ANNUAL REPORT

AN MWW WHITE PAPER WINTER 2012

ANNUAL REPORT

The Annual Report The communications tool that is the centerpiece of corporate performance, accomplishments, objectives and mission. The one vehicle where you can articulate all that, and do so strategically and effectively.

2012 MWW GROUP, ALL RIGHTS RESERVED | WHITEPAPER | WINTER 2012

ANNUAL REPORT

The annual report is evolving. Increasing investor expectations and dwindling attention, coupled with the growing influence of the Internet for research and information-gathering, and compliance and budget pressures, are significantly shaping this document and influencing its delivery. From our experience in producing annual reports over the last 40 years,

we view this singular communications tool at a threshold: transformation from an obligatory conventional financial document into a lively, readerengaging, multi-use communications piece and reference tool one that can be positioned to very specific reader targets and to a larger community. This is an opportunity to make your annual report a corporate original

document. We are delighted to provide the following snapshot of current annual report trends and our best practices in structuring this document. We look forward to working with you on creating your next corporate original communications piece.

2012 MWW GROUP, ALL RIGHTS RESERVED | WHITEPAPER | WINTER 2012

ANNUAL REPORT

TODAYS ANNUAL REPORT The annual report remains the optimum vehicle for articulating your companys track record (financial performance, challenges and accomplishments) and original corporate vision (mission and objectives). The annual report also can be a powerful mechanism for repositioning a firm, tackling misperceptions, diffusing any controversial issues and strengthening an image. THE PACKAGE: TRADITIONAL OR BUNDLED
The 10-K wrap is growing in use, and the principal influencers of this are budget and production considerations. A little over half (56%) of companies participating in the National Investor Relations Institutes (NIRIs) 2006 annual report survey utilized the 10-K wrap this year. Interestingly, the goals of both presentation formats are shared: to communicate corporate strategy. And the average length is the same for both traditional annual reports and 10-K wrap reports. The editorial narrative for 10-K wraps is increasing, according to NIRI.

THE TOP 6 FINANCIAL MEASUREMENTS ARE IDENTICAL IN TRADITIONAL REPORTS AND 10-K WRAPS: Earnings Growth 5-Yr Financial Summary Margins Return on Equity Return on Assets Pro Forma Data

2012 MWW GROUP, ALL RIGHTS RESERVED | WHITEPAPER | WINTER 2012

ANNUAL REPORT

WHATS THE DIFFERENCE? Both traditional annual reports and 10-K wraps contain the 10-K, a comprehensive summary report of a companys performance submitted annually to the SEC. The only real difference between the two is how a company chooses to present the surrounding information. THE TRADITIONAL ANNUAL
THE TRADITIONAL ANNUAL report emphasizes editorial narrative, in effect expanding upon the 10-K. Attention within that corporate narrative voice attention is given to nonfinancial drivers, such as growth opportunities and expansion plans. This report format seems to be favored by the retail investment community, which seeks information in a more expansive, text-driven format.

10-K WRAP
A 10-K WRAP is a bundled document containing the 10-K filing with accompanying editorial commentary. The 10-K wrap communicates direct disclosure based information and is considered to be geared more toward institutional investors and financial analysts. Although the narrative has been leaner than that of a traditional annual report, according to NIRI it is lengthening. A 10-K wrap is more likely to include a corporate mission or vision statement.

2012 MWW GROUP, ALL RIGHTS RESERVED | WHITEPAPER | WINTER 2012

ANNUAL REPORT

Both traditional annual reports (78%) and 10-K wraps (77%) liberally feature charts and graphs. Traditional annual reports are more likely to include photographs than 10-K wraps (89% over 71% respectively).

2010

19% 37%

2012

67

40,000 - 49,999
TRADITIONAL

20,000 - 29,000
10-K WRAPS MEDIA PRINT RUNS

COMPANIES PRODUCING REPORTS OVER 100 PAGES

FINANCIAL INFORMATION IN REPORT

Creative annual report hybrids are also starting to take shape, such as 10-K wraps bundled with corporate marketing brochures and/or fact sheets. Annual report length continues to grow in a post-Sarbanes-Oxley environment. Both traditional annual reports and 10-K wraps are now 51 to

100 pages in median length, according to NIRI. In the last 2 years the number of companies producing reports over 100 pages has increased from 19% to 37%. Financial information is also increasing, now comprising 67% of a typical report. 10-K wraps overall are trending longer, with a median increase of 9 to 17 pages. And 36% of

NIRI survey respondents report 10-K wrap editorial narrative of 5-8 pages; 32% report 9 to 20 pages. The median print run for traditional annual reports is 40,000 to 49,999 copies and 20,000 to 29,000 copies for 10-K wraps.

2012 MWW GROUP, ALL RIGHTS RESERVED | WHITEPAPER | WINTER 2012

ANNUAL REPORT

WHOS DOING WHAT? TRADITIONAL VS. 10-K WRAP According to NIRI, 10-K wraps were most utilized in 2006 by companies of $1 to $1.49 billion in median market cap. Traditional annual reports were favored by companies having a $1.5 to $4.9 billion in median market cap. Correspondingly, budget and cost savings seem to be the principal determining factors in report format. Secondary selection factors for 10-K wraps cited by NIRI were ease of production and preference for bundling of information. WHOS READING IT? Institutional investors both existing stakeholders of the company and potential new ones are the most important annual report target (85% of

traditional report producers and 82% of 10-K wrap producers considered this group #1 according to NIRI). And financial analysts and current individual investors hold slightly more sway than potential individual investors (70% over 63%). The importance of customers has steadily decreased since 2002. Although institutional investors have wide access to analytical tools and dialogue with management, they continue to rely on the annual report document, according to Rivel Research Group. In its 2005 study, Perspectives on the Buy Side, almost two-thirds (64%) of buy-side analysts and portfolio managers identified the annual report as one of the most valuable sources of information for determining which stocks to own.

The individual investor, with fewer advanced resources at hand, continues to rely heavily on the annual report. According to Better Investing, retail investors look for the following1:
Two-Year Financial Highlights Financial Summary: To include 5 or,

even better, 10-year record, current assets and liabilities, key balance sheet items explanation of both challenges and successes, industry commentary, competitive position

Written Content: High marks for

Design: Covers with impact, charts

and graphs complementing financial and written content, logical flow of contents

2012 MWW GROUP, ALL RIGHTS RESERVED | WHITEPAPER | WINTER 2012

ANNUAL REPORT

The paramount goal of the annual report: to communicate corporate strategy

THE MESSAGE No matter the means of delivery the overarching goal of the annual report is to communicate corporate strategy. According to NIRI, 86% of traditional reports and 83% of 10-K wraps place the greatest emphasis on this objective. Focus on financial performance is steadily increasing, while narrative on products and markets is decreasing. For both traditional annual reports

and 10-K wraps the 6 top financial measurements presented are identical, with earnings growth securing the top spot (included in 80% of reports regardless of format). According to NIRI, a 10-year financial summary has lost favor (9% of reports now include this, down from 31% reported in the last survey). However, it is worthwhile to note that a 10year financial record receives the highest financial summary score

within Better Investings annual report judging criterion. Putting a face on the company, or corporate-personalizing the report, is a growing theme, with heightened focus on employees, and quotations capturing distinct voices.

2012 MWW GROUP, ALL RIGHTS RESERVED | WHITEPAPER | WINTER 2012

ANNUAL REPORT

TECHNOLOGY TREND Virtually all companies post their annual reports in some format on their corporate web sites today. And thats a good thing. Annual and quarterly reports rank second only to investor presentations as key information sources on a companys web site2. For greater reader inclusiveness it is important to utilize Internet visibility, however not at the exclusion of the printed report. Over three-quarters of NIRIs 2006 annual report survey respondents (79%) do not plan to utilize a web report exclusively at any future point.

Not surprisingly, younger readers favor the web for convenience in accessing certain information, according to ADP Brokerage Services and Forrester Research. However, all generations Gen Y, Gen X, Younger and Older Boomers, and those 60+ value materials received by mail as more private and more secure than those posted on the web. And investors over 60 one-quarter of the U.S. investing public prefer by more than 2 to 1 to receive information on laws and regulations by mail rather than the web. In a January 2006 telephone survey of 1,500 investors conducted by Forrester, two-thirds preferred receiving a printed annual report. Why? Reasons included wanting to view the information on paper, and not wanting to print information at their own expense. Some other statistics worth noting3:
Among U.S. investor households, 8

Over in NIRIs annual report survey do not plan to exclusively utilize a web annual report at any future point.

Under current SEC rules, public companies must deliver their annual reports (and proxy statements) in paper form or, if the shareholder consents, the information can be delivered electronically. An alternative model proposed by the SEC4 would have a company post its annual report and proxy materials on a web site (other than Edgar) and send a notice of electronic proxy materials to all shareholders at least 30 days before its annual meeting. However, the proposed SEC rules do not suggest public companies can eliminate paper annual reports. If a shareholder requests a paper copy of the materials identified in the notice, the company must send the materials within 2 business days. Bottom line? Think through the total universe of your annual report reading audience. Electronic delivery of your report extends its reach and adds convenience for some. However, in utilizing the Internet there are notable demographic preferences and usage including age, ethnicity, geography and economic level.

million do not have Internet access use a (slower) dial-up connection

43% of investors with Internet access On-line readers typically avoid lengthy

documents, seeking specific content over the overall story

2012 MWW GROUP, ALL RIGHTS RESERVED | WHITEPAPER | WINTER 2012

ANNUAL REPORT

MODULAR WE GO Over one-third (35%) of companies now produce modular or flexible online reports (not PDF), according to NIRI. And they do so economically, with budgets of less than $20,000. Modular reports have downloadable financial data and can be searched, indexed and forwarded to a friend. WHOS RESPONSIBLE: INCREASING ROLE OF IR Not surprisingly, the role of investor relations in the annual report is significant. The investor relations department or consultant is the annual reports primary project manager. And IR involvement has risen dramatically in writing the MD&A content (up to 71%), so much so that the role of IR is nearly equal to that of the CFO or Finance/Treasury. One area where internal IRs role has decreased

is in writing the editorial portion of the 10-K wrap, which could be outsourced or assigned to another department. Over half of companies participating in NIRIs annual report survey indicated that the IR department houses all or most of the annual report budget. WHATS IT TAKE? One-half of the companies polled by NIRI begin focus on the annual report at least a full quarter before the end of the fiscal year. Those producing traditional reports dedicate just under 4 months of work, while those completing 10-K wraps average a little under 3 months.

THE TRIPLE BOTTOM LINE: SUSTAINABILITY REPORTS Sustainability reports, which focus on economic, environmental and social performance, have been published by privately held companies and nonprofits for years. Some investors are now defining business success more broadly than financial results. Among these investors there is an expectation for companies to earn a profit, and to set standards of environmental and social performance: the triple bottom line of sustainability. Within the S&P100, 40% of companies now issue corporate social responsibility reports, up from 25% in 2002.5 The Dow Jones Sustainability Index for North America currently covers 93 U.S. companies, 18 Canadian firms and a number of leading sustainability-driven companies worldwide6.

2012 MWW GROUP, ALL RIGHTS RESERVED | WHITEPAPER | WINTER 2012

10

ANNUAL REPORT

EXTRA EXTRA:
All Boats Rise in a Transparent Tide: With growing expectations for fuller

disclosure and access to information, private companies are increasingly producing some form of annual communication to stakeholders and other key constituencies. traditional reports and 10-K wraps are predictably increasing. Three-quarters (73%) of companies reported improvement in the quality of their MD&A, meaning willingness to increase transparency and eliminate nonessential information from commentary. respondents now use electronic proxy voting, vs. 18% in 1999. Over half disseminate an electronic proxy with their on-line annual report. reports, whether traditional or 10-K wrap. Of note for those targeting individual investors: Better Investing gives high marks to companies explaining their dividend policies in annual reports.

Compliance Grows: Trends for following SEC interpretative guidelines in

Established Electronic Proxy Trend: Almost half (49%) of NIRIs survey

With growing expectations for access to information and fuller disclosure, private companies are increasingly producing some form of annual communication to stakeholders.

Dividend Policy? Company dividend policy is explained in less than a third of

2012 MWW GROUP, ALL RIGHTS RESERVED | WHITEPAPER | WINTER 2012

11

ANNUAL REPORT

OUR RECOMMENDATIONS:
THE PACKAGE The annual report is your ball game. In terms of presentation there is no right or wrong, old or new, or one best practice. The overarching objective is to connect with your audiences. To do that, put your corporate fingerprints on the report in terms of image, objectives, information and budget. And whether you decide to package this singular communication as a socalled traditional report, or a bundled 10-K wrap, why not combine the best of both? KNOW YOUR AUDIENCE Know what motivates your target readers and build the book around it. Messaging should be targeted to the constituencies that you value, whether institutional investor, individual stockholder, financial analyst, employee or other. Because retail stockbrokers and individual investors are key targets for traditional reports, companies interested in reaching these groups should consider that format with its greater attention to explanatory narrative. Retail Of Note: The November 2006 issue of Better Investing includes the feature, Using Annual Reports and Proxy Statements. Chairman Ken Janke urges investors to carefully read annual reports: its a document that contains a great deal of information, especially for investors looking for prospective long-term investments. THE MESSAGE Editorial narrative should capitalize upon limited reader time and attention. Its critical to connect, and to connect with authority. The lengthening of narrative text within 10-K wraps also speaks to a need to communicate more completely and effectively. And in addition to covering performance and developments, your report should showcase the original vision and objectives of your company. Present narrative that is fresh, direct, simple and readable. Make use of strong, unequivocal points. Try to avoid buzz or popular and therefore overused jargon. Overall, make your report scannable with creative devices to break up editorial, such as:
Varied fonts, styles and sizes Heads and subheads Graphics Management Q&A: Open Dialogue! Case studies Bullets Boxed highlighted text Timeline Glossary Memorable quotations and captions

Better Investing gives high marks to companies providing the following: Theme Table of Contents Corporate Profile # of Shareowners # of Employees Named Investor Contact Glossary

Instill the shareholder message with your CEOs distinctive voice. Ensure that this section clearly covers the bases in measuring objectives and performance, and addressing challenges and forward-looking goals. And does so in the CEOs unique style. Organize the report with a table of contents and be sure to paginate. THE BIG PICTURE The annual report is an integral part of corporate branding and should never stand alone. Ensure that any established corporate theme and graphic elements are extended to your annual report.

2012 MWW GROUP, ALL RIGHTS RESERVED | WHITEPAPER | WINTER 2012

12

ANNUAL REPORT

SUSTAINABILITY & GOING GREEN Consider adding a page or sidebar about corporate responsibility to your annual report. Investigate recycled paper (costs and kinds). Demonstrating that the paper fiber used in your annual report is produced in an environmentally responsible manner conveys good corporate citizenship. YOUR REPORT ON-LINE Post your on-line report to extend the printed document, not replace it. On the web people read top down, rather than left to right. Imagine the users viewing experience in posting and keep information less than 3 clicks away. For the on-line report consider posting a dynamic, easy-to-navigate

(non-PDF) version. And take elements of your shareholder letter and post in a separate section of the web site. You can update this blog routinely with commentary on company news and developments. EXTENDING ITS FOOTPRINT Consider translating your annual report (print and/or on-line) if you have a substantial international base. You can also take key elements of the report and position that separately with target audiences via controlled editorial services. In addition to providing a window into performance, activities and objectives, your annual report can be utilized as a marketing and sales tool, and for employee recruitment. Within the report you can publicize additional opportunities, such as your companys DRIP. BUDGET TIPS Practical sizing can circumvent oversized envelopes and excess postage. Experienced graphic design firms and printers can guide you in cost effective annual report sizing. Also consider bulk or third class mailing. Have shareholder lists reviewed to eliminate duplicate mailings (i.e., dual investor households). Starting early in the process (obtaining bids, brainstorming theme(s), identifying your annual report team) can alleviate rush and late charges. NIRI reports that the average annual process takes about 3 to 4 months. Try tackling some of the advance work in late summer.

We hope this is of value to you in your annual report planning. Financial Relations Board is proud to have worked with companies within dozens of industries to produce their annual reports in 2006. These reports have impact and clearly articulate managements vision and record. A number have garnered awards. We have the capability to:
Coordinate

entire annual report process, including production time line, vetting graphic design firms, working with chosen graphic designer and writing the report management letter, starting with a meeting to identify key message points and themes, proceeding to a comprehensive outline and then to polished finished product the draft annual report.

Write the complete report including

Conduct a strategic review and edit of Incorporate corporate sustainability

Printing 100,000 annual reports on FSC-certified paper equals these environmental benefits: Not driving 2,356.66 miles Allowing 169.68 trees to remain standing.7

feature, add marketing or other communications pieces and position on-line

2012 MWW GROUP, ALL RIGHTS RESERVED | WHITEPAPER | WINTER 2012

13

SOURCES
1. 2. 3. 4. 5. 6. 7.
Better Investing Nicholson Awards Judging Criterion. Thomson Financial Study Jan. 2006. Park Associates 2005 and Forrester Research. Notice and access model under proposed rule S7-10-05. Park Associates 2005 and Forrester Research. Notice and access model under proposed rule S7-10-05. Mohawk Fine Papers.

Jared Hendler

FOR MORE INFORMATION, PLEASE CONTACT:

Executive Vice President, Global Director of Digital and Creative Services 212.827.3757 | jhendler@mww.com Twitter: @jaredhendler

Carreen Winters MWW

Executive Vice President, Corporate Communications Reputation Management 201.964.2410 | cwinters@mww.com

304 Park Avenue South, 8th Floor New York, NY 10010 212.704.9727 MWW.COM

EAST RUTHERFORD / CHICAGO / DALLAS / LONDON / LOS ANGELES / NEW YORK / SAN FRANCISCO / SEATTLE / TRENTON / WASHINGTON D.C.