Financial Fine Print Uncovering a Company’s True Value MICHELLE LEDER John Wiley & Sons, Inc. ffirs.qxd 7/15/03 9:56 AM Page iii Financial Fine Print ffirs.qxd 7/15/03 9:56 AM Page i ffirs.qxd 7/15/03 9:56 AM Page ii Financial Fine Print Uncovering a Company’s True Value MICHELLE LEDER John Wiley & Sons, Inc. ffirs.qxd 7/15/03 9:56 AM Page iii This book is printed on acid-free paper. Copyright © 2003 by John Wiley & Sons, Inc. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. 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HG4028.V3L43 2003 332.63'2042 dc21 2003010886 Printed in the United States of America. 10 9 8 7 6 5 4 3 2 1 ffirs.qxd 7/15/03 9:56 AM Page iv In memory of Al and Hannah Gilden, my wonderful grandparents, who taught me that there’s much more to life than money ffirs.qxd 7/15/03 9:56 AM Page v ffirs.qxd 7/15/03 9:56 AM Page vi vii Throughout this book, material is provided by financial experts as quoted from interviews conducted by the author. Identification of the source is provided in these instances by an immediate refer- ence to the person interviewed. NOTE TO THE READER ffirs.qxd 7/15/03 9:56 AM Page vii ffirs.qxd 7/15/03 9:56 AM Page viii ix Foreword xi Acknowledgments xv Introduction 1 Chapter 1 Don’t Get Fooled Again 7 Chapter 2 Reading the Fine Print Like a Pro 19 Chapter 3 You Don’t Need to Be a Pro 37 Chapter 4 Charge It! 49 Chapter 5 Optional Illusions 67 Chapter 6 All in the Family 85 CONTENTS ftoc.qxd 7/15/03 9:56 AM Page ix [...]... footnotes of a company’s financial reports speaks volumes about a company’s real financial health Details about many of the big corporate scandals that have dominated headlines in recent years and which have caused many investors to lose faith in the stock market were actually discussed, albeit in a limited fashion, in the footnotes of the financial reports filed with the Securities and Exchange Commission... the full-time analysis of financial statements, it is my opinion that Financial Fine Print: Uncovering a Company’s True Value is one of the most informative books ever written for investors Financial Fine Print enables investors to become their own forensic accountants, helping them to navigate the labyrinth associated with the increasingly complex financial reports of U.S corporations What comes out... country—could have been engaged in such financial chicanery I often wonder what one of my early mentors, Leonard Spacek, the former chairman of Arthur Andersen & Co., would have made of Enron’s confusing footnote on its “related party transactions” a footnote that had to have been approved by Andersen accountants I wish that Mr Spacek, who was an avid critic of creative accounting, had been able to hear what must... editing, and even on-site catering, she was and continues to be a constant source of strength and support xvi INTRODUCTION I important footnotes were to uncovering a company’s true financial condition back in 19 91, when I was a business reporter for The Bradenton Herald, a daily newspaper on Florida’s west coast It was at the height of the savings and loan crisis and rumors had been circulating that a small... money managers and stock analysts, many of whom preferred to speak on background, also shared their strategies for reading Securities and Exchange Commission filings Pat McConnell at Bear Stearns and Robert Olstein of Olstein & Associates were particularly helpful and repeatedly made themselves available to answer my many questions In my research, I was assisted by two diligent research assistants, Aixin... me that it wasn’t his job to read and understand the bank’s financial statements He was simply on the board to try to spread the word about the bank to colleagues in the area and, it was hoped, bring new business to the bank But it was those footnotes that prompted me to take a closer look at the company’s numbers What I found was that the bank was eking out a profit each year by selling assets, rather... banking deals And instead of reading the detailed filings with their audited financial information, I 3 Financial Fine Print skimmed the quarterly press releases, which were chock-full of words like pro forma earnings and EBITDA,* vague terms that should have prompted me to take a closer look at the company’s audited financials Sometimes the difference between the two numbers was literally night and...Contents Chapter 7 Pensions in Wonderland 10 3 Chapter 8 Debt by Many Other Names 12 5 Chapter 9 Five Common Ingredients 13 9 Chapter 10 Changing the World 15 3 A Few Final Words 16 3 Appendix A A Cheat Sheet for Reading Key SEC Filings 16 5 Appendix B A Brief Walk through Qwest’s Fine Print 16 9 Notes 17 5 Index 18 3 x FOREWORD B over 40 years of investing in the stock market and my career on Wall Street engaged... Whether it was Adelphia Communications, HealthSouth, and WorldCom disclosing large loans and loan guarantees to insiders, unusual “related party transactions” at Enron, or aggressive accounting practices at Tyco International, investors who read the footnotes probably would have gleaned enough information to keep away from these troubled stocks or at least to sell them before the bottom fell out ASED ON... rather than making money from its loans and deposits The financials also revealed that Key’s bad loans had been rising sharply, but that the bank’s reserves for those bad loans were being whittled down Several months later, OTS regulators forced the bank into a more stringent operating agreement and ordered Key’s board to fire the chief executive and several other top managers But for me, it was an early . financial reports speaks volumes about a company’s real financial health. Details about many of the big corporate scandals that have domi- nated headlines in recent years and which have caused many investors. financial statements, it is my opinion that Financial Fine Print: Uncovering a Company’s True Value is one of the most inform- ative books ever written for investors. Financial Fine Print enables investors. Financial Fine Print Uncovering a Company’s True Value MICHELLE LEDER John Wiley & Sons, Inc. ffirs.qxd 7 /15 /03 9:56 AM Page iii Financial Fine Print ffirs.qxd 7 /15 /03 9:56 AM Page i ffirs.qxd