8-K Item Codes

In his article on “Mining SEC forms for material events”, Michael Levy points out that competitive intelligence professionals are benefiting from the fraud committed at the end of the late 1990s. In attempt to prevent future fraud and improve corporate transparency, the SEC mandated a broader set of 8K material filings and shorter filing windows. The SEC also expanded the classification system of material events making it easier for CI professionals to research the financial, strategic, and personal decisions of US public companies. The “8-K Item Codes” figure provides an example of what is available.

The new material events subject to immediate filing include (1) off-balance-sheet arrangements, direct financial obligations, or changes in financial obligations, (2) significant layoffs, facility closures, or material impairments, (3) recognition that previously filed financials can no longer be relied upon, (4) noncompliance with exchange listing standards or an impending delisting, (5) material definitive agreement such as executive compensation packages or significant customer wins and losses, (6) changes in rules of incorporation, bylaws, or fiscal year, (7) changes to waivers of corporate code of ethics. For competitive intelligence, probably most important change is that the disclosure filing is now down to four business days. This makes SEC filings extremely useful and current.

Material weaknesses may be reported in 8-K filings or in standard 10-K and 10-Q submissions. A material weakness disclosure not only flags internal control issues, but could also result in (1) stock price volatility and price declines, (2) credit rating reviews and possible increase in the cost of capital, (3) shareholder lawsuits, (4) increased regulatory scrutiny, (5) increase in directors and officers insurance costs, (6) an increase in both internal and external audit and accounting compliance costs, (7) executive turnover, (8) damage to a firm’s reputation, particularly if the disclosures are fraud related and result in subsequent restatements of firms financials.

Thus an 8-K should be reviewed as an indispensable tool monitoring competitors and industry. All this said, some events are still difficult to directly track. For example mergers and acquisitions activities are often difficult isolate using the SEC item classification system. To further complicate matters, material definitive agreements also include credit facilities, executive contracts, another non-material M&A related agreements. As a workaround, the terms of the plan of M&A agreement found in the SEC filings do pretty good job of identifying merging firm items. It should be remembered that 8-K reports can be an invaluable source of company and industry competitive intelligence. This is because while 10-K reports are published only quarterly and are historical reflections of a firm’s performance, the 8-K discloses company events dynamically and thus in of themselves allow a CI professional to proactively monitor competitors and peers.