SEC Release 33-6231

Securities Act Release No. 6231

Exchange Act Release No. 17114

Accounting Series Release No. 279

September 2, 1980

Amendments to Annual Report Form, Related Forms, Rules, Regulations and Guides; Integration of Securities Acts Disclosure Systems

ACTION: Final Rules.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission today announced certain amendments to Form 10-K (17 CFR 249.310), the annual report form required to be filed by most publicly-owned companies, and a number of related rule, regulation, form and guide changes. The rule and regulation changes include: amendments to Rule 14a-3 (17 CFR 240.14a-3) and Rule 14c-3 (17 CFR 240.14c-3) with respect to annual reports to security holders; expansion of Regulation S-K (17 CFR 229.20) to include three new items: Managements Discussion and Analysis of Financial Condition and Results of Operations; Selected Financial Data; and Market Price of the Registrants Common Stock and Related Security Holder Matters; amendments to Regulation S-K Item 1, Description of Business; and amendments to related forms, rules and guides under the Securities Act of 1933 ("Securities Act") [15 U.S.C. 77a et seq.] and the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. 78a et seq.]. The amendments to Form 10-K and related revisions are part of a series of changes and proposals intended to improve disclosure in certain important areas, to reduce some of the burdens of disclosure by eliminating obsolete or duplicative requirements, and to facilitate the integration of filings made under the Securities Act and the Exchange Act. Three other releases issued today adopt changes relating to: (1) uniform financial statement instructions for certain forms and reports required pursuant to the Securities Act and the Exchange Act; (2) amendments to Regulation S-X (17 CFR 210) designed to eliminate, to the extent possible, the differences between the requirements of generally accepted accounting principles and those of Regulation S-X; and (3) a new simplified form for the registration of securities issued in certain merger and reorganization transactions ¹. In addition, two other releases issued today propose changes to Form 10-Q (17 CFR 249.308a) under the Exchange Act and propose three new registration forms under the Securities Act ².

FORM 10-K

A. Introduction.

The Commission today is adopting and proposing major changes in the Securities Act and Exchange Act disclosure systems. These changes are designed to improve the disclosure made to investors and other users of financial information, to facilitate the integration of the two disclosure systems into the single disclosure system long advocated by many commentators ³, and to reduce current impediments to combining informal security holder communications, such as annual reports to security holders, with official Commission filings.

This release deals with format and content changes in the Form 10-K and in the annual report to security holders. Under the system in effect as a result of these changes, minimum disclosure requirements have been developed by the Commission for the Form 10-K and the annual report to security holders. To the extent these disclosure requirements have common elements, the Commission has made it easier now to simply incorporate from the annual report to security holders to the Form 10-K, if registrants so choose.

The Commission has determined to require only portions of the Form 10-K and the annual report to security holders to have equivalent disclosure because these documents are not necessarily used in an identical manner. Disclosure requirements in annual reports evolved in the context of shareholders making voting decisions. The Form 10-K has traditionally confirmed information previously delivered to investors and other users making economic decisions about the company and, as a result, has been more detailed. The Commission recognizes that the information content in Form 10-K not only was originally formulated for a specialized use, but that within those groups which have utilized the Form there are different constituencies. Those constituencies which have been the most frequent users of Form 10-K information are institutional investors, professional security analysts and sophisticated individual investors. The Commission believes that it continues to be appropriate to focus primarily on these frequent user constituencies in formulating Form 10-K requirements, but that such a focus would not be appropriate in formulating requirements for the annual report to security holders.

With regard to the content of the restructured Form 10-K, several items in the present Form have been deleted and others have been simplified or have been moved to schedules or exhibits. The prime focus of this effort has been to eliminate unnecessary or duplicative disclosure throughout Commission filings through the further expansion of Regulation S-K and to relegate disclosures of a technical or supplementary nature to schedules or exhibits which are available to users upon request.

Insofar as the annual report to security holders is concerned, the principal effort has been to standardize disclosure items to make them consistent with similar requirements in Commission filings. In particular, the focus has been primarily upon financial disclosure to provide uniformity in form, content and timing of the required information.

B. Background and Development of New Form 10-K.

The Commissions review of the purpose and utility of the Form 10-K led it to believe that there is a basic information package which most, if not all, investors expect to be furnished. Further, it has became apparent that this basic information package, which in the context of Form 10-K developed to support the current information requirements of an active trading market, is virtually identical to the similar information package independently developed in connection with the registration and sale of newly issued shares under the Securities Act. The essential content of these Form 10-K and registration statement information packages includes audited financial statements, a summary of selected financial data appropriate for trend analysis, and a meaningful description of the registrants business and financial condition.

The restructured Form 10-K which the Commission is adopting today is specifically designed to segregate the basic information package contained in that Form from proxy related or supplemental information. In this regard, the new Form 10-K is structured in four parts. The first part retains the detailed disclosure requirements relating to business, properties, legal proceedings and beneficial ownership. Much of this information, which in the past has been required primarily in Securities Act filings and not in annual reports to security holders, has been placed in a supplemental role. The second part consists of the basic disclosure package which is common to both Securities Act and Exchange Act filings. The third part consists of the traditional proxy disclosure information relating to directors and executive officers and management remuneration. Finally, the fourth part contains requirements for financial statement schedules and, in accordance with a recent Commission release, scaled-down requirements for exhibits ⁴.

Although the revised Form 10-K is designed to promote the integration of the Securities Act and Exchange Act disclosure systems, which was the basic goal set forth in the report of the Advisory Committee, the restructured format of the new form does not precisely follow that suggested by the Advisory Committee. That Committee recommended a relatively unstructured document which would encourage registrants to combine informal annual and quarterly reports to security holders into single documents to be filed as Form 10-Ks and 10-Qs. The new Form 10-K continues to encourage the combination of formal and informal reports. However, the new form changes the emphasis from the Form 10-K (which the Advisory Committee emphasized) to the basic disclosure package, wherever it appears. As a result, where the Advisory Committee envisioned the Form 10-K as the document to be integrated with the Securities Act filing, the new Form 10-K permits registrants to utilize the minimum disclosure package from the annual report to security holders sent with the proxy statement, from the Form 10-K, or to completely restate it.

Furthermore, the Commission does not believe it would be appropriate at this time to adopt the Advisory Committee approach and to mandate a totally combined Form 10-K and annual report to security holders in order to produce the readable Form 10-K which would be needed to form the basis for integration. Such a mandate might be overly burdensome on some registrants and could adversely affect the annual report to security holders ⁵. Under these circumstances, the Commission believes that it would be wise to encourage combination on a voluntary basis. In the meantime, the detailed disclosure will remain available in the filed Form 10-K in order to supplement the more abbreviated presentation in the annual report to security holders.

C. Annual Report to Security Holders.

In a release issued on January 10, 1974, ⁶ the Commission amended Rules 14a-3 and 14c-3 to require that annual reports to security holders contain a variety of information, including certified financial statements, a summary of operations, a management analysis, a brief description of the issuers business, a lines of business breakdown, an identification of the issuers directors and executive officers, and an identification of the principal market in which securities entitled to vote were traded. These requirements were based on substantially similar requirements in the then existing Form 10-K. In requiring this new information, the Commission made the following statement:

The annual report to security holders has long been recognized as the most effective means of communication between management and security holders. Such reports are readable because they generally avoid legalistic and technical terminology and present information in an understandable, and often innovative, form. ... The Commission believes it is in the public interest that all security holders be provided with meaningful information regarding the business, management, operations and financial position of the issuer and that the annual report to security holders is the most suitable vehicle presently available for providing this information.

The Commission continues to believe that all security holders should be provided with meaningful information and that the changes in the Form 10-K requirements on which the annual report to security holder requirements were based should also be made in the annual report because of the importance of the disclosure. This results in a uniformity of the minimum disclosure package in the annual report to security holders and in Form 10-K. This uniformity has been achieved by adopting uniform financial statement requirements, by amending Regulation S-X, by adopting new provisions in Regulation S-K and by adopting several changes in Rules 14a-3 and 14c-3. The equivalency of the minimum disclosure package in both documents not only satisfies shareholder and investor needs, it also should avoid duplication by allowing issuers to use the disclosure in the annual report to security holders to satisfy some of the requirements of Form 10-K and, if they choose, when selling securities to the public. The changes made today in the annual report to security holders do not mean, however, that any further changes in Form 10-K will be reflected automatically in the annual report to security holders.

The Commission is aware that increasing the amount of required disclosure in annual security holder reports involves a risk that readability may be impaired. Although it is difficult to predict with certainty what the effect may be, the Commission does not believe that the changes implemented today should or will have general adverse consequences. The Commission staff, however, will continue to monitor the situation and, if adverse effects do occur, the new disclosure requirements will be revisited promptly ⁷.

With the same information appearing in the annual report to security holders and in Part II of the Form 10-K, the Commission is hopeful that most, if not all, registrants will incorporate that portion of the annual report to security holders into the Form 10-K. Because of the benefits of this type of incorporation both to registrants and to the Commission staff, the January 15, 1980 release proposed mandatory incorporation of portions of the annual report into the Form 10-K and optional incorporation of portions of the annual report into certain Securities Act filings. The mandatory incorporation feature was severely criticized by the commentators. ⁸ As a result of this criticism, this mandatory feature has been eliminated. Instead, the four-part Form 10-K system has been designed to encourage, but not to require, the combination of annual reports and Form 10-Ks into one document. For example, the revised financial statement requirements have been designed to require that only the financial statements of the registrant and its subsidiaries consolidated must appear in the annual report and in the financial statement section of the Form 10-K, Part II. The other financial statements and schedules have been designated "financial statement schedules" and have been placed in Part IV of the Form 10-K. This permits a less detailed minimum disclosure package, which is more compatible with a combined presentation, while nonetheless preserving in a separate information package the more detailed financial data for those who want it.

It should be emphasized that the minimal content changes adopted by the Commission today are not intended to change the basic structure or quality of existing security holder reports. Indeed, the Commission continues to believe that the communicative style of these reports is generally excellent and that, by and large, these reports do not include the type of boilerplate disclosures and disclaimers which frequently do appear in formal Commission filings. It is hoped that the type of attention to style which is evidenced by better examples of security holder reports will continue to have a salutary effect on all of the report content, whether or not the particular information is also a part of the Form 10-K.

D. Conclusion. The system adopted today will be carefully monitored for effectiveness, and future alternative systems will not be foreclosed. For example, consideration is still being given to approaches which might differentiate between user constituencies and which might give a security holder the option of receiving a simplified annual report containing summary indicators and other data in lieu of the traditional annual report or in lieu of the financial statement section of such report. This type of approach would be based upon an as yet unproven hypothesis that some users, particularly certain individual investors, either rely on financial advisers and therefore do not use detailed disclosure, or are overwhelmed by the technical nature or volume of presently required disclosure. ⁹ The Commission expects that these as well as other issues relating to concepts of differential disclosure will be pursued and studied as the integrated disclosure system evolves.

Table of Changes From Previous Form 10-K.

Item and Status

General Instructions. Revised.

Cover Page. Revised.

Part I

Item 1. Business. Revised [In revised Regulation S-K Item 1].

Item 2. Summary of Operations. Deleted [Replaced by Selected Financial Data, New Item 6].

Item 3. Properties. Unchanged. [New Item 2].

Item 4. Parents and Subsidiaries. Deleted [But replaced by an exhibit].

Item 5. Legal Proceedings. Unchanged [New Item 3].

Item 6. Increases and Decreases in Outstanding Securities and Indebtedness. Deleted.

Item 7. Changes in Securities and Changes in Security for Registered Securities. Deleted.

Item 8. Defaults Upon Senior Securities. Deleted.

Item 9. Approximate Number of Equity Security Holders. Deleted [But replaced by a requirement in new Regulation S-K Item 9].

Item 10. Submission of Matters to a Vote of Security Holders. Deleted.

Item 11. Indemnification of Directors and Officers. Deleted.

Item 12. Financial Statements, Exhibits filed, and Reports on Form 8-K. Revised [New Item 11].

Part II

Item 13. Security Ownership of Certain Beneficial Owners and Managers. Unchanged [New Item 4].

Item 14. Directors and Executive Officers of the Registrant. Unchanged [New Item 9].

Item 15. Management Remuneration and Transactions. Unchanged [New Item 10].

Signatures. Revised.

Instructions as to Financial Statements. Deleted [Replaced by New Item 8].

Instructions as to Exhibits. Revised [Per New Regulation S-K Item 7].

Supplemental Information. Revised.

The new Form 10-K consists of four parts containing the items outlined below. The information required by Parts I and II, or any portion thereof, at the registrants option, may be supplied by incorporating the information from an annual report to security holders either furnished to the Commission pursuant to Rule 14a-3(b) or Rule 14c-3(a) or otherwise meeting the requirements of Rule 14a-3(b), provided the incorporated portion contains the disclosure required by the appropriate items of Parts I and II of Form 10-K. Conversely, the information required by Part III must be supplied by incorporating by reference from the election of directors proxy statement (or information statement), if such statement has been or will be filed within 120 days of the end of the fiscal year.

Outline of New Form 10-K

General Instructions.

Cover Page.

Part I

Item 1. Business.

Item 2. Properties.

Item 3. Legal Proceedings.

Item 4. Security Ownership of Certain Beneficial Owners and Management.

Part II

Item 5. Market for the Registrants Common Stock and Related Security Holder Matters.

Item 6. Selected Financial Data.

Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.

Item 8. Financial Statements and Supplementary Data.

Part III

Item 9. Directors and Executive Officers of the Registrant.

Item 10. Management Remuneration and Transactions.

Part IV.

Item 11. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

Signatures.

Supplemental Information

Discussion of Items in New Form 10-K Which Are Unchanged From Previous Form 10-K

Item 2. Properties. [Item 3 of previous Form 10-K] Except for the numbering, this Item is unchanged from the existing Item 3, "Properties" (Item 2 of Regulation S-K).

A thorough analysis was made of Item 2 of Regulation S-K. Consideration was made of such factors as the comments received on the Item when it was originally proposed for comment in May of 1977 ¹⁰ as well as of comments received pursuant to the January 15, 1980 proposing release. ¹¹ Virtually all the commentators addressing the Item felt it should not be changed. Accordingly, on the bases of the careful work that originally went into drafting Item 2, the Commissions short experience with the Item (since March 31, 1978), the weight of the comments in favor of no change, and the importance of maintaining the integrity of Regulation S-K with its attendant value to the integration of Form 10-K into Securities Act filings, the Commission has decided that Item 2 should not be revised at this time.

Item 3. Legal Proceedings. [Item 5 of previous Form 10-K]

Except for the numbering the Item is unchanged from the previous Item 5, "Legal Proceedings." The underlying Regulation S-K Item 5, "Legal Proceedings," was recently adopted (July 28, 1978) ¹² and only a few commentators felt that any changes should be made. Accordingly, the Commission does not believe it is necessary to revisit this disclosure at the present time.

Item 4. Security Ownership of Certain Beneficial Owners and Management. [Item 13 of previous Form 10-K]

Item 9. Directors and Executive Officers of the Registrant. [Item 14 of previous Form 10-K]

Item 10. Management Remuneration and Transactions. [Item 15 of previous Form 10-K]

All three of these Items have recently been the subject of the comment process, Item 10 (Item 15 of previous Form 10-K; also Item 4 of Regulation S-K) having been adopted as recently as December 4, 1978. ¹³ Certain aspects of these Items are still being reconsidered at present time. Accordingly, the Commission does not feel it appropriate or necessary to amend these Items now.

Discussion of Items In Previous Form 10-K Which Have Been Deleted From New Form 10-K

Item 2. Summary of Operations.

The basis for deleting this Item is contained in the discussion of the new Item 6 relating to selected financial data. Briefly, however, this Item was deleted as a consequence of two basic decisions. First, the Commission believes that five-year information is relevant primarily where it can be related to trends in the registrants continuing operations. The Summary was not limited to this type of information about trends. Second, as a result of the change of focus of Managements Discussion and Analysis to a discussion of the financial statements, which now include statements of income for three years, the Summary of Operations is no longer the subject of that discussion and, therefore, its presentation is no longer needed. Although several commentators disagreed with this deletion, the overwhelming majority approved of it.

Because of the deletion of the Summary of Operations from the Form 10-K and the insertion of Selected Financial Data, corresponding changes are being made in a number of Securities Act and Exchange Act forms, such as Form S-1 (17 CFR 239.11) and Form 10 (17 CFR 249.210) (See Text of Proposed Forms and Rules).

The Office of the Chief Accountant is currently considering the comments received in response to a concept release (Securities Act Release No. 6196, March 7, 1980 [45 FR 16498]) which addresses the utility of historical and pro forma ratios of earnings to fixed charges and earnings to combined fixed charges and preferred dividends ("ratios"). A rule proposal is expected to be considered in the near future. However, until amended rules are adopted, the present requirements for presentation of the ratios must be maintained. For this reason, the present ratio instructions in the Summary of Operation Items of Forms S-1, S-11 (17 CFR 239.18), 10 and 10-K and in the Statements of Income Item of Form S-7 (17 CFR 239.26) (Items which are being deleted by this release) are being retained in the forms as part of the new Item entitled "Selected Financial Data." It should be noted that these ratio requirements are being included in the Forms as an interim measure and are expected to be revised and perhaps placed elsewhere in the future.

Item 4. Parents and Subsidiaries.

In the proposed new Form 10-K, the Commission deleted this Item in favor of a new exhibit requiring a list of "all" subsidiaries as suggested by the Advisory Committee. While a few commentators stated that no such exhibit, in any form, should be required, most commentators did not object to the exhibit if insignificant subsidiaries need not be named. The Commission agrees with the Commentators that listing all subsidiaries would be too burdensome and accordingly has decided to adopt the exhibit with only the names of significant subsidiaries being required.

Item 6. Increases and Decreases in Outstanding Securities and Indebtedness.

Item 7. Changes in Securities and Changes in Security for Registered Securities.

Item 8. Defaults Upon Senior Securities.

Item 10. Submission of Matters to a Vote of Security Holders.

Item 11. Indemnification of Directors and Officers.

The above five Items were omitted by the Advisory Committee from its Form 10-K, were the subject of an express inquiry in Release No. 34-15068, ¹⁴ and were also the subject of comments in Release No. 33-6176. A significant number of commentators on both Releases agreed with the Advisory Committee that all of these Items should be deleted, either because the information called for is not generally useful (this was felt to be particularly true of Item 11, Indemnification of Directors and Officers) or because the information is available elsewhere (i.e., in Form 10s, Form 10-Qs, or in the financial statements). Several commentators indicated that this information would have to be disclosed either in the text or in the notes to the financial statements, if material, even if there is no specific item requirement covering the particular event or transaction. The Commission agrees with these commentators and accordingly has omitted these items from the new Form 10-K.

Item 9. Approximate Number of Equity Security Holders.

This Item has been deleted, but the substance has been added to new Item 5 of Form 10-K [New Item 9 of Regulation S-K], which deals with market information concerning the registrants common stock and related security holder matters. The Commission believes that the information concerning the number of holders of common stock will have greater utility in this context. The commentators, to the extent they addressed this Item, generally agreed with this approach.

Discussion of Form 10-K Items and Instructions Which Are New or Are Revised From Current Form 10-K

General Instruction A. Rule As To Use of Form 10-K.

A technical amendment has been made to this Instruction to make it clear that only the schedules under Article 12 of Regulation S-X, and not all financial statement schedules, may be filed up to 120 days after the end of the fiscal year.

General Instruction D. Signatures and Filing of Report.

In the January 15, 1980 Release, it was proposed that this Instruction be expanded to require that the Form be signed on behalf of the issuer by the registrants principal executive officer or officers, its principal financial officer, its controller or principal accounting officer, and by at least a majority of the board of directors or persons performing similar functions.

Many commentators either did not address or did not oppose requirements as to additional officers signatures. However, the proposed change concerning directors signatures was disapproved of by most of the commentators. The main-thrusts of the objections to director signatures were concerns over the expense and logistics of obtaining the signatures in a timely fashion or over the extent, if any, to which the signatures might increase director liability. Moreover, few of those responding thought that signing the Form 10-K would appreciably increase director awareness of or participation in its preparation.

The Commission has given careful consideration to the objections of the commentators concerning director signatures. It has, nevertheless, concluded that a requirement for the signatures of a majority of a registrants directors--in addition to those of its principal executive officer, its principal financial officer, and its controller or principal accounting officer--is an appropriate one under the circumstances. The Commission believes that just as its rules and the administrative focus of the Division of Corporation Finance are being realigned to reflect the shift in emphasis toward relying on periodic disclosure under the Exchange Act, so too the attention of the private sector, including management, directors, accountants, and attorneys, must also be refocused towards Exchange Act filings if a sufficient degree of discipline is to be instilled in the system to make it work. With an expanded signature requirement, the Commission anticipates that directors will be encouraged to devote the needed attention to reviewing the Form 10-K and to seek the involvement of other professionals to the degree necessary to give themselves sufficient comfort. In the Commissions view, this added measure of discipline is vital to the disclosure objectives of the federal securities laws, and outweighs the potential impact, if any, of the signature on legal liability. The Commission has given attention to the concerns of commentators over the expense and logistics of obtaining the requisite signatures, but believes they do not constitute an undue obstacle to the imposition of this requirement ¹⁵.

The Commission recognizes, however, that this requirement may result in certain hardships and inconveniences. It has therefore instructed the staff to report to it on the results of imposing the requirement after an appropriate time has passed, and the Commission will revisit the question if such action appears necessary or appropriate at that time.

General Instruction F. Information as to Employee Stock Purchase, Savings and Similar Plans.

The substance of this instruction has not been changed although some confusing and unnecessary language has been deleted.

General Instruction G. Information to be Incorporated by Reference.

First, this Instruction includes the requirement as to incorporation by reference contained under Instruction F of the previous Form 10-K. Second, it reflects the change from the proposals, as discussed above, making the incorporation of certain annual report to security holders information optional with the registrant rather than mandatory. Third, the requirement in the proposal that the annual report to security holders and the proxy be delivered with the Form 10-K has been deleted. Upon analyzing the comments and the existing requirements, it became evident that the existing Form 10-K delivery requirements encompassed only existing security holders. As such persons already receive the annual report and proxy, the Commission believes that the proposed requirement was an unnecessary and burdensome expansion of a registrants duties. Accordingly, it was deleted.

General Instruction H. Registrants Filing on Form S-18.

The language of this Instruction has been revised, for purposes of clarity, from that contained in the previous Form 10-K. This revision is intended to make it clear that persons filing on Form 10-K who are allowed to use Form S-18 disclosure for certain items are only permitted to follow the Form S-18 disclosure requirements, as differentiated from being permitted to use the actual disclosures contained in their Form S-18, which may be out of date for Form 10-K purposes.

Cover Page

The requirement that the number of common shares outstanding be disclosed has been revised to be given as of the most recent practicable date, rather than as of the year end. This disclosure is included in the Form for purposes of Rule 144 under the Securities Act, and having the information more current is believed to be of greater value than having information which is usually almost 90 days old when filed.

Two technical changes have also been made in the cover page. The first requires disclosure of the market value of the voting stock held by non-affiliates of the registrant. The purpose of this change is to obtain data to be evaluated in connection with possible future changes in the eligibility requirement of various Securities Act registration forms. The second requires, for microfiche purposes, a listing of the documents incorporated by reference.

Item 1. Business.

This Item merely incorporates the revised Item 1 of Regulation S-K with the exception that the discussion of the development of the registrants business need only include developments since the beginning of the fiscal year.

In Release No. 33-6176 it was proposed to amend paragraph (b) of Item 1 of S-K to conform to the proposed new three-year requirement for statements of income. In addition, two specific questions were asked: Commentators were asked to consider (1) the advisability of requiring Item 1 disclosure to be included in annual reports to security holders in its current form or as modified by proposed changes; and (2) the advisability of conforming the present detailed segments reporting requirements in paragraph (b) of Item 1 to the similar but somewhat less extensive requirements in SFAS 14.

The Commission agrees with the commentators that to require Item 1 disclosure to be included in the annual report to security holders may seriously affect that documents readability. However, the Commission believes that to reduce the Item 1 segment disclosure to conform to SFAS 14 would result in the loss of some relevant and material information. Accordingly, the Commission has decided to make only three changes in the Item 1 segment requirements: (1) amend relevant portions to conform to the new three-year requirement for statements of income; (2) delete transitory provisions no longer needed; and (3) delete the requirement for information on intraenterprise sales due to the marginal disclosure received in response to this requirement in the past. Notwithstanding the changes to be made in the segment data requirements, however, it should be noted that significant trend data might still be presented in the Selected Financial Data called for under Item 6 of the new Form 10-K, and some registrants might find it advisable to include five-year selected data in that context.

A thorough analysis was made of the other provisions of Item 1 of Regulation S-K prior to the issuance of the January 15, 1980 release. Consideration was given to such factors as the comments received on the Item when it was originally proposed for comment in May of 1977, ¹⁶ as well as to comments received on the existing Form 10-K in the Commissions release of August 16, 1978. ¹⁷ Moreover, most commentators addressing the Item in response to the January 15, 1980 release wanted Item 1 kept generally intact. Accordingly, on the bases of the careful work that went into drafting Item 1, the Commissions short experience with the Item (since March 31, 1978), the importance of maintaining the integrity of Regulation S-K as it relates to Securities Act filings, and the recent comments, the Commission believes that no substantive revisions other than the one referred to above should be made at this time.

Item 4. Security Ownership of Certain Beneficial Owners and Management.

While there has been no change in the language of this Item, which utilizes existing Item 6 of Regulation S-K, it should be noted that this disclosure has been moved from Part III of the new Form 10-K, the Part which can be completed by incorporation of a proxy or information statement, to Part I. The reason for the move is to eliminate the necessity of amending Form 10-K in the future if certain revisions in the proxy statements now being considered are adopted. These revisions would focus beneficial ownership, for proxy purposes, on voting power, leaving Item 6 of Regulation S-K as a non-proxy item.

Item 5. Market for the Registrants Common Stock and Related Security Holder Matters.

This Item contains the disclosure required by new Item 9 of Regulation S-K which must be included both in the annual report to security holders and in the Form 10-K (incorporation by reference from the annual report to security holders being optional with the registrant). As proposed, this new S-K Item required market information for all of the registrants securities, the number of equity security holders, and information on dividends paid as well as on dividend policy.

The proposed item constituted an amalgam of paragraph (8) of Rule 14a-3 [17 CFR 240.14a-3] (which required market price information to be included in the annual report to security holders), Guide 26 of the Guides for Preparation and Filing of Registration Statements under the Securities Act of 1933 (17 CFR 231.4936), [which required a statement of a registrants dividend policy], and Item 9 of the previous Form 10-K (which required information as to the approximate number of equity security holders.) The January 15, 1980 proposing release also asked commentators to consider whether the Item should be expanded to require the presentation of market data either of a general nature or of an industry specific nature and whether, if such data were required, it should be presented in one or more specific graphic forms.

The commentators pointed out that the market data requirements, as proposed, would include debt securities, which was much broader disclosure than the Commission had ever previously required and of debatable value. The Item accordingly has been revised to limit the market data to that for common stock only, which is the most relevant market information for most investors and users. The Commission has also amended the requirement on dividend policy to make such disclosure completely optional with the registrant. This change was made since it appears that dividend policy requirements generally have not elicited meaningful disclosure, but rather have resulted in meaningless boilerplate. The title of the Item has accordingly been changed to reflect the deletion of the dividend policy requirement.

An additional instruction has been added to obtain data on currency restrictions, taxation, etc. on dividends payable to United States holders of foreign securities. Concurrently, the Commission is also rescinding Guide 26, Statement of Dividend Policy, from the Guides for Preparation and Filing of Registration Statements Under the Securities Act of 1933. Finally, it was decided not to implement the inquiries concerning possible market data disclosure, largely because it is generally difficult to relate any index to a particular registrant. Item 6. Selected Financial Data.

In the Form 10-K as proposed in Release No. 33-6176 the Summary of Operations called for under Item 2 of the previous Form 10-K was deleted and in lieu thereof a new item calling for Selected Financial Data was inserted (which would become new Item 10 of Regulation S-K). This new requirement was designed to present significant five-year trend data relating to a registrants financial condition and results of continuing operations. Although a registrant, under the proposal, was permitted to include other financial information in addition to that specified, it was expected that any presentation of additional information would not necessarily emphasize income or revenues as opposed to other components of financial condition.

The deletion of the present summary and the substitution of Selected Financial Data ¹⁸ reflected the Commissions concern that operations summaries have duplicated information otherwise available in income statements and may have unduly emphasized income over other enterprise performance measures. The Commission recognized that a detailed specification of the contents or format of a summary might not cure the perceived deficiencies. Accordingly, it hoped that the proposal would strike a reasonable balance between specified content and a flexible approach which permits registrants to select that data which best indicates performance. For example, those registrants who present the information relating to the impact of inflation and current prices on their business required by SFAS 33 ¹⁹ would be encouraged to combine the summary information required by SFAS 33 with the information required by the proposed new Item.

Almost all the commentators favored the deletion of the Summary of Operations, and most of these also approved of the Selected Financial Data Item as a disclosure concept, although a significant number objected to certain specific aspects of it. For example, a number believed elements such as cost of sales and interest expense should be included while others questioned the value of including working capital or some other measure of liquidity in the Item. The Commission has decided to adopt Item 6, but has determined not to increase the disclosure requirements of the Item as proposed or its specificity in order to avoid decreasing a registrants flexibility. However, the Item clearly encourages registrants to include those additional elements which they believe will aid investors and other users. The requirement to include working capital or some other measure of liquidity has been deleted. The commission has concluded that there are potentially numerous indicators of liquidity in a given business and to require display of each for five years may be impractical. Further, the Commission believes that the disclosures required by the new Managements Discussion and Analysis should be adequate to address liquidity and trends therein. Finally, the instruction concerning SFAS 33 has been slightly revised to make it clear that the SFAS 33 data may be combined with this Item.

Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.

The Form 10-K, as proposed, incorporated an entirely restructured Managements Discussion and Analysis. Additionally, this Item was moved from the Guides to become new Item 11 in Regulation S-K.

The major features of the proposed new Item were as follows:

(1) The discussion was to be focused on the financial statements and no longer centered upon a summary of operations. Indeed, as has been indicated above, the Summary of Operations would be eliminated.

(2) The proposed Item called for discussion of at least three financial aspects of the registrants business--liquidity, capital resources, and results of operations.

(3) Within each area of the discussion there Would be emphasis upon favorable Or unfavorable trends and upon the identification of significant events or uncertainties.

(4) A discussion focused on individual segments would be required only if, in the registrants judgment, it would be appropriate to an understanding of the registrants business.

(5) Information concerning the effects of inflation and changing prices would be required.

(6) The percentage tests and line-by-line analysis encouraged by the present requirements contained in Guides 1 and 22 ²⁰ would be eliminated. However, the proposed Item indicated that the causes for material changes in line items should be discussed.

(7) The proposed Item would not specifically require projections or other forward-looking information, although the presentation of this type of information on a voluntary basis would be encouraged.

(8) No specific provisions with respect to the location of managements discussion in the annual report to security holders were included.

The changes in Managements Discussion and Analysis were proposed as the result of the Commissions concerns that the disclosure elicited by the present requirements of Guides 1 and 22 is not fulfilling originally contemplated objectives. Instead, existing percentage tests are applied without regard to any concept of materiality or significance to the registrants business. Accordingly, although some portions of the resulting discussion may be meaningful, the meaningful discussion is often obscured by the inclusion of material which is of little relevance.

The Commission was also concerned that the focus of the requirements of Guides 1 and 22 may be too narrow. In todays environment there is a growing need to analyze an enterprises liquidity and capital resources, in addition to its revenues and income. The narrow approach set forth in Guides 1 and 22 does not ordinarily produce a discussion which focuses upon the financial condition of the enterprise as a whole.

Finally, the Commission, as it has indicated on a number of occasions, was concerned about the adequacy of disclosures with respect to the impact of inflation and changing prices on individual registrants businesses. Although the Commission does not believe that it would be appropriate at this time to expand the applicability of SFAS 33 beyond that established by the Financial Accounting Standards Board, it does believe that all registrants, including those which are not required to present SFAS 33 information, should make some textual presentation with respect to these matters. In this regard the Commission believes that Managements Discussion and Analysis should contain information which changes the potentially confusing situation involving inflation impact disclosure into a meaningful discussion of the effects of changing prices on the registrants business.

The Managements Discussion and Analysis, as proposed, evoked extensive and diverse responses from the commentators. Some rejected it in its entirety, others endorsed it to the letter, Some felt that it was too specific and eliminated needed flexibility, others wanted more specific guidance. The main areas of concern, however, were three: First, there were various problems with the concepts of liquidity and capital resources; second, there was general disapproval of any disclosure requirements relating to inflation and changing prices, and third, there were various objections to those aspects of the Item which were seen as forward looking.

As was stated earlier in this release and in the proposing release, the Commission believes there is a growing need in todays environment to analyze enterprise liquidity and capital resources. ²¹ Therefore, the disclosure requirements concerning liquidity and capital resources have been retained, although in somewhat modified form. While the Commission recognizes that the terms "liquidity" and "capital resources" lack some precision in definition, it is believed that additional specificity would decrease the flexibility needed by management for a meaningful discussion. Moreover, the liquidity section has been revised to de-emphasize working capital and to emphasize the right and obligation of management to use whatever liquidity parameters they deem to be most appropriate.

In a similar manner, the Commission believes that disclosure on inflation and changing prices should be retained despite the early state of its development. Revisions have been made, however, to clarify that nothing more than SFAS 33 data is needed from those required to supply it and that the SFAS 33 type of detailed analysis is not necessary for those smaller registrants not required to comply with SFAS 33.

An effort also has been made to distinguish between those aspects of the Items which are entirely forward looking in nature, and hence encouraged but not mandated, and those mandated aspects which, although they look to the future, are basically present fact, such as a future labor cost increase established by an existing contract which will clearly increase future costs.

A number of other changes of a lesser nature have been made, often in response to specific comments. It is indicated that liquidity and capital resources discussions may be combined. Segment disclosure, if made, need not include every segment and registrants may use other breakdowns, such as company subdivisions, if investor understanding would thereby be improved. Causes of material changes in line items need be described only to the extent necessary to an understanding of a registrants business as a whole. Foreign registrants are permitted to use their own countrys version of SFAS 33, if it exists, and are required to discuss any governmental factors having a material impact on United States security holders.

Finally, as suggested in the proposing release, this new Item 11 of Regulation S-K is also being made a part of other Securities Act and Exchange Act forms (See Text of Amended Forms, Rules and Guides).

Item 8. Financial Statements and Supplementary Data.

Concurrently with the publication of this release the Commission, under cover of separate releases, is adopting uniform financial statement instructions and various amendments to Regulation S-X which are designed to facilitate the implementation of the proposed integrated disclosure system. ²² Although reference should be made to the two adopting releases for full details, the principal goals of the amendments are to adopt uniform three-year income statement and statement of changes in financial position and two-year balance sheet requirements for all registration forms as well as for the annual report to security holders and Form 10-K, and to eliminate, to the extent possible, the differences between the requirements of generally accepted accounting principles and those of Regulation S-X.

However, the Commission has determined to retain the substance of former Instruction 9 of the Instructions as to Financial Statements of Form 10-K for registrants using Form S-18. Thus, this Item 8 provides that a registrant may include audited financial statements prepared in accordance with generally accepted accounting principles in the Form 10-K which it files for the year in which it had a registration statement on Form S-18 become effective. The financial statements would include consolidated statements of income, statements of changes in financial conditions, and statements of other stockholders equity for the registrants two, rather than three, most recently ended fiscal years and a balance sheet as of the end of each of those years. For the earlier of the two years, the registrant would furnish financial statements and the balance sheet previously disclosed in its Form S-18. After this first Form 10-K is filed, compliance with Regulation S-X would be phased prospectively into effect. Two minor technical amendments designed to clarify the application of the instruction as discussed in Securities Act Release No. 6049 ²³ also have been made.

Item 11. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

Recently, in Release No. 33-6230, ²⁴ the Commission adopted extensive revisions in the general exhibit requirements applicable to a number of forms including the Form 10-K. An addition has been made to this Item as adopted in Release No. 33-6230 to label the financial statements and schedules which are filed in Part IV of the Form 10-K but which are not required in the annual report to security holders pursuant to Rule 14a-3 (or Rule 14c-3) as "financial statement schedules." The reason for the new term "financial statement schedules" is to distinguish such documents from the other exhibits filed as part of Form 10-K for purposes of Form 10-K mailings to security holders and for microfiche processing, among others. For example, security holders requesting a copy of the Form 10-K from a registrant will receive, at no charge, copies of the financial statement schedules but will not receive copies of any exhibits.

Finally, a new exhibit requiring the preparation of a list of the registrants significant subsidiaries and setting forth limited data concerning subsidiaries has been added to the recently adopted Item 7, Exhibits, of Regulation S-K. This list replaces Item 4 of the previous Form 10-K and would be repeated in each annual filing or an express reference to the most recent list filed would be included.

Signatures.

This section has been amended, as explained above, to provide for the signatures of a registrants principal executive officer or officers, its principal financial officer. Its controller or principal accounting officer, and at least a majority of its board of directors or persons performing similar functions.

Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Act by Issuers Which Have Not Registered Securities Pursuant to Section 12 of the Act.

This section has been amended to make it clear that any materials incorporated by reference into the Form 10-K, and hence already furnished to the Commission, need not be supplied again pursuant to the provisions hereunder.

Amendments to Form 10 Under the Exchange Act--Discussion.

The changes in Form 10 reflect the deletion of Item 2, Summary of Operations, and its replacement by Regulation S-K Items 10 and 11, Selected Financial Data and Managements Discussion and Analysis of Financial Condition and Results of Operations, respectively.

Amendments to Forms S-1, S-7, and S-11 Under the Securities Act-Discussion.

The changes in the above Forms reflect the deletion of the Summary of Operations and Statements of Income from these Forms and their replacement by Regulation S-K Items 10 and 11, Selected Financial Data and Managements Discussion and Analysis of Financial Condition and Results of Operations, respectively. The Commission, however, has decided not to delete or amend, at this time, the Summary of Earnings requirements in Item 14 of Schedule 14A which contains the Summary of Earnings requirements for Form S-14.

Amendments to Rule 14a-3 and Rule 14c-3--Discussion.

The changes in Rule 14a-3 and Rule 14c-3 are minimal and are basically technical in nature, that is, they are made to reflect other substantive rule and regulation amendments adopted in this release and the two accounting releases. ²⁵ Subparagraphs (b)(1), ²⁶ (b)(2), and (b)(3) of Rule 14a-3 and subparagraphs (a)(1) ²⁷, (a)(2), and (a)(3) of Rule 14c-3 are amended to reflect the proposed new uniform Regulation S-X financial statement instructions. Subparagraph (b)(4) of Rule 14a-3 and subparagraph (a)(4) of Rule 14c-3 are revised to delete the reference to the Summary of Operations and to replace it with proposed Items 10 and 11 of Regulation S-K, Selected Financial Data and Managements Discussion and Analysis of Financial Condition and Results of Operations, respectively. The disclosure currently contained in subparagraph (b)(8) of Rule 14a-3 and subparagraph (a)(8) of Rule 14c-3 is deleted and a reference to the new Regulation S-K Item 9, Market Price of the Registrants Common Stock and Related Security Holder Matters, which is a revised and expanded version of that subparagraph, is inserted. Subparagraph (b)(9) of Rule 14a-3 and subparagraph (a)(9) of Rule 14c-3 are expanded to indicate that if a registrant prepares an annual report to security holders which meets all the Form 10-K disclosure requirements, it need not also supply a Form 10-K to requesting security holders. In addition these two Items are revised to indicate that the "financial statement Schedules" are to be delivered to requesting security holders. Finally, subparagraph (c) of Rule 14a-3 and subparagraph (b) of Rule 14c-3 are revised to reflect the fact that General Instruction G to the new Form 10-K permits certain information from the annual report to security holders to be incorporated by reference into the Form 10-K and that such parts of the annual report are therefore "filed" for purposes of Section 18 of the Exchange Act.

Amendments to Guides for Preparation and Filing of Reports and Registration Statements Under the Securities Exchange Act of 1934--Discussion.

Guide No. 1 Summary of Operations. This Guide is rescinded due to the deletion of Item 2, Summary of Operations, from Form 10-K and Form 10.

Guide No. 4 Integrated Reports to Shareholders. The revisions in this Guide are minimal and are only technical changes necessitated by the changes in Form 10-K and in the annual report to security holders.

Amendments to Guides for Preparation and Filing of Registration Statements Under the Securities Act of 1933--Discussion.

Guide No. 22 Summary of Earnings. This Guide is rescinded due to the deletion of Summary of Operations and the Statements of Income from Forms S-1, S-7 and S-11.

Guide No. 26 Statement of Dividend Policy. This Guide is rescinded as no longer necessary and appropriate in view of the adoption of Item 9 of Regulation S-K, as discussed above.

TEXT OF AMENDED FORMS, RULES, AND GUIDES

17 CFR Chapter II is amended as follows:

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

1. By amending §249.310 to read as follows:

[Text omitted]

2. By amending §249.210 to read as follows:

[Text omitted]

PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES ACT OF 1933 AND SECURITIES EXCHANGE ACT OF 1934--REGULATION S-K

3. By amending Items 1 and 7 of §229.20 and adding Items 9, 10 and 11 to read as follows:

[Text omitted]

PART 231--INTERPRETATIVE RELEASES RELATING TO THE SECURITIES ACT OF 1933 AND GENERAL RULES AND REGULATIONS THEREUNDER

4. Part 231 is amended by rescinding Guide 22, "Summary of Earnings," of the Guides for the Preparation and Filing of Registration Statements Under the Securities Act of 1933.

5. Part 231 is amended by rescinding Guide 26, "Statement of Dividend Policy," of the Guides for the Preparation and Filing of Registration Statements Under the Securities Act of 1933.

PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933

6. By amending §239.11 to read as follows: