wall street nuggets

It is interesting to examine the distribution of the lags between the end of the reporting period and the actual SEC filing date for publicly traded companies. As mandated by Sarbanes-Oxley, many large companies, defined as “accelerated filers” (those with a public float greater than $75 million, at least one previous 10-K filing and who have been subject to the Exchange Act’s reporting requirements for at least one year), currently have 40 days following the end of the quarter and 75 days following the end of the fiscal year to file their 10Q’s and 10K’s with the SEC. Non-accelerated filers have 45 days following the end of the quarter to file their 10-Q’s and 90 days following the end of the fiscal year to file their 10-K’s.

In December of 2005, the SEC adopted amendments that defined a new category of “large accelerated filers” which is defined as those publicly traded companies with a public float of $700 million or more. As of December 15, 2006, “large accelerated filers” will be required to file their 10-K’s within 60 days of the end of the fiscal year. There will be no change in the deadline for 10-Q’s for “large accelerated filers.”

One might assume that the 40 day grace period would be fully taken advantage of by most companies, especially in view of the penalties associated with errors in reporting financial results. So it is no surprise that as of August 29, 2006, about 35% (or about 1,264) of the top 3,589 publicly traded U.S. companies in market capitalization[1], had exactly a 40 day gap between the end of most recent reporting period date and the filing date with the SEC. So we might ask how the other 65% of the publicly traded companies are distributed.

The actual distribution of gaps between the end of the most recent reporting period and the filing date for a sample of the top 3,589 U.S. companies in market capitalization can be seen in the following chart. Several observations regarding this empirical distribution can be made.

First we observe that there is relatively little early reporting until about three weeks before the deadline. Then there is a very gradual pickup in reporting with obvious gaps for the weekends until we reach 570 filings on the day before the deadline and 1264 on the deadline itself. We should also note that there are non-accelerated filers in the sample which explains the peak at 45 days and presumably a distribution similar to that of the accelerated filer gaps, albeit much smaller.

About 98.1% of the companies in our sample have filed their 10-Q’s within 50 days of the end of the quarter. We publish a list of the really delinquent filers about once per month (the “White Rabbits”). It should also be noted that about 0.5% of the companies in our sample incorrectly specify the end date of the period for which they are reporting (confusing it with the filing date) and these errors had to be cleaned up manually.

The actual shape of the distribution leading up to the deadline is interesting. Since the log of the frequency counts is approximately linear in each of the two weeks preceding the deadline, we are inclined to label the pre-deadline distribution as being exponential and this would be consistent with the assumption that the pressure to complete the filing is inversely proportional to the number of days to the deadline.

Does size matter?

Of course the answer here is yes since non-accelerated filers are allowed 5 more days to file. However, without this effect, companies with a larger market capitalization generally have a tendency to file closer to the 40 day limit. This can be seen in the following scatter diagram of gaps versus market capitalization.

Notice that we use a logarithmic scale for market cap which reveals some rather striking behavior in the distribution. As we have observed above, companies with larger market caps tend to file closer to the deadline.

The Press Release Gap

Regulation FD also has an interesting impact on the distribution of Current Report (8-K) filings that announce quarterly earnings and provide early access to financial statements. Approximately 85% of the companies in our sample, have filed such reports between the end of the reporting period and the most recent 10-Q filing date. This is the same frequency we observed last year as well. The distribution of the gaps between the end of the reporting period and the press release date can be seen in the following chart.

What is striking about this distribution is a clear superposition of a weekly pattern that favors press releases on Tuesday, Wednesday or Thursday, over the course of the three to four weeks leading up to the Sarbanes-Oxley deadline for the quarterly filing.

What about Annual Reports?

The pre-deadline distribution for the gap between the end of the fiscal year and the current 10-K deadline for “accelerated filer” companies is quite similar to the distribution in the quarterly reports.

As in the case of the quarterly reports we see a gradual build-up for 3-4 weeks before the deadline.

We should also note the interesting spike at 90 days (the deadline for non-accelerated filers). Obviously, this spike, numbering 143 companies in our sample of 3,589 companies, corresponds to companies filing their first 10-K or those who have not been subject to filing requirements for a full year and therefore are not defined as “accelerated filers” or those with public floats below $75 million.

As we wrap up earnings season, it seems appropriate to update our list of “white rabbits,” defined as those companies in the SigmaInverse Universe that have not officially filed a 10-Q or 10-K at sec.gov, covering a period that intersects the past 160 days. We should point out that not all of the following companies are necessarily delinquent yet, depending on when their fiscal year ends and the size of the company. However, whatever the situation, the reality is that we don’t have good current visibility for the following companies.

It’s about time for an update on the companies we haven’t heard from in a while. The following companies have not filed a quarterly or annual report covering the last 160 days. Technically not all of these are late, since not all are classified as “accelerated filers.” (For example, NATIONAL BEVERAGE CORP has a fiscal year ending April 30th and is not an accelerated filer, so it has until July 31st to file its 10-K.) In some cases, the companies may have filed recent 8-K documents.

Parlux Fragrances Inc. [PARL] which includes Guess, Paris Hilton, and a number of other very well-known perfume brands, not only remained well below the offered takeover bid of $29 per share proposed by CEO Ilia Lekach, but dropped 4.9% on Thursday, closing at $19.47. There is apparently considerable skepticism that Mr. Lekach will be able to raise the funds required for the buyout, probably based on the failed buyout attempt in 2004. The company still has yet to file an official10-K for the year ending March 31^st, and it has now been 166 days since the last day covered in its public filings. In a June 14^th press release, the company provides some impressive, albeit unaudited, results, indicating sales of $182.2 million, an increase of 82% over 2005, and earnings of $22.5 million, or $2.13 per share, up 109% over 2005. In the same press release, the company blames the filing delay on its change in status to that of “accelerated filer” when the public float exceeded $75 million, and therefore the company was required to file its 10-K within 75 days, instead of the 90 days allowed for smaller cap companies. (Actually, I think they were a week late filing last year’s 10-K.) Until we have better visibility both into what is going on operationally and into the actual likelihood that PF Acquisition of Florida can raise the money needed for the buyout, we would be somewhat cautious about [PARL], but with earnings of $2.13 per share the implied P/E ratio is a VERY attractive 9.14, and, even if the proposed buyout does not materialize, we don’t see why the price would go any lower. (Video thoughts: dizzy blond visited by SEC official who tries to explain new deadline. She confuses “accelerated filer” with “x-rated flier” and takes offense. He manages to explain. She recruits him to sample a new fragrance called Nepenthe which has him giving her all the time she needs.)

Encysive Pharmaceuticals Inc. [ENCY] announced on Thursday that the FDA had accepted for review its response to the March 24, 2006, “approvable” letter regarding the new drug application for Thelin^™, with a target action date of July 24. The stock closed up 38.8% in very active trading on Thursday. We first identified the [ENCY] opportunity here on June 3^rd and added it to our so-called VioxBasket on June 9^th.

The Broker sector was up a sizzling 4.8% on Thursday, with Bear Stearns turning lose the bulls with its announcement of a banner quarter. E-Trade Group [ET] topped the group with a gain of 11.3% closing at $21.57. Ameritrade Online Holdings [AMTD] was not far behind, with a gain of 8.8% and Charles Schwab also posted a strong gain of 8.1%. Two other more thinly traded members of the sector, Thomas Weisel Partners [TWPG] and Calamos Asset Management [CLMS] both turned in gains exceeding 9% for the day. Thank you, Ben, for more measured rhetoric.

Catalyst Semiconductor Inc. [CATS] announced on Thursday that it was postponing its previously rescheduled news release and conference call to a later date. The announcement blamed changes in cost accounting for the delay in the conference call. The company anticipates net revenues of approximately $14 million for the quarter ended April 30, 2006, down from $16.3 million for the corresponding quarter in 2005. Pretty ugly stuff. The stock price was down 13.2% closing at $3.62.

Hewitt Associates [HEW] down 7.7% on the news that its Chairman and CEO, Dale L. Gifford, would be retiring at the end of 2006, with no reason given. The same 8-K filing indicates that Bryan J. Doyle, President – HR Outsourcing Group and a member of the Board of Directors would be leaving somewhat abruptly, effective July 3^rd. We expect that the two events are probably related and that there is more to the story.

The average gain on Thursday for a stock in the SigmaInverse Universe (containing 3,512 stocks) was 2.8% with 89% of the stocks in the universe posting positive returns for the day.

An update on the companies for whom we don’t have recent 10-Q or 10-K information. Rather than looking at just the gap between the last filing date and today (as we did last month), we now focus on the gap between the last date covered in the filings and today, which is a arguably a much better way to gauge tardiness. Only companies with a gap of more than 160 days are flagged, which of course is more of a gap than is allowed for quarterly filings (130 days), but will tend to keep companies that are using the maximum number of days allowed for filing an annual report off the list.