Looking at risk factors in a company’s 10K

What’s in a 10K? That dry SEC document covers a company’s fiscal year. It includes the financial results, the management’s discussion of those results, and everything about how and where the company operates. Ho hum and yet not. There are hidden insights in a 10K or prospectus (see this discussion of Facebook from my colleague Amy Schein), especially in the Risk Factors section where a company has to lay out everything that can go wrong. Some are unintentionally hilarious, some are sobering, and some are the plot of a Michael Bay disaster movie. All tell us something about how the company is run.

Corrections Corporation of America, which operates prisons:

Competition for inmates may adversely affect the profitability of our business. … Escapes, inmate disturbances, and public resistance to privatization of correctional and detention facilities could result in our inability to obtain new contracts or the loss of existing contracts.

Well yes, I suppose they would.

Advance America (payday loans and cash advance operations):

Media reports and public perception of cash advances and similar loans as being predatory or abusive could materially adversely affect our business, prospects, results of operations, and financial condition.

Bank of America:

Law enforcement authorities in all 50 states and the U.S. Department of Justice and other federal agencies, including certain bank supervisory authorities, continue to investigate alleged irregularities in the foreclosure practices of residential mortgage servicers. Authorities have publicly stated that the scope of the investigations extends beyond foreclosure documentation practices to include mortgage loan modification and loss mitigation practices. The Corporation is cooperating with these investigations and is dedicating significant resources to address these issues.

Note: Bank 10Ks are generally pretty fascinating reading. (Yes, I did just write that.) You know those banking fees that have everyone up in arms? It’s eye opening to see just how much those fees from ATMs, credit cards, and loans add up to in a company’s financial statement. Hint: it’s a lot.

Electronic Arts:

If one or more of our titles were found to contain hidden, objectionable content, our business could suffer.

Throughout the history of our industry, many video games have been designed to include certain hidden content and gameplay features that are accessible through the use of in-game cheat codes or other technological means that are intended to enhance the gameplay experience. However, in several cases, hidden content or features have been found to be included in other publishers’ products by an employee who was not authorized to do so or by an outside developer without the knowledge of the publisher. From time to time, some hidden content and features have contained profanity, graphic violence and sexually explicit or otherwise objectionable material. In a few cases, the Entertainment Software Ratings Board (“ESRB”) has reacted to discoveries of hidden content and features by reviewing the rating that was originally assigned to the product, requiring the publisher to change the game packaging and/or fining the publisher. Retailers have on occasion reacted to the discovery of such hidden content by removing these games from their shelves, refusing to sell them, and demanding that their publishers accept them as product returns. Likewise, consumers have reacted to the revelation of hidden content by refusing to purchase such games, demanding refunds for games they have already purchased, and refraining from buying other games published by the company whose game contained the objectionable material.

Rogue developers. Be glad your industry doesn’t have to worry about them.

Apple:

Political events, war, terrorism, public health issues, natural disasters and other circumstances could materially adversely affect the Company.

War, terrorism, geopolitical uncertainties, public health issues, and other business interruptions have caused and could cause damage or disruption to international commerce and the global economy, and thus could have a strong negative effect on the Company, its suppliers, logistics providers, manufacturing vendors and customers, including channel partners. The Company’s business operations are subject to interruption by natural disasters, fire, power shortages, nuclear power plant accidents, terrorist attacks, and other hostile acts, labor disputes, public health issues, and other events beyond its control

I think this can be considered the apocalypse clause. This would put a damper on any company’s operations.

Krispy Kreme:

The food service industry is affected by litigation, regulation and publicity concerning food quality, health and other issues, which can cause customers to avoid our products and result in liabilities.

 

[C]lass action lawsuits have been filed and may continue to be filed against various food service businesses (including quick service restaurants) alleging, among other things, that food service businesses have failed to disclose the health risks associated with high-fat foods and that certain food service business marketing practices have encouraged obesity. Adverse publicity about these allegations may negatively affect us and our franchisees, regardless of whether the allegations are true, by discouraging customers from buying our products. Because one of our competitive strengths is the taste and quality of our doughnuts, adverse publicity or regulations relating to food quality or other similar concerns affects us more than it would food service businesses that compete primarily on other factors.

In a country that has concerns over the obesity epidemic, Krispy Kreme can be considered to be operating in hostile territory. Fast food companies in general have to walk a very fine line between appealing to consumers’ taste buds and trying to operate under the radar of health and wellness advocates.

No matter what business a company is in, they operate in a veritable minefield of likely and unlikely events. Company documents like 10Ks are essential for understanding a company. And they aren’t just for investors. Open one up – they are available through the SEC website and often through a company’s Investor Relations link on its website. (Don’t bother with the company annual report. While they often include the 10K, annual reports are more a public relations document.)

You’ll be enlightened.