The Securities and Exchange Commission (SEC) requires that every stockholder of a publicly-traded U.S. corporation be given a copy of its annual report, a formal document describing the corporation's performance over the past year. However, besides being required by law, annual reports can also serve as vital sources of company information-information that should be a part of your investment decisions.

Like many individual investors, perhaps you feel you just don't have the time to teach yourself all you need to know about the annual reports that arrive in your mailbox. In the hopes of making these important documents more accessible, this three-part article will take a brief look at some (but not all) of the main sections contained in a typical annual report. Of course, not all reports will contain every one of these sections; nor will they all offer the same degree of information. But, as you familiarize yourself with their contents, you may find them significantly less intimidating than when you began.

Management's Discussion and Analysis

Federal law requires every annual report to include a "Management's Discussion and Analysis" section to address any past or future conditions with a possible material effect on the company. Generally, this section consists of a series of short, detailed discussions that analyze the company's performance during the past year. Results of operations and the adequacy of the company's financial resources to fund those operations are also covered. In contrast to the opening sections of most reports, no marketing messages will appear here. Instead, you'll find realistic appraisals, accompanied by tables that list results by segment, five- year summaries of operations and quarterly revenue, profit and income figures for the last two years.

Independent Auditor's Opinion

The independent auditor's opinion is found at or near the end of most annual reports. It summarizes the findings of an independent firm of certified public accountants who are hired to determine the completeness and "reasonableness" of the company's financial statements and whether they've been prepared in accordance with generally accepted accounting principles (GAAP) as of the date of the opinion.

Paragraph one of the opinion usually defines the audit period and reminds the reader that the company, not the auditor, is responsible for the financial statements. Paragraph two describes the manner in which the audit was conducted-i.e., in accordance with generally accepted auditing standards (GAAS). The actual opinion itself appears in the last paragraph and is expressed as either "unqualified" (good), "qualified" (less than good) or "adverse" (bad). Alternatively, and for reasons that must be explained, the auditor may choose to "disclaim" and express no opinion at all.

When expressing a qualified opinion, the auditor describes why it believes that certain portions of the financial statements have not been presented accurately by the company. An adverse opinion reflects a belief that the statements as a whole have not been presented accurately and lists the factors that led to this conclusion. However, you should note that even an unqualified opinion is no guarantee of total accuracy. There are occasions when properly audited financial statements contain one or more material misstatements of which the auditors were not aware as of the date of their opinion.

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