The Securities and Exchange Commission recently adopted new Regulation G and amendments to Regulation S-K regarding use of non-GAAP financial measures.

Generally, the new Regulation and amendments require that every public disclosure or filing that includes a non-GAAP financial measure also include a presentation of the most directly comparable GAAP financial measure as well as a reconciliation between the non-GAAP financial measure and the most directly comparable GAAP financial measure.

The new Regulation G applies to all disclosures as of March 28, 2003 and the amendments to Regulation S-K will apply to any annual or quarterly report filed with respect to fiscal period ending after March 28, 2003.

I. GAAP" versus "Non-GAAP" Financial Measures

A non-GAAP financial measure is defined as a numerical measure of a company's historical or future financial performance, financial position or cash flows that:

• excludes 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); or
• includes amounts that are excluded from the most directly comparable measure so calculated and presented in accordance with GAAP.

Examples of a non-GAAP financial measure include (i) a measure of operating income that excludes one or more expense or revenue items that are identified as "non-recurring" and (ii) EBITDA (earnings before interest, taxes, depreciation and amortization), which could be calculated using elements derived from GAAP financial presentations but, in any event, is not presented in accordance with GAAP.

However, non-GAAP financial measures do not include (and Regulation G and the amended Regulation S-K would therefore permit their public disclosure without an accompanying GAAP measure) (i) operating and other statistical measures (such as unit sales, numbers of employees, numbers of subscribers, or numbers of advertisers); and (ii) ratios or measures that are calculated using only GAAP numbers or a combination of GAAP numbers and operating/statistical measures.

Non-GAAP financial measures also 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 the new rules would not apply include:

• amounts of expected indebtedness;
• amounts of repayments that have been planned but not yet made;
• estimated revenues or expenses of a new product line, so long as such amounts were estimated as GAAP figures; and
• measures of profit or loss and total assets for each segment required to be disclosed in accordance with GAAP.

Non-GAAP financial measures also do not include financial measures that otherwise would be non-GAAP, but that are required to be disclosed by GAAP, SEC rules, or an applicable system of regulation of a government or governmental authority or self-regulatory organization, such as measures of capital or reserves calculated for regulatory purposes.

II. Regulation G

Regulation G provides that whenever a reporting company publicly discloses material information that includes a non-GAAP financial measure, the registrant must accompany that non-GAAP financial measure with a presentation of the most directly comparable financial measure calculated and presented in accordance with GAAP as well as a reconciliation (by schedule or other clearly understandable method) of the differences between the two measures.

The company is responsible for making the determination as to which is the "most directly comparable financial measure calculated and presented in accordance with GAAP." As general guidance, the SEC has taken the view that non-GAAP financial measures that measure liquidity should be reconciled with GAAP amounts from the statement of cash flows or similar statement. Non-GAAP financial measures that depict performance should be with GAAP amounts from the net income, or income from continuing operations.

If a non-GAAP financial measure is released orally, telephonically, by webcast or broadcast or by similar means, the required accompanying GAAP information and reconciliation may be provided on the company's website. The information must be posted by the time the non-GAAP financial measure is made public and the location of the website must be made public in the same presentation in which the non-GAAP financial measure is made public.

III. Amendments to Regulation S-K

The requirements for a GAAP presentation and for a reconciliation under the amendments to Regulation S-K are more extensive and detailed than new Regulation G. Specifically:

• in filings with the SEC, the presentation of the comparable GAAP financial measure must have equal or greater prominence; and
• any non-GAAP financial measure presented must be accompanied by statements disclosing (i) why management believes the non-GAAP financial measure would be useful to investors regarding the registrant's financial condition and results of operation and (ii) to the extent material, additional purposes, if any, for which management uses the non-GAAP financial measure that are not otherwise disclosed.

• excluding charges or liabilities that required, or will require, cash settlement, from non-GAAP liquidity measures, other than the measures EBIT and EBITDA;
• adjusting a non-GAAP performance measure to eliminate or smooth items identified as non-recurring, infrequent or unusual, when (i) the nature of the charge or gain is such that it is reasonably likely to recur within two years, or (ii) there was a similar charge or gain within the prior two years;
• presenting non-GAAP financial measures on the face of the company's financial statements prepared in accordance with GAAP or in the accompanying notes;
• 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
• 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 new rules do 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 (e.g. Rule 14a-12 under the Exchange Act and Rule 425 under the Securities Act).

The foregoing is meant to be a summary only. As with any discussion of the law, certain exceptions may apply to specific situations. Please call Ted Tashlik or Martin Goldwyn to discuss any specific matters.