Using SEC FilingsOnline Tutorial

Donald W. Reynolds National Center for Business Journalism

at Arizona State University

Prepared by Chris Roush, director of the Carolina Business News Initiative,

University of North Carolina at Chapel Hillcroush@email.unc.edu

What we’re going to learn• In this online tutorial, we’ll cover:1. How the Securities and Exchange operates and how a business journalist can use

the SEC to its advantage.2. Reading SEC filings to find news.3. Mining little-used SEC filings to find hidden gems.

• In addition, there will be a test at the end to review all of the material to gauge how well you learned market information.

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The SEC• The SEC is not a football conference for schools from South

Carolina to Louisiana.• The SEC stands for Securities and Exchange Commission. It

regulates all companies that have stocks or bonds that trade regularly. This includes all public companies and some private companies – those that have a large shareholder base.

• Because the SEC is there to protect the investor, it requires lots of information to be filled for public dissemination. This is the treasure trove for business reporters.

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How does it do that?• Simple. If the SEC requires companies to file

information about their operations on a regular basis, then investors and potential investors will be able to read that information.

• The bad information disclosed – most likely in an SEC filing and not in a news release – will likely send a stock price down. The good information will likely be disclosed with horns blaring and whistles blowing in a release.

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The SEC and you• That’s why the good business journalist reads

the SEC filings.• And that’s why the SEC is quite often the best

friend of the business reporter.• Many investors and analysts still don’t read

SEC filings. So the media can serve as a watchdog by performing this function.

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The filings• Here are the main filings that will be

reviewed in this tutorial:1. 10-Qs and 10-Ks are the primary documents filed by

companies.2. 8-Ks and proxy statements also provide important

disclosures.3. S-1s and S-4s can be valuable resources for journalists

writing M&A or IPO stories.4. Insider trading filings also provide insight into a company.

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The filings• The Form 10-Q is a quarterly filing of a company’s

financial statement, plus other GOOD STUFF.• Must be filed with the SEC within 40 days of the end

of the quarter. • SEC has been moving up these deadlines, requiring

faster turnaround by the companies.

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The 10-Q• Here is a link to News Corporation’s 10-Q for the first

quarter ended Sept. 30, 2008. • Please review it to get a better sense of what the

document contains.• http://www.sec.gov/Archives/edgar/data/

1308161/000119312508226120/d10q.htm • Was there anything in here that surprised you?

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The 10-Q• Some of the information that News Corp. includes in

its 10-Q may seem unusual – and can be used by a business reporter.

• For example, the company discloses the value of films and television shows in its inventory, and breaks out the revenue for its different subsidiaries.

• This is information that would make for a nice mention in a retail story.

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Deadline problems?• If a company is not going to file its 10-Q or

Form 10-K on time, it will let the SEC know this, and will typically state a reason why.

• Look for the NT 10-Q or NT 10-K filing. This is the document stating a company’s inability to file on time.

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10-Qs and stock repurchase info

• Is the company buying its stock? This 10-Q disclosure is interesting because it tells investors whether or not the company believes the stock is undervalued, or overvalued.

• If a company has been repurchasing a large amount of stock in the recent quarter, then the CFO or CEO thinks it’s a good investment.

• That’s information you want to tell your readers, because they will buy and sell stocks based on this information.

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Stock repurchase disclosure

• This is what a typical disclosure will look like:• “The Company may repurchase as much as $120

million of its outstanding Class A common stock through December 31, 2002. During the second quarter of 2002, 25,500 shares were repurchased at a total cost of $734,295 or an average price of $28.80. The Company repurchased 149,957 shares at a total cost of $4,300,216 during the second quarter of 2001.”

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Stock repurchase info• What does this tell us? • That whoever is in charge of this company’s stock buyback

plan may have thought the stock was a lot cheaper a year ago, when they spent $4.3M in the second quarter, than in the most recent quarter, when they spent only $700K to buy back stock.

• Companies buy stock when they think it’s cheap and going to go up, not when they think it’s expensive.

• You can use this information to determine what executives are thinking about a company’s prospects.

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10-Qs and spending money• Sometimes companies plan to spend money in the future to

improve their infrastructure or other operations. • It may involve building a new factory, or adding new

computers. • Again, not all companies report this in their 10-Q filings, but

when they do, they can estimate the financial impact to future earnings – something that an investor/reader will want to know.

• If business journalists can write stories about this information, then we will have served our readers well.

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10-Qs and spending money• Here is what that would look like:• “In 2001, the Company began the development of several eCommerce initiatives in

support of the Erie Insurance Group’s business model of distributing insurance products exclusively through independent agents. The eCommerce program includes initiatives to replace property/casualty policy administration systems as well as customer interaction systems. The eCommerce program also includes significant information technology infrastructure expenditures. The program is intended to improve service and efficiency, as well as result in increased sales. Total five-year expenditures for the program are estimated at $150 to $175 million. The cost of these initiatives will be shared among several companies of the Erie Insurance Group, including the Company. Based on preliminary estimates, which will be further refined in the second half of 2001, the after-tax effect on net income of the Company is estimated to reduce earnings per share between $0.08 and $0.12 for 2001 and between $0.05 and $0.07 per share for each of the next four years of the program.”

• Bold added for emphasis.

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What does this tell us?• This company is spending a lot of money on

new computers, and its earnings will be lower for every year for five years as a result.

• If investors or analysts don’t know this information, then it’s a major story. The company is likely disclosing the expense deep in the 10-Q filing.

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10-Qs and lost business• Business decisions, either made by by the company or by

clients that could have an adverse affect on the company’s financial performance, are often disclosed in a 10-Q. Here’s a good example:

• “In late July, the Company received notice from the Massachusetts Teachers Association (MTA) that the MTA is terminating its agency relationship with the Company and has withdrawn their endorsement, effective January 1, 2002, of the personal automobile group-marketing plan made available to members of the MTA by The Commerce Insurance Company. Commerce expects that approximately $16.7 million of premiums written will not be renewed as a result of this.”

• This is a major client for this insurance company based in Massachusetts. Losing this business will hurt its profitability, and slow its revenue growth.

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10-Qs and litigation• Litigation is also discussed frequently in 10-Q filings. This can

be quite nasty sometimes. But it can also affect stock prices, and companies will often set aside money to pay for settlements or adverse rulings resulting from lawsuits.

• They can be even juicier, and more important, to readers, if the litigation involves a lawsuit between two public companies.

• Look for section headlined “pending litigation.”

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10-Qs and M&A activity

• Quite often, a company will disclose the sale price, or purchase price, of a recent deal in a 10-Q. Or it may use the 10-Q as a way to update the world on the progress of a recent acquisition.

• Business journalists are always interested in these nuggets of information, because the price likely hasn’t been disclosed elsewhere, or likely contain numbers that we haven’t seen before. That, my friends, is a story.

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10-Qs and M&A activity• Here is what that might look like:• “In connection with the MMI purchase, we established a

reserve of $28 million, including $4 million in employee-related costs and $24 million in occupancy-related costs. The employee-related costs represent severance and related benefits such as outplacement counseling to be paid to, or incurred on behalf of, terminated employees. We estimated that approximately 130 employee positions would be eliminated, at all levels throughout MMI. Through June 30, 2001, 118 employees had been terminated, with payments totaling $4 million. Our remaining obligations for employee-related costs at MMI are expected to be less than $1 million.”

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What does this tell us?• Originally, the acquiring company said it would spend

$4 million to fire or lay off workers from the company it was acquiring.

• But in this 10-Q disclosure, it is saying that it has already spent that $4 million and still has more money to spend.

• Conclusion: They underestimated the cost of acquiring this company and integrating it.

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Final points on 10-Qs• Information is not always contained in the same

place for every 10-Q. • The lawsuit information is commonly under a header

called “Contingency.”• The information about rate increases and business

decisions can sometimes be found under “Management’s Discussion,” but in some other 10-Qs is located in a footnote.

• It pays to read the entire filing sometimes.

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Form 10-Ks• The mother of all filings with the SEC for a company.• It is a more detailed version of a 10-Q that is filed

once a year. • Most companies have 75 days after the end of the

fiscal year to file a 10-K. • This makes the middle of March a busy reading time

for business journalists.• Some large companies have to file within 60 days.

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Form 10-Ks• The biggest difference between a 10-Q and a 10-K is

that the 10-Q discusses financial performance for a quarter, while a 10-K discusses financial performance for the entire year.

• For that reason, the news you want to look for in a 10-K is similar to the news you want to look for in a 10-Q: Litigation, extra expenses, changes in operation, stock repurchases, etc.

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Form 10-Ks• Here is a link to a form 10-K for News Corp. for

the fiscal year ended June 30, 2009. Note that these documents are much bigger than a 10-Q because they encompass the entire year.

• http://www.sec.gov/Archives/edgar/data/1308161/000119312508175187/d10k.htm

• How much time do you think it would take you to read the entire document?

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Form 10-Ks

• The first time you read a 10-K for a company, it might take several hours to read.

• After a couple of times doing it, however, you’ll realize what is boilerplate information – and what is potentially newsworthy.

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Quick review

• Answer the following questions before going on to the next section.1. The SEC exists to: A.) schedule football games; B.) give journalists access to documents; C.) protect investors; D.) provide jobs for people in Washington.

• If you answered C, that is correct.

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Quick review2. Which of the following material is not usually found in a 10-Q? A.) litigation against the company;

B.) updates on mergers or acquisitions; C.) stock repurchase information; D.) how a company plans to spend money in the future; E.) shareholder proposals.

The answer is E. That’s found in a proxy statement.

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Form 14-A• This is commonly called the proxy statement.• This is where companies have to tell investors every year how

much money they have paid their top executives.• This filing is sent to every investor of a company. There are

proposals included in it that the company’s shareholders will vote on at its annual meeting.

• But business journalists primarily care about salary and bonus disclosures, and sweetheart deals with board members.

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Executive compensation chart• Always look for a chart like this:

LONG-TERM COMPENSATION• ANNUAL COMPENSATION AWARDS • NUMBER OF • RESTRICTED SECURITIES UNDERLYING • STOCK OPTIONS/SARS ALL OTHER • NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER(1) AWARDS(2) (INSHARES)(3) COMPENSATION(4) • • Stephen C. Hilbert (5) 1999 $1,000,000 $7,895,391(6) $123,254 $1,192,369 2,047,443 $835,974• Chairman of the Board, 1998 1,000,000 13,500,000 130,714 1,275,891 2,571,897 754,568 • President and Chief Executive Office 1997 250,000 15,000,000 163,240 4,156,373 2,561,792 4,297• • Ngaire E. Cuneo 1999 250,000 4,500,000 390,635 221,814 4,745• Executive Vice President, 1998 250,000 1,235,000 109,718 422,967 4,991 • Corporate Development 1997 250,000 2,612,000 780,035 621,859 4,983 • • Rollin M. Dick (5) 1999 250,000 3,800,000 333,041 609,812 592,360• Executive Vice President 1998 250,000 3,816,000 302,094 741,635 554,510 • and Chief Financial Officer 1997 250,000 3,816,000 1,108,184 853,452 20,669• • Thomas J. Kilian (5) (7) 1999 250,000 2,000,000 185,023 5,447 3,570• Executive Vice President 1998 237,148 1,262,852 56,520 352,576 3,896 • and Chief Operations Officer• • Maxwell E. Bublitz(7) 1999 250,000 1,800,000 168,576 5,447 3,227• Senior Vice President, 1998 250,000 1,400,000 28,558 201,785 3,608 • Investments

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The proxy statement• Here is what should jump out at even the first-time proxy

reader when looking at this chart:• Mr. Hilbert was making a ton of money before he resigned.

His “all other compensation” is more than three times the salary of his executive vice presidents. Look at the (4) footnote to find out why he is being paid this money. In this case, it’s the amount of premiums for split-dollar life insurance that the company paid on behalf of Mr. Hilbert.

• You also see items here such as companies buying the homes of executives, paying for cars and airplanes, or relocations.

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The proxy statement• Although Hilbert’s bonus is still huge, it declined by almost

half in 1999. Does the (6) footnote explain why? • The footnote states: “Mr. Hilbert agreed that his bonus, after reduction for cash to

pay taxes, relating to the last three quarters of 1999, was to be paid in shares of Common Stock valued at the higher of $50 per share or market. Consequently, his bonus for 1999 consisted of 108,221 shares of Common Stock (which are reflected in the table at the values at the respective dates of issuance) and $5,466,056 in cash.”

• You should look also elsewhere for more explanation. Where? I’ll get to that in a minute.

• Why have the restricted stock awards gone down in the past three years? Again, you should look for an explanation for why this is happening.

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The proxy statement• There is a report on executive compensation that is not usually found with

the chart on executive compensation. • Instead, you’ll have to look for it elsewhere in the proxy. THERE IS NO

UNIFORM PLACE FOR WHERE THIS IS PLACED IN THE PROXY. Some companies place it early on in the proxy with all of the other board of director-type stuff.

• Others place it way in the back, assuming that many proxy readers will fall asleep before they get to it.

• But look for it. It is the report from the members of the board of directors who sit on the compensation committee, which decides how much or how little executives get paid.

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The proxy statement• For example, the Conseco compensation committee report tells you that: • “In 1998 Conseco and Mr. Hilbert entered into a new employment agreement (the "CEO

Contract"). The CEO Contract provided for an annual salary of $1 million. In addition, Mr. Hilbert was entitled to receive an annual bonus equal to the lesser of a non-discretionary amount ($13.5 million for 1999 prior to the revision described below) or 3 percent of Net Profits. Mr. Hilbert was entitled to receive an additional bonus for any year in excess of this amount only if payment of that additional bonus amount would not cause the total bonus to exceed 3 percent of the annual Net Profits and the Company's return on equity ("ROE") for such year after giving effect to such bonus would be at least 15 percent. In addition, the Compensation Committee had the authority under the CEO Contract to reduce any such additional bonus. The Company's ROE for 1999 was less than 15%. Consequently, Mr. Hilbert's bonus for 1999 would have been $13.5 million, but Mr. Hilbert agreed that his bonus, after reduction for cash to pay taxes, relating to the last three quarters of 1999, was to be paid in shares of Common Stock valued at the higher of $50 per share or market. Consequently his bonus for 1999 consisted of 108,221 shares of Common Stock and $5,466,056 in cash.”

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What does that mean?• Although this is a lot of legal mumbo jumbo, it

does tell you why his bonus was reduced last year.

• And there is also an explanation in the compensation committee report as to why the stock options were reduced.

• This is where the story is for the business journalist.

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The proxy statement• Another eyebrow-raising section of the proxy that is

normally contained right after the list of the members of the board of directors. It details business relationships between board members and the company.

• For example, if a board member is an attorney, this section will detail, in dollar amounts, how much the company is paying his or her law firm in annual fees.

• Or if a board member owns a company that does business with the proxy company, this section will detail how much is being paid to that company on an annual basis in fees, etc.

• These often make great stories for the business section.

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An example• Here is an example from a Progressive proxy:• “On April 23, 1999, the Company sold its corporate airplane, a Canadair Challenger 601-

1A, to a company independently owned by Peter B. Lewis. The airplane was sold to Mr. Lewis for $12.1 million, the fair market value as determined by JetPerspectives, Inc., an independent aircraft appraiser. The net book value of the airplane was $6.9 million at the date of the sale. Operation of the airplane is supported by two pilots and a mechanic, who are employees of a subsidiary of the Company.”

• Lewis is the CEO and chairman of this company. Do you think this makes a story? Why is he buying it for more than its value on the company books?

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An example• This may not necessarily be a story.• It appears that Lewis, the CEO, is buying the

airplane for more than the value on the company’s books.

• That means that the company would likely post a gain on the transaction.

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Another example• This is from a recent Aetna proxy:• A subsidiary of the Company paid Richard Wolfson, a son-in-law of Mr. Abramson,

$150,469 under an independent contractor agreement for services rendered in1999.

• Abramson is the chairman of the board of the company that filed this proxy. Is there a story here?

• During 1999, the Company and its subsidiaries paid $7,068,958 to Criterion Communications, Inc. pursuant to a service agreement. Marcy Shoemaker (a daughter of Mr. Abramson) owns 100% of the outstanding voting securities of Criterion.

• Again, Abramson is the chairman of this company. Story? Yes.

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More proxy info• The proxy is also where shareholder proposals are disclosed

to other shareholders. • They are typically from disgruntled shareholders who want to

force the executive team to do something.• Could be request to eliminate stock options, or to stop buying

products from South Africa.• Most times, the company board will oppose these proposals.

But they can make for a good story if the proposal seems serious and if it has passed at another company.

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A proxy• Here is a link to the News Corp. proxy for the

fiscal year ended June 30, 2008.• http://www.sec.gov/Archives/edgar/data/

1308161/000119312508180853/ddef14a.htm• Look at the amount of information disclosed

about executive and board member compensation.

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Form 8-K• These are the filings with the SEC that keep public relations

workers honest.• In legal lingo, an 8-K is a “current event report” for a

“materially important” occurrence in the life of a public corporation. This means that an 8-K can disclose just about anything.

• An event that requires disclosure is made under one or more of the following items: change in control, acquisition or disposition of assets, bankruptcy court filing, change in accounting firm, resignation of directors, financial statements and exhibits, and change in fiscal year.

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New reasons for 8-K• In 2005, the SEC added additional reasons why a company should file an

8-K. They include:• Entry into an agreement that is “material” in nature, termination of an

agreement that is “material” in nature, filing for bankruptcy or receivership, completion of acquisition or disposition of assets and announcing results of operations and financial condition.

• They also include taking on debt or creating an off-balance sheet arrangement, triggering events that accelerate or increase a direct financial obligation under an off-balance sheet arrangement, costs associated with exiting a business or disposal of assets and material impairments.

• Companies used to have five days from event to file, but that has been moved up by SEC to four days.

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An 8-K filing• The filing of an 8-K separates the wheat from the chaff. There

used to be a saying at a newspaper I worked at: Regardless of what the public relations person might say, if the event doesn’t merit the filing of an 8-K, then it probably doesn’t merit being on page 1 of the business section.

• Quite often, the 8-K filed by a company is simply a copy of the news release issued. However, sometimes the 8-K will contain extra information not provided in the release. And sometimes, the 8-K will be filed without a release being issued. Those are, quite often, the best for “news.”

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An 8-K story• Here is a typical 8-K story:• Daily Deal/The Deal February 23, 2009 Monday Platinum Research to liquidate

BYLINE: by John BlakeleyLubricant and coating technologies maker Platinum Research Organization Inc. will liquidate its assets under bankruptcy court protection.

Platinum submitted a Chapter 7 petition with the U.S. Bankruptcy Court for the Northern District of Texas in Dallas, where the company is based, on Tuesday, Feb. 17. Two affiliates, PRO Operations LP and Platinum Intellectual Property LP, filed separate petitions.The company estimated assets of about $1 million and total debts of about $7 million in its bankruptcy filing.Judge Stacey G. Jernigan appointed Daniel J. Sherman as Chapter 7 trustee on the day of the bankruptcy filing, according to a Form 8-K statement filed with the Securities and Exchange Commission.In lieu of Sherman's appointment, all of Platinum's directors, as well as president and CEO John Jaeger, have stepped down, the filing said.

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The best 8-K ever• Disclosed all of this:• “The California Department of Insurance ("CDI") has seized the assets and operations of and

conserved Superior National Insurance Group Inc.'s (the "Company") four California domiciled insurance subsidiaries,California Compensation Insurance Company,Combined Benefits Insurance Company, Superior National Insurance Company,and Superior Pacific Casualty Company (the "Insurance Companies").Commercial Compensation Insurance Company, another subsidiary of the Company, will either be conserved in its state of domicile, New York, or will be redomiciled in California in order to become subject to the supervision of CDI.

• “The Nasdaq National Market has halted trading in the Company's common stock since approximately 11:06 a.m. on Friday, March 3, 2000, pending the receipt of a response to a request for information delivered to the Company. The Company expects to provide the information requested no later than March 20, 2000, but has no assurance that trading will resume or that the Nasdaq will not take an adverse action with respect to the continued listing of the Company's common stock.

• “The Company has retained bankruptcy counsel to advise it on possible alternatives, but has no present plans to seek the protection of the bankruptcy courts.

• “Voice messages may be left for the Company's executives at 818/707-1464 until new corporate offices are established.”

• Items bolded for emphasis.

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Just to recap• This company has been a.) seized by

regulators, b.) hired a bankruptcy attorney, c.) seen trading in its stock halted and d.) it doesn’t have any offices any more, but THEY’RE NOT PLANNING TO SEEK BANKRUPTCY PROTECTION?

• Puhhlease.

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What it looked like• If you’d like to see what this filing looked like

for Superior National Insurance, it can be found at the link below:

• http://www.sec.gov/Archives/edgar/data/810463/0000912057-00-012718.txt

• Note the additional information about the seizure by regulators.

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Quick review• Answer the following questions about proxy

statements and 8-Ks:1. Which of these is not a reason that would require a company to file a form 8-K? A.) bankruptcy filing; B.) director quitting; C.) selling a material asset; D.) creating an off-balance sheet arrangement; E.) lawsuit filed against the company.

• The answer is E. Not all lawsuits require an 8-K.

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Quick review2. What is the job of a company’s compensation committee? A.) To review the salaries of the top executives;

B.) To determine raises; C.) To set goals to be met for executive bonuses; D.) All of the above.

The answer is D, all of the above. A compensation committee of a board oversees all salary and bonus issues for a company.

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Form S-1• A Form S-1 is filed with the SEC when a private

company wants to sell stock on Wall Street and convert to a public company.

• The filing is important to a business journalist because it gives us our first glimpse at a company that has previously been private and hasn’t disclosed to us any financial information or analysis of its performance.

• We can find out how much money a private company has made, or lost, in the past.

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What to look for• Size and Scope: People reading a story about a

company filing to sell shares to the public will want to know how many shares will be sold, and a range of the price of the stock.

• The more shares a company sells, in general, the more interest the Wall Street brokers are having in getting their clients to buy the stock.

• The stock price range is also important, because it can also be an indication of the demand for the offering.

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What to look for• The changes in the stock price range should be

looked at in conjunction with the number of shares being offered.

• At the same time, a company raised the stock price range of its offering, it has also decreased the amount of shares in the IPO from 73.8 million to 48.8 million. They’ve upped the price, but lowered the amount of shares they’re going to sell.

• What we have here is a case of basic supply-and-demand economics. The fewer shares, the greater the demand from investors.

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More S-1 disclosures• The listing of the underwriters will give you an indication of how

successful the company could be in selling the stock. If you see big Wall Street firms like Goldman, Salomon, JP Morgan and Morgan Stanley listed as underwriters, that should be a sign that these firms will be selling as much of the offering to their institutional clients as possible. That increases the chances of the IPO rising shortly after the stock begins trading.

• It’s important to note relationships between the underwriters and the company going public detailed in the S-1 filing. Sometimes that tells a better story of why a Wall Street firm is an underwriter in the offering:

• “Mr. Mario P. Torsiello, one of our directors, currently serves as a Managing Director of Dresdner Kleinwort Wasserstein, Inc., an affiliate of which, Dresdner Kleinwort Wasserstein Securities LLC, is acting as an underwriter in this offering.”

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More S-1 disclosures• The risk factors section in an S-1 is where every company going public has

to list anything and everything that could possibly go wrong that would result in its stock price going down. Dirty laundry and skeletons in the closet are disclosed here.

• Some risk factors are basic and are included in virtually every S-1. They talk about how a downturn in the overall market may hurt a company. They will also mention competition.

• What you want to look for are risk factors unique to the company.• A recent S-1 noted a company’s high debt levels, which may limit its

ability to finance growth and make acquisitions. “Our debt level reduces our flexibility in responding to changing business and economic conditions, including increased competition in the insurance brokerage industry,” its filing stated. “And our debt level limits our ability to pursue other business opportunities, borrow more money for operations or capital in the future and implement our business strategies.”

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Another S-1 disclosure• Business reporters also want to tell their readers whether a

company is selling stock above or below the company’s actual worth. To do this, you need to look for the disclosure of the company’s net tangible value.

• Why is this important? Investors or other people who may be interested in buying stock in this company may be turned off if the company plans to sell the stock at $20.00 per share, but the company’s net tangible value is only $16.00 per share.

• In other words, investors who bought the IPO stock are doing so at a price much higher than the actual worth of the company. They’re doing so under the belief that the company’s worth will go up in the future.

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Other tips for S-1s• Form S-1s are often amended. You should always read the

amended filings to find what has been changed.• Review the financial performance of the company.

Dramatic shifts from losing money to making money should be noted in your story, as should dramatic changes in the opposite direction.

• Most S-1s include the first disclosures about executive compensation, stock options, loans to corporate executives, and other juicy tidbits. If you are reporting on an S-1, it’s important to read the document the entire way through. Some information that you think might be included in one section may not be there, but could be elsewhere.

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The S-1 for foreign companies• It’s called an F-1, and it has many of the same

disclosures that you’d find in an S-1.• If you’re having trouble finding an S-1 for a

company, look to see where it’s headquartered.

• Companies with headquarters in Bermuda or London will file an F-1.

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A typical S-1• Below is a link for an S-1 filed by James River Group

Inc. on May 3, 2005, before its IPO in August 2005:• http://www.sec.gov/Archives/edgar/data/

1325177/000095013605002497/file001.htm • What is missing from this document that is later

included in the amended S-1 filed Aug. 4, 2005?• http://www.sec.gov/Archives/edgar/data/

1325177/000095013605004549/file001.htm

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A typical S-1• What you’ll see by comparing the two

documents is that James River is giving more detailed information about the offering.

• The stock price range is more carefully defined in the updated filing.

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Form S-4• A Form S-4 is filed when a company wants to sell more shares

of its stock and needs shareholder approval to do so. Why does a company want to sell more stock? The most common reason is that it wants to make an acquisition.

• Form S-4s also have nice background details on how deals were negotiated: Phone conversations, lower bids that were then raised, bidders who dropped out, etc.

• These filings make great business stories, because they’re often overlooked as places to find information.

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Form S-4• One of the best parts of an S-4 is the detail

about whether the buyer raised or lowered their purchase price.

• This can often tell you who had the upper hand in the negotiations.

• It’s a way to get around executives who won’t provide details of how a deal was done because it hasn’t closed.

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Form S-4• Here is what one of these forms stated about

negotiations between two CEOs:• “One such meeting occurred on April 13, 2000, between Mr. Booth and

Mr. Maurice R. Greenberg, chairman and chief executive officer of AIG, at AIG’s headquarters in New York. They discussed industry conditions, strategies being pursued by AIG and HSB and the competencies of each company in their respective marketplace. Both prior to and subsequent to this meeting, Mr. Booth met with other industry executives to discuss potential relationships.”

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Form S-4• The discussion detailed here was the first

between the CEO of Hartford Steam Boiler and the CEO of American International Group that led to AIG buying Hartford Steam Boiler.

• Later on in the AIG filing, it details other meetings and how the negotiations progressed over months.

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Quick review• Please answer the following questions before going on to the

next session:1. What is not one a piece of information in a Form S-1 filing that a journalist should look for: a.) the underwriters; b.) the company’s past financial performance; c.) risk factors for the company; d.) the name of the company’s advertising agency; e.) the size of the offering.

• The answer is D. Although this may be important to a marketing reporter, it’s not germane to the IPO story.

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Quick review2. An S-4 filing is related to what type of announcement from a company? a.) the naming of a new CEO;

b.) selling more stock in the company; c.) changing the name of the company; d.) changing the company’s auditor; e.) reporting quarterly earnings.

The answer is B, selling more stock, usually to help pay for an acquisition.

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Insider trading filings• It’s not illegal, if done right.• Form 4, Schedule 13D and the Schedule 13G are the

forms to look at to see insider trading. • According to the rules used by the SEC to govern

investing, an insider is defined as an officer or director of a public company or an individual or entity owning 10 percent of more of any class of a company’s shares.

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Insider trading• Executives and board members can buy and sell stock in their

companies as long as they file a Form 4 with the SEC following the transaction. If an insider buys or sells stock in the open market, he or she must file with the SEC by the 10th day of the month following such a trade.

• It becomes illegal insider trading when the executive, director or outside investor buys or sells stock in the company based on non-public information that is, or could be, considered material in nature – generally anything that would require the company to file a Form 8-K.

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Insider trading• Schedule 13 filings indicate the activity of outside investors

in a particular stock. An increase or decrease in Schedule 13 filings can be an indicator of what the Wall Street pros think about a certain stock.

• The SEC notes that “certain institutional investors and professionals in the securities business … often acquire securities in the ordinary course of their business and not with a view toward changing or effecting change in the control of an issuer.”

• When this happens, an institutional investor files a 13G.• How much of a treasure trove of information is this?

Schedule 13Gs and Schedule 13Ds give names and phone numbers to investors buying and selling stocks in companies.

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Insider trading• The difference between 13Ds and 13Gs is that the 13D

indicates the initial investment by a shareholder or group of shareholders -- that they have purchased 5 percent or more of a company’s shares. The 13D must be filed within 10 days of the investment. In addition, someone filing a 13D typically wants a change at the company. These are most often disgruntled shareholders.

• A 13G, on the other hand, must be filed within 10 days of the end of the quarter when the transaction occurred.

• A 14D is associated with a hostile takeover. Be on the lookout for these too.

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Insider trading• Look at the Schedule 13G filed by Wachovia

Corp. to reflect its ownership in James River Group:

• http://www.sec.gov/Archives/edgar/data/36995/000107468305000272/jrivers.htm

• As a reporter covering this company, what information in the filing is useful?

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Insider trading• If you were looking to talk to an investor in

James River Group, then the name of the person at Wachovia plus their phone number could be valuable information.

• In addition, you’d want to mention how many shares they purchased if you quoted the person.

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Test• Answer the following 10 questions about SEC

filings.• When you have completed answering a

question, click “Continue,” and you will see whether your answer is correct.

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Test Question No. 1• How often are Form 10-Qs filed by

companies?• A.) Once a quarter.• B.) Once a year.• C.) Once a month.• D.) When a materially important event occurs.

• The answer is A. 10-Qs are filed every quarter except the fourth quarter, when a 10-K is filed.

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Test Question No. 2

• What types of companies are required to file documents with the SEC?

• A.) Companies whose stock is traded on an exchange.• B.) Private companies that have a large amount of shareholders.• C.) Private companies with debt offerings that are traded.• D.) All of the above.• The answer is D. All of these companies are required to file

documents with the SEC.

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Test Question No. 3• What does an increase in the amount of

shares a company repurchases of its stock in a quarter tell you about the company?

• A.) That the company is trying to go private.• B.) That the company might think the stock is cheaply priced.• C.) That the company wants to use the stock to make acquisitions.• D.) That the company’s stock is expensive.• The answer is B. None of the other statements above can be

inferred by a stock buyback.

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Test Question No. 4• What is NOT a reason why a company would

file an 8-K?• A.) Change in control.• B.) Change in auditors.• C.) Addition of new board members. • D.) Change in fiscal year.

• The answer is C. While a board member resigning requires an 8-K, a new board member does not.

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Test Question No. 5

• In addition to the compensation chart, what else should a reporter look at in the proxy statement when writing a story about the company’s executive pay?

• A.) The compensation committee report.• B.) The relationships between board members and the company.• C.) The stock options chart.• D.) All of the above.

• The answer is D. All of these sections can provide information about compensation.

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Test Question No. 6• What is NOT a document that is filed with the

SEC by a company?• A.) An S-1.• B.) A DEF-14A.• C.) A Form 990.• D.) An 8-K.

• The answer is C. A Form 990 is filed by non-profit organizations with the Internal Revenue Service.

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Test Question No. 7

• What information is disclosed by a company about its board members in a proxy statement?

• A.) The board member compensation.• B.) How many shares the board member owns.• C.) Business relationships between the board member and the company.• D.) All of the above.

• The answer is D. All of these are disclosed by a company about its board members.

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Test Question No. 8

• When a private company files an S-1, what information will it likely disclose for the first time?

• A.) Its profits and revenue for the past five years.• B.) Its CEO.• C.) Its products or services.• D.) Its headquarters location.

• The answer is A. This other information can likely be found by looking at its Web site or at Secretary of State filings.

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Test Question No. 9• What is typically included in an S-4 filing?• A.) A financial statement for the most-recent quarter.• B.) Negotiations that occurred for a merger or acquisition.• C.) An executive’s salary and bonus.• D.) A company’s board of directors.

• The answer is B. An S-4 is filed typically when a company wants to issue stock to help fund an acquisition.

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Test Question No. 10• Why is it important to review insider

trading filings by executives, board members and others involved in a company?

• A.) To see how much money an executive or board member makes.• B.) To get an idea of whether they are bullish or bearish about the company’s future.• C.) To assess how much commissions they are paying on stock trades.• D.) To look at what they plan to do with their money.

• The answer is B. Insider buying or selling can provide a reporter with an idea of what executives think about a company.

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Your instructor• Please contact me with any questions about financial markets or business

journalism at croush@email.unc.edu. • Chris Roush is the Walter E. Hussman Sr. Distinguished Scholar in business

journalism at UNC-Chapel Hill and the author of Show Me the Money: Writing Business and Economics Stories for Mass Communication, a business reporting textbook published by Lawrence Erlbaum Associates, and Profits and Losses: How Business Journalism Shaped Society, a book published by Marion Street Press. Roush worked as a business reporter for The Sarasota Herald-Tribune, The Tampa Tribune and The Atlanta Journal-Constitution. He has also worked for BusinessWeek in its Connecticut bureau and for Bloomberg News in its Atlanta bureau.

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