Required Filings Of Earnings Releases And Non-GAAP Financial Information

At the end of January, we issued a Client Alert summarizing the SEC's new Regulation G. These new rules concern earnings releases and the use of non-GAAP financial information and became effective at the end of March. Since most public companies will be issuing first quarter earnings announcements within the next few weeks, we thought it important to remind you of the effect of Regulation G on your public disclosures.

Companies that issue earnings releases (and similar announcements containing material non-public financial information about completed annual or quarterly fiscal periods) must now furnish each release to the SEC under new Item 12 of Form 8-K. This Form 8-K must be filed within five business days after the earnings release is issued.

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

• excludes amounts that are included in the comparable measure calculated under GAAP in the statement of income, balance sheet or statement of cash flows; or

• includes amounts that are excluded from the comparable measure calculated under GAAP.

Examples of non-GAAP financial measures include:

• operating income excluding non-recurring items;

• EBITDA; and

• Funds From Operations (FFO), a term commonly used by REITs to show operating results without the effects of depreciation and amortization.

The term non-GAAP financial measure does not generally apply to operating or statistical measures (such as unit sales or number of employees) or ratios or measures either calculated, or not required to be calculated, in accordance with GAAP (such as sales per square foot and same store sales). The term also excludes financial information that does not have the effect of providing numerical measures that are different from GAAP measures. Thus, the amount of debt repaid in a period, new product revenues or segment information, all of which are extracted from GAAP financial statements, do not constitute non-GAAP financial measures.

Financial measures required by insurance or banking regulators or other governmental authorities, as well as those required by SEC rules, are excluded from the definition of non-GAAP financial measures. Accordingly, items such as a financial institution's loan loss reserves, an insurance company's schedule of reserves or a broker-dealer's net capital are not subject to the Regulation G disclosure requirements.

Whenever a public company publishes a non-GAAP financial measure in an earnings release, the company also must:

• present the most comparable GAAP financial measure; and

• quantitatively reconcile the non-GAAP financial measure to the comparable GAAP financial measure.

Whenever a public company publishes a non-GAAP financial measure orally, telephonically, by webcast or other broadcast means, the company also must follow the earnings release disclosure rules above. However, a company may satisfy these disclosure requirements by:

• posting the comparable GAAP financial measure and the reconciliation thereto on its website; and

• directing listeners, during the presentation, to the location of the information and advising them of its availability.

If a non-GAAP financial measure is included in a periodic report, in addition to the requirements described above for oral or broadcast public disclosures, management must explicitly state in the report the purposes for which management uses the measure and why management believes the non-GAAP measure may be useful to investors beyond the comparable GAAP measure.

Under Regulation G, non-GAAP financials measures may no longer be presented:

• on the face of a GAAP financial statement;

• in the accompanying footnotes;

• under captions typically used for GAAP schedules or statements; or

• in a pro forma financial statement required by Regulation S-X.

Thus, non-GAAP measures may appear only within the text of management's discussion and analysis or in an operating data table.

Regulation G also prohibits some non-GAAP financial measures:

• except for EBIT and EBITDA, a public company may not use a non-GAAP financial measure that excludes charges or liabilities that required, or will require, cash settlement, or would have required cash settlement absent an ability to settle in another manner; and

• a public company may not use a non-GAAP financial measure that contains an adjustment to eliminate or "smooth" items identified as non-recurring, infrequent or unusual, when it is reasonably likely the item will recur within the next two years or if there was a similar charge within the prior two years.

Regulation G is lengthy and, in a number of instances, not entirely clear. Therefore, we urge you to call one of us for assistance in interpreting Regulation G if you plan to include a non-GAAP financial measure in an earnings release, during your quarterly earnings presentation to investors or in your Form 10-Q.