Michelle Leder Editor/founder footnoted and footnotedPro ml@footnoted.org Twitter: @footnoted

Brief background

•  footnoted launched in August 2003 to coincide with publication of Financial Fineprint: Uncovering a Company’s True Value (John Wiley & Sons) •  footnotedPro, a subscription-only service launched in October 2008 •  Morningstar acquired the site in February 2010; earlier this month I bought the site back

Why read SEC filings?

•  Because they’re there! •  Because so few people (including analysts, and yes even journalists) actually do •  Because it can give you a competitive edge •  Because it can help generate alpha •  Because knowledge = power Photo by Flickr user auxesis

Digging in

•  Last year, over 650,000 filings made to SEC •  Using various search techniques, we dig through

hundreds of SEC filings to find the nuggets that really matter.

•  Best items often filed late on a Friday night. We call that the “Friday Night Dump”. Nearly 8% of all 8Ks filed last year were filed during the last 90 minutes of the day on a Friday. (4 pm-5:30 EST)

•  Much of what we find is negative, but we also find some positive signals too.

The Challenge

•  Beyond the sheer number, filings are large blocks of text written mostly by attorneys.

•  Largest 10-K filed in 2011 was 2,229 pages and contained 30 separate exhibits.

•  Lawyers + boilerplate = poor signal-to-noise ratio

•  Poor choices for investors: Read it all, try to come up with reliable search algorithms and hope you don’t miss something Photo by Flickr user Victor1558

SEARCH IS DUMB!

•  It would take a skilled army to read everything, so don’t even try!

•  Computers are dumb & search is imperfect •  Searching for “subpoena” turns up hypotheticals as well as actual events •  Pick your poison: a lot of false positives — or missing something

Remember the cardinal rule!

•  There are no accidents in SEC filings! Everything is there for a reason!

Photo by Frank Wasserfuehrer

Tips for navigating the 10-K

10-Ks are usually much bigger, but they’re also standardized, which makes them easier to tackle. Focus on a few key sections: 1.  Business description (Section 1) 2.  Risk factors (Section 1A) 3.  Unresolved staff comments (Section 1B) 4.  Properties (Section 2) 5.  Legal issues (Section 3) 6.  Financial statements (Section 8) 7.  Exhibits, especially exhibits that start w/the number 10

Remember: Be sure to pay attention to amended filings. It’s pretty common for companies to file 10-K/As that include proxy-related information.

A typical table of contents for a 10-K

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 the candidate’s relationship with Bain Capital

•  Former Fannie Mae CEO Roger 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.

•  Former NY Times CEO Janet Robinson got consulting contract that pays her $25,000 per hour worked. Photo by Flickr user futureatlas.com

On your own: Netflix’s 10-K

•  Netflix filed this 83-page 10-K late on a Friday night (just 36 seconds before the SEC closed for the night)

•  We’re going to focus on the risk factors •  Spend 10 minutes reading this and come up with a

paragraph that describes the most important disclosure in this section.

Photo by Flickr user soobahgrover

So what did you find?

•  The timing of the filing alone should have been a big clue that something worthwhile was buried in there.

•  I only gave you a few pages of risk factors. They actually went on for 18 pages!

•  Here’s what we wrote about the disclosure

Tips for navigating 10-Qs

•  10-Qs are less standardized, which makes them trickier to navigate

•  Always look for the legal disclosure footnote, which is sometimes called “commitments and contingencies”

•  See how earnings results compare with headline number in the 10-Q: earnings are not regulated, but Qs are so companies take less liberty with their numbers.

•  Look for new consulting agreements in the exhibits

Some of our favorite finds in 10-Qs

•  AMR’s 10-Q in Oct. 2011 was 956 pages and had several clues that it was prepping for bankruptcy.

•  An exhibit to Huntsman’s Aug. 2012 10-Q included a consulting agreement with former Presidential candidate Jon Huntsman

•  In Nov. 2010, CME Group became the first large financial company to disclose that Occupy Wall Street was worrisome

•  Motorola Mobility revised a number of employment agreements in a 10-Q filed just a month before Google announced it was buying company late last summer.

On your own: Wal-Mart Stores’ 10-Q

•  Wal-Mart filed this 36-page 10-Q on Dec. 6, 2011. •  We’re going to focus on the legal disclosures •  Spend 5 minutes reading this and come up with a paragraph

that describes the most important disclosure in this section.

Photo by Walmart Stores

So what did you find?

•  One of these disclosures was the pre-cursor to this A1 story in the NY Times.

•  We alerted footnotedPro subscribers to this disclosure in December, but because the disclosure was so vague, it was hard to do much with it.

•  Here’s what we wrote in early May, once the story came out.

Beware of these traps

•  New disclosures are critical, but they can be very difficult to find, so be extra careful

•  Best to compare two of the same documents, i.e. two 10-Ks or two 10-Qs.

•  But at least twice a year, that doesn’t work very well so you wind up comparing a 10-Q to a 10-K or vice versa.

•  It’s easy to misinterpret a disclosure and companies (the IR/PR folks) very rarely provide clarity if you call. 99 times out of 100, they’ll say “read the disclosure”.

•  Companies have a “bag of tricks” when it comes to filings, so it’s important to pay attention

Questions?