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U.S. Securities and Exchange Commission

Supplement to Commissioner Unger's
June 10, 1998, Testimony:
Year 2000 Disclosure Task Force Survey

Division of Corporation Finance

Introduction

As the end of this century nears, experts’ predictions as to how much havoc Year 2000 technology problems will wreak on global economies intensify. Some believe these problems could cost up to $1 trillion to fix—$600 billion for software problems and $400 billion for hardware problems and costs related to business interruptions, litigation, and liability. 1

The Commission takes the Year 2000 problem seriously. In the agency’s roles as administrator and enforcer of the federal securities laws, the Commission endeavors to protect investors and to maintain fair, honest, and efficient markets. The Commission realizes that, if not adequately addressed, the Year 2000 problems could potentially debilitate the technologies that keep the capital markets and their underlying industries running. 2

The Commission’s disclosure framework requires public companies to disclose material information about themselves. This enables investors to make informed decisions. Although the Commission’s disclosure framework requires all public companies to provide specific categories of information, it is flexible enough to enable companies to tailor disclosure to their particular circumstances.

In almost every case, the Commission relies on this general framework and does not provide specific guidance on any particular issue. However, with respect to the Year 2000 issue, the Commission made an exception and provided specific guidance as to what public companies should consider when disclosing information about their Year 2000 readiness. 3

Also, the Division of Corporation Finance created a Year 2000 Task Force to determine how many public companies are addressing the Year 2000 issue and to assess whether the disclosure being provided is meaningful.

Current Issues Outline

In May 1997, the Division of Corporation Finance updated its Current Issues and Rule Making Projects outline to discuss the need for public companies to disclose the effect of Year 2000 technology problems. The update described generally the nature of these issues and the disclosures that public companies should make.

The Division noted that the failure to successfully address these issues may materially affect public companies. Further, the Division noted that companies should be continually reassessing the need to disclose information concerning projected expenditures and uncertainties associated with Year 2000 consequences, particularly in connection with any upcoming obligations to file reports or registration statements with the Commission.

Staff Legal Bulletin No. 5

On October 8, 1997, the Divisions of Corporation Finance and Investment Management issued a joint Staff Legal Bulletin reminding those entities with disclosure obligations that the Commission’s rules and regulations apply to Year 2000 issues, just like any other significant issue. 4

On January 12, 1998, the Divisions revised the Staff Legal Bulletin to provide more specific guidance under existing Commission rules and regulations. 5 The staff intended this guidance to alleviate the uncertainty expressed by some members of the accounting and legal professions regarding what a company should disclose about its Year 2000 issues.

The revised Staff Legal Bulletin explains that public companies may have a Year 2000 disclosure obligation in their Commission filings because an applicable form or report requires the disclosure. The most likely regulation triggering disclosure on a Commission form or report is "Management’s Discussion and Analysis of Financial Condition and Results of Operations." 6 This is also known as "MD&A." In their MD&A, companies must discuss known trends, demands, commitments, events, or uncertainties that are likely to have a material impact on them.

With regard to Year 2000 issues, MD&A requires disclosure if:

  • the costs of addressing these issues is a material event or uncertainty that would cause reported financial information not to be necessarily indicative of future operating results or financial condition, or

  • the costs or the consequences of incomplete or untimely resolution of these issues represent a known material event or uncertainty that is reasonably expected to affect their future financial results, or cause their reported financial information not to be necessarily indicative of future operating results or future financial condition.

In the revised Staff Legal Bulletin, the staff described three circumstances under which a company should consider its Year 2000 issues to be material 7 :

  • if the company has not yet started to assess its Year 2000 issues;

  • if the company has started to assess its Year 2000 issues but has not yet determined whether these issues are material; and

  • if, after assessing its Year 2000 issues, the company has determined that these issues could be material to its business, operations, or financial condition, irrespective of any remediation plans or insurance coverage. In other words, the company must have determined the materiality of its Year 2000 issues on a "gross" basis.

Once a company has determined that its Year 2000 issues are material, it can look to the revised Staff Legal Bulletin for specific guidance on what type of information to disclose. The staff expects a company to disclose, at a minimum:

  • its plans to address the Year 2000 issues that affect its business and operations, including operating systems;

  • its timetable for carrying out these plans;

  • if material-

    • an estimate of its Year 2000 costs and any material impact it expects these costs to have on its results of operations, liquidity, and capital resources; and

    • its historical Year 2000 costs; 8 and

    • how it could be affected if its customers, suppliers, and other constituents are not Year 2000 ready.

Boilerplate disclosure should be avoided.

Staff comments on Year 2000 Disclosure

The Divisions of Corporation Finance and Investment Management request companies to confirm they have considered the revised Staff Legal Bulletin and their Year 2000 disclosure obligations. The staff includes this request in the comment letters it sends to companies whose registration statements or periodic filings have been selected for review. For example, since October 1997, the Division of Corporation Finance has issued the following comment to public companies as a standard part of its review of a filing:

Please see Staff Legal Bulletin No. 5 (CF/IM). In this bulletin, we explain what public companies should disclose about Year 2000 issues in their filings. Please supplementally confirm to us that you disclose in this filing all required information about Year 2000 issues.

The purpose of these comments is to increase companies’ awareness of the Year 2000 problem and assist them in meeting their disclosure obligations.

The Division of Corporation Finance
Year 2000 Task Force

Objectives

The Task Force’s objectives, particularly in light of the interpretive guidance provided by the staff in revised Staff Legal Bulletin No. 5, were to determine how many public companies are addressing the Year 2000 issue and to assess whether the disclosure being provided is meaningful.

Methodology

First, we searched the following reports in the EDGAR database to determine if they contained the phrase "Year 2000":

  • annual reports filed on Form 10-K or 10-KSB during the first four months of 1997;

  • annual reports filed on Form 10-K or 10-KSB during the first four months of 1998; and

  • quarterly reports filed on Form 10-Q or 10-QSB during January and February 1998. 9

Next, we selected over 1,000 of the annual reports filed during the first four months of 1998 that contained the phrase "Year 2000." To compile the 1,023 annual reports, we randomly selected companies in 12 industry groups, including 66 small business filers. Our aim was to compile a sampling of filings that would represent a cross-section of all public companies. We also surveyed the most recent annual or quarterly report filed by each Fortune 100 company that is publicly held. 10

The Task Force read this sampling of 1,023 reports to see if they included eight categories of information. These categories are based on the specific guidance provided in revised Staff Legal Bulletin No. 5:

  1. the status of a company’s assessment of its Year 2000 issues;

  2. the level of detail in the disclosure relating to a company’s remediation plan;

  3. the estimated timetable for completing a company’s assessment and/or its plan;

  4. whether a company intends to or is evaluating its Year 2000 issues with entities with whom a company has material relationships;

  5. whether a company discloses how much has been spent on Year 2000 issues to date;

  6. whether a company discloses an estimate of the amount to be spent on Year 2000 issues;

  7. whether a company addresses, and the level of materiality, of its Year 2000 issues; and

  8. whether a company includes cautionary language in its Year 2000 disclosure.

Findings

Frequency

Only 10% of the annual reports filed by public companies during the first four months of 1997 contain the phrase "Year 2000." For the quarterly reports filed after the staff published Staff Legal Bulletin No. 5, this percentage increased to 25%. After the staff published revised Staff Legal Bulletin No. 5 in January 1998, 70% of the annual reports filed by public companies contained the phrase "Year 2000."

Assessment

While the number of companies mentioning Year 2000 issues has increased dramatically, our survey of the 1,023 reports show that many companies are not following the specific guidance provided in revised Staff Legal Bulletin No. 5.

Statistical Presentation of Findings

Annual Reports – Frequency of Year 2000 Disclosure11

A. 1998 vs. 1997


Year Annual reports
filed during first
4 months
12

Total number that contain the phrase "Year 2000"

Percentage


1998

9,449

6,612

70%

1997

9,886

  963

10%


B. Selected SIC Codes

This section of the survey shows the frequency of Year 2000 disclosure in reports filed by companies in selected Standard Industry Classification (SIC) codes. The charts below show, for the SIC codes specified: 13

  • the total number of annual reports filed during the first four months of 1998 on Form 10-K or, for the industry entitled Small Business, on Form 10-KSB; and

  • of those totals, the number that contained the phrase "Year 2000."

Health Care Services and Products


SIC

Title

Total

Y2K Discl.

% of Total






2834

Pharmaceutical Preparations

135

108

80%

2836

Biological Products

70

53

76%

5047

Wholesale-Medical Supplies

5

5

100%

6321

Health Insurance

11

8

73%

8060

Services-Hospitals

8

7

88%

8062

Services-General Medical & Surgical

6

6

100%

8090

Services-Home Health Care

22

18

82%


Total

257

205

80%

Electric Utilities and Energy Transmission Systems


SIC

Title

Total

Y2K Discl.

% of Total






4911

Electric Services

108

94

87%

4922

Natural Gas Transmission

24

22

92%

4923

Natural Gas Distribution

15

12

80%

4924

Natural Gas Distribution

15

11

73%

4931

Electric & Other Services

62

59

95%

4941

Water Supply

16

10

63%


Total

240

208

87%

Computer Services and Products


SIC

Title

Total

Y2K Discl.

% of Total






3571

Electronic Computers

16

11

69%

3576

Computer Communications

28

23

82%

3577

Computer Peripheral

51

40

78%

7370

Services-Computer Programming

24

23

96%

7373

Services-Computer Integrated Systems

67

55

82%


Total

186

152

82%

Oil and Gas Utilities


SIC

Title

Total

Y2K Discl.

% of Total






1311

Crude Petroleum

228

154

68%

1381

Drilling Oil and Gas

67

61

91%

2911

Petroleum Refining

32

22

69%

4610

Pipelines

8

6

75%


Total

335

243

73%

Transportation


SIC

Title

Total

Y2K Discl.

% of Total






3711

Motor Vehicles

17

12

71%

3714

Motor Vehicle Parts

38

24

63%

3721

Aircraft

7

4

57%

3812

Search Aeronautical Systems

13

11

85%

4011

Railroads

20

19

95%

4213

Trucking

45

34

76%

4512

Air Transportation

27

24

89%


Total

167

128

77%

Manufacturing


SIC

Title

Total

Y2K Discl.

% of Total






3089

Plastic Products

23

15

65%

3580

Refrigeration Machinery

9

5

56%

3585

Air Conditioning Equipment

14

10

71%

3730

Ships & Boats

6

4

67%

3990

Misc. Manufacturing

12

10

83%

4953

Refuse Systems

14

10

71%

4955

Hazardous Waste

25

18

72%


Total

103

72

70%

Financial Institutions


SIC

Title

Total

Y2K Discl.

% of Total






6021

National Commercial Banks

222

132

59%

6029

Commercial Banks

4

2

50%

6035

Savings Institutions

126

65

52%

6141

Personal Credit Institutions

37

28

76%

6162

Mortgage Bankers

35

17

49%


Total

424

244

58%

Real Estate


SIC

Title

Total

Y2K Discl.

% of Total






6500

Real Estate

332

193

58%

6512

Operators of Non-Residential Buildings

75

35

47%

6798

REITs

270

186

69%

7011

Hotels

71

44

62%


Total

748

458

61%

Electronic Equipment and Machinery

SIC

Title

Total

Y2K Discl.

% of Total






3510

Engines & Turbines

6

6

100%

3620

Elect. Industrial Apparatus

6

6

100%

3674

Semiconductors

52

42

81%

3823

Industrial Instruments for Measuring

16

9

56%

3825

Instruments for Meas. & Testing of Elec.

21

13

62%

3826

Laboratory Analytical Instruments

19

12

63%

3841

Surgical & Medical Instruments

44

27

61%

3845

Electromedical & Electrotherapeutic Apparatus

56

41

73%


Total

220

156

71%

Telecommunications


SIC

Title

Total

Y2K Discl.

% of Total






3661

Telephone & Telegraph Apparatus

44

35

80%

3663

Radio & TV Communications Equipment

48

42

88%

3669

Communications Equipment, NEC

19

13

68%

4812

Radio Telephone Communications

65

51

78%

4813

Telephone Communications

106

95

90%

7385

Services-Telephone Interconnect

4

2

50%


Total

286

238

83%

Financial Services


SIC

Title

Total

Y2K Discl.

% of Total






6199

Finance Services

41

18

44%

6200

Security & Commodity Brokers

42

19

45%

6211

Security Brokers

33

23

70%


Total

116

60

52%

Miscellaneous


SIC

Title

Total

Y2K Discl.

% of Total






2621

Paper Mills

20

10

50%

2200

Textile Mill Products

8

4

50%

2800

Chemicals

10

4

40%

7389

Services-Business Services

43

39

91%

8050

Services-Nursing & Personal Care

13

9

69%


Total

94

66

70%

Small Business




Total

Y2K Discl.

% of Total


Total

1194

683

57%

Assessment of Year 2000 Disclosure

In this section of the survey, we show the extent to which the filings we selected for survey followed the staff’s guidance in revised Staff Legal Bulletin No. 5. These statistics also account for the Form 10-Ks and Form 10-Qs filed by the Fortune 100 companies that are publicly held. The Appendix sets forth this information assorted for each of the 12 industries, the Fortune 100 companies, and the 66 small businesses.

1. Assessment - the extent to which the company has assessed the seriousness of its Year 2000 technology problems if no corrective action is taken.


Assessment:

Percentage

About to be started

9%

Still in progress

56%

Completed

27%

No disclosure regarding assessment

8%

2. Plan - the extent to which a company described its plan to remedy its Year 2000 technology problems.


Plan:

Percentage

General description

44%

Detailed description

9%

Plan is fully implemented

4%

No disclosure regarding plan

43%

3. Timetable - the time frame within which a company intends to complete its assessment and/or its remediation plan. We considered disclosure like "in time" or "by the year 2000" as "No disclosure."


Timetable:

Percentage

By the end of 1998

19%

Other than the end of 1998

17%

No disclosure regarding timetable

64%

4. Relationships - whether a company plans to evaluate or is evaluating the Year 2000 technology problems of those entities with which it has material relationships.


Relationships:

Percentage

Disclosure regarding evaluation of material relationships

49%

No disclosure regarding evaluation of material relationships

51%

5. Historical Costs - the amount of money a company has already spent on Year 2000 issues to date.


Historical costs:

Percentage

Disclosure regarding historical costs

8%

No disclosure regarding historical costs

92%

6. Estimated Costs - the amount of money a company estimates it will spend on Year 2000 issues.


Estimated costs:

Percentage

Disclosure regarding estimated costs

22%

No disclosure regarding estimated costs

78%

7. Materiality - whether a company disclosed that the Year 2000 issue is material to its business and, if so, the level of materiality.


Materiality:

Percentage

Year 2000 issues could be material

9%

Year 2000 materiality is unknown at this time

5%

Year 2000 issues are not material as to remediation costs or operations

67%

No disclosure regarding materiality of Year 2000 issues

19%

8. Cautionary Language - whether a company warned investors that, because the effects of Year 2000 technology problems cannot be known until the Year 2000, actual effects may differ from the company’s predictions.

The Task Force evaluated whether companies sought specifically to avail themselves of the safe harbor under the Private Securities Litigation Reform Act of 1995 or included general cautionary language. Because it was possible for companies to do both, and many did, the percentages for the categories below total more than 100%.


Cautionary language:

Percentage

Statutory safe harbor language;

  • specifically mentions Year 2000 issues; and

  • appears physically near the other Year 2000 disclosure

7%

Statutory safe harbor language:

  • specifically mentions Year 2000 issues: but

  • does not appear near to or in the same section as other Year 2000 disclosure

6%

Statutory safe harbor language:

  • does not:

    • mention Year 2000 issues; or

    • appear near to or in the same section as other Year 2000 disclosure

59%

Disclosure includes general cautionary language with the Year 2000 disclosure

43%

No disclosure regarding the statutory safe harbor or general cautionary language on Year 2000 issues

19%

FOOTNOTES

-[1]- These estimates from a Gartner Group survey have been reported widely. See, e.g., "Many Reported Unready to Face Year 2000 Bug," New York Times, Sept. 25, 1997, page D3.

-[2]- See Reports to be Made by Certain Brokers And Dealers, Securities Exchange Act Rel. No. 34-39724 (March 5, 1998) and Year 2000 Readiness Reports to be Made by Transfer Agents, Securities Exchange Act Rel. No. 34-39726 (March 5, 1998). These releases are on the Commissionís web site at www.sec.gov.

-[3]- Senate Financial Services and Technology Subcommittee Chairman Robert Bennett has introduced legislation, the Year 2000 Computer Remediation and Shareholder Protection Act of 1997 (S.1518), which would require public companies to disclose their Year 2000 issues.

-[4]- The Staff Legal Bulletin contains the Divisionsí staffsí guidance on good disclosure practices. It is not a rule, regulation, or statement of the Commission.

-[5]- Revised Staff Legal Bulletin No. 5 supersedes the original bulletin and is located on the Commissionís web site at www.sec.gov/rules/othern/slbcf5.htm.

-[6]- See Item 303 of Regulations S-K and S-B.

-[7]- This guidance is not exclusive. Compliance with the Staff Legal Bulletin does not necessarily constitute compliance with the disclosure requirements of the federal securities laws. Companies need to consider these laws and the Commissionís rules and regulations in addition to the bulletin.

-[8]- Revised Staff Legal Bulletin No. 5 did not request this disclosure. Rather, companies are required to make this type of disclosure in the "Results of Operations" section of MD&A.

-[9]- Companies that file quarterly reports during January or February would not have a fiscal year end that coincided with the calendar year end.

-[10]- Seven of the Fortune 100 companies are not publicly held: State Farm Life Insurance, Prudential Insurance, TIAA-CREF, Metropolitan Life Insurance, New York Life Insurance, Federal Home Loan Mortgage Corp., and Fannie Mae.

-[11]- These statistics are based on numerous advanced text searches within the Commissionís electronic filing system, EDGAR, for 1998 and 1997. Also, the statistics in this Survey do not include paper filers, which mainly consist of foreign private issuers. Most foreign private issuers have not had to file a periodic report since the issuance of revised Staff Legal Bulletin No. 5.

-[12]- These reports were filed on Form 10-K or Form 10-KSB. Of the 13,000 public companies required to file either of these forms, the vast majority file during this time period.

-[13]- For the 12 major industries, these numbers do not include small businesses that file annual reports on Form 10-KSB. Small businesses that file Form 10-KSBs are under the caption entitled "Small Business."

http://www.sec.gov/news/extra/y2k/y2kcfty.htm


Modified:06/11/98