unless expressly
permitted under the GAAP used in the company's primary financial
statements.
Some non-US GAAP standard setters specifically permit
alternative earnings per share measures to be presented but do not
specify the particular earnings measures that may be used. In those
circumstances, the expressly permitted condition is not intended to
prohibit inclusion of earnings per share measures where the numerator of
the per share measure is directly derived from an appropriately
presented measure in the home country GAAP income statement.
Question 29: A foreign private issuer furnishes a press
release on a Form 6-K that includes a section with non-GAAP financial
measures. Can a foreign private issuer incorporate by reference into a
Securities Act registration statement only those portions of the
furnished press release that do not include the non-GAAP financial
measures?
Answer 29: Reports on Form 6-K are not
incorporated by reference automatically into Securities Act registration
statements. In order to incorporate a Form 6-K into a Securities Act
registration statement, a foreign private issuer must specifically
provide for such incorporation by reference in the registration
statement and in any subsequently filed Form 6-K. See Item 6(c) of Form
F-3. Where a foreign private issuer wishes to incorporate by reference a
portion or portions of the press release provided on a Form 6-K, the
foreign private issuer should either: (1) specify in the Form 6-K those
portions of the press release to be incorporated by reference, or (2)
furnish two Form 6-K reports, one that contains the full press release
and another that contains the portions that would be incorporated by
reference (and specifies that the second Form 6-K is so incorporated).
We believe that the second method, using two reports on Form 6-K, may
provide more clarity for investors in most circumstances. A company must
also consider whether its disclosure is rendered misleading if it
incorporates only a portion (or portions) of a press release.
Question 30: If a Form F-3 is filed after March 28, 2003 and
the company incorporates by reference a Form 20-F annual report for the
fiscal year ended December 31, 2002 that includes a non-GAAP financial
measure, how may the company comply with Regulation G?
Answer 30: See the answer to Question 1. The
company could comply with Regulation G by one or a combination of: (1)
amending the Form 20-F annual report; (2) filing a report on Form 6-K
that is incorporated by reference into the Form F-3; or (3) providing
the Regulation G disclosure in the Securities Act filing.
Question 31: A foreign private issuer publishes a non-GAAP
financial measure that does not comply with Regulation G, in reliance on
Rule 100(c), and then furnishes the information in a report on Form 6-K.
Must the foreign private issuer comply with Item 10(e) of Regulation S-K
with respect to that information if the company chooses to incorporate
that Form 6-K report into a Securities Act registration statement (other
than an MJDS registration statement) filed after March 28, 2003?
Answer 31: Yes. If the non-GAAP financial measure
is for a period ending after March 28, 2003, the company must comply
with all of the provisions of Item 10(e) of Regulation S-K.
Question 32: If a Canadian company includes a non-GAAP
financial measure in an annual report on Form 40-F, does the company
need to comply with Regulation G or Item 10(e) of Regulation S-K with
respect to that information if the company files a non-MJDS Securities
Act registration statement that incorporates by reference the Form 40-F?
Answer 32: No. Information included in a Form 40-F
is not subject to Regulation G or Item 10(e) of Regulation S-K.
Question 33: Section 15(d) of the Exchange Act suspends
automatically its application to any company that would be subject to
the filing requirements of that section where, if other conditions are
met, on the first day of the company's fiscal year it has fewer than 300
holders of record of the class of securities that created the Section
15(d) obligation. This suspension, which relates to the fiscal year in
which the fewer than 300 record holders determination is made on the
first day thereof, is automatic and does not require any filing with the
Commission. The Commission adopted Rule 15d-6 to require the filing of a
Form 15 as a notice of the suspension of a company's reporting
obligation under Section 15(d). Such a filing, however, is not a
condition to the suspension. A number of companies whose Section 15(d)
reporting obligation is suspended automatically by the statute choose
not to file the notice required by Rule 15d-6 and continue to file
Exchange Act reports as though they continue to be required. Must a
company whose reporting obligation is suspended automatically by Section
15(d) but continues to file periodic reports as though it were required
to file periodic reports comply with Regulation G and the requirements
of Item 10(e) of Regulation S-K?
Answer 33: Regulation S-K and Regulation S-B
relate to filings with the Commission. Accordingly, a company that is
making filings as described in this question must comply with Regulation
S-K or Regulation S-B, or Form 20-F, as applicable, in their filings.
As to other public communications, any company "that has
a class of securities registered under Section 12 of the Securities
Exchange Act of 1934, or is required to file reports under Section 15(d)
of the Securities Exchange Act of 1934" must comply with Regulation G.
The application of this standard to those companies that no longer are
"required" to report under Section 15(d) but choose to continue to
report presents a difficult dilemma, as those companies technically are
not subject to Regulation G but their continued filing is intended to
and does give the appearance that they are a public company whose
disclosure is subject to the Commission's regulations. It is reasonable
that this appearance would cause shareholders and other market
participants to expect and rely on a company's required compliance with
the requirements of the federal securities laws applicable to companies
reporting under Section 15(d). Accordingly, while Regulation G
technically does not apply to a company such as the one described in
this question, the failure of such a company to comply with all
requirements (including Regulation G) applicable to a Section
15(d)-reporting company can raise significant issues regarding that
company's compliance with the anti-fraud provisions of the federal
securities laws.
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