Check the Footnotes, Dude!

If you've been learning anything here at Fool.com about how to evaluate companies as possible investments, you probably know to look at where the money goes, demand competitive advantages, seek value in stock prices, consider Rule Breakers and dividend payers, and pan for gold -- among other things.

But have you come to appreciate the great value found in footnotes? Michelle Leder has. She runs www.footnoted.org, which highlights the many red and green flags found in company filings. Here are some of her recent findings:

  • According to the recent 10-K filing of M.D.C. Holdings (NYSE: MDC  ) , a firm that encompasses some home-building and home-selling businesses, the CEO's wife has been making some good money. In 2003, she was paid $240,000 by the company for her decorating consulting services. That's up from 1998's $98,000 and down from 2004's $120,000 (which comes with an apparent reduction in hours). Is this criminal? Not at all. She may well be delivering a terrific service for a great price. But it does look at least a little fishy. As Leder commented, "After all, does anyone really believe that any MDC employee would be willing to complain about the quality of the work done by the boss' wife?" If I saw something like this going on with one of my companies, I might start looking out for other possible red flags.

  • According to a recently filed 8-K report, in January, telecom company TelularCorp. (Nasdaq: WRLS  ) awarded its chairman and CEO a $100,000 retention bonus. But within a few weeks, he departed the firm. Interestingly, he's keeping his $100,000 retention bonus. Perhaps the word "retention" has some meaning of which we non-executives are not aware.

Leder also discussed the common corporate tactic of releasing not-so-ideal news and reports at times when they will receive minimal media attention, such as on Friday afternoons. She offered the example of Motorola (NYSE: MOT  ) , which revealed the generous severance package of a former executive that way. And she wondered whether there was anything particularly embarrassing or troubling in the 10-Ks recently filed on a Friday afternoon from Starbucks (Nasdaq: SBUX  ) and Qwest Communications (NYSE: Q  ) .

Meanwhile, Leder praised Honeywell (NYSE: HON  ) for breaking out its executive compensation into much more detail than you'll usually find in SEC filings. Honeywell's info lets you see the value of various perks for its top five bigwigs. That's good stuff.

So when you're urged to read annual reports and 10-K reports and other SEC filings from cover to cover, remember that that includes footnotes -- because that's often where you'll find things that the company may hope you won't notice.

Learn more about reading financial statements in these articles:

LongtimeFoolcontributorSelena Maranjiandoes not own shares of any companies mentioned in this article.


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