2.8 Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered (Rules 3-10 and 13-01)
Under the Securities Act, guarantees of securities are considered to be
securities themselves. Therefore, all offerings of securities, as well as the
guarantees of such securities, must either be registered with the SEC or be exempt
from registration. A registrant must provide separate financial statements of each
subsidiary issuer or guarantor of debt securities registered or being registered
unless certain criteria are met (discussed below). Obtaining such separate financial
statements could be expensive and difficult. Therefore, in the context of an initial
registration statement related to guaranteed debt securities, a company must
carefully evaluate the reporting requirements in Regulation S-X, Rules 3-10 and
13-01. Rule 3-10 contains certain exceptions under which a registrant may provide
more limited financial information in lieu of full financial statements. If the
registrant qualifies for one of these exceptions, it may be eligible to provide, in
MD&A or a footnote to the financial statements of the parent company that issued
or guaranteed the security, either of the following types of alternative disclosures
in lieu of separate financial statements:
- Summarized financial information about the parent, issuer(s), and guarantor(s) as well as nonfinancial disclosures.
- Nonfinancial disclosures only.
Alternative disclosures may be provided in lieu of separate financial statements
if (1) each subsidiary issuer/guarantor is consolidated by the parent and (2) either
(a) the parent company issues or co-issues (on a joint-and-several basis with one or
more of its consolidated subsidiaries) securities that are guaranteed by one or more
consolidated subsidiaries or (b) a consolidated subsidiary issues or co-issues (with
one or more other consolidated subsidiaries of the parent company) the securities,
and the securities are fully and unconditionally guaranteed by the parent company.
For its initial registration statement, a registrant should evaluate the guarantor
structure as of the filing date of the registration statement to determine what
financial information is required by Rules 3-10 and 13-01. If the registrant
provides full financial statements, the periods presented should generally be the
same as those of the issuer for both annual and interim periods. However, if a
registrant provides summarized financial information, the periods presented should
be the most recent annual and year-to-date interim period (if applicable).
Rule 3-10 does not apply to private (nonregistered) securities, bank debt, or other private financings.
Thus, a private offering under Securities Act Rule 144A is not subject to Rule 3-10. However, if the private
144A offering of a guaranteed debt security includes registration rights, the issuer will need to comply
with Rule 3-10 at the time the private debt is exchanged for public debt.
For additional considerations related to guaranteed securities, see Deloitte’s
Roadmap SEC Reporting Considerations for Guarantees
and Collateralizations.
2.8.1 Summarized Financial Information
Registrants that provide summarized financial information should
disclose, at a minimum, the following captions:
- Current and noncurrent assets.
- Current and noncurrent liabilities.
- Redeemable preferred stock.
- Noncontrolling interests.
- Revenues.
- Gross profit (or costs and expenses applicable to net sales or gross revenues).
- Income (loss) from continuing operations.
- Net income (loss).
- Net income (loss) attributable to the entity.
An entity may need to disclose additional line items if such
disclosure would be material to an investor’s evaluation of the sufficiency of
the guarantee(s). The information may be presented on a combined basis; however,
to the extent that the information provided applies to one or more, but not all,
issuers and guarantors, separate disclosure of summary financial information may
be required for the relevant guarantors and issuers to the extent that such
disclosure is material. For example, if a subsidiary’s guarantee was not full
and unconditional, that fact would be disclosed and separate financial
information would be provided for the subsidiary unless such information can be
provided narratively.
A brief description of the basis of presentation must be provided and the
following policies should be reflected:
- Transactions between issuers and guarantors that are presented on a combined basis should be eliminated.
- Information for nonguarantors or nonissuers should be excluded.
- Separate presentation is required for transactions with, and amounts due from or due to, (1) nonguarantor subsidiaries (i.e., those amounts that do not arise from the issuers’ or guarantors’ investment in the nonguarantors) and (2) other related parties.
Summarized financial information may be omitted when not
material or in certain nonexclusive circumstances. While the specific
requirements depend on the guarantor structure, they generally apply to
circumstances in which all substantive entities are in the same legal position
with respect to the registered securities (i.e., all are co-issuers or all are
guarantors).
2.8.2 Nonfinancial Disclosures
When providing the alternative disclosures permitted by Rule
13-01, registrants will need to disclose nonfinancial information (to the extent
material) in addition to the financial information discussed in Section 2.8.1. Such
nonfinancial information includes a description of:
- The issuer(s) and guarantor(s) of the security.
- The terms and conditions of the guarantee(s).
- How the issuer(s) and guarantor(s) are structured.
- Other factors that may affect payments to holders of the guaranteed security, including contractual or statutory restrictions on dividends, guarantee enforceability, and the rights of a noncontrolling interest holder.
Beyond the requirements outlined above, disclosure of specific
facts and circumstances related to each guarantor is required if such
information would be material to investors and would help them understand the
sufficiency of the guarantee. Registrants must provide additional information to
the extent necessary, to ensure that their disclosures are not misleading. This
nonfinancial information should help investors in the guaranteed securities
understand the issuer(s), guarantor(s), and guarantee(s), as well as the
accompanying financial disclosures.
In addition, the identity of the issuer(s) and guarantor(s) must be listed in an
exhibit to the registration statement or periodic filing.
2.8.3 Recently Acquired Guarantors
A company should also be aware of the requirements of Rule 13-01(a)(5), which
applies to recently acquired subsidiary issuers or subsidiary guarantors. Under
Rule 13-01(a)(5), a registrant must provide separate preacquisition summarized
financial information of a significant subsidiary issuer or guarantor if the
subsidiary’s historical results have not been incorporated into the parent’s
most recent balance sheet included in the registration statement. To determine
significance under Rule 13-01(a)(5), a registrant would use the results of the
significance tests discussed above for significant acquisitions in accordance
with Rule 3-05.