Diving into the

10-K

Michelle Leder

editor/founder footnoted

ml@footnoted.org

@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,…..

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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

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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.

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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