diving into the 10-k
DESCRIPTION
Michelle Leder, founder of Footnoted.com, presents "SEC Filings Master Class," a free, Reynolds Center webinar geared toward journalists. This presentation, on the 10-K, is the first of three presentations on SEC filings. Others focus on the proxy and 10-Q. Check out additional materials from the webinar at the following link: http://businessjournalism.org/2012/11/12/sec-filings-master-class-self-guided-training/. For more information about training for business journalists, including free workshops and webinars, please visit BusinessJournalism.org.TRANSCRIPT
Diving into the
10-K
Michelle Leder
editor/founder footnoted
@footnoted
Photo by flickr user TauchSport_Steininger
So what is a 10-K anyway?
• Think of it as the annual report – on steroids!
• At its heart, it’s the audited financial
statements – the only time all year that a
company does this.
• Extensive footnotes
• Details on all sorts of other things critical to
the business – from its competitors to its tax
rate
We don't mean to scare you, but:
• The largest 10-K filed last year was 2,229
pages and was filed by Realogy, which isn't
even publicly traded (but has public debt).
• It included 31 exhibits.
• A few weeks later, Realogy filed an
amended 10-K (10-K/A) with an additional
66 pages.
An annual
report for
Marvel Comics
from 1991.
A chart from Apple’s 10-K
Do you really need to read all this?
• No, no, and no!
• But you do need a system that helps you
figure out the most important parts to read
• Keep in mind that 10-Ks are highly
organized.
Let's take a closer look…
Photo by flickr user Vectorportal
Focus on a few key sections:
Section 1: Business description
Section 1A: Risk factors
Section 2: Properties
Section 3: Legal issues
Section 8: Financial statements
Section 15: Exhibits, especially exhibits that start
w/the number 10
Go straight to the table of contents
Some of our favorite finds in 10-Ks
Romney’s relationship with Bain:
buried in a 2001 10-K for Domino’s
pizza is a very complicated and
interesting explanation of his
relationship with Bain Capital:
“Consists of (i) 1,849,036 shares of Class A-1 Common
Stock owned by Bain Capital Fund VI, L.P. ("Fund VI"),
whose sole general partner is Bain Capital Partners VI,
L.P., whose sole general partner is Bain Capital
Investors VI, Inc., a Delaware corporation wholly owned
by W. Mitt Romney,…..
Ph
oto
by f
lickr
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Some of our favorite finds in 10-Ks
Former Fannie Mae CEO
Daniel Mudd, who got $9
million in severance after
leaving Fannie, gets a
second shot at hefty
severance when he leaves
Fortress Investment Group
with $16 million after 4 years. Ph
oto
fro
m C
-Sp
an
Some of our favorite finds in 10-Ks
Former NY Times CEO Janet
Robinson got a consulting
contract that pays her $25,000
per hour worked.
Ph
oto
by f
lickr
use
r d
avid
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ankb
one
New disclosures are rare white truffles!
There are several ways to find new disclosures:
• Subscription services such as Alpha-Sense, Factset
Blackline, Morningstar Document Research (formerly
10KWiz)
• Microsoft Word (involves lots of cutting and pasting)
• Textdiff site
None is totally foolproof, but
it’s better than doing it
manually! Photo from Shutterstock
Section 1: Business description
This is where companies provide a narrative
about what they do:
• how they make money
• the competition they face
• key customers
• number of employees
Photo by flickr user AMagill
Tip: Look for any significant changes in language from
year to year.
Section 1A: Risk Factors
• More narrative, but on the risks the company
faces in the company's own words (or at
least their lawyer's own words)
• Be on the lookout for economic issues,
competition and new legal issues.
My all-time favorite risk
factor was in Feb. 2004,
when Halliburton disclosed
that Dick Cheney was a risk
factor!
Photo by
flickr user
The U.S. Army
Section 2: Properties
While it's very rare you'll find a smoking gun in this
section, you may just find some interesting trends.
Section 3: Legal
issues/proceedings
• Some companies have lots to say here;
others are much more circumspect.
• Patterns are important.
• So is anything new
• This is where it really pays to use a
comparison tool.
• Some companies handle this section in a
footnote, but they'll guide you in that footnote
to this section.
Section 8: Financial statements
• Footnotes, footnotes, and more footnotes
• Unless you're really digging in, it's hard to
get through every footnote.
• Footnotes vary depending on company
type. A mining company will have very
different footnotes from a bank.
• My single favorite footnote is the tax
footnote because it's a quick gut-check.
Section 15: Exhibits
• Pay close attention to any exhibit that begins
with the number 10, the number for "material
contracts."
• Also pay attention to exhibits that begin with
a 99 -- a catch-all category.
• Some companies attach the whole annual
report to this section.
Amended 10-Ks
• Companies often file amended filings. For a
10-K, it has the designation 10-K/A.
• The amendment can be relatively minor, or it
could be significant.
• Some companies file an amended 10-K with
proxy info, if they can't make proxy
statement deadline.
Your homework: Netflix's 10-K
• Netflix filed this 83-page 10-K late on a Friday night
(just 36 seconds before the SEC closed).
• We’re focusing on the first five of the 18 pages of risk
factors.
• Read this section and come up with 3 bullet points
that describe its most important disclosures.
Here are a few hints
• The timing of the filing
alone should have been
a big clue that
something worthwhile
was buried in there.
• 18 pages of risk factors
may seem like a lot. But
it really is par for the
course when it comes
to the 10-K.
Photo copyright Netflix