Mr. Jonathan G. Katz
Dear Mr. Katz:
The undersigned wishes to comment on behalf of The Boeing Company (the "Company") on the proposed rule issued by the U.S. Securities and Exchange Commission (the "Commission") on June 17, 2002, entitled "Additional Form
8-K Disclosure Requirements and Acceleration of Filing Date." We applaud your efforts to ensure timely disclosure of important corporate events. However, we wish to convey certain concerns and recommendations about the proposed rule. The comments contained in this letter focus on our views as follows:
Shortened Filing Deadline for Form 8-K
We believe that the proposed shortened Form 8-K filing deadline of two business days after the triggering event would generally be insufficient. Due to the nature of many existing and proposed items requiring disclosure in Form 8-K, it may be prudent for a registrant to consult with its legal counsel, audit committee, auditors, and/or others prior to releasing certain information publicly. In light of recent regulatory actions that have reshaped officers' obligations for financial disclosures, it is especially important that the new Form 8-K rules accommodate a timeframe sufficient for thorough consultation and review. The call for enhanced disclosures to be provided in an accelerated timeframe would increase the risk of boilerplate, inaccurate or incomplete information being released, and hence, quality may be compromised. Additionally, companies with operations in various time zones may experience even greater difficulty in meeting a deadline of two business days because of the internal coordination required before the filing of a Form 8-K.
In response to the Commission's specific question as to whether business days or calendar days should be used as the measure for the filing deadline, we believe the use of business days is preferable. For example, if a Form 8-K triggering event were to occur on a Friday, it could be impracticable in certain circumstances for a registrant to access all appropriate management and, possibly, Board personnel required to compose and review a high-quality disclosure over the weekend, to adequately support a Form 8-K filing within two calendar days.
For these reasons, we are concerned with the proposal that Form 8-K's be filed within two business days of a triggering event, and suggest that a minimum of five business days be permitted for filing of Form 8-K.
Disclosure of Items Which May Result in Competitive Harm
We are concerned with the proposed provisions of Item 1.01 (Entry into a Material Agreement) that would require disclosures about certain letters of intent or other non-binding arrangements, and Item 1.02 (Termination of a Material Agreement) which would require disclosures about notices of default. Also, we are concerned with the proposed provisions that would expand the requirements for filing certain agreements as exhibits to Form 8-K. We believe these disclosure requirements may result in competitive harm.
We believe the Form 8-K rules should not require disclosure of any contract terms regarding the entry into a letter of intent or other non-binding arrangement, as would be required pursuant to proposed Item 1.01. Such disclosure would provide information about arrangements which may not ever be consummated, and may therefore be subject to misinterpretation. Also, a letter of intent is merely a step in a negotiation process. As such, we believe it is inappropriate for competitors to have access to information about a proposed transaction or contract terms that are preliminary or non-binding.
Additionally, proposed Item 1.02 indicates that "if the company is not the terminating party, it would not have to disclose information until it receives a written termination notice from the terminating party, unless the agreement provides for notice in some other manner, and all material conditions to termination other than those within the control of the terminating party or the passage of time have been satisfied." However, in practice, parties may send written notices of default to start negotiations in earnest, and ultimately, the path toward contract termination may be reversed. Disclosing receipt of such a notice may be misleading.
Proposed Items 1.01, 1.02, 2.03 (Creation of a Direct or Contingent Financial Obligation That Is Material to the Registrant) and 2.04 (Events Triggering a Direct or Contingent Financial Obligation That Is Material to the Registrant) each contain provisions that would require certain agreements or letters to be filed as exhibits to Form 8-K. By requiring such filing, all of an agreement or letter's terms, some of which might be the subject of confidentiality or intense negotiation, or are otherwise sensitive in nature, would become accessible to competitors and customers. We believe that filing of the full text of an agreement or letter should not be included in the final rules. Rather, we believe a description of key contract terms, using the bullet-point guidance set forth in Items 1.01, 1.02, 2.03, and 2.04 of the proposed rule, would adequately convey the critical factors relating to the contract entered into or terminated, while allowing a registrant to protect detailed information that is confidential, sensitive, or otherwise competitively harmful.
In summary, we believe that disclosure should not be required regarding any letters of intent or other contracts that are non-binding; disclosure should not be required upon notice of an event of default; and for binding contracts that are material and not made in the ordinary course of business, only key terms should be disclosed - the entire agreement should not be furnished as an exhibit.
Inconsistency in Application of Materiality Guidelines
We believe the proposed rule should apply a consistent materiality threshold for required disclosures. For example, proposed Item 1.03 (Termination or Reduction of a Business Relationship with a Customer) specifies a materiality threshold of 10 percent of a company's consolidated revenues for the most recent fiscal year, and proposed Item 2.01 (Completion of Acquisition or Disposition of Assets) incorporates a materiality threshold of 10 percent of a company's total assets. However, proposed Items 1.01 (Entry into a Material Agreement) and 1.02 (Termination of a Material Agreement), as well as other proposed Items, do not specify a materiality threshold that is tied to a financial measure. The lack of uniformity in materiality guidelines could create inconsistencies in the disclosures provided. Hence we propose that materiality guidance be conveyed in the form of consistent thresholds that are tied to relevant financial measures.
Direct and Contingent Financial Obligations
We believe the definition of direct and contingent financial obligations contained in the proposed rules should be enhanced, and the proposed disclosure requirements for contingent financial obligations be evaluated for possible duplication of other developing regulations.
Proposed Items 2.03 and 2.04 require disclosures associated with certain financial obligations and related triggering events. Footnote 68 to Item 2.03 specifies that the term contingent financial obligation includes the following: "guarantees, co-obligor arrangements, obligations under keepwell agreements, obligations to purchase assets and any similar arrangements and all other obligations that exist or may arise under an agreement." Footnote 69 to Item 2.03 describes a keepwell agreement as "any agreement or undertaking under which the company is, or would be, obligated to provide or arrange for the provision of funds or property to an affiliate or third party." Based on these descriptions, it is unclear what would distinguish a financial obligation from a non-financial obligation. For example, if a company was required to transfer assets (other than monetary assets) based on a contingency, could this constitute a contingent financial obligation? We believe further clarification on this issue would be helpful.
Also, given that contingent financial obligations include guarantees (as per footnote 68 referenced above), we are concerned that this proposed rule could result in duplication of disclosures that are proposed by the Financial Accounting Standards Board ("FASB"), pursuant to its Exposure Draft titled "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others - an interpretation of FASB Statements No. 5, 57, and 107." While the proposed Form 8-K disclosure requirements would call for a shorter timeframe to disclose the creation of certain financial obligations, or the triggering of certain financial obligations, the rules recently proposed by the FASB provide for disclosures that would adequately consider the overall spirit of disclosures suggested by the proposed Form 8-K rules. We believe the Commission should eliminate duplicate disclosure requirements, as the additional information would not be useful.
Disclosure of Exit Activities
We believe proposed Item 2.05 (Exit Activities Including Material Write-Offs and Restructuring Charges) should be revised to exclude quantitative disclosures, and re-considered in the context of Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." As for the proposed non-quantitative disclosures, we believe the guidance should be clarified with respect to the evaluation of when a triggering event has occurred.
Proposed Item 2.05 identifies several quantitative disclosures that would be required in the case of an exit activity involving a material write-off or restructuring charge, including the following:
We believe that disclosure of the above information within a short time of the action taken to approve or commit to an exit activity, such as two or even five business days, is unreasonable. Development of quality estimates should incorporate a robust review process. Without an adequate allotment of time to carry out thorough internal reviews, information released publicly is more likely to contain inaccuracies. Timely financial information is not useful if it is inaccurate and subject to continuing updates and revisions. Therefore, we recommend that the Form 8-K requirements omit disclosure of quantitative information.
Additionally, on July 30, the FASB issued SFAS No. 146, which changes the accounting for costs associated with exit or disposal activities from a method that allowed accrual of certain costs as of the commitment date, to a method that calls for costs to be accrued when they are incurred. Hence, the quantitative disclosures summarized above would require the presentation of financial estimates that will not necessarily have a financial statement impact until generally up to a year in the future. We question the value of such disclosure, and believe the Commission should omit this provision.
We generally agree with the non-quantitative disclosures proposed by Item 2.05. However, we believe additional clarification should be furnished with respect to when the event occurs. The guidance contained in proposed Item 2.05 indicates that it would "require disclosure when the board of directors or the company's officer or officers who are authorized to take such action, if board approval is not required, definitively commits the company to a course of action, including a plan to terminate or exit an activity ..." As the scope of any particular action changes throughout its development, the levels of approval a company requires may change accordingly. We believe this description is subject to differing interpretation as to when a triggering event has occurred. Therefore, we recommend that further guidance be provided to clarify events that trigger this disclosure.
Disclosure of Material Impairments
We suggest the disclosures proposed by Item 2.06 (Material Impairments) be excluded from the final rule. The proposed disclosures would generally duplicate information that is already required to be included in periodic reports as part of Management's Discussion and Analysis and/or notes to the financial statements. Also, as the timing of impairment reviews may be primarily geared toward the quarterly reporting cycle, many companies may not report impairments significantly earlier in a Form 8-K filing, than they currently do as part of a Form 10-K or Form 10-Q filing.
Disclosure of Rating Agency Decisions
We believe proposed Item 3.01 (Rating Agency Decisions) should be excluded from the final rule. Currently, rating agency communications provide adequate information regarding actions taken. Also, the proposed rules are not clear regarding the amount of conversation and data exchanged with a rating agency before a company becomes obligated to disclose that the agency declined to provide a requested rating.
Amendments to Bylaws
In response to proposed Item 5.03 (Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year), we believe that immaterial bylaw amendments should not trigger disclosure on Form 8-K. Minor updates and administrative changes should be scoped out of this proposed requirement.
We appreciate your attention to this important matter.
James A. Bell