10-K’s: A Good Read for the Curious Investor
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EVEN with the cynicism about corporate financial statements generated by the Enron collapse, investors can still learn plenty about a public company’s performance, the known risks it faces in the future and its current problems. But that information almost certainly won’t be found in the slick annual report mailed to shareholders. Getting the substantive stuff requires examining the dry disclosure documents that most shareholders quickly pitch into the trash. The most important of these are the annual 10-K and the three quarterly 10-Q forms that companies are required to file with the Securities and Exchange Commission. Access to those documents has become much easier since the mid-1990’s, when the S.E.C. embraced electronic filing and the Internet. These documents can be read online at the S.E.C.’s Web site (www.sec .gov), at the privately owned FreeEdgar (www.freeedgar.com) and other Web sites and, often, from links at a corporation’s own Web site, usually in the area called ”investor relations.” (Edgar stands for Electronic Data Gathering, Analysis and Retrieval.) Prof. Jerry Arnold, founder of the S.E.C. and Financial Reporting Institute at the University of Southern California, recommends that investors unaccustomed to the 10-K pay close attention to Item 1, the description of the enterprise; Item 3, legal proceedings; Item 6, selected financial data; Item 7, management’s discussion and analysis of financial condition and operations; Item 7a, market risk; and Item 8, financial statements. ”The informed reader will also look at the index to exhibits near the end of the 10-K,” Professor Arnold said, ”especially items under Exhibit 10, which are material contracts.” Employment agreements with executives are listed there, as well as important contracts like leases. Investors examining the 10-K should look not just for bad news, like a warning that cash flow is so shriveled that management can no longer assure that the enterprise will continue. ”Management is supposed to disclose every material known event, trend or uncertainty that may cause the future to differ from the present,” Professor Arnold said. He said those disclosures must deal with both the negative and the positive because, without positive disclosures, ”investors might sell prematurely” and miss a run-up in a stock’s price. Whether Enron technically violated the full-disclosure requirement in Item 7 of its latest 10-K, filed last April 2, is a matter of debate. Enron’s hidden liabilities in hundreds of partnerships that eventually led to the company’s collapse were never mentioned, although a tortuous path through the footnote section acknowledges the existence of some of these partnerships. Critics say Enron buried that information so completely, and omitted even more, that it was the same as a failure to disclose the truth. Henry T. C. Hu, a professor of banking and finance law at the University of Texas, said Enron was supposed to show ”a real big-picture view of what could go wrong at a company.” Professor Hu said he thought ”the likelihood is quite high” that regulators would now look into whether Enron had disclosed the risks adequately. Source : query.nytimes.com |