Question

Purpose: The purpose of this assignment is to learn the content of a 10K report using a real company. It is also a requirement for ACC 230. Audience: Your audience is someone who wants to know more about this company (ex: potential investor or employee). Background: Publicly traded companies in the United States are required to file a 10K report with the Securities Exchange Commission (SEC), which gives an overview of the company's financial position. Directions: You have already been assigned a company (Allergan plc). You will need to use the most recent 10K. You can find a company's 10K by using the SEC's website and typing in the company name: https://www.sec.gov/edgar/searchedgar/legacy/companysearch.html Using the 10K, fill in the template. Much of the information will be given in the beginning section of the 10K. When searching the 10K, you may find it helpful to use 'Find' in the Home ribbon or control + F.

Name

Company Name

Ticker Symbol

Company Website

Fiscal Year End

Industry Classification and Description

Major Product and Service Categories and listing of products or services

Brand Names

Description of Business

Market Segments

Geographic Regions - Countries the Company Operates In

Reporting Segments

Customers (Direct and Indirect)

Suppliers

Competitors

Inputs (raw materials, components, labor etc.)

Employees

Business Activities (steps in making, selling, and delivering product and services)

Financial Highlights

Income Statement Revenue line items

Income Statement Cost items

Income Statement Operating Income

Balance Sheet (Total Assets or Total Liabilities plus Equity)

Statement of Cash Flows Depreciation Expense

Statement of Cash Flows Cash Flow from Operating Activities

Statement of Cash Flows Cash Flow from Investing Activities

Statement of Cash Flows Cash from Financing Activities

Statement of Stockholder's Equity (Total)

List the headings to several Notes to the Financial Statements

List a couple of things from the Segment Financial Information

List a couple of things from the Management Discussion and Analysis (MD&A)

List any advertising expense amount

List any financial and non-financial performance measures

List any Major Initiatives, projects, or changes in operations

Answer 1

Items an Investor Might Find in a Form 10-K Filing

Because the government requires certain information to be included in the Form 10-K, no matter which company's 10-K you read through, you'll find they contain many of the same items. Let's look at a few of them so you can feel more comfortable before you try and tackle your first SEC filing.

• A Form 10-K filing will include an explanation of a company’s operations, how it makes its money, and the markets in which it currently operates. This explanation lets you understand the business. You’ll be surprised by some of the things you find. One of the greatest investments of the 1990s was a mutual fund company called Janus that began as a tiny subsidiary of a railroad in Kansas City. Shareholders who read through the railroad's Form 10-K and found that this little money management unit was doing spectacularly made enough money to retire in just a few short years.

• A Form 10-K filing will provide disclosures of risks the company faces, including current lawsuits. Throughout my career, I’ve actually come across companies that otherwise looked very healthy, but after a reading through their risk disclosures, they were facing the specter of bankruptcy due to pendinglawsuits that threatened to take down the entire firm. Famous cases include the asbestos trials decades ago when businesses that were only tertiarily related to construction were sued and forced into liquidation or reorganization, wiping out the business and its stockholders. The risk disclosures is not a section you'll want to lightly skim through. In fact, you'll definitely want to set time aside to read through them and understand them in depth. Current accounting rules are written in a way that if management cannot accurately predict the potential damage of a certain risk, it may not have to put aside any reserve at all so the exposure doesn't show up in the financial statements.

• A Form 10-K filing will include the financial statements, such as theincome statement and balance sheet, that show you how much money a company made, its debt levels, and other important data. The financial statements are the most important part of the Form 10-K filing because, together, they allow you to see what is going on with a company’s finances. The process of reading these financial statements is not as difficult as it sounds, but there are dozens of pitfalls that you should be looking for as you read the 10-K. Discussing those here is far beyond the scope of this article, but if you read Investing Lesson 3 – How to Read a Balance Sheet and Investing Lesson 4 – Income Statement Analysis, you'll find in-depth articles and analyses to help you make sense of these important financial statements.

• A Form 10-K filing will list aggregate operating leases that don’t count as debt on the balance sheet but are real obligations nonetheless. There are many forms of debt that can make a company go bankrupt that do not show up on the balance sheet due to accounting rules but the law requires the payments be disclosed in the Form 10-K filing. To help you understand this concept better, imagine that you owned a small clothing boutique at the local mall and had no debt. You signed a lease to the mall owner that requires a monthly rent charge of $10,000. According to GAAP rules (those are the guidelines that determine how the finances must be disclosed), you may end up showing little or no debt on your balance sheet, but if revenues decline and you stop sending checks to the landlord, the mall owner can kick you out of your storefront and force your company into bankruptcy due to the missed lease payment. These obligations are disclosed somewhere in the Form 10-K, often under a section called "operating leases", "fixed payments", or "minimum cash payments due." Find it. Read it. Know it.

• A Form 10-K filing includes a look under the hood at a company’s accounting policies and practices. Imagine that you are considering buying stock in a washing machine manufacturer. Suddenly, the company makes national headline news because thousands of models are breaking down beyond repair. Is the company on the hook for taking them back from customers? In the Form 10-K filing, a company must disclose its warranty policies and estimated warranty costs for products it sells or manufactures.
• A Form 10-K filing includes signed letters from the CEO and CFO swearing under oath that the books are accurate to their knowledge. These letters were made a requirement after the accounting frauds following the dot-com bust when Worldcom and Enron dominated the headlines. They are a way for the government to prosecute executives that knowingly falsify their Form 10-K or other required disclosures.

• A Form 10-K filing includes a letter from the company's independent auditor. This letter should detail the scope of their certification of the financial records, as well as any material deficiencies it uncovered. If the auditor thinks the company could face imminent demise, you might see the auditor reference a question as to the company's ability to "continue as a going concern" or some derivation thereof. If you ever come across those words, or a similar phrase, alarm bells should be ringing.

You'll Notice Certain Patterns In Form 10-K Filings by Industry and Sector

As you develop your own circle of competence around certain industries and sectors, you'll notice specific things that are unique in the 10-K filings of the firms you are analyzing.

For example, if you are investing in bank stocks, you'll realize that it's common to find page after page of information in the Form 10-K filing on the financial institution's book of loans detailing the geographic breakdown of the money it has loaned to customers, the type (residential mortgage, small business, real estate development, automobile, student loan, etc.) of loans it has made, the weighted average interest income it's generating on those loans, the non-performance and default experience it is having with those loans, and the reserves it is putting aside from income to cushion against future problems with those loans.

Using 10-K Forms in Your Investment Analysis

In a nutshell, the bullet points listed above are the important parts of a 10-K. Learning to read one is sort of like swimming. At some point, you have to jump in the pool and get wet. You don't need to start doing Olympic-quality dives right away or swimming faster than Michael P