I believe you are referring to what is called "pro forma" earnings. If not, please write in again.

In fact, the SEC issued a warning about this matter in early December which you can read at: www.sec.gov (click on "SEC Issues Caution, Alert on Pro Forma Financials" on the left side of the home page). You'll see that the SEC has asked companies to stop misusing pro forma earnings because they can mislead investors.

The SEC warning was largely motivated by the fact that a growing number of companies are putting out press releases using pro forma earnings in a calculated effort to highlight certain points and overlook others. Pro forma earnings numbers exclude various charges the company may not want investors to see.

NOTE: The SEC warning merely asks companies to take care when issuing pro forma earnings. It did not ban their use.

GAAP or REPORTED EARNINGS vs PRO FORMA EARNINGS...

Federal law requires most publicly held companies to file statements with the SEC. These statements must be prepared using specific accounting conventions called "Generally Accepted Accounting Principles" or GAAP. The great advantage to the GAAP rules is that all reported earnings are calculated in the same way, providing ongoing consistency. In other words, GAAP figures make it easier to track a company's financial results from quarter to quarter and from year to year. They also enable you to compare one company's earnings with those of another.

Pro forma information, on the other hand, is NOT prepared in accordance with these standards. As the SEC puts it in its typically dry tone: "Some of the numbers announced by companies in their "pro forma" financial information may be based on assumptions or principles that are not recognized as appropriate for SEC filings."

The fact that pro forma numbers are not prepared using GAAP procedures also means they may not convey an accurate picture or the total picture. They tend to highlight only positive information and, until the SEC warning, often failed to account for certain costs or charges.

What's likely to be eliminated? Stock-based compensation, acquisition-related expenses, unsold inventories, depreciation, amortization and sometimes interest and taxes.

By stripping out these and other such costs, the company can appear to be profitable even when it is not.

Sometimes pro forma earnings refer to earnings that would have been generated if a recently acquired business unit had contributed to the company's coffers for the quarter or entire year.

YOUR HOMEWORK ASSIGNMENT...

An article in "USA Today" earlier this month cited Amazon.com as a company that recently used pro forma earnings to paint a rosier-than-reality picture. I went to the company's website (www.amazon.com) to read the press release. Indeed it states that for the third quarter ended September 30, 2001, the pro forma net loss was $58 million or 16 cents per share. It also notes that the official (GAAP) net loss was actually $169.9 million or 46 cents a share. Unless you're a sophisticated investor, you might not have caught the difference.

The press release goes on to say, "a reconciliation of GAAP to pro forma is included in the attached financial statements." That's all very well and good but probably asking too much of the average investor.

Several paragraphs later, Warren Jenson, the CFO, says that the company would be profitable this quarter, on a pro-forma basis.

I urge you to read the release as a clear example of how pro forma information can be dispensed. At the very bottom of Amazon.com's home click on "About Us." This takes you to "Press Releases." You want the one dated October 23, 2001.

WHAT YOU SHOULD DO...

The fact that companies do selective editing of financial information means you need to have the full story before investing. If you see the phrase "pro forma" immediately look for a footnote or explanation of what is and what is not included in the figure. Unless an earnings figure is identified as being on a GAAP or reported basis, it is not the true bottom line.

You can also download (for free) a company's GAAP-based financial statements from the SEC's "EDGAR" database of corporate filings at: www.sec.gov/edgar.shtml.

THE BOTTOM LINE...

Pro forma earnings statements depart from traditional accounting conventions and make it difficult and time consuming for investors to compare a company's financial information with other reporting periods and with other companies. Although they are not illegal, they can be confusing or misleading, so view them with skepticism and seek out the GAAP backup figures.