The Multi-Year Comprehensive Form 10-K: Catching Up With Periodic Reports
From the fourth quarter of 2007 through most of 2009, a significant number of smaller public companies elected not to file their annual reports on Form 10-K and quarterly reports on Form 10-Q as required under the Securities Exchange of 1934 for a variety of legitimate business reasons, including lack of new investment capital, more limited operations and loss of key management. As the economy has improved, some of these companies have begun the process of resuming their SEC filings, re-engaging their independent auditors and seeking to have their shares quoted on the OTC Bulletin Board or even listed on Nasdaq.
To correct their Exchange Act violations, these companies would need to file all delinquent Form 10-K and Form 10-Q reports. For companies that did not file their periodic reports for more than a year, this could be a heavy reporting burden, requiring:
- management to spend excessive time and effort preparing and reviewing old information instead of focusing on business operations; and
- the company to spend more money on outside counsel and auditors to help prepare the delinquent periodic reports.
However, the SEC has adopted a practice that will allow companies to file a single comprehensive Form 10-K and Form 10-Q reports for only the current year instead of all delinquent periodic reports.
The company should first submit a letter to the SEC’s Office of Chief Accountant at the Division of Corporation Finance that:
- lists all missing periodic reports;
- describes in detail the reason(s) the company was unable to make those filings and the reason(s) the company is resuming reporting;
- outlines the company’s suggested approach and timing for full compliance; and
- requests that the SEC not object to the company’s filing of a limited number of its past periodic reports instead of these delinquent reports.
The company should also note in the letter whether any required information is unknown and not reasonably available to it because obtaining the information would involve unreasonable effort and expense. The SEC has stated that it will relax its normal procedures to accommodate registrants with circumstances beyond their control in reliance on Rule 409 under the Securities Act of 1933.
The company may also request an accommodation from the SEC to omit quarterly financial information from the comprehensive annual report during any periods in which it had nominal assets, minimal expenses and no material operations (essentially existing as a “shell company”).
Usually, the company’s counsel prepares this letter and corresponds with the SEC on behalf of the company.
The SEC makes clear that it will not waive the requirement to file past due Form 10-K and 10-Q reports. Instead, it will accept one comprehensive Form 10-K covering multiple fiscal years and quarters if the filing includes all of the following:
- audited historical financial statements for each of the missing years;
- unaudited summarized financial information consistent with Item 302 of Regulation S-K for each of the first three fiscal quarters (and the prior comparable period) for quarters ended before the most recent fiscal year’s audited financial statements;
- Management’s Discussion and Analysis of Financial Condition and Results of Operations based on all the annual and quarterly financial information provided in the filing; and
- all material information that would have been available and disclosed in the company’s delinquent periodic reports had they been timely filed (such as any acquisitions or changes in management during the periods in which no reports were filed).
Depending on how much time has passed since a company’s last periodic report was filed with the SEC and the significance of changes made to its business in the interim, the information relating to the company, its management and its capitalization should focus on more recent periods and also include updated information for periods through the date of filing.
For example, the business section required by Item 1, Part I of Form 10-K should describe the current state of the company’s business rather than provide a description of the company’s business as it was at the time that the delinquent reports were due.
It may also be helpful to readers to provide an explanatory note at the beginning of the Form 10-K that discusses the reason(s) for the comprehensive filing.
Some companies may also find it prudent to include special risk factors in the Form 10-K (as well as in any subsequent prospectus or private placement memorandum) regarding the company’s delinquent filings with the SEC, including a risk factor alerting current and prospective investors that they will be unable to review certain financial and other disclosures that would have been contained in missing periodic reports and stating that the company is no longer eligible to register securities on Form S-3 and will be unable to use short-form registration until it has timely filed all required reports under the Exchange Act for the 12 months before filing a registration statement.
Most late filers also must discuss weaknesses in their internal control over financial reporting (and that their disclosure controls and procedures were not effective) as a result of insufficient accounting systems and processes in place to ensure timely reports and changes made to their internal control over financial reporting to address these weaknesses.
In reviewing the comprehensive filing, current management should be prepared to sign the Form 10-K and related certifications, even if the report and certifications cover periods prior to their joining the company. To give management some comfort going forward, a new accounting firm will often act as the company’s independent auditors for those accounting periods.
A comprehensive filing will not result in a company becoming immediately “current” in its Exchange Act reports. However, it will satisfy the more general requirements that the company has filed all reports required to be filed under the Exchange Act.
Many form and rule eligibility standards under the Securities Act and the Exchange Act (such as, for example, Form S-3, Form S-8, Rule 144 and Regulation S) require, among other things, that a company wishing to use that form or rely on that rule be subject to the Exchange Act reporting requirements and either:
- has filed all material required to be filed under Section 13 or 15(d) of the Exchange Act for a specified period of time (generally over the last 12 months); or
- has timely filed all material required to be filed.
While this may not be relevant for smaller public companies that must use Form S-1 to register securities with the SEC, Form S-3 and rules related to incorporation by reference require timely periodic filings during the 12 calendar months preceding the filing. In contrast, Form S-8 requires the company to have filed all of the Exchange Act reports required to be filed during the previous 12 months.
As a result, after a company files a comprehensive report, it will be able to use Form S-8 because it has now filed the reports required to be filed even if they are late, but it will not be able to use Form S-3 because the reports were not timely.
With a single multi-year comprehensive filing, companies do not need to continue filing endless Form 12b-25 reports, do not need to terminate their Exchange Act registrations by filing a Form 15, and can catch up with their Exchange Act periodic reports without incurring the lengthy delay and significant cost in preparing all of the missing periodic reports.
Spencer G. Feldman is a shareholder at Greenberg Traurig, LLP. Spencer is the head of the Smaller Public Companies Practice Group. Spencer can be reached at 212.801.9221 or via e-mail at firstname.lastname@example.org