In concert with the recent posts about printing annual reports and 10-Ks, an overall review of what is required in a 10-K seems appropriate.
All public companies other than foreign private issuers must file an Annual Report on Form 10-K following the end of each fiscal year. The Form 10-K includes four parts, the items of which are described below.
Part I of Form 10-K provides a general description of the business of the company and its properties along with the risk factors that investors should consider when investing in the company.
Part I also includes:
- a description of any material legal proceedings other than routine litigation incidental to the business to which the company or any of its subsidiaries is a party or to which any of its property is subject, and any such proceedings that were terminated in the fourth quarter of its fiscal year (along with a description of the outcome)
- for accelerated filers and large accelerated filers, a description of any material unresolved comments from the SEC staff regarding the company’s periodic and current reports that were received 180 days or more before the end of the fiscal year and…
- if applicable, a statement that the information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Act and Item 104 of Regulation S-K (which are discussed in more detail in section of this handbook entitled “The Dodd-Frank Act”) is included in an exhibit to the Form 10-K
Part II of Form 10-K includes a comparative presentation of selected financial data for the last five fiscal years, management’s discussion and analysis of the company’s operating results and its liquidity and capital resources, and the audited consolidated financial statements of the company (which may also be filed in Part IV), along with certain supplementary quarterly financial data.
Part II also includes:
- information relating to the company’s common stock, including the trading market, historical high and low sales prices, the number of registered holders, the payment of cash dividends, unregistered sales of securities, and company repurchases of its common stock during the fourth fiscal quarter
- quantitative and qualitative disclosures relating to market sensitive instruments held by the company and other primary market risk exposures (smaller reporting companies do not need to provide the information required by this item)
- if there has been a change in the principal accountants of the company, disclosure of: 1.) any disagreements with the accountants that the accountants would have been required to disclose; or 2.) any “reportable event” that had occurred, which was material and accounted for or disclosed in a manner different from what the former accountants would have apparently concluded was required (which disclosure is required with respect to disagreements or reportable events that occurred during the year in which the change in accountants took place or during the subsequent year)
- the conclusion of the company’s principal executive and financial officers regarding the effectiveness of the company’s disclosure controls and procedures (which are discussed in more detail below in the “Disclosure Controls and Procedures” part of this section and in the section of this handbook entitled “The Sarbanes-Oxley Act”)
- management’s assessment of the effectiveness of the company’s internal control over financial reporting, including disclosure of any material weakness in its internal controls
- an attestation report of the independent auditors on the company’s control over financial reporting
- any changes in the company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, such internal controls and…
- any information required to be reported in a Form 8-K during the fourth quarter that was not reported
Companies need not comply with disclosure requirements relating to disclosure controls and procedures and internal control over financial reporting until after they have filed an Annual Report on Form 10-K for a prior fiscal year. In addition, as codified in Section 989G of the Dodd-Frank Act, smaller reporting companies and non-accelerated filers are exempt from the requirement to include the attestation report of the independent auditors on the company’s internal control over financial reporting.
Part III of the Form 10-K includes disclosures relating to directors, executive officers, corporate governance, executive compensation, the beneficial ownership of management and certain large shareholders, related person transactions, director independence and accountant fees and services. Part III items may only be incorporated by reference if such proxy statement is filed within 120 days of the company’s fiscal year end. If the proxy statement is not filed within such 120-day period, the company must file an amendment to its Form 10-K prior to the end of such period that includes the Part III information.
Companies should list under Part IV of the Form 10-K their financial statements and the schedules required to be filed in Part II, along with all exhibits required to be filed by Item 601 of Regulation S-K.
The exhibits to the Form 10-K will generally include:
- all material contracts
- the company’s organizational documents
- all instruments defining the rights of security holders
- a list of the company’s significant subsidiaries
- any applicable consents of experts and counsel (namely, the consent of the independent auditors where the financial statements are incorporated by reference in one or more registration statements)
- certifications under the Sarbanes-Oxley Act, which are described in more detail below and…
- interactive data files with the company’s financial statements in XBRL. Most exhibits can be incorporated by reference to a previously filed document. Management contracts and compensatory plans and arrangements must be specifically identified.
Summary of Selected Items
Risk Factors. Item 503(c) of Regulation S-K requires public companies to disclose under the caption “Risk Factors” a discussion of the most significant factors that make investing in the securities of the company risky or speculative. The factors should be those risks that are specific to the company and should not include risks that apply to every public company. As a general rule, any fact or circumstance that could pose a risk to the company’s financial condition, results of operations or potential growth, or which could otherwise materially affect the performance of the company’s securities, may be a risk factor. In addition to identifying the risk factors, the company must discuss how each factor could affect the company or its securities. Companies should not include mitigating language in their risk factor disclosures.
In addition, the discussion of risk factors must be written in plain English. Smaller reporting companies are not required to provide the information required under this item. Many smaller reporting companies, however, will include risk factors in their Annual Reports to take advantage of a safe harbor defense for forward-looking statements.
Section 21E of the Exchange Act provides a safe harbor defense for companies in securities litigation for forward-looking statements that are made by the company in its Exchange Act reports. This defense is similar to the defense in Section 27A of the Securities Act and the “bespeaks caution” defense developed in securities case law. Forward-looking statements, which are commonly found in a company’s MD&A (defined below), are statements not of historical fact but of the expectations of the company with respect to its future performance or other predictions or expectations regarding future events.
To qualify for the safe harbor, companies must identify the forward-looking statements in the report with sufficient particularity and accompany the statements by cautionary language that identifies the significant factors that could cause actual results to materially differ from those contained in the forward-looking statements. The risk factors identified in the Form 10-K and other filings can provide the meaningful cautionary language required by the safe harbor.
Management’s Discussion and Analysis (MD&A) of Financial Condition and Results of Operations.
Item 303 of Regulation S-K requires a discussion and analysis of the company’s operating results and its liquidity and capital resources. As articulated by the SEC, the purpose of this disclosure is to present the company’s financial condition and results of operations “through the eyes of management” and to provide the context for analysis of the financial information presented in the periodic report. A critical requirement of the Management’s Discussion and Analysis of Financial Condition and Results of Operations (better known as the MD&A) is to disclose any known trends, commitments, events or uncertainties that have had or are reasonably likely to have a material effect (positive or negative) on the company’s operating results or liquidity.
The MD&A should identify and discuss the principal drivers that have impacted and will continue to impact the company’s operating results and financial condition, as well as key performance measures, including non-financial performance indicators, which are used by management and which would be material to investors, particularly where management refers to these measures in its earnings releases. In general, the MD&A should emphasize material information and de-emphasize or omit immaterial or duplicative information.
Among other material items, the MD&A should include an analysis of the following matters relating to the company:
- changes in cash flows
- debt instruments and certain related covenants, including covenants: 1.) the company has breached or is reasonably likely to breach; or 2.) that materially restrict the company’s ability to incur additional debt or to undertake an equity financing
- critical accounting policies and estimates that require subjective judgments to account for uncertain matters or matters subject to change
- any material tax contingencies or trends or uncertainties that could affect the company’s tax obligations or effective tax rate
- commitments for capital expenditures
- material contingencies arising from pending litigation and regulatory matters
- commitments for environmental expenditures and…
- any off-balance sheet arrangements
The MD&A should include a liquidity and capital resources section that provides a clear picture of the company’s ability to generate cash and to meet existing and known or likely future cash requirements. The discussion should focus on material changes and trends in operating, investing and financing cash flows and the reasons underlying those changes. The MD&A also must include quantitative tabular disclosure regarding the company’s contractual obligations.
The Sarbanes-Oxley Act created two certification requirements for the principal executive and principal financial officers of public companies. Section 302 of the Sarbanes-Oxley Act requires a certification that is filed with each quarterly and annual report and which states that the reports are accurate and complete and that the company has in place adequate disclosure controls and procedures and internal control over financial reporting. Section 906 of the Sarbanes-Oxley Act requires a certification that is furnished with any report containing financial statements and which states that the report fully complies with Section 13(a) or 15(d) of the Exchange Act and fairly presents, in all material respects, the financial condition and results of operations of the company. Although paragraph 3 of the Section 302 certification may be omitted in certain circumstances, and plural references to “certifying officers” in paragraphs 4 and 5 can be made singular, the certifications must otherwise strictly follow the language provided in SEC rules.The SEC has said that it will not accept an altered certification even if the alteration would appear to be inconsequential. If a filed certification is not correct and complete, the accompanying report may be considered by the SEC to be materially incomplete and deemed not filed (thus potentially affecting Form S-3 eligibility, among other things).
The Form 10-K must be signed on behalf of the company by a duly authorized officer as well as by its principal executive officer(s), its principal financial officer(s), its controller or principal accounting officer, and by at least a majority of the members of the board of directors. When the form is filed by a limited partnership, it must be signed by at least a majority of the members of the board of directors of any corporate general partner that signs the report.