The recent equity market meltdown, coupled with the tightening of credit in the debt markets, has significant implications for the periodic reporting requirements of public companies. Such companies must quarterly prepare management discussion and analysis reports, which require a description of any trends that could have a material impact on the results of operations, liquidity or capital resources. In light of recent events, public companies should give consideration to updating any general overview sections to address recent events and related trends. In addition, the following sections of typical public company reports should be carefully reviewed.
Liquidity and Capital Resources
- Continued compliance, or potential noncompliance, with covenants under existing debt agreements.
- Estimated future financing needs and the ability to access short-term financing sources.
- The ability to raise capital through equity offerings at unattractive market prices.
- The effect of reduced capital availability and softening liquidity on the company’s sources of and uses of for capital, and the related ability to complete existing capital commitments.
- The impact of commodity price volatility on the company’s results of operations and liquidity.
- Companies are required to conduct impairment tests on their assets, including goodwill and other intangible assets. Current market conditions may have a material negative effect on valuations.
- Disclosure should be made of any impairment determined to exist. A Form 8 K may be required unless the impairment is discovered in the course of preparing periodic or annual financial statements.
Pension Plan Funding
- Companies are required at year end to make certain minimum funding contributions to pension plans. The market meltdown may have affected the company’s pension plan assets, with the result that the funding contributions may be significantly greater than previously disclosed.
- Companies should review the assumptions and discount rates used in valuing pension plan assets to determine the continued appropriateness of such assumptions and determine any new disclosures required in light of changes in pension asset valuations and expected pension plan contributions.
Bankrupt Suppliers or Customers
- Companies should review relationships with suppliers or customers that have recently declared bankruptcy or otherwise have shown significant signs of trouble.
- If the bankrupt or troubled companies have a material direct or indirect impact on the company, consideration should be given to disclosure of any significant losses resulting from investments in the businesses and the impact on the company’s results of operations resulting from uncollectible receivables or discontinued sales to such businesses.
Company Filing Status
- The SEC has established market value tests to determine if a company is a well-known seasoned issuer (“WKSI”) and if the company qualifies for use of an S-3 registration statement.
- WKSI status is important since such companies can register securities on an automatic shelf registration statement. WKSI status requires $700 million public float.
- S-3 status is important due to the abbreviated registration requirements. Generally, a primary or secondary offering for cash is available on Form S-3 if the company has a public float held by non-affiliates of at least $75 million.
- Public companies include a listing of risk factors in various securities registration and securities reporting documents.
- Updating of existing risk factors, or addition or new risk factors, may be required to address known or potential risks or uncertainties related to market conditions. The risks may relate to the ability to access credit markets, the compliance with existing debt covenants, potential asset impairment, and the relationship with distressed customers or suppliers.
- Companies should also consider updates to the forward-looking statement warnings contained in press releases and other securities filings.