Annual Reports

An annual report is one of the main tools used in the investor relations profession. Investor relations professionals focus on educating investors about the true value of the company. As a result, one of the key activities of investor relations is an extensive disclosure on the variety of company involvements in order to enable shareholders to see the big picture of the company's value; these reports feature such topics as corporate structure, products produced, research and development efforts, financial results achieved, new management hires, and merger and acquisition plans.

Disclosure is conducted through individual meetings with investors, roadshows by company [Page 28]executives to key financial centers, conference calls with investors and analysts, and the especially relevant production of an annual report.

There are two types of annual reports. One type is usually a glossy and upbeat publication that details the company's achievements over the last year. This type of report tends to have many pictures, bright colors, and text in plain English. Publishing of this type of annual report is at the discretion of the company's management; it is not required nor is the content regulated: typically, it starts with a letter to shareholders from the chief executive officer or from the chairperson of the board of directors (corporate speech), and then the content that follows can vary widely from company to company and from year to year.

The second type of annual report, known as Form 10-K, is one that the Securities and Exchange Commission (SEC) requires all publicly traded (and some private) companies to publish. This form must be submitted to the SEC within 60, 75, or 90 days after the end of the fiscal year, depending on the status of the company. After filing, the report is immediately available online through the Electronic Data Gathering, Analysis and Retrieval (EDGAR) system. Companies must also file Form 10-Q, a quarterly report, and Form 8-K, a current report about unexpected important events). Often written in codified legalese, the 10-K annual report is quite difficult to read and understand—it can be as long as hundreds of pages with many footnotes.

The content of 10-K annual reports is strictly regulated: each must consist of four parts and 15 schedules. Part 1 provides a general description of the company's business, including its history, its main markets, its risk factors, and a description of its assets and business processes. Part 2 largely focuses on financial results from the previous year—including financial results, management discussion and analysis of these results, explanation of accounting practices used to display these results, and a detailed explanation of the procedures used to collect the data and ensure its accuracy. Part 3 discusses the company's management team and each manager's compensation and security ownership. Part 4 includes a variety of exhibits and signatures.

The EDGAR system and the 10-K annual report format have been undergoing significant changes. In 2010, in order to make the 10-K more user-friendly, easier to read and easier to retrieve information the SEC launched a process of changing the report format from text to XBRL, or eXtensible Business Reporting Language. Due to this XBRL conversion, the data in an annual report becomes machine readable and searchable. To achieve this, the annual report is populated with tags that label information in the report using machine code—the tags identify each piece of information in the report. Consistent use of standard tags allows a comparison of reports between different companies. XBRL is still in the early stages of adoption—only large companies are required to use it and many issues still exist with accuracy of the data-tagging process.

...