With 10-K season now upon us, we at Westlaw Business see it as our job to keep you informed of issues and events, based on SEC correspondence and other related documents, that may impact your filings. To help you prepare your disclosures, we’ve begun this series, covering important 10-K considerations during the current economic climate.

With the late-breaking news of the stimulus package passed on Feb. 17, filers may want to hold off pushing the “file now” button.  A $787 billion significant development has just transpired that may bear thought…or even disclosure as companies consider their final 10-K preparations. While the President’s stimulus plan has now been signed into law as American Recovery and Reinvestment Act of 2009 (ARRA), the unknown effects of the huge cash injection may still bring concern.  Companies are starting to adopt the lottery player’s mentality of “if I win, I’d do this and that,” even though the money has not yet been distributed.

Companies in targeted industries will be receiving government money as part of the President’s economic stimulus package, through alternative energy incentives, and through use of the influx of cash from the Troubled Asset Relief Program (TARP).   Although the stimulus money has not yet been completely divvied up, with the influx of new government capital on the horizon, companies are eager to put it to use. Just where they are planning on putting it is an issue for disclosure.  Recipients should consider detailing both risks related to the stimulus package and desired use of the proceeds in their 10-K filings.  

With the details of President Obama’s stimulus plan mostly finalized, a diverse spectrum of industries stands to benefit. (It will be worth keeping an eye out for individual details in the future.) For example, senior citizen healthcare provider Omnicare, Inc. recently projected $19 billion will be targeted for its industry.  The company is still considering the impact of the potential cash injection, but is uncertain about just how much will end up on its books. Of course, the stimulus plan does not focus solely on healthcare.  The legislation also includes funding for plans to provide grants for technology improvements in rural or underserved communities.  Broadband provider Frontier Communications therefore states that as a possible recipient, it would use proceeds to expand broadband access to customers in markets “to whom it is not available due to the high cost.”  Storage company Mobile Mini, Inc. also noted the planned infrastructure projects in the stimulus package.  The company has even put in place a “dedicated team” to focus on the opportunities arising from the package’s funds.  Education and training, not to be left behind, will receive $53 billion through the bill, which publisher McGraw-Hill hopes will increase its bottom line.  

Other specific provisions in the stimulus plan allow $16 billion in funds to be made available to companies that utilize renewable and alternative energy.   Companies such as Solar Enertech Corp. have been disclosing expectations of federal and state funding for their alternative energy projects.  The California-based solar cell maker claims certain government funding incentives should give a “boost” to its business.  Meanwhile, oil-field supplier Lukin Industries believes the stimulus will provide “opportunities for power transmission products.” However, not all companies see benefit in the funds.  Xcel Energy, identifies its “areas of interest” such as smart grid (digitally controlled power lines) technology, yet the company says it does not see the “merit” of applying for stimulus money since it may interfere with one of the company’s own smart grid projects. Telecom and energy infrastructure provider Mastec, Inc. expresses its uncertainty over the ability of its customers to obtain the financing needed to take advantage of the stimulus plan’s tax credits and grants for the developers of wind farms. 

While some companies tout that they will benefit from the economic stimulus plan, others worry about the potential impact.  Aerospace giant Lockheed Martin, for example, expresses concern that the economic stimulus plan as a whole may compete with other national priorities, such as defense – and may therefore negatively impact the company’s ability to receive government contracts.  Pacific-coast based utility, PPL Electric Utilities, claims that the value of its generation facilities could decline as new technologies, such as solar or wind power, reduce demand for the company’s electricity.

The largest of all government incentives to date is TARP, and its related disclosures provide telling context.  As broadly reaching as the stimulus plan is, companies disclosing their use of TARP funds have been mainly focusing on their financing and lending programs.  For some companies, however, their participation in TARP poses uncertainties over how the use of proceeds must be disclosed.  Since disclosure of TARP funds is uncharted territory, some may seek guidance from the SEC itself. In recent staff correspondences, the SEC advised Wilber Corp. that the New York-based bank should consider: 1) how the proceeds may affect the company’s net interest margin; 2) how the dividends on the preferred stock will impact income available to common shareholders; and 3) how the transaction will impact the company’s earnings, and diluted shares outstanding. 

Not all TARP companies will be disclosing personal benefits of the funds, though – the effects of TARP can alternatively harm some companies whose competition gains an advantage from participation.  For example, credit card giant MasterCard explains that TARP investments strengthens its competitors business.  MasterCard uses American Express’ participation in TARP to show how it provided additional resources to American Express, but MasterCard would not be able to see similar resources as it is not a TARP eligible company. Similarly, specialized leasing company GATX Corp. explains how TARP allows its competitors to offer leases and loans to customers at lower rates, thus impacting the company’s “asset utilization” and profitability.

So, while the ARRA plan is broad reaching and generous, there are some negatives to go along with ($787 billion) positives.  The focus of the package is not on just one sector or industry, but everywhere – from tax rebates to bridge construction.  Companies are ready to spend the proceeds, but the competitive (or operational) risks to some companies are not minor.  The government and some shareholders hope that companies will take advantage of the incentives provided, yet the incentives can work to serve the opposite effect to those at a competitive disadvantage.   This season, companies should pay particular attention to issues surrounding government funds, whether currently realized or not, in drafting 10-K documents.

Published:  March 3, 2009