In our previous two posts dealing with the differences between the Form 10-K and the Annual Report to Shareholders (the ARS that accompanies the proxy), we delved into the differences between “filed” and “furnished” documents.
Here is another fairly subtle place that this “filed versus furnished” distinction comes into Form 10-K.
Regulation S-K Item 201(e) is the source of the requirement for the “performance graph” which does a five-year comparison of the return on a $100 investment in the company’s stock, a broad market index and an industry index. (The text of Item 201(e) is included below).
Here is an example of the graph from American Woodmark:
From this part of the Instructions to Item 5 of the Form 10-K it seems relatively straightforward that this graph should be in Item 5 of the 10-K:
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
- (a) Furnish the information required by Item 201 of Regulation S-K (17 CFR 229.201)…
(Note: The rest of the Item 5 instructions are omitted as they do not affect this issue)
However, if you persevere (that is stay awake!) trying to read the whole of S-K Item 201, including the instructions (always an important part of the items!) you will find Instruction 7 to Item 201(e):
- The information required by paragraph (e) of this Item need not be provided in any filings other than an annual report to security holders required by Exchange Act Rule 14a-3 (17 CFR 240.14a-3) or Exchange Act Rule 14c-3 (17 CFR 240.14c-3) that precedes or accompanies a registrant’s proxy or information statement relating to an annual meeting of security holders at which directors are to be elected (or special meeting or written consents in lieu of such meeting). Such information will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
The reason for this instruction goes back many years to when changes were made in the proxy rules and this graph was moved from the proxy statement to S-K Item 201.
And, as you read this instruction, you might be tempted to say “so what”! But the subtle and important issue is that the ARS is not a filed document!
So, if you put the graph in the Form 10-K, it is “filed” information, subject to 1934 Act liability provisions. However, if you put it only in the ARS, it is not subject to 1934 Act liability. While this might not be a major issue, it is still one to think about.
One path some companies use is to put the graph on the back page of a 10-K wrap, so it is not actually included in the 10-K itself.
Here is an example of a company, American Woodmark, that dealt with the issue by putting the graph in the 10-K wrap pages instead of the Form 10-K, in order to keep the graph from being filed. Check out page 12 of their ARS:
Yes, this one is pretty subtle, even picky, but one to think about.
As always, your comments and thoughts are welcome!
Here is the main part text of S-K Item 201(e). You can see the whole Item at:
S-K Item 201
(e) Performance graph. (1) Provide a line graph comparing the yearly percentage change in the registrant’s cumulative total shareholder return on a class of common stock registered under section 12 of the Exchange Act (as measured by dividing the sum of the cumulative amount of dividends for the measurement period, assuming dividend reinvestment, and the difference between the registrant’s share price at the end and the beginning of the measurement period; by the share price at the beginning of the measurement period) with:
(i) The cumulative total return of a broad equity market index assuming reinvestment of dividends, that includes companies whose equity securities are traded on the same exchange or are of comparable market capitalization; provided, however, that if the registrant is a company within the Standard & Poor’s 500 Stock Index, the registrant must use that index; and
(ii) The cumulative total return, assuming reinvestment of dividends, of:
(A) A published industry or line-of-business index;
(B) Peer issuer(s) selected in good faith. If the registrant does not select its peer issuer(s) on an industry or line-of-business basis, the registrant shall disclose the basis for its selection; or
(C) Issuer(s) with similar market capitalization(s), but only if the registrant does not use a published industry or line-of-business index and does not believe it can reasonably identify a peer group. If the registrant uses this alternative, the graph shall be accompanied by a statement of the reasons for this selection.