COMPANY FINANCIAL INFORMATION—THE ANNUAL REPORT

As mentioned in the last section, public companies are required to provide information to their shareholders and other interested parties.  This information is provided four times per year in quarterly and an annual report. These reports provide a summary of the financial status of the company.  In addition, the company files information with the SEC, the Securities and Exchange Commission; there are two basic reports: the 10-Q for quarterly information and the 10-K for annual information.  The financial information in annual reports can differ from the 10-K.  There’s nothing sinister in the reason for these differences.  Shareholders need information useful in making an investment decision.  The SEC has strict requirements that detail what a company must report.  You can ask a company for their SEC filings (10-K and 10-Q) and use these to augment what you find in the annual report.

In the next few sections, I want to detail exactly what you will find in the annual report of a company.  While annual reports differ from company to company, they all have the same basic structure.  Keep in mind that when numbers are reported, except for per share data, they are in 1,000’s.  For example, when you see depreciation and amortization totaling 17,795, it means 17,795,000—almost $18 million.  The three trailing zero’s are discarded to simplify the reporting.

Letter to the Shareholders

The first few pages of the annual report contain some useful information.  The inside cover often has a summary of recent financial highlights.  These will contain information from the balance sheet and income statement that you will learn about in detail later on.  It is an opportunity of management to present recent impressive events.

The letter to shareholders is an excellent place where you can hear directly from management about the strategies and future prospects of the company.  Until recently, this letter was about the only place to get such insight; however, nowadays, CEO’s regularly appear on channels like CNBC where they gladly discuss company strategy and recent events.  Nevertheless, the letter in the annual report is carefully written and should be read with equal care.  If management feels that there might be problems ahead, they could subtly alert shareholders to this possibility in the letter.  I have a tendency to amplify any hint of bad news.  If you read a phrase like “we are working to aggressively counter some gains by competitors in the southwest,” I read the worst into that.  They’re in trouble in some area; their competitors are eating their lunch and the company is forced to react.  I get a kick out of translating “spin” into English.  Maybe I err too much on the side of caution, but I believe it’s better to be conservative.  Pleasant surprises are better than nasty shocks.