The Ten Worst 10-Ks of 2011 (HPQ, GRPN, BWLD)

Covering a wide range of industries and behaviors, the 10Q Detective lists some of the more sophomoric — and predictable — regulatory filings made to the Securities and Exchange Commission in 2011:

  • Hewlett-Packard (NYSE: HPQ) continued its revolving door policy, showing CEO Leo Apotheker the exit in September after the SAP (NYSE: SAP) software veteran fumbled the TouchPad tablet launch. During his 11-month tenure, the common stock fell some 45% in value. Apotheker had hoped to leverage HP’s strengths in global reach and hardware to make the webOS-based device a formidable competitor to Apple’s (NASDAQ: AAPL) ubiquitous iPad. He bungled magnificently — the product was killed a mere six weeks after its launch due to anemic sales. Nonetheless, despite his failure to lead, Apotheker received almost $16 million in compensation: a severance payment of $7.2 million (including the accelerated vesting of shares worth $3.6 million and a performance bonus of $2.4 million) and a cash sign-on bonus totaling $8.6 million. HP believed the severance package, also called the “Apotheker Agreement,” was appropriate — in “recognition of, among other things, the compensation from his former employee being foregone … and the considerable expense he incurred in relocating his family to the United States (from Europe).” The board of directors might want to reconsider its “pay-for-results” ethos.
  • Can Groupon (NASDAQ: GRPN), industry leader in the online coupon discounting space, defy the odds? Of the 30 social media or Internet-related IPOs launched since the start of 2010, 60% are trading below their offering price, according to Birinyni Associates analyst Kevin Pleines. In two amended prospectus filings leading up to its November 4 IPO, the company backed away from a controversial accounting metric. In particular, Groupon’s original offering prospectus in July focused on “adjusted income” of $81.6 million. In actuality, the company’s operations had generated losses of $117.8 million in the quarter ending March 31 — if some $200 million in online marketing expenses were recognized. Conveniently, adjusted income does not reflect the significant working capital consumed in acquiring subscribers. Come 2012, whether Groupon can continue to trade above its original IPO of $20 a share ultimately will depend on the company posting real earnings and cash flow growth.
  • MF Global Holdings became the first U.S. casualty of the European sovereign debt crisis in 2011, filing for bankruptcy on October 31. Though he has yet to acknowledge culpability, the blame rests squarely with chairman and chief executive Jon Corzine, who pushed the financial derivatives broker-dealer to make an ill-timed $11.5 billion bet on European bonds (with borrowed money). Corzine’s judgment that European leaders would resolve the euro crisis, leading to a rebound in the value of MF Global’s holdings, proved dead wrong. As the euro crisis intensified, the value of MF Global’s bonds dropped, leading to margin calls and the subsequent collapse of the company. Bondholders of a $325 million offering last August probably are rethinking their insistence of a “key man event” clause, which stated that “the interest rate applicable to the notes would be subject to an increase of 1.00% upon the departure of Mr. Corzine as full time chief executive officer due to his appointment to a federal position by the President of the United States.” In hindsight, bond buyers probably would have accepted 100 basis points less to have been rid of the erstwhile New Jersey senator and governor.
  • Buffalo Wild Wings (NASDAQ: BWLD) insists that professional basketball is not a significant driver of restaurant sales (like the NFL). Nonetheless, the share price rose 10% in the days following word that NBA owners and players reached a new labor accord over the Thanksgiving weekend, ending a five-month lockout that led to the loss of 16 games in the regular 82 game season schedule. Notwithstanding a potential labor dispute in the NHL next year (collective bargaining agreement expiry), profitability at the chicken-wing restaurant chain could come undone in 2012 due to rising poultry prices. A report by the USDA suggests that a combination of high feed costs and (anticipated) processing cutbacks could send boneless/skinless breast prices into the $1.50 to $1.60 per pound range by spring, from $1.15 per pound in November 2011. Wings accounted for 39% of third-quarter 2011 sales, according to the Buffalo Wild Wing’s quarterly filing with the SEC.
  • In straightforward fashion, News Corp. (NYSE: NWS) reported that the company faced criminal investigations regarding the well-publicized phone hacking scandal and “inappropriate payments” (bribes) to British police made by higher-ups at the media company’s erstwhile publication, News of the World. “It is also possible that these proceedings could damage our reputation and impair our ability to conduct our business,” declared the 10-K filing. You think? In July, the media conglomerate withdrew its $12.4 billion takeover bid for British pay-TV satellite broadcaster British Sky Broadcasting (BSkyB), following pressure from the government. Despite mounting legal problems, it was another profitable year for anyone named Murdoch at the family-controlled holding. Chairman and CEO Rupert Murdoch took home total compensation of $33.3 million, up from $22.7 million in 2010; his son James, deputy chief operating officer, pocketed $17.9 million, a 70% increase over the prior year. It looks like the financial messes resulting from the newspaper scandal did not damage the Murdochs’ ability to conduct business.

Read the rest of the “Worst of the Bad” regulatory filings of 2011 in tomorrow’s 24/7 Wall St.

David Phillips

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