What Are the Requirements of Item 101 of Regulation S-K?

The U.S. Securities and Exchange Commission (SEC) requires public companies to detail their operations in various filings. Regulation S-K serves as the blueprint for these disclosures, outlining the non-financial information that must be included. It standardizes the qualitative portions of filings to ensure investors receive consistent and comparable information across companies.

Within this framework, Item 101 governs the “Description of Business” section. This narrative is a foundational component of annual reports, such as Form 10-K, and registration statements for new securities, like Form S-1. The purpose of Item 101 is to compel a company to explain its business comprehensively, giving investors an understanding of its history, current operations, and overall strategy.

General Development of the Business

A company must describe the general development of its business, providing a historical context and focusing on information material to understanding how the company has evolved. While this section previously required a five-year look-back, recent amendments shifted to a principles-based approach. Now, the emphasis is on disclosing developments from any period that are material to an investor’s comprehension of the business’s trajectory.

The narrative should cover any significant events that have shaped the company, such as instances of bankruptcy, receivership, or similar proceedings. It must also detail material changes in the company’s business model or structure, including major acquisitions or dispositions of assets. For filings subsequent to a company’s initial registration, the rules permit an update of the business development rather than a full restatement, as long as the update incorporates the prior full discussion by reference.

Narrative Description of Business Operations

The core of the business description is a detailed narrative of the company’s current operations. This section is principles-based, meaning the company must disclose topics material to a complete understanding of its business, rather than following a rigid checklist.

Principal Products, Services, and Markets

A company must describe its principal products and services and the markets in which it sells them. This includes discussing the methods used to distribute these products and services. If a company operates in multiple business segments, this information should be provided for each reportable segment.

Raw Materials and Intellectual Property

The disclosure must address the sources and availability of raw materials for the company’s operations, including any dependency on certain suppliers. A company must also describe its intellectual property, such as patents, trademarks, franchises, and licenses. This includes explaining their duration and how they affect the business.

Seasonality and Working Capital

If a company’s business is seasonal, it must describe the seasonality and its impact on operations and financial results. The company must also disclose its practices related to working capital. This includes the need to maintain significant inventory levels or any special payment terms extended to or received from suppliers or customers.

Customers and Order Backlog

A company must disclose if it is dependent on a small number of customers, particularly if the loss of a single customer would have a material adverse effect on the business. Companies are also required to disclose the dollar amount of their order backlog, if material. They must also provide an analysis of what portion of that backlog is not reasonably expected to be filled within the current fiscal year.

Competition and Research Activities

A description of the competitive conditions in the business is required, including the methods of competition, such as price or innovation, and the company’s position within its industry. The disclosure must also cover company-sponsored research and development activities. The amounts spent on these activities during each of the last three fiscal years must be disclosed.

Financial Information by Segment and Geographic Area

Beyond the narrative descriptions, Item 101 requires quantitative disclosures that break down a company’s financial results by business line and geographic region. This data supplements the narrative discussion of the business.

For the last three fiscal years, a company must disclose financial information about its reportable segments. For each segment, the company must present revenues from external customers, a measure of profit or loss, and total assets. A similar breakdown of financial information by geographic area is also required. Companies must disclose revenues from external customers and the value of long-lived assets for their home country and for all foreign countries in total. If revenues or assets in any individual foreign country are material, that country’s specific data must be disclosed separately.

Human Capital and Regulatory Compliance Disclosures

Recent amendments require disclosure of human capital resources to the extent such information is material to understanding the business. Companies are expected to describe any human capital measures or objectives that management focuses on, which could include information about employee attraction, development, and retention strategies. The total number of employees must also be disclosed.

The rules also require a description of the material effects of complying with government regulations on the business, including environmental regulations. A company must disclose any material capital expenditures for environmental control facilities for the current and succeeding fiscal years. The disclosure should also address the broader effects these regulations may have on the company’s earnings and competitive position.