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 10-K season now raging, it’s not surprising to see that the
credit freeze has produced some 10-K gloom. What is actually surprising
is the number of companies that are taking extra time to get a handle
on their liquidity situation or work through their accounting before
filing. Worse still, some companies seem to be doing a little
early-spring balance sheet cleaning in hopes of avoiding a going
concern warning. By comparison, reduced earnings, downbeat growth
projections, and even industry-wide distress look positively rosy to
other filers who simply want to get this information out the door as
soon as possible.
10-K filing season is now at its peak – many large accelerated
filers are done and other accelerated filers are not far behind. The
bad news continuing to brew in the economy is also making its way into
a large number of 10-Ks. Filers of all sizes – once iconic names
and large accelerated filers alike – are finding themselves
compelled to swallow pride and break bad news in one of three ways: The
most extreme cases are breaking the bad news of “going
concern” opinions or holding back (presumably) bad news as they
file late filing notices (and work to clean up their numbers or even
restructure). Some are simply jumping in and breaking general bad news
shared by many in this economy. In all three cases, companies are
facing tough decisions around their disclosures and, more broadly, the
restructuring that must follow.
The most extreme category of 10-Ks are those accompanied by concern
warnings. “Going concern” is an accounting term used to
describe a business that can operate for the foreseeable future (until
the next 10-K). Financial statements are prepared under a going concern
assumption. However, if an auditor determines that the going concern
assumption is unwarranted, then it must issue an opinion a called
“going concern warning”. And more importantly, form
the companies’ prospective, a going concern warning can trigger
technical default on loan covenants, push the stock price off the
cliff, and practically assures that no financing will be forth coming
without a bankruptcy filing.
In the quest for more time, some companies will file a notification of
late filing (NT forms) and enter into the 15 calendar-day grace period
allotted under the rule. Companies that have recently noted the
possibility of going concern warnings in their NT 10-K are MGM Mirage,
Conseco, and Lear. Companies can use this grace period to work through
issues, like going concern warnings. GM recently filed an NT 10-K and
then went onto drop a bombshell on the market when it filed its 10-K
with a going concern warning. MGM Mirage, Conseco, and Lear will
have to roll the dice on their respective 10-Ks later this month.
Perhaps they can pull off a “Sirius” miracle.
Less extreme, but still unpleasant, is the situation where companies
need to work through less dire accounting intricacies or restructure
before their 10-K is ready for public consumption. Sirius was faced
last month with maturing debt, a hostile acquirer, and an impending
10-K filing. However, the satellite radio provider was lucky enough to
receive an emergency equity infusion from Liberty Media, which played
the role of white knight. The radio company had to postpone its 10-K
because of all the executive, legal, and accounting bandwidth that was
eaten up by the transactions. Other companies that have recently filed
NT 10-Ks to buy time to work through the liquidity issues include
AbitibiBowater, Conseco, and Anthracite Capital. A few companies that
are similarly burdened by attempting to work through lifesaving mergers
or more prosaic M&A transactions include season include Sovereign
Bancorp and Verisign Technologies. Other companies need the extra time
in order to work through the arcanum of accounting. These companies
include ACI Worldwide, Vornado Realty, and Hertz Global Holdings. These
postponements were all less dire than a going concern warning, but
still less than pleasant. Then again, is there is much pleasant to talk
about in today’s market?
Most commonly appearing is simply the need to break bad news, without
resorting to special filings. Take, AIG for example – the insurer
managed to rack up some of the most impressive loss in history, but
didn’t see it as any reason to forestall the inevitable
announcement of its worst quarter and year ever. Other financial
companies performing to their personal-worst included Citigroup, Morgan
Stanley, and Bank of America. The auto industry has been hard hit, but
members of that industry, both up and down the supply chain, have
ponied-up and simply put the bad news out there. Quaker Chemical notes
the company is vulnerable to the same business cycles as automobiles.
Dollar Thrifty Automotive expects the challenging sales environment to
continue into 2009. Retailers like Lacrosse Footwear noted declining
sales due to the challenging retail environment. Most retailers have
not filed their 10-Ks yet, but as the due date edges nearer, each will
have to decide whether ripping the band aid off the bad news as quickly
as possible or postponing to polish is the right course.
The credit freeze is producing a rather harrowing season for 10-K
filers. If, for the most part, the best you can do is report diminished
performance and prospects in line with your peer group, then things are
tough. But on the positive side, late filings and going concern
warnings are still in the minority for this 10-K season. Most companies
have at least another year to restructure and reinvigorate themselves
for next year’s 10-K beauty pageant.
Published: March 10, 2009
