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What's going on? It's in the annual report

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It's that time of year when we receive annual reports from companies we hold stock in. How many of you just toss these aside and without giving them a second look?

I'm afraid to know the real answer to that question. Keep in mind that you're an owner of that corporation, and the annual report is filled with important information. I personally love reading the reports; I find them interesting and chock full of information about what the company has done in the past or what they would like to do in the future.

But if you're overwhelmed by the annual report your company sends, let me try to break it down for you. After all, some of these reports cost $4-$5 apiece.

Generally the report will start off with the financial highlights over the past two or three years. Then, on page two or three, you'll find a letter written from the CEO. I use the term "written by the CEO" loosely, since public relations firms can also write them. I still enjoy reading the letters, but keep in mind this is like the beginning of a jury trial where you can talk more freely.

As you continue on, which I hope you do, you'll read more about the company's products and services. This is still in what I call the glossy section, where company has more freedom. If you're trying to learn about a company, this can be a great asset. You may find pictures of the products, graphs and charts showing performance of products or locations of where in the world the company has made sales or has satellite offices.

Once you're past the glossy section you'll generally begin looking at the section filed with the Securities and Exchange Commission known as the 10K. If you have a company that is less than profitable or going through difficult times, you may only receive the 10K. The reason: Again, it can save the company $4-$5 per shareholder -- and when times are tough it's good to pinch the pennies. The 10k will give you a more detailed description of the business than what you read in the glossy section. Here you may find information on acquisitions, who the customers are, research and development. You will also learn about legal proceedings and more about top executives.

Continuing on, you will also discover a section known as MD&A, management discussion and analysis of financial conditions and results of operations. The MD&A is where you can find the "real deal." The company will talk about cash management, how it handles inventory, accounts receivable, goodwill and other factors related to the business, good and bad. It can really give you a better understanding of the business in which you may want to become part owner.

You will also find a section about the directors and executive officers of the corporation. Reading this section, you should learn more on the compensation of the directors or executives, along with stock holdings and options. Any notes on special relationships or agreements should be found here.

At this point you should reach the key financial statements, the balance sheet, statement of operations and the cash flow statement. If you're like myself and you've owned the company over the past year or so, you have probably seen this statement already. But what you haven't been able to obtain are the notes that follow the financial statements. Some will be duplications from the MD&A, however, you may find something new here that has not been listed before. Read through the notes, looking for new information not yet discussed. Some notes from companies can be rather lengthy, but don't give up.

The next time you receive that annual report in the mail, don't just throw it away. Remember, you own a part of that company, and here's your chance to learn more about what's going on.


A word of caution

Investing in individual companies does contain a high degree of risk and should be done only after you've consulted with your own investment adviser or broker. Technology stocks do have a greater risk than the general market. The preceding article is for informational purposes only and should not be a recommendation to buy or sell any stocks. Past performance is not indicative of, or a guarantee of future results. Information provided by Marketguide.


Wilsey is a registered principal with Linsco/Private Ledger, a member of the SIPC. "Smart Investing with Brent Wilsey" can be heard Saturdays at 8 a.m. on KFMB AM 760 and Tuesdays at 12:30 p.m. on Channel 8 news. Contact him at brent.wilsey@sddt.com.

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