Take a Footnote, Please

Bear with me, Fools. This is going to sound a tad preachy, but it's important. Ready? OK, here goes: One of the most important investing habits you can develop is to read financial reports -- especially those enlightening little footnotes in every quarterly 10-Q and annual 10-K public companies file in the Securities and Exchange Commission's (SEC) Edgar database.

What's a footnote, you ask? Simple. Any time a company has to explain the details behind an item listed on its financial statements, it creates a footnote. A company with several pages of footnotes ought to give you pause, for it probably means that the story told through the income statement, balance sheet, and cash flow statement isn't as rosy as it appears. Witness, for example, companies such as Intel (Nasdaq: INTC  ) and Cisco (Nasdaq: CSCO  ) that hide the real cost of stock options in the footnotes of their quarterly and annual filings.

Anyone who invested in Enron or WorldCom probably has already learned about footnotes the hard way. For the rest of you, be assured that with the mutual fund scandal, a mixed economic outlook, and a fresh series of investigations of large insurers such as Marsh & McLennan (NYSE: MMC  ) , sifting through footnotes is just as important as ever. Witness these two recent gems taken from a most insightful blog called footnoted.org, compiled by freelance writer Michelle Leder, also the author of Financial Fine Print:

  • A recent proxy statement filing (often called a 14A) by Mandalay Resort Group (NYSE: MBG  ) , due to be acquired by MGM Mirage (NYSE: MGG  ) , shows that Mandalay's top executives will receive a $76 million windfall when the deal closes. Only in Vegas can you get that kind of jackpot.

  • Surely financier Edward Lampert will do well by Kmart's (Nasdaq: KMRT  ) $11 billion acquisition of Sears (NYSE: S  ) , but so could a newly minted Sears employee. According to the most recent 10-Q filed by Sears, Luis Padilla, president of merchandising and marketing since August, would collect $2 million in salary and bonus and be able to cash out 150,000 shares in options and restricted stock if his job is eliminated in the merger. Talk about a win-win.

Scary? You bet. But also all too common, even today.

If you'd like to learn more about reading financial statements, including quarterly reports, we offer several self-paced courses that can help, such as "How to Crack the Code: Read Financial Statements Like A Pro," which you can find here. You can also get more personalized help with all aspects of your finances and investing through TMF Money Advisor. A free trial is yours for the asking.

Fool contributor Tim Beyers hasn't yet read Ms. Leder's book, but it's on his list. Tim doesn't own shares in any of the companies mentioned. To view his stock holdings check out his Fool profile, which you can find here.


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