SEC Reporting “An Audience Perspective”

SEC Reporting “An Audience Perspective”


Dave MossbergBeacon Street Group, LLC

Strategic Investor Relations

(817) 459-2346


• Who is your audience?– Buyside Research– Sellside Research– Independent Research– Individual Investors

• How are their roles changing?

• How should companies react to these changes?


Company

Sellside Broker/Dealer

Financial Press

Independent Research

Buyside Institutions

Company

Direct

Retail Investors

Communications Channels

Investors

A Picture of the Capital Markets


Who are Buyside Analysts

• Work for mutual funds, money managers, pension plans, or other institutional Investors.

• “Inch deep and a mile wide” - Cover 40 to 50 stocks.

• Generalists • Mosaic Theory – Information from multiple

places helps paint a complete picture


A Day in the Life of a Buyside Analyst

7:30 to 8:00 Morning meeting to discuss changes in portfolio

8:00 to 5:00 Company meetings and Investment research

Travel up to 1 week out of the month to visit companies and conferences

More time spent researching and little or no time spent selling.


Who are Sellside Analysts?

• Work for broker dealers/ investment banks

• Subject matter experts – focus on 10 to 15 companies.

• Who are they? – Cross between an investment banker, broker and analyst.


A Day in the Life of a Sellside Analyst

6:30 to 7:00 Morning meeting comment and publish first call note

7:00 to 12:00 Make calls to clients explaining note12:00 to 4:00 Channel checks, client meetings,

company meetings, company research, investment banking meetings.

4:00 to 8:00 Earnings conference calls, morning meeting preparation.

Travel 2 to 3 weeks out of every month…trade shows, visiting companies and institutional investor clients.


Sellside Process• Industry theme• Develop investment thesis• Provide sponsorship for companies

– Publish ongoing estimates to help set the bar– Expands the companies reach in the investment community

(investor conferences, road shows)

• Provide incremental data flow to investors– Channel checks with customers, suppliers– Competitive intelligence– Surveys, Industry data analysis

• More than likely have a bullish bias


Who are the Independent Analysts?

• Not as well defined as sellside and buyside analysts– Subject Matter experts and/or quantitatively driven

• Individual Investor Focused– Cover large universe of stocks– Publish general overviews– Examples: Value Line, Morning Star

• Institutional Investor Focused– More exclusive and expensive– Publish detailed value added research– Examples: Sanford Bernstein & Co. LLC, Prudential


Side-by-side Comparison

Buy Side Sell Side Independent40 to 50 stocks 10 to 15 stocks 10 to 200 stocks

Institutional Investment Firm Broker Dealer/ Investment Bank Independent research company

100% of time spent researching1/2 time spent selling 1/2 time

spent researhcing1/2 time spent selling 1/2 time

spent researchingGeneralists Subject Matter Experts Generalists and/or Experts


How are Things Changing?

• Sellside decreasing in numbers and importance

• Independent research gets more attention

• Increasing demand for fundamental research – More demand for unbiased opinion on buy and sell

decisions


What Caused the Sellside to Loose its Importance?

Investors' interests were compromised for greater investment banking revenues.

• Research was a tool for selling investment banking services

• The Chinese Wall – There was no wall• Merrill Lynch examples• SEC is fining the large Wall Street firms and is

making new rules for research. • Tough for sell-side to justify their compensation



Examples• July 2000

– In public - Merrill boasts Infospace is one of the best ways to play the wireless Internet.

– In Private - Blodget cautions that Infospace has a "bad smell" about it.

• Oct. 2000, – In public - Infospace has a rating of 1-1 (intermediate-term buy,

long-term buy).– In private - Blodget refers to Infospace as "a piece of junk.”– Its stock is down 99% from its high.



More Examples• Oct. 2000

– In public – Merrill had a 1-1 rating on the stock– In private - Merrill says Aether Systems could fall from $96.50

to $50 or $60. – The stock trades today for under $4.

• June 2000 – In public - Merrill research had a rating of 2-1 (intermediate-

term accumulate, long-term buy) on At Home. – In private - Research analyst Virginia Syer emails Henry

Blodget… At Home is “such a piece of crap”


More Scrutiny for Sell-Side Analysts

• Analysts required to certify they actually believe what they put in the research reports and public statements

• Analysts must sign statements they did not receive any compensation related to stock recommendations, research or comments they provide.

• The firms must disclose analysts' ratings and price targets, to permit outside assessment of their accuracy.


How the Sellside Looks at Coverage?

1) Generating commissions

2) Investment banking fees are no longer applicable

10% allocation of commission to cover analyst cost $250,000Commission $2,500,000Commission Per share $0.05Number of Shares 50 millionNumber of stocks followed 15 Number of shares required to trade per year (per stock) 3.3 million


Sellside Analysts are LeavingCan no longer justify their pay

• During the bull market, many analysts received total compensation (including banking bonuses) topping $1 million

• Salomon Smith Barney's former telecom analyst Jack Grubman received annual pay as high as $20 million


None44%

> One Analyst

42%

One Analyst

14%

Sellside Analysts are Leaving• According to First Call, the number of stock

calls being issued fell 14% since early 2000.

• 58% of the 3,800 NASDAQ companies are being covered by only one or no analysts.

Source: NASDAQ


13% 17%

45%

0%10%20%30%40%50%

Large Cap Mid Cap Small Cap

Sellside Analysts are Leaving Less sponsorship for small companies

• Research will focus on larger companies that are more suitable for the highest paying clients.

% of professional investors who expect less sellside coverage

Source: NASDAQ


Independent Research Gets More Attention

• $450 million of the $1.4 billion in penalties will go to fund independent research over the next five years.

• They require Wall Street firms to provide independent research aimed at individuals.

• Playing field leveled by Reg. FD.

• Less biased research is being demanded


What Investors WantOverall

rank Attributes

1 Industry knowledge2 Integrity/professionalism3 Accessibility/responsiveness4 Useful & timely calls & visits5 Management access6 Independence from corporate finance7 Special services8 Written reports9 Financial models

10 Communication skills11 Stock selection12 Quality of sales force13 Earnings estimates14 Market making/execution15 Primary market services Source: Institutional

Investor Magazine


Reg. FD Evens the Playing Field

• Analysts can no longer receive preferential treatment by management– Prior to FD, the sellside analyst’s job was a lot

easier. – Selected analysts could call up management

and find out what's going on.– Fundamental research took a back seat and

information seldom got challenged


Reg. FD Evens the Playing Field

• Now analysts have to do the fundamental research• Clients are demanding it• Preferential access to management is no longer

available.

• Focus on value-added research– Channel checks (suppliers, customers, competitors)– Industry knowledge

• Information is being challenged. • Be prepared to answer the tougher questions.


How Should Companies React to Changes?

• Must have more direct contact with investors.– Fewer sellside analysts – According to Institutional Investor

Magazine… while 68% of respondents to an annual survey expect to have less sell side research available to them, none of respondents indicated that they plan to reduce the level of in-house research staff.

– Increase in fundamental research means sellside will no longer rubber stamp company messages.

– Market the your stock; just like your products, nobody else is going to do it for you.

• Expect more hard question, but don’t avoid them.• Don’t release new material info in an SEC filing.


Don’t Avoid the Tough Questions Del Monte Case Study

On Nov. 21 - BB&T analysts Heather Jones downgrades stock to "underweight" from "buy",

citing litigation over the 1996 sale of Fresh Del Monte's predecessor company to IAT Group

- Shares fall 20% that dayJan. 16, - BB&T contends the company's earnings are "very leveraged to the golden pineapple

product" and that "significant price discounting" on premium pineapple was occurring in the U.S.

Feb 11- From an earnings conference call - CEO Mohammad Abu-Ghazaleh – "Let me tell

you, Heather, one thing please, you are covering us without our will, and we would not like you to ask questions on this conference call.“ "We don't want you to ask questions. ... You can cover us the way you want, but you have not been covering us in any objective way, and we thank you for being on this call.“

- Stock falls 10% next week on 4x normal trading volume


Don’t Release New Material Information in an SEC Filing

GE Capital – • March 2003 - General Electric revealed in its annual report that its

pension fund lost $5.25 billion in 2002.

• Shares of General Electric fell 3% after the filing.

• The first chance investors had to hear about the change in pension assumptions was thirty-seven pages into the 10K

• "They could go further," said Brian Bruce, head of equities at PanAgora Asset Management ($12 billion in assets). "It's nice that they have put the information forward, but more upfront disclosure would be better."

• Especially in this time of increased scrutiny, it is important not to put out new material information in an SEC filing


Don’t Release New Material Information in an SEC Filing

• Chico’s – – In 2001, disclosed a new methodology for same store

sales calculation in a 10k.

– Had not disclosed the methodology prior to the 10k filing

– Even though the new methodology only had a slight affect on the same store sales metric, the disclosure method created the perception they were hiding something.

– While the retailer was within the SEC filing rules, the company’s credibility is questioned


Summary• Who is the Audience

• How the audience is changing

• How it is impacting you and your company– Cannot rely on Sellside to help tell the story.– Need to establish direct relationships with the

buyside. – Be prepared to answer the tough questions.

Documents

SEC Reporting “An Audience Perspective”