[GRAPHIC OMITTED]
MARSULEX
May 12, 2005
Mr. Rufus Decker
Accounting Branch Chief
United States Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C.
20549
Re: Form 20-F for the fiscal year ended December 31, 2004
File No. 333-09410
Dear Mr. Decker:
Thank you for your comment letter dated April 28, 2005. Set forth below is the
response of Marsulex Inc. (the "Company") to your comments relating to Form
20-F for the fiscal year ended December 31, 2004. For ease of reference each of
the comments from your letter have been included below with our response
following.
Selected Financial Data, page 1
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1. It appears to us that your presentation of the non-GAAP performance
measure, Earnings from operations before the under noted (EBITDA),
does not fully comply with item 10(e) of Regulation S-K and that
certain adjustments do not comply with Item 10(e)(1)(ii)(B). We point
you to the guidance set forth in the "Frequently Asked Questions
Regarding the Use of Non-GAAP Financial Measures" (FAQ) prepared by
the Staff Members in the Division of Corporation Finance. The
following comments are not meant to be an all-inclusive list of the
deficiencies in your disclosures.
o You indicate that EBITDA is a measure used to indicate your operating
profitability and performance. Since this performance measure
eliminates recurring charges you must fully comply with all the
disclosure requirements set forth in the five bullet points to
Question 8 of the FAQ.
o Address each item you have included as "unusual items". To the extent
they are recurring items, address them as requested in the above
bullet. To the extent they are nonrecurring items, address for us the
appropriateness of eliminating them from your non-GAAP performance
measure.
o Rename your acronym, EBITDA, as it eliminates items other than
interest, taxes, depreciation and amortization.
o You must reconcile EBITDA to net income.
Tell us how you intend to revise the non-GAAP performance measure you
present or explain why you believe the current measure is appropriate.
111 Gordon Baker Road, Suite 300, Toronto, ON Canada M2H 3R1
T (416) 496 4178 F (416) 496 4155 Toll Free 800 387 5030 Page 1
www.marsulex.com
Mr. Rufus Decker
US Securities and Exchange Commission
May 12, 2005
Page 2
Company's Response:
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We have read Item 10(e) of Regulation S-K and believe that any adjustments made
to EBITDA do comply with Item 10(e)(1)(ii)(B). The Company uses EBITDA to
measure the performance of the Company and its segments, as well as to
calculate the Company's incentive compensation. We have applied our methodology
of calculating EBITDA consistently from period to period. Any adjustments made
to EBITDA were for unusual items (both gains and losses) that were unplanned
and were not expected to occur. These unusual items are non-recurring and are
related to financing and capital decisions that are not part of the normal
course of operations of the business and are difficult to anticipate.
Significant unusual items are identified and discussed in detail in Note 2 of
page 3 of the Form 20-F as well as in page FS-9 of the Financial Statements.
For example:
o Note 2a - Expenses incurred on cancellation of stock options held by
former employees. In December of 2003, the Company purchased stock
options held by former employees of the Company for a total
consideration of $0.7 million. This financing expense is not part of
the Company's normal operations and as such it is reasonably not
likely to recur within two years nor was there a similar charge within
the prior two years.
o Note 2c - Expenses incurred on early retirement of debt. In 2001, the
Company fully retired its outstanding 10.21% Senior Notes and
cancelled its U.S. $50.0 million operating credit facility at an
expense of $5.6 million. In August of 2002 the Company was obligated
to purchase a portion of its Senior Subordinated Notes and incurred
expenses of $1.3 million writing off deferred debt issuance costs and
other expenses. These again were financing activities that are unusual
to our operations and therefore not likely to recur within the next
two years.
o Note 2e - (Loss) gain on disposal of parts and service business and
other assets. There was a $4.0 million gain on the disposal of the
parts and service business and other assets in 2002. In 2003 and 2004,
the Company recorded subsequent and unexpected costs relating to that
disposition as unusual costs ($0.7 million in 2003 and $0.2 million in
2004). The capital decision to dispose of a business is not part of
the normal operations of the Company and as such it is not reasonably
likely to recur within two years.
o Note 2f - Write-off of capitalized costs. Due to significant changes
in financial markets, the Company and Santee Cooper, South Carolina's
state owned electric and water utility, mutually agreed not to proceed
with the project. This resulted in a write-off of capitalized project
costs of $9.5 million in 2002. Write-off of capitalized costs has not
recurred within the last two years and not reasonably likely to recur
within the next two years.
o Other Unusual items - These are unrelated unusual items not
significant enough to be disclosed separately ($0.5 million, nil and
$0.7 in 2004, 2003 and 2002, respectively). The nature of these
charges is such that it is not reasonably likely to recur within two
years.
The Company also believes it appropriately followed the required disclosures
set forth in the five bullet points to Question 8 of the FAQ when it uses
EBITDA, a non-GAAP measure, in its 2004 Form 20-F. We disclose (1) the way
management uses EBITDA to conduct or evaluate its business; (2) the reason for
management's decision to use this
Mr. Rufus Decker
US Securities and Exchange Commission
May 12, 2005
Page 3
measure; (3) the material limitations associated with its use; (4) the way
management compensates for limitations when using EBITDA; and (5) the reasons
why management believes EBITDA provides useful information to investors as
follows:
Bullets 1 and 2 - As discussed on page 4 of our Form 20-F and on page
8 of our MD&A, earnings before interest, taxes, depreciation,
amortization and unusual items, or EBITDA, is used by management
internally to measure the performance of the business as a whole as
well as to measure the performance of the individual segments and also
forms the primary basis upon which employees of the Company receive
incentive compensation.
Bullet 3 - In our continuous disclosures over the last few years and
in our 2004 Management Discussion and Analysis ("MD&A") we have
reduced the prominence given to the use of EBITDA. Gross Profit, as
described in detail in pages 4 and 5 of the MD&A, is the GAAP measure
the Company uses to describe the Company's operating performance.
Bullet 4 - The Company believes that it adequately compensates for
limitations when using EBITDA, for example, on page 4 of the Form 20-F
and page 8 of the MD&A, the Company presents supplemental EBITDA
information with a clear and quantitative reconciliation to the
nearest comparable GAAP measure (net earnings before income taxes,
minority interest and amortization of goodwill). We also disclose the
acronym, EBITDA, and note that the Company's method of calculating it
may differ from other companies and accordingly, the Company's EBITDA
may not be comparable to measures used by other companies. In pages 2
to 6 of the MD&A we discuss and give prominence to the following items
Revenue, Gross Profit, SG&A, Foreign Exchange Gains and Losses,
Depreciation, Interest expense, Income taxes and Net Earnings (Loss).
Bullet 5 - EBITDA is presented as supplemental information because
Management of the Company, through its discussions with key
stakeholders of the Company including shareholders, analysts and
financial institutions, believes EBITDA is a widely used financial
indicator of the Company's operating profitability and performance
before the effects of capital investment and financing decisions.
In conclusion, we believe we have sufficient disclosure to comply with Item
10(e) of Regulation S-K, although, in future filings we will eliminate the use
of EBITDA in the Selected Financial Data Section of Form 20-F. We will be more
explicit with the supplemental disclosure included in the MD&A, thus disclosing
the nature of any unusual items and the likelihood of their recurrence,
although these items have been disclosed in Note 2 and 4 of the Financial
Statements and were not significant in 2004. We will also reconcile EBITDA to
Net Income as requested.
Controls and Procedures, page 33
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2. You indicate "Disclosure controls and procedures are defined by the
Securities and Exchange Commission as those controls and other
Mr. Rufus Decker
US Securities and Exchange Commission
May 12, 2005
Page 4
procedures that are designed to ensure that information required to be
disclosed by the Company in reports filed or submitted by it under the
Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the Securities and
Exchange Commission's rules and forms." In future filings, if you
choose to disclose such definition, ensure that you disclose the
entire definition of disclosure controls and procedures as defined by
the Section 240.13a-15(e) or 240.15d-15(c) of the Exchange Act.
Company's Response
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In the future we will disclose the entire definition of disclosure
controls and procedures as defined by Section 13a -15(e) of the Exchange
Act.
Management's Discussion and Analysis
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Results of Operations, page MDA-2
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3. Please disclose the extent to which each business reason discussed for
the changes between periods in your revenue and your selling, general,
administrative and other costs sections contributed to the overall
change in those line items. See item 303 of Regulation S-K and SEC
Release 33-8350.
Company's Response:
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In our MD&A we include information the Company believes is necessary to
understand of our financial condition, changes in financial condition and
results of operations as required in Item 303 of Regulation S-K and SEC
Release 33-8350. We focus on material information and avoid immaterial
information that does not promote a better understanding of the results of
operations.
With respect to the 2004 MD&A, the Company believes the significant
changes between periods in revenue and selling, general, administrative
and other costs are appropriately described throughout the MD&A. As
required, material changes are discussed and amounts disclosed where
appropriate. We have, in some cases, also decided to disclose other events
that we consider important to promote a better understanding of the
business although not material enough to quantify.
On page 4 of our 2004 MD&A, we discuss the change in revenue from 2003 for
the Power Generation Group as follows: "Revenue for Power Generation was
$8.5 million in 2004, down 7.6% from $9.2 million in 2003, primarily
reflecting revenues earned from the new projects as well as the licensing
activity in 2004, compared to the revenues from the Shajiao project that
was completed in 2003." As disclosed in the MD&A Overview, the Power
Generation Group won three new projects in China in 2004 that started to
earn revenue in 2004 as well as increased licensing activity. The
increased revenue from these projects and increased licensing activity was
partially offset by the fees earned on the Shajiao project completed in
2003. The $0.7 million decrease in Revenue in 2004 is not considered
material but management felt
Mr. Rufus Decker
US Securities and Exchange Commission
May 12, 2005
Page 5
comments provided would promote a better understanding of results to the
readers in this case. In future filings, we will disclose the dollar
amount of the respective changes.
On page 5 of the MD&A we discuss the reason for the change in Selling,
General, Administrative and Other Costs ("SGA") as follows: "SGA costs
were $23.3 million in 2004 compared to $19.7 million in 2003, an increase
of $3.6 million or 18.3%. The increase in SGA costs was due primarily to
the costs associated with the change in senior management and the impact
of the increase in the cost of the long-term incentive program offset by
cost cutting measures in the Power Generation Group. SGA as a percent of
gross profit increased to 47.6% in 2004 from 40.7% in 2003 and largely
reflects the $4.3 million cost of the change in senior management". Here
we provide the readers with the primary reasons for the changes in SGA:
(a) $4.3 million of the $3.6 million variance was related to the change in
Senior Management, which is also discussed in the 2004 Overview on page 2
and in the Supplemental Financial information on page 9; (b) the other
material impact is the $1.4 million increase in the cost of the long-term
incentive program described in detail on page 10 under the heading Share
Capital Outstanding; and (c) the cost cutting measures relating to the
Power Generation Group. In future filings we will quantify all
explanations in each of the areas presented.
As mentioned above, in future filings we will be even more explicit when
describing results of operations as required in Item 303 (a) (3) of
Regulation S-K and SEC Release 33-8350.
Contractual Commitments, page MDA-11
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4. Please revise your table of contractual commitments in future filings
to include the following:
o Estimated interest payments on your debt; and
o Planned funding of pension and other postretirement benefit
obligations.
Because the table is aimed at increasing transparency of cash flow, we
believe these payments should be included in the table. Please also
disclose any assumptions you made to derive these amounts. If you
choose not to include these payments, a footnote to the table should
clearly identify the excluded items and provide any additional
information that is material to an understanding of your cash
requirements.
Company's Response:
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In future filings, we will include the estimated interest payments on the
debt and planned funding of pension and other post-retirement benefit
obligations in the contractual commitments table.
*****
Mr. Rufus Decker
US Securities and Exchange Commission
May 12, 2005
Page 6
To conclude, all persons who are responsible for the accuracy and adequacy of
the disclosure in the filings are certain that they have provided all
information investors require for an informed decision. The Company and its
management are responsible for the accuracy and adequacy of the disclosures
made. Therefore, as requested, the Company acknowledges that:
o It is responsible for the adequacy and accuracy of the disclosure in
our filings;
o Staff comments or changes to disclosure in response to staff comments
do not foreclose the Commission from taking any action with respect to
the filing; and
o The Company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the federal
securities laws of the United States.
If you have any follow-up questions in respect to the foregoing, please do not
hesitate to contact me @ 416-496-4164.
Yours truly,
MARSULEX INC.
Signed by,
Edward R. (Ted) Irwin
Chief Financial Officer
Cc: Ms. Judith George, Corporate Secretary
Mr. Brian Hemming, Investor Relations Consultant
Mr. Ken McKay, KPMG
Mr. Lucio Milanovich, Director, Finance
Mr. Christopher Morgan, Skadden, Arps, Slate, Meagher & Flom LLP
Mr. Dee Rajpal, Stikeman Elliott
Mr. John Rogers, Audit Committee Chairperson
Mr. Lee Stewart, Audit Committee Member
Mr. Laurie Tugman, President and CEO
Mr. Robert Yohe, Audit Committee Member