Using S.E.C. Documents

Reasons S.E.C. Documents are Important to Investors

1. Give financial information (annual and quarterly).2. Identify principal products, services, markets, distribution, patents,

licenses, etc.3. Alert to major material events & changes in the company4. Discussion by management of current & future plans, explanations of

current state of the company & opportunities & threats.5. Information about alliances, joint ventures, stakes in other companies,

etc.6. Insiders (Board of Directors, management) compensation and

sales/buying of shares.7. Legal proceedings involving the company.8. Tender offers, Mergers & Acquisitions, Divestitures, 9. Registration and offering of both equity & debt

Major S.E.C. Documents

• 10-K –Comprehensive Yearly Analysis of the Company• 10-Q –Unaudited Quarterly Report updating the 10-K• 20-F -Filed by foreign companies trading on U.S. Exchanges.• 8-K -report filed announcing events investors should know

about.• Proxy Statements• S- 3,4, 5 Statements• Shelf Registrations, Prospectuses• Tender Offer/Acquistion Documents

10-K• Comprehensive summary , more than annual report. 60 days from year

end if >$750 million, 75 days for less.• Detailed financials. Balance sheet, income statement, cash flow

statement.• Business summary describes operations, business segments, history, real

estate, marketing, R&D, competition , employees, trademarks/patents, international trade/operations

• MD&A (Management Discussion and Analysis)-explanation of the company’s operations and financial outlook.

• Discussion of management team and legal proceedings (if any).• Quantitative/Qualitative disclosures about market risk• Changes in and disagreements with accountants on accounting and

financial disclosure.

20-F

• Required to be filed by foreign companies trading on U.S. exchanges.

• Within 6 months of financial year end.• Do not have to file 10-Q’s.

10-Q

• Unaudited quarterly reports.• Filed within 40 days of quarter end.• Updates the 10-K.

8-K

• Notifies investors of any unscheduled material event. Very broad. Filed within 4 business days of the event.

• Updates both the 10-Q and 10-K documents.• Examples:

– Financial information, completion of acquisition/divestiture– Results of operations & financial conditions, accounting changes– Appointments or departures of executives– Creation/triggering of events that accelerate or increase a direct

financial obligation– Entry/termination of material definitive agreement,

bankruptcy/receivership– Securities & Trading-delisting, unregistered sales of equity

Proxy Statements/DEF14A

• The SEC requires that shareholders of a company receive a proxy statement prior to a shareholder meeting, whether an annual or special meeting.

• Must be filed with the SEC before soliciting a shareholder vote on the election of directors and the approval of other corporate action.

• Solicitations, whether by management or shareholders, must disclose all important facts about the issues on which shareholders are asked to vote.

• Lists Officers, Directors, Members of the Board & information about compensation.

• May be issued in response to shareholder vote on possible merger/acquistion by either the company or an outside party.

Forms 3,4,5• Who are "Insiders" ? Corporate officers, directors, and 10% owners• What is "Insider Trading" Corporate insiders buy and sell stock in their

own companies• Insider Trading Law

– Short-swing profits (profits realized in any period less than six months) by corporate insiders in their own corporation's stock are prohibited

– Insider transactions must be reported to the SEC by filing a FORM 4 within two business days of the date the transaction occurred (2002 Sarbanes-Oxley Act)

What Does Research Say About Insider Trading?

• When executives bought shares in their own companies, the stock tended to outperform the total market by 8.9% over the next 12 months. When they sold shares, the stock underperformed the market by 5.4% (Nejat Seyhun, a professor and researcher in the field of insider trading at the University of Michigan)

• Insider trading is significantly correlated with stock price run-ups implying that insider (i.e., informed) trades affect price discovery differently than non-insider (i.e., uninformed) trades (Chakravarty and McConnell 1997, Financial Management, 26, p. 18-34)

• A positive relationship is observed between insider transactions and future stock returns (Iqbal and Shetty 2002, Quarterly Review of Economics and Finance, 42 (1) p. 41-57)

• Key executives buying stock it is usually a good sign. Look out for single purchases.

• A corporate officer selling shares may/may not tell you something. If you see several key executives selling at the same time it might be worth taking a close look at the company's fundamentals again .

It makes a difference which company insiders are making the buys. Top executives are the most informed, followed by officers and directors, with large shareholders being the least informed.

Look for messages in insider data: • How large was the trade (shares or $ value)? • How much of an insider's holdings were included in the trade? • Is there more than one insider in the company making the same

trade? • Which officers in the company are making the trade?

How to Use Insider Trading

Shelf Registration (S-1), Prospectus (424B3,

• Listing of intent to offer securities (both equity & debt instruments)

• Prospectus-details about instrument being offered, shares and $ amount, how the business operates, history, management, financial condition and insight into risk.

Tender Offers/Acquisition Statements• Schedule 13-D (commonly referred to as a “beneficial ownership report.”

Includes any person /group of persons who directly or indirectly shares voting power or the power to sell the security).

• Person or group of persons acquires beneficial ownership of > than 5% of a voting class of a company’s equity securities.

• Schedule 13D reports the acquisition and other information within ten days after the purchase to both the company and the exchanges where traded.

• Gives background information on the owner including criminal misbehavior, type of relationship this owner has with the company.

• Explanation of why transaction is taking place and where the $ is coming from for the purchase.

Tender Offers/Acquisition Statements14-D1 & 14-D9

• 14-D1 Tender offer filing with the SEC at time when offer is made to shareholders of a target company, if acceptance of offer would give the bidder over 5% ownership of the subject securities.

• Gives identity and background information of the company soliciting the equity shares including past contacts, transactions or negotiations with the subject company.

• Explanation of purpose of the transaction and plans or proposal of the bidder and where the $ is coming from for the purchase. Also included are legal opinion on tax consequences & persons retained, employed to be compensated.

• 14-D9 –solicitation/recommendation submitted to equity holders and filed with SEC by the management of company being subject to the tender offer. Made within 10 days of the initial tender offer.

Where Do We Find SEC Documents?

• United States Securities and Exchange Commission Website www.sec.gov, Formerly called SEC/EDGAR.Search Company Filings, http://idea.sec.gov/Interactive Data Electronic Applications (IDEA)

• SECInfo-private site which reformats documents http://www.secinfo.com• SEC Filings on Yahoo. http://biz.yahoo.com/reports/edgar.html

Other Sites of Interest

• Footnoted.org -Each day, the site takes a closer look at the things that companies try to bury in their routine SEC filings. Some posts are simply quirky little factoids,while others tend to focus on more serious issues, like aggressive accounting, excessive compensation or the type of questionable self dealing that can often be indicative of more serious problems at a company.

• 10Qdetective -Investors often overlook SEC filings, and it is the job of the 10Q Detective to dig through businesses’ 8-K and 10-Q SEC filings, looking for financial statement ‘soft spots,'(depreciation policies, warranty reserves, and restructuring charges, etc.)that may materially impact Quality of Earnings.