Prying Open Private Firm Financials

Covering private companies has always been a challenge since most of the businesses were notoriously secretive about their financial condition.

For one thing, it was difficult to get a copy of the financial statements. And even if a reporter did get the company's statements, often the presentation would not be in the standard format followed by public companies, making them difficult to understand.

For several reasons, however, accessing and understanding private company financial statements has become somewhat easier in recent years.

First, as companies take on more debt and as more public companies are taken private, many firms find themselves having to make regular filings with the Securities and Exchange Commission, just as their public company counterparts. The private companies are filing the basic SEC documents such as 10-Ks, 10-Qs, 8-Ks, etc.

There are at least three main reasons that private companies must make regular filings with the SEC. They are:

• If a company sold bonds or notes as part of a contract sale and the buyer said the company must file with the SEC until the bonds are retired. This is the most common reason.
• If a private company has any debt that trades on an exchange.
• It the debt was issued on a registration statement and is held by more than 500 holders of record, even if it is not traded on an exchange. This obligation continues until the number of shareholders of record falls below 300.

Even if a public company is bought by a private equity group and taken private, the obligation to file with the SEC continues if the debt remains under previous conditions.

As an example, look at AMC Entertainment, one of the world's largest movie theater companies. The company went private in 2004 and in December 2006 its owner filed a registration statement announcing that it would take AMC public again. Since AMC's debt met at least one of the three criteria above, the private company has been making regular filings with the SEC. A check of EDGAR shows that it has regularly filed forms 10-K, 10-Q, 8-K and 4, as well as prospectuses.

On June 28, 2006, AMC filed its 10-K, which showed $1.7 billion in revenues and a $188 million loss for the fiscal year ending March 30. AMC's 10-K was just like any other 10-K, including the auditor's report from Pricewaterhouse Coopers, financial statements and other standard entries. All this from a company that is officially a "private company."

Private companies also might be somewhat easier to cover because of the Sarbanes-Oxley Act of 2002. Under the act, most private companies now present financial statements in the same format as their public counterparts -- following Generally Accepted Accounting Principles (GAAP).

In a 2005 survey of private companies by the law firm Foley & Lardner, reported by the Milwaukee Journal Sentinel, almost all of the responding companies said they already required or planned to require financial statements audited under GAAP rules.

The Journal Sentinel also reported that several reasons for private companies to adopt Sarbanes-Oxley provisions were presented at a meeting of the National Directors Institute. Some are:

• Many banks and insurers have begun requiring companies to implement SOX requirements before doing business with the firms.
• If owners of a private company want to sell to a public company or to go public, the sellers will have to get their company into compliance.
• Private equity funds seem to be more willing to invest in companies following SOX because they think their investment will be safer, which might make it easier to sell to a public company later on.
• Talented outside directors will be easier to bring on the board of a company in compliance.

In many cases, however, digging up private company financial data remains a challenge, either requiring a financial investment or some creative thinking. For example, a number of companies collect financial information on private firms and sell it for the right price. Typical of those sources are Dun & Bradstreet's Million Dollar Database and the S&P Register.

Hoover's, a property of Dun & Bradstreet, maintains a database of basic private company financial information. For no charge, a reporter interested in Cargill, the massive international agriculture business, can get a list of its executive officers, a description of the business, its history, the industries it is in, NAICS and SIC codes for its units, its markets, its competitors and some basic financial information. For example, Hoover's reported that for the fiscal year ending in May, Cargill had $75 billion in revenue, $1.5 billion in net income, a profit margin of 2 percent and one-year sales growth of 5.8 percent.

If a private company receives public funds such as industrial revenue bonds, it generally must file its financial statements with the bonding agency.

In addition, if a private company decides to go public, it must file a Registration Statement, also known as Form S-1 or a prospectus, with the SEC. The prospectus gives an extensive profile of the company including financial statements, executive compensation and proposed uses of the funds to be raised. Much of the information probably will be public for the first time. To find a company's S-1 filing, go to EDGAR at www.sec.gov.

Two more places where reporters can find financial information on private companies are lawsuits and Uniform Commercial Code filings. Companies frequently sue others and are sued themselves. The various filings and depositions associated with court cases can yield interesting company financial information. Likewise, when executives get divorced, an extensive amount of information enters the public record. Financial statements also would accompany a bankruptcy filing.

Banks and other creditors frequently make a UCC filing when making a loan to a business and financial statements can be part of that record. The Texas Secretary of State's website describes a UCC filing thusly: "In plain language, the Uniform Commercial Code allows a creditor to notify other creditors about a debtor's assets used as collateral for a secured transaction by filing a public notice (financing statement) with a particular filing office." The filings typically are at the Secretary of State's office.

For a more complete description of sources for information on private companies, see Chris Roush's excellent primer, on Covering Private Companies.

James K. Gentry is a professor and former dean of the School of Journalism and Mass Communications at the University of Kansas.