The Fine Print: How to Read Those Key Footnotes

The sudden collapse of Enron (ENE ), until recently the nation's seventh-largest corporation, took investors by surprise. But had the Wall Street analysts, mutual fund managers, journalists, and individual investors who followed the company dug a little deeper, they could have had a heads-up that all was not quite right at the Houston energy giant long before the bad news broke in October. The source of this information? The footnotes companies are required to publish with their financial statements.

Buried in Enron's annual report for 2000, for example, are hints of the hidden debt that pushed the company into bankruptcy in December. A footnote on "preferred stock" indicates that if Enron's share price were to fall below $48.55--which first occurred on June 14--the company would be obliged to issue stock to a partnership called Whitewing Associates. Other footnotes reveal similar arrangements. True, Enron never put a dollar value on its potential obligations, and the footnotes did not divulge the extent of the partnerships. But enough was revealed to suggest that investors were not getting a full view of the company's finances.