GO TO THE BACK of the book. Read the footnotes. Pore over the fine print. Educate yourself about the behind-the-scenes dealings of the companies you invest in.
The slick annual-report covers and the glossy color photos inside are nice to look at and probably are a good public-relations tool for the companies, but investors need to dig into the footnotes and detailed explanations toward the back.
That's the advice of experts who say investors need to do more homework on the corporations they own. Companies provide a lot more information in the aftermath of reform measures enacted after a wave of corporate and Wall Street scandals in recent years.
To be sure, 10-K filings (annual financial reports), proxy statements, and 10-Qs (quarterly financial reports) are not the most exciting reading material. But experts say they are worth the trouble.
Many of the 21 public companies based in northwest Ohio and southeast Michigan are in a state of flux, selling off business segments that don't fit into their core strengths, dealing with ever-changing accounting rules, and coping with the two-year-old Sarbanes-Oxley Act.
For one thing, Sarbanes-Oxley - passed by Congress in the heat of publicity after the failure of Enron Corp. and the bankruptcies of WorldCom and Global Crossing - increases the cost of doing business for most firms.
In this area, most public companies are paying substantially more for auditing fees than they were two years ago.
A study by The Blade last year found that auditing fees rose 13 percent for the 10 largest local companies in 2002, and fees for 20 public firms (excluding Dana Corp., which had a special situation) rose 24 percent in 2003.
A number of companies in this area will be affected by new accounting rules for "goodwill" that went into effect beginning in 2002.
Before that, companies amortized their goodwill - the premium they paid for acquisitions above the book value - over as many as 40 years.
But now they have to assess the actual value of that goodwill periodically and take a writedown if the goodwill has lost value.
Five large area companies already are paying the price for their aggressive acquisitions in recent decades, collectively writing down their goodwill by $2.1 billion in the last two years.
They have reduced the asset value of such segments as plastic bottles, furniture, replacement auto parts, building materials, and compressors.
Companies disclose many things that aren't exactly smoking guns but are of interest to some investors.
For example, the multinational firms in the region must disclose details of their derivatives and other arcane financial arrangements that are used to hedge against such risks as interest-rate changes, foreign-currency exchange rates, and the future costs of raw materials and energy.
And they must disclose "related-party transactions."
Most are relatively innocent deals, such as a corporation doing business with a law firm or insurance company owned by one of its directors.
But the reason for those disclosures is to keep companies honest, and the disclosures can affect the way other companies regard them.
What follows are some disclosures made by area companies in their most recent U.S. Securities and Exchange Commission filings.
As early as two years ago, several area firms began warning that they would assess their goodwill values and likely would be chopping some.
Owens-Illinois Inc. took a $460 million writedown of goodwill for its plastic-packaging operations in 2002 and a $720 million writedown last year, made up of $670 million for plastic bottles and $50 million for a soda-ash facility.
Those accounting hits contributed to huge losses at O-I, nearly $1 billion in 2003 alone.
The Toledo Fortune 500 firm is considering whether to sell all or some of its blow-molded-plastics operations in North and South America and in Europe - plants that produced nearly $1.9 billion of the firm's $6.2 billion in sales last year.
Owens Corning of Toledo also acted quickly, taking a $491 million writedown of goodwill for its building-products operations in 2002.
Dana downsized its goodwill for various replacement auto-parts, engine, and fluid-systems operations by $289 million in 2002.
Tecumseh Products Co. of Tecumseh, Mich., took a $29.5 million hit in its European compressor business late last year.
And La-Z-Boy Inc., of Monroe, wrote down goodwill and trade-name values for furniture operations by $77.7 million in its fiscal 2003 and recently notified the SEC it plans to take a charge of nearly $72 million in fiscal 2004.
La-Z-Boy has written down the goodwill of its upholstery group by $17.1 million and of its casegoods (wood furniture) group by $12.3 million, and it downsized its casegoods trade-name value by $48.3 million.
Dana has sold off some of the businesses involved in the asset writedown, and it plans to sell its entire automotive aftermarket operation, also part of the goodwill reduction, by next month.
After the passage of Sarbanes-Oxley, experts predicted auditing fees would rise sharply. They were right.
One study by the Ohio Society of Certified Public Accountants found that large companies faced audit-fee boosts averaging 27 percent last year. But it noted that some firms around the state reported a doubling or even quadrupling of fees.
Gordon Kaiser, Jr., a partner in the Cleveland law firm Squire, Sanders & Dempsey, estimated that Sarbanes-Oxley requirements for things like internal controls could easily add $500,000 a year to the auditing bills for the average company and perhaps $1 million for large companies.
A study by the Milwaukee law firm Foley & Lardner also put the additional cost at $1 million or more for large companies.
Most area companies had significantly higher auditing costs last year, but some were able to pare those costs by switching auditing firms or by eliminating some auditing no longer needed because of a change in the business.
Dana, for example, was able to cut its total audit-firm fees from $21.9 million to $16 million last year, largely because its acquisitions and joint ventures ground to a halt during a year marked by a worldwide restructuring and fighting off a hostile takeover bid by ArvinMeritor Inc.
"When you're involved in a [possible] takeover, you have other things on your mind," said spokesman Gary Corrigan.
Still, its costs for auditing rose even as its audit-related fees dropped. It added a cost last year: $500,000 for compliance with Sarbanes-Oxley. That's probably just the beginning, said Neal Barnard, Dana's Sarbanes-Oxley project leader.
"You really won't see the fees hit until the 2005 proxy," said Mr. Barnard, adding that some of the Sarbanes-Oxley requirements didn't take full effect until this year.
A study by Financial Executives International released recently puts compliance costs at $280,000 for firms with annual sales of less than $25 million, and up to $4.7 million for the largest firms. Those estimates include software and consulting costs.
Owens-Illinois added about $350,000 to its audit-related fees, and a spokesman said it was mostly because of Sarbanes-Oxley.
Altogether, the 21 area public firms paid their main auditing firms $41 million last year, down slightly from $42 million in 2002. But those figures were skewed by Dana's cuts.
Excluding Dana, audit-related fees rose 28 percent to $2.8 million. The lion's share of the total auditing, audit-related, and tax fees of $41 million went to Ernst & Young and PriceWaterhouseCoopers, which audited 11 of the 12 largest companies.
Few investors in Ohio Art Co. needed to be told in the toymaker's SEC filings that Chairman William Killgallon and President Martin L. "Larry" Killgallon II are brothers. The Killgallon family has controlled the firm for decades.
Nor did it shock investors in Toledo's N-Viro International Corp. that Michael Nicholson, chief operating officer, is the son of founder J. Patrick Nicholson, still a major shareholder.
But perhaps not all O-I shareholders knew that three of its directors - partners in Kohlberg Kravis Roberts & Co., which owns 23 percent of the glassmaker's stock - get an extra perk: Their New York firm got management fees and expenses totaling $2.2 million last year.
Other such disclosures in area company filings include:
One of Dana's directors last year, Fernando Senderos, and his family members own controlling stock in a firm that owns half of a Dana joint venture in Mexico that does more than $100 million a year worth of business with Dana.
Top officers of Health Care REIT Inc. owe the company $475,000 that was lent to them to pay taxes on restricted stock. The loans, which would be illegal under Sarbanes-Oxley, are grandfathered.
The Washington law firm of Terence Stewart, a Libbey Inc. director, got fees of $119,000 from Libbey last year. Similarly, a La-Z-Boy director, Rocque Lipford, is a partner in a law firm that provides services for the furniture maker. La-Z-Boy also disclosed that Kevin Norton, son of Chairman Patrick Norton, is an independent sales representatives for La-Z-Boy.
Paul Ormond, chairman of Manor Care Inc. in Toledo, is a director of Cleveland's National City Corp., and until recently, Robert Siefers, former vice chairman of the bank, was a director of Manor Care.
Sky Financial Group Inc. in Bowling Green bought insurance carrying $234,000 worth of commissions last year from James McBane, a director and part owner of an insurance firm.
MBT Financial Corp. in Monroe owes $739,000 in lease payments to director Joseph Daly, who owns a real-estate firm. Douglas Kapnik, board chairman of Adrian's Pavilion Bancorp Inc., and interim president, sold insurance with premiums of $204,000, to the bank holding company last year.
Most banks disclose that some of their executives have loans, and a few offer more disclosure.
For example, United Bancshares Inc. in Columbus Grove, Ohio, said its officers, directors, and major shareholders have $7.9 million worth of loans, all being paid on time. If nothing else, Enron and Adelphia Communications did one thing for all investors: Their collapse ensured that future annual reports will be fatter.
Investigations into the Enron scandal found that the energy firm had hundreds of off-balance-sheet deals, many involving "special purpose entities" that hid billions of dollars of debt, artificially inflated profits, and helped the company avoid income taxes.
Adelphia used $2.3 billion in off-balance-sheet arrangements to guarantee loans for the Rigas family, major stockholders.
Early last year, the SEC revamped its rules for disclosure of off-balance-sheet items, derivatives and other hedging maneuvers, corporate guarantees for loans made to foreign subsidiaries, and numerous other risks.
Dana now devotes three pages of its annual report outlining how it handles such instruments as interest-rate swaps on $825 million in U.S. money and 200 million euros.
And Owens-Illinois uses four pages of its report to detail commodity-futures contracts to guard against higher natural-gas costs, interest-rate swaps in a number of currencies, and guarantees for hundreds of millions of dollars of credit for its subsidiaries.
Contact Homer Brickey at:
or (419) 724-6129.