Streamlining Disclosure Requirements Relating to Significant Business Acquisitions

Federal RegisterOct 18, 1996

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 210, 228, 239 and 249

[Release Nos. 33-7355; 34-37802; FR-47; International Series No. 1021;

File No. S7-19-95]

RIN 3235-AG47

Streamlining Disclosure Requirements Relating to Significant

Business Acquisitions

AGENCY: Securities and Exchange Commission.

ACTION: Final rules.

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SUMMARY: The Commission is adopting revisions to its rules that will

streamline requirements with respect to financial statements of

significant business acquisitions in filings made under the Securities

Act of 1933 and the Securities Exchange Act of 1934.

EFFECTIVE DATE: The rule revisions are effective November 18, 1996.

FOR FURTHER INFORMATION CONTACT: Douglas Tanner, (202) 942-2960,

Associate Chief Accountant, Office of Chief Accountant, or Walter Van

Dorn, (202) 942-2990, Special Counsel, Office of International

Corporate Finance, Division of Corporation Finance, U.S. Securities and

Exchange Commission, Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION: The Commission is adopting amendments to the

following rules and forms under the Securities Act of 1933 (the

``Securities Act'') 1 and the Securities Exchange Act of 1934 (the

``Exchange Act'') 2 concerning financial statements of acquired

(or to be acquired) businesses: Rule 3-05 of Regulation S-X,3 Item

310 of Regulation S-B,4 Item 17 of Form S-4,5 Item 17 of Form

F-4,6 and General Instructions and Item 7 of Form 8-K.7

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\1\ 15 U.S.C. 77a et seq.

\2\ 15 U.S.C. 78a et seq.

\3\ 17 CFR 210.3-05.

\4\ 17 CFR 228.310.

\5\ 17 CFR 239.25.

\6\ 17 CFR 239.34.

\7\ 17 CFR 249.308.

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I. Introduction

On June 27, 1995, the Commission published for comment proposed

revisions to rules and forms that would streamline reporting

requirements concerning financial statements of acquired and to be

acquired businesses and require quarterly reporting of unregistered

equity offerings.8 The proposals were intended to reduce

impediments to registered offerings and address certain problematic

practices involving unregistered sales of equity securities of domestic

reporting companies purportedly in reliance on Regulation S.9 A

significant number of sales under Regulation S have been attributed to

the inability of issuers to meet the registration disclosure

requirement of providing audited financial statements of significant

businesses acquired or likely to be acquired.10 The Commission is

today adopting amendments to those requirements. In a companion release

[[Page 54510]]

issued today, the Commission is also adopting certain amendments

regarding requirements for reporting unregistered sales of equity

securities, including sales made under Regulation S.11

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\8\ Securities Act Release No. 7189 (June 27, 1995) [60 FR

35656] (the ``Proposing Release'').

\9\ 17 CFR 230.901-904. Regulation S was adopted by the

Commission in 1990 to clarify the extraterritorial application of

the registration requirements of the Securities Act. See Release No.

33-6863 (Apr. 24, 1990) [55 FR 18306].

\10\ See ``Recent Problems Arising Under Regulation S,''

Insights, Volume 98, Number 8, August 1994.

\11\ Release No. 34-37801 (Oct. 10, 1996).

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The amendments adopted today will allow companies in most

circumstances to provide information about significant acquisitions in

Securities Act registration statements on the same basis as for

Exchange Act reporting. The amendments eliminate in most cases the

impediment of obtaining audited financial statements for a business

acquisition more promptly than otherwise would be required. That

requirement may have caused companies to forgo public offerings and to

undertake private or offshore offerings. As discussed more completely

in Section II, the amended rules provide that financial statements of a

business acquired within the preceding 74 days or expected to be

acquired in the future need not be furnished in connection with most

initial and repeat offerings under the Securities Act if the business

falls below a 50% significance level. Those financial statements will

continue to be required to be filed in most cases on Form 8-K

subsequent to the offering. In addition, as discussed more completely

in Section III, the Commission is raising the thresholds of

significance that determine whether financial statements of an acquired

business must be provided in filings made under either the Securities

Act or the Exchange Act, and the number of years for which historical

financial statements must be furnished. Audited financial statements of

acquired businesses for one, two or three years were required under the

former rules for businesses significant at the 10%, 20%, and 40%

levels, respectively. The amended rules raise those thresholds to 20%,

40%, and 50%, respectively.

II. Waiver of Financial Statements for Certain Pending and Recently

Completed Business Acquisitions in Registration Statements and Proxy

Statements

The amendments adopted today will eliminate in most circumstances

the requirement to include in Securities Act registration statements

audited financial statements for probable business acquisitions or for

business acquisitions that were consummated 74 or fewer days before a

registered offering of securities.12 Although the proposed rules

would have permitted omission of those financial statements in all

circumstances other than offerings by ``blank check companies,''

13 the rules as adopted provide that financial statements of

probable and recently consummated business acquisitions will continue

to be required in registration statements of any issuer if the

acquisition would be significant above the 50% level using the tests

that have been previously established.14 As was permitted prior to

today's amendments, registered offerings that are not primarily of a

capital raising nature and certain private placements may go forward

without financial statements of an acquired business, regardless of its

significance, until 75 days following the acquisition.15

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\12\ See revisions to Rule 3-05 of Regulation S-X and Item

310(c) of Regulation S-B [17 CFR 210.3-05 and 17 CFR 228.310(c)].

The date of an offering is specified as the date of a final

prospectus or prospectus supplement relating to the offering as

filed with the Commission pursuant to Rule 424(b) [17 CFR

230.424(b)] under the Securities Act.

\13\ A ``blank check company'' is defined in Sec. 230.419 of

Regulation C [17 CFR 230.419(a)(2)].

\14\ The significance of an acquired business is evaluated based

on: (i) the amount of the issuer's investment in the acquired

business; (ii) the total assets of the acquired business; and (iii)

the pre-tax income of the acquired business, all as compared to the

comparable items in the registrant's most recent audited annual

financial statements. [See 17 CFR 210.1-02(w) and 17 CFR

228.310(c)(2).]

\15\ See Instruction 2 to Item 7 of Form 8-K.

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The Commission received nineteen comment letters on the Proposing

Release, of which seventeen generally supported conforming the

disclosure requirements under the Exchange Act and the Securities Act

for significant business acquisitions. Although some commenters

recommended that offerings be allowed to proceed without limitation as

to the size of the business acquisition, most commenters favored

limiting the waiver of financial statements to acquisitions below some

particular significance level. Among the commenters supporting a limit,

the recommended thresholds for disclosure varied greatly, ranging from

10% to 80%.

As adopted, the amendments to Rule 3-05 of Regulation S-X and Item

310 of Regulation S-B require inclusion of the audited financial

statements in registration statements only if the pending or recent

acquisition exceeds the 50% significance level. The Commission believes

it is an appropriate policy to strive to remove obstacles to proceeding

with registered offerings despite pending or recent acquisitions, but

recognizes that an acquisition could be so large relative to an issuer

that investors would need financial statements of the acquired business

for a reasoned evaluation of any primary capital raising transaction by

the issuer. The selection of the 50% significance level reflects a

weighing of conflicting considerations in the light of comments

received on the proposal.

The amended rules do not require the financial statements of

businesses below the 50% significance level to be included in

registration statements until 75 days after consummation of the

acquisition, although registrants may choose to do so on a voluntary

basis. Under the proposal, the requirement to furnish financial

statements in registration statements would have been automatically

waived until the 75th day unless the financial statements were readily

available at an earlier time, which was similar to the requirement for

Exchange Act reporting purposes.16 Eight commenters criticized the

term ``readily available'' as vague and unworkable. In that regard,

several commenters observed that, although an acquired business's

financial statements may have been audited previously, filing of the

financial statements may be delayed while consents and representations

are obtained, due diligence procedures are performed, pro forma

information is prepared, and compliance with all filing requirements is

ascertained. While some issuers may choose to complete promptly all

steps necessary to file the financial statements well in advance of the

75th day deadline, others may schedule these activities solely to

ensure that the financial statements can be filed by the final date

due. Because of the discretion exercisable by issuers, the ``readily

available'' criterion would not appear to result in more prompt filing

of financial statements nor would it be interpreted consistently by

issuers. Accordingly, as adopted, the rule omits the ``readily

available'' criterion for presenting financial statements during the

75-day period. A conforming change to the requirements of Form 8-K also

has been adopted.17

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\16\ A Form 8-K reporting a significant acquisition is required

to be filed within 15 days of consummation of the acquisition. If

financial statements of the acquired business are not available,

they are required to be filed by amendment to the Form 8-K as soon

thereafter as practicable, but not later than 60 days after the

initial report is filed. See General Instructions and Items 2 and

7(a)(4) of Form 8-K.

\17\ See revisions to Item 7 of Form 8-K.

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As contemplated by the proposal, today's amendments provide that

the pro forma financial information required by Regulation S-X to

depict the effects of a business acquisition need not be furnished

unless the financial statements of the acquiree are furnished. Article

11 of Regulation S-X is amended to conform the significance threshold

for providing pro forma financial statements in connection with

[[Page 54511]]

business acquisitions to the minimum 20% significance level in Rule 3-

05 and Item 310 of Regulation S-B.18

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\18\ See revisions to Rule 11-01 of Regulation S-X and Item

310(c) of Regulation S-B [17 CFR 210.11-01 and 228.310(c)].

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Other than the changes described herein affecting the financial

statements and pro forma information required pursuant to Rules 3-05

and Article 11 of Regulation S-X and Item 310 of Regulation S-B, the

amendments do not change the information required in filings with

respect to significant acquisitions. For example, likely effects of a

probable or recently consummated business combination are required to

be discussed in Management's Discussion and Analysis, to the extent

material.19 In addition, an issuer's financial statements must

include disclosures regarding the terms and effects of material

business combinations to the extent required by generally accepted

accounting principles.20

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\19\ See Item 303 of Regulations S-K and S-B [17 CFR 229.303 and

228.303].

\20\ Material terms, significant accounting policies applied,

and certain summarized pro forma information must be included with

respect to material business combination in a note to financial

statements for the period in which the transaction occurs. See

paragraphs 95 and 96 of Accounting Principles Board Opinion No. 16,

``Business Combinations.'' Comparable summary disclosure is required

in interim financial statements pursuant to Rule 10-01(b)(4) of

Regulation S-X [17 CFR 210.10-01(b)(4)].

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The Commission recognizes the difficulty in determining the

disclosure to be made regarding significant transactions and events

that occur in proximity to an issuer's capital raising activities

before complete and reliable information becomes available. Issuers may

conclude in some cases that an offering must be delayed until

significant uncertainties are resolved, or at least until they are

identified fully, while in other cases no delay is necessary because

adequate disclosure can be furnished. One commenter recommended that a

safe harbor be provided for disclosures pertaining to significant

acquisitions until audited financial statements are available. Since a

business acquisition is not fundamentally different from other

significant events affecting issuers and requiring careful

consideration of the appropriate disclosure to be made in Management's

Discussion and Analysis and the financial statements, the Commission

believes it is not appropriate at this time to address separately the

need for a safe harbor.

A domestic company may proceed with a registered offering of

securities without financial statements of a recent or probable

acquiree in the circumstances described above, but it is required by

Form 8-K to file financial statements of each significant acquired

business within 75 days of consummation of the acquisition.21

Although the amended rules apply to offerings of domestic and foreign

issuers alike, foreign private issuers are not subject to quarterly or

Form 8-K reporting rules. Several commenters believed that foreign

issuers should be required to file the financial statements within some

specified time after completion of a business acquisition as a

condition for omission of the acquiree's financial statements in a

registration statement under the new rules. However, a requirement to

furnish those financial statements would modify significantly the

foreign private issuer's interim and current events reporting

requirements, which rely generally on home country standards and

already contemplate that investors in securities of foreign private

issuers will not necessarily receive the information customarily

provided by domestic issuers regarding significant business

acquisitions. Consequently, no amendment to require a special report by

foreign private issuers is adopted.

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\21\ See Item 2 and Item 7 of Form 8-K [17 CFR 249.308]. Also,

under the rules as revised, an issuer, other than a foreign private

issuer, that omits financial statements of a recently consummated

business combination from its initial registration statement in

reliance on the new rules must furnish those financial statements,

and related pro forma information, within 75 days of the

consummation of the acquisition under cover of Form 8-K.

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The Commission also had proposed to eliminate the requirement that

issuers provide in registration statements audited financial statements

of recently acquired businesses that, in the aggregate, but not

individually, are significant at the 20% level.22 Although a

number of commenters supported elimination of the requirement, several

commenters observed that individually insignificant businesses could be

so numerous as to become material, or could be components of a broader

acquisition plan that is material.

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\22\ Under the former rules, if the businesses in aggregate

exceeded the 20% level under the tests for significance, the issuer

was required to furnish audited financial statements of the most

recent fiscal year for a majority of the individually insignificant

businesses. See Rule 3-05(b)(i) of Regulation S-X.

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To address these concerns, the amendments adopted today provide

that the acquisition of ``related businesses'' should be treated as a

single business combination for purposes of determining the

transaction's significance under Rule 3-05 and the periods for which

financial statements of those businesses are required. The amendment

codifies present staff interpretive practices concerning acquisitions

of related businesses. The amended rule defines related businesses as

businesses under common ownership or management or whose acquisitions

are conditional on each other or on a single common condition.23

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\23\ See revisions to Rule 3-05(a)(3).

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In addition, the amended rules require one year of audited

financial statements of a majority of individually insignificant

businesses acquired subsequent to the issuer's latest audited balance

sheet date if, in the aggregate, the businesses are significant at a

level exceeding 50%.24 Accordingly, the amendment raises the

threshold for the requirement to furnish financial statements of

individually insignificant businesses from the present 20% level to

50%.

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\24\ Instructions to Item 2 of Form 8-K are amended to clarify

that acquisitions of individually insignificant businesses do not

result in a reporting requirement under that item unless the

businesses are related businesses, as defined. See revisions to

Instruction to Item 2 of Form 8-K.

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Although there may be other circumstances in which investors would

want audited financial statements of individually insignificant

businesses to be provided, the Commission believes that extending the

requirement to other circumstances would unintentionally impose a

costly and unnecessary burden. Existing rules permit the staff to

exercise appropriate discretion where warranted in determining that

financial statements in addition to those expressly required by a form

should be provided for an adequate presentation of an issuer's

financial condition, as well as to permit the omission of required

financial statements where consistent with investor protection.25

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\25\ 17 CFR 210.3-13.

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Consistent with the proposal, the amendments do not modify the

requirement to furnish audited financial statements of a business to be

acquired if securities are being registered in connection with the

acquisition of that business.26 In such a registration statement,

however, the issuer may rely on the amended rules with respect to

omission of other pending or recently completed acquisitions. The

amended rules apply to proxy statements and registration statements

under the Exchange Act, but do not change the proxy statement

requirement of Item 14 of Schedule 14A to provide financial statements

of a business to be acquired.27 Accordingly, the financial

[[Page 54512]]

statements of the acquiree will continue to be required in registration

statements and proxy statements delivered to shareholders in connection

with the solicitation of their approval of the acquisition transaction

or other investment decision.28

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\26\ Forms S-4 and F-4 do provide certain accommodations with

respect to acquirees that are not reporting companies under the

Exchange Act. See Item 17 in each Form [17 CFR 239.25 and 34].

\27\ If action is to be taken with respect to a merger,

consolidation, acquisition or similar matters, financial statements

of an acquired business that is the subject of the action are

required pursuant to Item 14 [17 CFR 240.14a-101.14].

\28\ The Commission may consider in the future certain

recommendations to modify requirements for financial statements of

nonreporting companies in registration statements relating to

exchange offers. See Section VI.B.2 of the Report of the Task Force

on Disclosure Simplification, published by the Commission on March

6, 1996.

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The revisions adopted today do not effect Rule 3-14 of Regulation

S-X governing financial statements required for acquired operating real

estate properties.29 Several commenters expressed the view that

clarification or modification of that rule was needed. In the future,

the Commission may address generally disclosure requirements applicable

to real estate partnerships, real estate investment trusts, and similar

types of businesses. Because Rule 3-14 is intended to address unique

features of that industry, such as the ``blind pool'' type of offering

frequently used in the industry, the Commission has decided to consider

revision of Rule 3-14 in the context of its evaluation of a more

comprehensive disclosure scheme.30

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\29\ Audited income statements of significant acquired or to be

acquired operating real estate properties are required to be

furnished pursuant to Rule 3-14 of Regulation S-X and Item 310(e) of

Regulation S-B [17 CFR 210.3-14 and 228.310(e)]. The income

statements are required to be presented only for the most recent

fiscal year, regardless of significance, if the property is not

acquired from a related party and the registrant is not aware of any

material factors relating to the specific property that would cause

the reported financial information not to be necessarily indicative

of future operating results. The income statements may exclude items

not comparable to the proposed future operation of the property,

such as mortgage interest, leasehold rental, depreciation, corporate

expenses and federal and state income taxes.

\30\ See Section IX.E. of the Report of the Task Force on

Disclosure Simplification, published by the Commission on March 6,

1996, which discusses recommendations to streamline and update

requirements of Industry Guide 5 pertaining to partnerships and

REITs.

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III. Increased Significance Thresholds for Acquiree Financial

Statements

The rules amended today raise the thresholds at which an acquired

business will be considered significant enough to require the provision

of its audited financial statements in filings made under either the

Exchange Act or the Securities Act. Issuers are required to report

under Form 8-K the acquisition of a significant business within 15 days

of consummation of that transaction. Prior to today's amendments,

issuers were required to furnish audited financial statements of the

acquired business as soon as practicable thereafter, but no later than

60 days after the initial report on Form 8-K. Audited financial

statements for one, two or three years were required if the acquired

business was significant at the 10%, 20% or 40% levels,

respectively.31 A small business issuer could omit audited

financial statements of an acquired business falling below the 20%

level if they were not readily available, and could omit under similar

circumstances the first of two years of financial statements required

if the acquired business was between the 20% and 40% significance

level. Financial statements for periods preceding the two most recent

fiscal years are not required in filings by small business

issuers.32

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\31\ See General Instructions and Items 2 and 7 of Form 8-K.

\32\ See Item 310 of Regulation S-B [17 CFR 228.310].

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As originally proposed, the rules applicable to businesses acquired

by small business issuers would be extended to all issuers, except that

the present requirement applicable to all issuers other than small

business issuers--that three years of audited financial statements must

be furnished for acquirees exceeding the 40% significance level--would

be retained.33 The Commission requested comment as to the

appropriate significance threshold for determining when financial

statements that are not readily available should be waived.

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\33\ See old Item 310(c) of Regulation S-B [17 CFR 228.310(c)].

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As discussed above, many commenters criticized the ``readily

available'' criterion because of the possibility of different

interpretations and, therefore, different levels of disclosure based on

factors such as an issuer's discretionary scheduling of activities

necessary to furnish the financial statements. In addition, several

commenters favored raising the significance thresholds for required

financial statements and believed that a requirement for readily

available financial statements at lower thresholds was unnecessary.

Several commenters expressed the view that imposition of the costs of

providing financial statements of acquired businesses was justified

only at thresholds higher than those in place currently.

The amendments to Rule 3-05 of Regulation S-X and Item 310 of

Regulation S-B adopted today do not include a ``readily available''

criterion, and provisions of Item 310 of Regulation S-B are amended in

a conforming fashion to eliminate requirements to furnish financial

statements based on availability.34 The amended rules provide that

audited financial statements of an acquired business should be

furnished for the most recent fiscal year if the significance of the

acquiree exceeds 20%, for the most recent two years if significance

exceeds 40%, and, except with respect to issuers making offerings under

Regulation S-B and acquired businesses reporting annual revenues of

less than $25 million, for the latest three years if the significance

exceeds 50%. No financial statements will be required for acquisitions

below the 20% significance threshold.35

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\34\ See revisions to Item 310(c) of Regulation S-B. Also, a

technical correction revises a reference in Form 8-K to paragraphs

of Item 310 of Regulation S-B. See revisions to the General

Instructions to Form 8-K.

\35\ See revisions to Rule 3-05 of Regulation S-X and Item

310(c) of Regulation S-B.

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The threshold at which audited financial statements of an acquired

business are required for three years, as required for the issuer

itself (except for small business issuers), has been raised from 40% to

50% in recognition of the significant burden imposed by the lower

threshold. In addition, consistent with the criteria for small business

issuers, financial statements for periods preceding the most recent two

fiscal years would not be required for acquired businesses reporting

revenues below $25 million.36

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\36\ See Item 10 of Regulation S-B [17 CFR 228.10].

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The revised rules are expected to be less subjective in their

application. Also, they will accomplish the goal of reducing the burden

of providing audited financial statements of acquired businesses,

thereby increasing issuers' flexibility to make registered offerings

without jeopardizing investor protection. Although investors will

receive less information about some business acquisitions under the

revised rules, the Commission believes that the benefits of the

amendments outweigh that cost.

IV. Cost-Benefit Analysis

It is expected that the amendments will decrease registrants' costs

and compliance burdens because the instances in which financial

statements of acquired businesses and the number of years for which

such financial statements are required will be reduced, enabling

issuers to avoid the cost of preparing and auditing those statements.

The amendments also are expected to reduce impediments to sales of

securities in registered offerings, enabling companies the flexibility

[[Page 54513]]

raise capital at a lower cost that may be available through

unregistered sales.

V. Summary of Final Regulatory Flexibility Analysis

The Commission has prepared a Final Regulatory Flexibility Analysis

pursuant to the requirements of the Regulatory Flexibility Act,37

regarding the amendments to Rule 3-05 of Regulation S-X, Item 310 of

Regulation S-B, Form S-4 and Form F-4 and Form 8-K. The analysis notes

that these amendments relating to financial statement requirements for

acquired businesses will provide issuers greater flexibility and

efficiency in accessing the public securities markets.

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\37\ 5 U.S.C. 603 (1988).

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As stated in the analysis, the amendments would eliminate certain

requirements that a company registering securities under the Securities

Act provide information, including audited financial statements, in the

registration statement about significant acquisitions from such time as

the acquisition is probable, and provide an automatic waiver in some

circumstances for such financial statements under the Exchange Act. The

reduction in expense, time and effort resulting from the elimination of

this requirement will benefit all entities that issue securities in the

United States, including small entities. An additional expected benefit

of the amendments would be that offerings may be registered for sale in

the United States in situations where hitherto investors in the United

States would have been excluded due to the time and expense involved in

registration. A resulting increase in registered offerings in the

United States by issuers could be expected to increase ease of

investment for small U.S. entities acting as investors.

As stated in the analysis, the proposed amendments would eliminate

certain requirements that a company registering securities under the

Securities Act provide information in a registration statement,

including audited financial statements, about significant acquisitions

from such time as the acquisition is probable, and would provide an

automatic waiver in some circumstances for such financial statements

under the Exchange Act.

It is expected that the new rules will decrease reporting,

recordkeeping and compliance burdens for persons that are small

entities, as defined by the Commission's rules. The Commission is aware

of approximately 1,100 reporting companies that currently satisfy the

definition of ``small business'' under Rule 157. With respect to the

amended Securities Act filing requirements, only small businesses that

undertake a registered offering during the pendency of an acquisition

will be affected. Of the above-referenced 1,100 companies, the

Commission staff estimates that a maximum of approximately 50 companies

will be affected in any single fiscal year. The Commission staff does

not believe any will be negatively affected by these amendments. With

respect to the amended Exchange Act reporting requirements, the

Commission staff does not believe the amendments will have any

significant effect on the such 1,100 companies. Therefore, the economic

impact of the proposed amendments would be only to lessen the

regulatory, reporting, recordkeeping and compliance burden on all

reporting entities, both small and large.

A copy of the Final Regulatory Flexibility Analysis may be obtained

by contacting Walter Van Dorn, Office of International Corporate

Finance, Division of Corporation Finance at (202) 942-2990, U.S.

Securities and Exchange Commission, 450 Fifth Street, N.W., Washington,

D.C. 20549.

VI. Paperwork Reduction Act

In June, 1995, the staff submitted to the Office of Management and

Budget (``OMB'') for review proposals to amend the following

information collections: Form 10, Form 8-K, Form S-1, Form S-2, Form S-

3, Form SB-1, Form SB-2, Form 20-F, Form F-1, Form F-2, and Form F-

3.\38\ These information collections display an OMB control number and

expiration date.\39\ The information collections are required to be

filed by companies registering securities under the Securities Act. The

Commission solicited comment on the compliance burdens associated with

the proposals but received no public comment on the burden estimates.

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\38\ There are no changes regarding the purpose, use or

necessity of the information collections for which OMB approval was

requested, nor are there changes to the estimates of reporting or

recordkeeping burden expected to result from adoption of the

proposed amendments. See the Proposing Release for estimates of

changes in reporting or recordkeeping burden.

\39\ Unless a currently valid OMB number is displayed, an agency

may not sponsor or conduct or require response to an information

collection pursuant to 44 U.S.C. Sec. 3506(c)(1)(B).

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As discussed in Sections II and III of this release, some changes

to the information collections are being adopted that differ from the

proposed changes to such information collections. Specifically, audited

annual and unaudited interim financial statements of business acquired

or to be acquired will no longer be required in filings made under the

Exchange Act or Securities Act with respect to individual acquisitions

below the 20% significance level or individually insignificant

acquisitions below the 50% significance level. Only one year of audited

financial statements, rather than two years, will be required for

acquisitions falling in the 20% to 40% significance levels; and only

two years, rather than three years, of audited financial statements

will be required for acquisitions falling in the 40% to 50%

significance levels. The amendments also permit omission of audited

financial statements of acquired businesses between the 20% and 50%

significance levels from registration statements and proxy materials in

certain circumstances, although those financial statements will be

required at a later date in a Form 8-K. Although some of the

differences will increase the total annual burdens estimated at the

proposing stage, other differences will decrease the burdens estimated

at the proposing stage. The overall effect is that the differences will

not result in any significant changes to the total burden estimates

that were submitted to OMB at the proposing stage.

VII. Statutory Bases

The foregoing amendments to the Commission's rules and forms are

being adopted pursuant to sections 2, 3, 4 and 19 of the Securities Act

of 1933 and 3(b), 4A, 12, 13, 14, 15, 16 and 23 of the Securities

Exchange Act of 1934.

List of Subjects in 17 CFR Parts 210, 228, 239, and 249

Accountants, Accounting, Reporting and recordkeeping requirements,

Securities, Small businesses.

Text of Amendments

In accordance with the foregoing, title 17, chapter II of the Code

of Federal Regulations is to be amended as follows:

PART 210--FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL

STATEMENTS, SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF

1934, PUBLIC UTILITY HOLDING COMPANY ACT OF 1935, INVESTMENT

COMPANY ACT OF 1940, AND ENERGY POLICY AND CONSERVATION ACT OF 1975

1. The authority citation for part 210 continues to read as

follows:

Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77aa(25),

77aa(26), 78l, 78m, 78n, 78o(d), 78w(a), 78ll(d), 79e(b), 79j(a),

79n, 79t(a), 80a-8, 80a-20, 80a-29, 80a-30, 80a-37a, unless

otherwise noted.

2. By amending Sec. 210.3-05 by revising paragraphs (a)(3) and (b)

to read as follows:

[[Page 54514]]

Sec. 210.3-05 Financial statements of businesses acquired or to be

acquired.

(a) * * *

(3) Acquisitions of a group of related businesses that are probable

or that have occurred subsequent to the latest fiscal year-end for

which audited financial statements of the registrant have been filed

shall be treated under this section as if they are a single business

combination. The required financial statements of related businesses

may be presented on a combined basis for any periods they are under

common control or management. For purposes of this section, businesses

shall be deemed to be related if:

(i) They are under common control or management;

(ii) The acquisition of one business is conditional on the

acquisition of each other business; or

(iii) Each acquisition is conditioned on a single common event.

* * * * *

(b) Periods to be presented. (1) If securities are being registered

to be offered to the security holders of the business to be acquired,

the financial statements specified in Secs. 210.3-01 and 210.3-02 shall

be furnished for the business to be acquired, except as provided

otherwise for filings on Form N-14, S-4 or F-4 (Secs. 239.23, 239.25 or

239.34 of this chapter). The financial statements covering fiscal years

shall be audited except as provided in Item 14 of Schedule 14A

(Sec. 240.14a-101 of this chapter) with respect to certain proxy

statements or in registration statements filed on Forms N-14, S-4 or F-

4 (Secs. 239.23, 239.25 or 239.34 of this chapter).

(2) In all cases not specified in paragraph (b)(1) of this section,

financial statements of the business acquired or to be acquired shall

be filed for the periods specified in this paragraph (b)(2) or such

shorter period as the business has been in existence. The periods for

which such financial statements are to be filed shall be determined

using the conditions specified in the definition of significant

subsidiary in Sec. 210.1-02(w) as follows:

(i) If none of the conditions exceeds 20 percent, financial

statements are not required. However, if the aggregate impact of the

individually insignificant businesses acquired since the date of the

most recent audited balance sheet filed for the registrant exceeds 50%,

financial statements covering at least the substantial majority of the

businesses acquired shall be furnished. Such financial statements shall

be for at least the most recent fiscal year and any interim periods

specified in Secs. 210.3-01 and 210.3-02.

(ii) If any of the conditions exceeds 20 percent, but none exceed

40 percent, financial statements shall be furnished for at least the

most recent fiscal year and any interim periods specified in

Secs. 210.3-01 and 210.3-02.

(iii) If any of the conditions exceeds 40 percent, but none exceed

50 percent, financial statements shall be furnished for at least the

two most recent fiscal years and any interim periods specified in

Secs. 210.3-01 and 210.3-02.

(iv) If any of the conditions exceeds 50 percent, the full

financial statements specified in Secs. 210.3-01 and 210.3-02 shall be

furnished. However, financial statements for the earliest of the three

fiscal years required may be omitted if net revenues reported by the

acquired business in its most recent fiscal year are less than $25

million.

(3) The determination shall be made by comparing the most recent

annual financial statements of each such business, or group of related

businesses on a combined basis, to the registrant's most recent annual

consolidated financial statements filed at or prior to the date of

acquisition. However, if the registrant made a significant acquisition

subsequent to the latest fiscal year-end and filed a report on Form 8-K

(Sec. 249.308 of this chapter) which included audited financial

statements of such acquired business for the periods required by this

section and the pro forma financial information required by

Sec. 210.11, such determination may be made by using pro forma amounts

for the latest fiscal year in the report on Form 8-K (Sec. 249.308 of

this chapter) rather than by using the historical amounts of the

registrant. The tests may not be made by ``annualizing'' data.

(4) Financial statements required for the periods specified in

paragraph (b)(2) of this section may be omitted to the extent specified

as follows:

(i) Registration statements not subject to the provisions of

Sec. 230.419 of this chapter (Regulation C) and proxy statements need

not include separate financial statements of the acquired or to be

acquired business if it does not exceed any of the conditions of

significance in the definition of significant subsidiary in Sec. 210.1-

02 at the 50 percent level, and either:

(A) The consummation of the acquisition has not yet occurred; or

(B) The date of the final prospectus or prospectus supplement

relating to an offering as filed with the Commission pursuant to

Sec. 230.424(b) of this chapter, or mailing date in the case of a proxy

statement, is no more than 74 days after consummation of the business

combination, and the financial statements have not previously been

filed by the registrant.

(ii) An issuer, other than a foreign private issuer required to

file reports on Form 6-K, that omits from its initial registration

statement financial statements of a recently consummated business

combination pursuant to paragraph (b)(4)(i) of this section shall

furnish those financial statements and any pro forma information

specified by Article 11 of this chapter under cover of Form 8-K

(Sec. 249.308 of this chapter) no later than 75 days after consummation

of the acquisition.

(iii) Separate financial statements of the acquired business need

not be presented once the operating results of the acquired business

have been reflected in the audited consolidated financial statements of

the registrant for a complete fiscal year unless such financial

statements have not been previously filed or unless the acquired

business is of such significance to the registrant that omission of

such financial statements would materially impair an investor's ability

to understand the historical financial results of the registrant. For

example, if, at the date of acquisition, the acquired business met at

least one of the conditions in the definition of significant subsidiary

in Sec. 210.1-02 at the 80 percent level, the income statements of the

acquired business should normally continue to be furnished for such

periods prior to the purchase as may be necessary when added to the

time for which audited income statements after the purchase are filed

to cover the equivalent of the period specified in Sec. 210.3-02.

(iv) A separate audited balance sheet of the acquired business is

not required when the registrant's most recent audited balance sheet

required by Sec. 210.3-01 is for a date after the date the acquisition

was consummated.

* * * * *

3. By amending Sec. 210.11-01 by revising paragraphs (b) and (c) to

read as follows:

Sec. 210.11-01 Presentation requirements.

* * * * *

(b) A business combination or disposition of a business shall be

considered significant if:

(1) A comparison of the most recent annual financial statements of

the business acquired or to be acquired and the registrant's most

recent annual consolidated financial statements filed at or prior to

the date of acquisition indicates that the business would be a

significant subsidiary pursuant to the conditions specified in

Sec. 210.1-02(w),

[[Page 54515]]

substituting 20 percent for 10 percent each place it appears therein;

(2) The business to be disposed of meets the conditions of a

significant subsidiary in Sec. 210.1-02(w).

presented pursuant to this section if separate financial statements of

the acquired business are not included in the filing.

* * * * *

PART 228--INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS ISSUERS

4. The authority citation for part 228 continues to read as

follows:

Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s,

77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn, 77sss,

78l, 78m, 78n, 78o, 78w, 78ll, 80a-8, 80a-29, 80a-30, 80a-37, 80b-

11, unless otherwise noted.

5. By amending Sec. 228.310 by revising paragraphs (c) and (d)(1),

removing paragraph (d)(2), and redesignating paragraph (d)(3) as

paragraph (d)(2), to read as follows:

Sec. 228.310 (Item 310) Financial Statements.

* * * * *

(1) If a business combination accounted for as a ``purchase'' has

occurred or is probable, or if a business combination accounted for as

a ``pooling of interest'' is probable, financial statements of the

business acquired or to be acquired shall be furnished for the periods

specified in paragraph (c)(3) of this Item.

(i) The term ``purchase'' encompasses the purchase of an interest

in a business accounted for by the equity method.

(ii) Acquisitions of a group of related businesses that are

probable or that have occurred subsequent to the latest fiscal year-end

for which audited financial statements of the issuer have been filed

shall be treated as if they are a single business combination for

purposes of this section. The required financial statements of related

businesses may be presented on a combined basis for any periods they

are under common control or management. A group of businesses are

deemed to be related if:

(A) They are under common control or management;

(B) The acquisition of one business is conditional on the

acquisition of each other business; or

(iii) Annual financial statements required by this paragraph (c)

shall be audited. The form and content of the financial statements

shall be in accordance with paragraphs (a) and (b) of this Item.

(2) The periods for which financial statements are to be presented

are determined by comparison of the most recent annual financial

statements of the business acquired or to be acquired and the small

business issuer's most recent annual financial statements filed at or

prior to the date of acquisition to evaluate each of the following

conditions:

(i) Compare the small business issuer's investments in and advances

to the acquiree to the total consolidated assets of the small business

issuer as of the end of the most recently completed fiscal year. For a

proposed business combination to be accounted for as a pooling of

interests, also compare the number of common shares exchanged or to be

exchanged by the small business issuer to its total common shares

outstanding at the date the combination is initiated.

(ii) Compare the small business issuer's proportionate share of the

total assets (after intercompany eliminations) of the acquiree to the

total consolidated assets of the small business issuer as of the end of

the most recently completed fiscal year.

(iii) Compare the small business issuer's equity in the income from

continuing operations before income taxes, extraordinary items and

cumulative effect of a change in accounting principles of the acquiree

to such consolidated income of the small business issuer for the most

recently completed fiscal year.

Computational note to paragraph (c)(2): For purposes of making

the prescribed income test the following guidance should be applied:

If income of the small business issuer and its subsidiaries

consolidated for the most recent fiscal year is at least 10 percent

lower than the average of the income for the last five fiscal years,

such average income should be substituted for purposes of the

computation. Any loss years should be omitted for purposes of

computing average income.

(3)(i) If none of the conditions specified in paragraph (c)(2) of

this Item exceeds 20%, financial statements are not required. If any of

the conditions exceed 20%, but none exceeds 40%, financial statements

shall be furnished for the most recent fiscal year and any interim

periods specified in paragraph (b) of this item. If any of the

conditions exceed 40%, financial statements shall be furnished for the

two most recent fiscal years and any interim periods specified in

paragraph (b) of this item.

(ii) The separate audited balance sheet of the acquired business is

not required when the small business issuer's most recent audited

balance sheet filed is for a date after the acquisition was

consummated.

(iii) If the aggregate impact of individually insignificant

businesses acquired since the date of the most recent audited balance

sheet filed for the registrant exceeds 50%, financial statements

covering at least the substantial majority of the businesses acquired

shall be furnished. Such financial statements shall be for the most

recent fiscal year and any interim periods specified in paragraph (b)

of this Item.

(iv) Registration statements not subject to the provisions of

Sec. 230.419 of this chapter (Regulation C) and proxy statements need

not include separate financial statements of the acquired or to be

acquired business if it does not meet or exceed any of the conditions

specified in paragraph (c)(2) of this Item at the 50 percent level, and

either:

(A) The consummation of the acquisition has not yet occurred; or

(B) The effective date of the registration statement, or mailing

date in the case of a proxy statement, is no more than 74 days after

consummation of the business combination, and the financial statements

have not been filed previously by the registrant.

(v) An issuer that omits from its initial registration statement

financial statements of a recently consummated business combination

pursuant to paragraph (c)(3)(iv) of this section shall furnish those

financial statements and any pro forma information specified by

paragraph (d) of this Item under cover of Form 8-K (Sec. 249.308 of

this chapter) no later than 75 days after consummation of the

acquisition.

(4) If the small business issuer made a significant business

acquisition subsequent to the latest fiscal year end and filed a report

on Form 8-K which included audited financial statements of such

acquired business for the periods required by paragraph (c)(3) of this

Item and the pro forma financial information required by paragraph (d)

of this Item, the determination of significance may be made by using

pro forma amounts for the latest fiscal year in the report on Form 8-K

rather than by using the historical amounts of the registrant. The

tests may not be made by ``annualizing'' data.

(d) Pro Forma Financial Information. (1) Pro forma information

showing the effects of the acquisition shall be furnished if financial

statements of a business acquired or to be acquired are presented.

* * * * *

[[Page 54516]]

PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1993

6. The authority citation for part 239 continues to read in part as

follows:

Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77sss, 78c, 78l,

78m, 78n, 78o(d), 78w(a), 78ll(d), 79e, 79f, 79g, 79j, 79l, 79m,

79n, 79q, 79t, 80a-8, 80a-29, 80a-30 and 80a-37, unless otherwise

noted.

* * * * *

7. By revising paragraph (b)(7) of Item 17 of Form S-4 (referenced

in Sec. 239.25) to read as follows:

Note: Form S-4 does not and these amendments will not appear in

the Code of Federal Regulations.

Form S-4

* * * * *

Item 17. Information with Respect to Companies Other Than S-3 or S-2

Companies.

* * * * *

(b) * * *

(7) Financial statements as would have been required to be included

in an annual report furnished to security holders pursuant to Rules

14a-3 (b)(1) and (b)(2) (Sec. 240.14a-3 of this chapter) or Rules 14c-3

(a)(1) and (a)(2) (Sec. 240.14c-3 of this chapter), had the company

being acquired been required to prepare such a report; Provided,

however, that the balance sheet for the year preceding the latest full

fiscal year and the income statements for the two years preceding the

latest full fiscal year need not be audited if they have not previously

been audited. In any case, such financial statements need only be

audited to the extent practicable. If this Form is used for resales to

the public by any person who with regard to the securities being

reoffered is deemed to be an underwriter within the meaning of Rule

145(c) (Sec. 230.145(c) of this chapter), the financial statements of

such companies must be audited for the fiscal years required to be

presented pursuant to paragraph (b)(2) of Rule 3-05 of Regulation S-X

(17 CFR 210.3-05).

* * * * *

8. By revising paragraph (b)(5) of Item 17 of Form F-4 (referenced

in Sec. 239.34) to read as follows:

Note: Form F-4 does not and these amendments will not appear in

the Code of Federal Regulations.

Form F-4

* * * * *

Item 17. Information with Respect to Foreign Companies Other Than F-3

or F-2 Companies.

* * * * *

(b) * * *

(5) Financial statements as would have been required to be included

in an annual report on Form 20-F (17 CFR 249.220f) had the company