Thursday, January 12, 2006

Fun With Risk Factors

Companies are grappling with the new requirement to list risk factors in their 10-Ks. Under SEC rules, they’re supposed to disclose the "most significant" things that make investment in the company "speculative or risky." The idea is to list risks specific to the company, not uncertainties that apply to any business.

Prospectuses have included risk factors for many years, but this disclosure is, it seems, far from an exact science. Case in point: the 10-K recently filed by International Display Works, Inc. (IDW).

Some of the risk factors IDW lists are the kind you’d expect to see, and arguably helpful to investors, like “we are subject to particularly lengthy sales cycles in some markets.” But how about these?

"Failure to optimize our manufacturing potential and cost structure could materially and adversely affect our business and operating results."

If we do not retain our key management personnel, our business will suffer."

"Potential strategic alliances may not achieve our objectives."

Don't many businesses face such challenges? Isn't this what running a company is all about, and why I'm not doing it? Unless IDW management views itself as unusually incompetent (or the poor fellows suffer from low self-esteem), I don’t know why this stuff is in here. It simply muddles up the disclosure of the real risk factors, the ones that Joe Investor might not be able to think of for himself.
Take heart, IDW. You are the proud recipient of Proxyland's Wal-Mart Award for Unabashed Outsourcing, which I award whenever I feel like it. IDW, which manufactures its products entirely in China, earned the honor with this 10-K language: "We believe that our China-based operations provide us with a competitive cost structure and access to a highly educated engineering work force."

But doing business in China does have its drawbacks. Among the things IDW wants investors to fret about is the relationship between the date of the Chinese New Year (determined, I believe, by the full moon) and the end of the company’s fiscal quarter. Huh?