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Published by igodigital, 2017-04-16 10:36:57

The INVESTOR RELATIONS Guidebook

The INVESTOR RELATIONS Guidebook

Keywords: investor,relation,guidebook

AccountingTools® Series

The

INVESTOR
RELATIONS

Guidebook

Second Edition

Steven M. Bragg, CPA

The Investor Relations
Guidebook

Second Edition

Steven M. Bragg

Copyright © 2014 by AccountingTools, Inc. All rights reserved.

Published by AccountingTools, Inc., Centennial, Colorado.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in
any form or by any means, except as permitted under Section 107 or 108 of the 1976 United
States Copyright Act, without the prior written permission of the Publisher. Requests to the
Publisher for permission should be addressed to Steven M. Bragg, 6727 E. Fremont Place,
Centennial, CO 80112.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their
best efforts in preparing this book, they make no representations or warranties with respect to
the accuracy or completeness of the contents of this book and specifically disclaim any
implied warranties of merchantability or fitness for a particular purpose. No warranty may be
created or extended by written sales materials. The advice and strategies contained herein
may not be suitable for your situation. You should consult with a professional where
appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other
commercial damages, including but not limited to special, incidental, consequential, or other
damages.

For more information about AccountingTools® products, visit our Web site at
www.accountingtools.com.

ISBN-13: 978-1-938910-33-3

Printed in the United States of America

Table of Contents

Chapter 1 - Introduction to Investor Relations....................................................................1
What is Investor Relations? .................................................................................................1
The Investor Relations Officer.............................................................................................2
The Investor Relations Staff.................................................................................................5
Investor Relations Funding..................................................................................................5
Specific Advantages of Investor Relations...........................................................................7
Interactions with Public Relations.......................................................................................8
The Securities and Exchange Commission ..........................................................................9

Chapter 2 - The Value Proposition .....................................................................................10
The Value Proposition Concept.........................................................................................10
Background Research........................................................................................................11
Formulation of the Value Proposition ...............................................................................12
The Problem of Too Much Market Share ..........................................................................18
The Problem of Seasonality ...............................................................................................19
Communication of Risk Mitigation ....................................................................................19
The Impact of a Negative Reputation.................................................................................20
Communication of the Value Proposition..........................................................................21
The Value Proposition and Corporate Strategy ................................................................23

Chapter 3 - Communicating the Message ..........................................................................25
The Press Release ..............................................................................................................25
The Earnings Press Release ..............................................................................................28
The Annual Report.............................................................................................................29
The Fact Sheet ...................................................................................................................31
Conference Presentations and Discussions .......................................................................34
Newspapers and Related Media ........................................................................................34
Other Forms of Communication ........................................................................................36
The Communications Review Process ...............................................................................37
The Communications Calendar .........................................................................................38
The Communications Mailing List.....................................................................................38
Handling Negative News ...................................................................................................39

i

The Negative News Response System..........................................................................39
The Negative News Early Warning System..................................................................40
The Contagion Effect ....................................................................................................41
The Nature of the Response ..........................................................................................41
Risk Mitigation by the Investor Relations Officer ........................................................42

Chapter 4 - Regulation FD...................................................................................................44
The Essentials of Regulation FD .......................................................................................44
Compliance with Regulation FD .......................................................................................45

Chapter 5 - The Earnings Call ............................................................................................49
Earnings Call Attendees ....................................................................................................49
Earnings Call Logistics .....................................................................................................49
Structure of the Earnings Call ...........................................................................................50
The Question and Answer Session .....................................................................................51
Earnings Call Variations...................................................................................................53
Earnings Call Bad Behavior..............................................................................................53

Chapter 6 - Guidance ...........................................................................................................55
The Case for Guidance ......................................................................................................55
Guidance Guidelines .........................................................................................................56
Timing...........................................................................................................................57
Type of Information ......................................................................................................58
Guidance Range ............................................................................................................59
Consistency ...................................................................................................................60
How Guidance is Communicated ......................................................................................61
The Preannouncement .......................................................................................................61
The Guidance Schedule .....................................................................................................62
Aggressive Guidance .........................................................................................................62
The Consensus Earnings Estimate.....................................................................................64
When Not to Issue Guidance..............................................................................................64

Chapter 7 - The Forward-Looking Statement ...................................................................66
The Legal Basis of the Forward-Looking Statement .........................................................66
The Private Securities Litigation Reform Act ....................................................................68
The Safe Harbor for Forward-Looking Statements ...........................................................69
The Cautionary Statement .................................................................................................70

Chapter 8 - The Investor Relations Website ......................................................................73

ii

Contents of the Investor Relations Website........................................................................73
Functionality of the Investor Relations Website ................................................................76
Multimedia.........................................................................................................................77
Using the Website for Regulation FD Disclosure..............................................................77
Hyperlinks to Third-Party Information..............................................................................80
Interactive Website Features .............................................................................................82
Website Information Removal............................................................................................83
The Website and the IPO ...................................................................................................84
Third Party Providers........................................................................................................85

Chapter 9 - The Sell Side and the Buy Side........................................................................86
The Sell Side ......................................................................................................................86
The Analyst...................................................................................................................86
The Stockbroker............................................................................................................94
The Investment Banker .................................................................................................95
The Buy Side ......................................................................................................................96
The Institutional Investor ..............................................................................................96
The Buy Side Analyst ...................................................................................................98
The Hedge Fund............................................................................................................99
Sovereign Wealth Funds ...............................................................................................99
The Individual Investor.................................................................................................99
The Foreign Investor...................................................................................................101
Investment Clubs ........................................................................................................102

Chapter 10 - Investing Strategies ......................................................................................104
Investing Strategies..........................................................................................................104
Implications for Investor Relations..................................................................................107

Chapter 11 - Short Sellers..................................................................................................109
The Short Selling Strategy ...............................................................................................109
The Short Seller Target....................................................................................................112
Short Interest ...................................................................................................................112
Dealing with Short Sellers ...............................................................................................113
The Passive Approach .....................................................................................................115

Chapter 12 - Stock Exchanges...........................................................................................117
Stock Exchange Overview................................................................................................117
The New York Stock Exchange ........................................................................................119
The NYSE Amex ...............................................................................................................120

iii

The NASDAQ...................................................................................................................120
The NASDAQ Global Select Market..........................................................................120
The NASDAQ Global Market ....................................................................................121
The NASDAQ Capital Market....................................................................................122

The Toronto Stock Exchange ...........................................................................................122
Delisting from an Exchange ............................................................................................124
The Over the Counter Bulletin Board..............................................................................124
The Pink Sheets................................................................................................................125

Chapter 13 - Share Management ......................................................................................126
Float Management...........................................................................................................126
Activities to Increase the Float....................................................................................126
Activities to Delay Stock Sales...................................................................................127
The Direct Stock Purchase Plan......................................................................................128
The Employee Stock Purchase Plan ................................................................................128
Dividend Reinvestment Plans ..........................................................................................129
Stock Splits.......................................................................................................................129
Dividend Payments ..........................................................................................................130
The Stock Buyback Option...............................................................................................132
The Stock Repurchase Safe Harbor Provision.................................................................133
Odd Lot Shareholders......................................................................................................134
Treatment of Abandoned Property ..................................................................................135

Chapter 14 - SEC Filings ...................................................................................................137
The Income Statement......................................................................................................137
The Balance Sheet............................................................................................................140
The Statement of Cash Flows...........................................................................................144
The Direct Method......................................................................................................144
The Indirect Method ...................................................................................................146
The Statement of Retained Earnings................................................................................147
The Form 10-Q ................................................................................................................148
The Form 10-K ................................................................................................................149
The Form 8-K ..................................................................................................................152
Forms 3, 4, and 5.............................................................................................................156
The Disclosure of Non-GAAP Information......................................................................157

Chapter 15 - Annual Meeting Planning and Voting ........................................................160

iv

















































The Value Proposition

• Patent risk. If key products are coming off of patent protection, state how
the company is working on extending the duration of key patents, which
patents are being applied for, and which patents it has recently purchased
from other parties.

• Old product risk. If key products are old, describe the company’s product
development process and its pipeline of new products.

• New competitors. If there is a risk of entry into the market by new competi-
tors, describe how the company has altered the competitive environment to
increase the amount of capital required to start a business, its lobbying to
require government licensing for new competitors, and so forth.

• Government regulation. If there is a risk of government controls that will
increase costs, describe the ability of the company to pass these costs
through to customers.

• Raw material restrictions. If there is a risk of supply chain disruption,
describe how the company is stockpiling key supplies, or how it is shifting
to suppliers who are located closer to the company’s facilities.

As long as the investor relations officer clearly shows the extent of risk mitigation
efforts, investors will be more comfortable holding a company’s stock, and will be
able to price the stock within a narrower range, thereby reducing variability in the
stock price.

If a business operates in a market that is subject to occasional severe downturns,
it is quite useful to prepare a presentation about what the company plans to do if
another such downturn occurs. This preparation indicates to investors that the
company is ready for even the most severe eventualities. For example:

The company always maintains an outsized cash reserve, which it plans to use
during industry downturns to buy competitors who are not so well prepared.

The company operates in multiple agricultural regions, so a weather-related
problem in one area is unlikely to have a large impact on the company’s agricultural
supplies business as a whole.

These disaster plans do not have to be trotted out at every investor presentation, but
should be available if a more investigation-minded audience asks about catastrophic
risk issues.

The Impact of a Negative Reputation

A company could do an excellent job of establishing and communicating a
reasonable value proposition, and yet still see its stock price languishing at an
inordinately low level. If so, the problem may be the reputation of the business.
Some companies have become embroiled in any number of public relations snafus
over the years, and the cloud associated with those events may continue to hover
over them for years. The baneful effects of these events may be particularly

20

The Value Proposition

pernicious if investors believe that the same events could occur again. Consider the
impact of any of the following reputational issues on the value proposition of a
business:

• An uncapped oil well that causes a massive environmental disaster
• A series of vicious labor strikes that result in protestor deaths
• An explosion at a chemical facility that kills neighboring people
• Any plane crash

All of the examples are, in effect, the negative outcome of risk issues. In all cases,
greater attention to risk mitigation issues might have prevented them, and might
therefore have saved the reputations of the companies involved in them. However,
there are also outlier events that will occur, despite every reasonable risk mitigation
issue that a business might implement.

If there is a prospect of an outlier event that can cause significant reputational
damage to a company, it may be useful to build the groundwork for an offsetting
amount of existing favorable reputation. For example, a company that has a long
history of supporting local community activities with funding and the paid time of
its employees might find that local support will counteract the effects of a one-time
negative event. Similarly, a business might invest an inordinate amount in green
environmental controls, corporate governance issues, and/or attention to labor
relations to build its reputation against the effects of a reputation-damaging event.

It can be expensive to build a high-end reputation, especially given how difficult
it is to ascertain the correct amount to invest in this effort. Nonetheless, the investor
relations officer should work with the public relations staff to create a budget for
reputation-enhancing activities. From the perspective of the investor relations
officer, the point of this exercise is to keep the negative effects of reputational issues
from damaging the value proposition perceived by investors.

Communication of the Value Proposition

The value proposition should be repetitively enforced with the outside world by
weaving it into every investor relations presentation. There should be a brief
statement of the value proposition and value drivers at the beginning and end of each
presentation, with occasional references to it elsewhere, if doing so can be
accomplished without interfering with the flow of a presentation.

Tip: Where possible, have a staff person specialize in creating investor relations
presentations. Centralizing this task ensures that the value proposition is consistently
presented in all communications.

Though the investor relations officer may have a handy concept of the value
proposition that a business represents, this does not mean that precisely the same
message must be communicated to all investors. Instead, consider that the more
quantitatively-minded investors will have their own investment models that they use
to derive the price of a share. For example, a model may be primarily based on

21

The Value Proposition

earnings, or sales, or cash flow, or at least incorporate these items. They may also
incorporate one or more of the value drivers described in the last section. This can
result in slightly different messages that are tailored to the audience. For example:

• Basic message. The company has invested 10% of its cash flow in the DuraSoft

brand of multi-use diapers for the last decade, resulting in a secure customer
niche that generates profits twice as high as the industry average.
• Message for growth-oriented investor. The company expects revenues from its
DuraSoft products to increase at a rate at least twice as high as the industry
growth rate for the next three years.
• Message for analysts. The company expects its DuraSoft-related revenues to
increase by at least 20% per year, while related cash flows should increase at a
25% rate.

The value proposition can be translated into whatever information investors need as
inputs to their valuation models. To do this, ask prospective investors which types of
information they use in their valuation models. Then adjust the standard presentation
to emphasize the required elements.

In those cases where an investor does not want to divulge the inputs to his
valuation model, present the company’s valuation model instead. Explain how the
model works, the inputs to it, and the likely range of inputs to the model (e.g., cash
flows are expected to be between $1 million and $1.2 million next year). This
approach at least gives an investor the company’s viewpoint on the intrinsic value of
the business.

In short, the basic underlying message stays the same from presentation to
presentation, but there can be a varying emphasis on the inputs that listeners need for
their valuation models.

Tip: Enforce a central review of all presentations, press releases, and SEC filings to
ensure that extraneous information is not issued. Instead, there should be a tight
focus on the value proposition and value drivers, which is not muddied by
superfluous information.

A company can also use its value proposition to present an expanded story about the
business, so that investors can see how its value proposition is driving its business
decisions and results. For example:

Hegemony Toy Company makes military-oriented toys and games for the under-20
age group. It has entered into licensing agreements with several military-oriented
high school programs, which will use the Hegemony name as the basis for their
military strategy classes. The company expects that these licensing agreements will
lead to additional brand recognition within its target market.

In the example, the company shows how a new licensing deal fits directly into its
value proposition by expanding the number of potential users of its product line.

22

The Value Proposition

The Value Proposition and Corporate Strategy

Once a company has devised a reasonable value proposition and it has been
communicated to the investment community, there must be a commitment to
maintaining that proposition for a long time. The worst thing that a company can do
is to constantly change its message about why it is in business. Instead, investors
want to hear a consistent story that a company reinforces with solid results that
adhere closely to its value proposition.

This level of consistent, long-term performance is difficult for some companies
to achieve, for one or more of the following reasons:

• Change in company leadership
• Inconsistent or nonexistent planning systems
• Inadequate financial results

A new CEO frequently wants to make his or her mark on a business by altering its
direction. While this is excellent news for the CEO’s ego, it forces the company to
project a new value proposition to the investment community, which may look
askance at the new approach and drive down the company’s stock price. The
following suggestions can mitigate the impact of a change in company leadership:

• Promote someone into the CEO position from within, since insiders
understand the company’s current direction and are less likely to change it.

• Have a long-term employee development system in place, so that there are
several employees capable of taking over the CEO position.

If there are inconsistent or nonexistent planning systems in place, the obvious
solution is to install those systems. However, this is not quite so simple. There must
be a solid system of accountability in place to ensure that plans are followed, which
is remarkably rare. Also, the investor relations officer must continually impress upon
the planning staff the need to adhere to the value proposition that the business has
been communicating to the outside world. If there is a divergence between where
management wants to take the company and the stated value proposition, there must
be an excellent reason for doing so that can be clearly stated to the investment
community.

What if a company simply cannot achieve a reasonable level of profitability
within the boundaries of its stated value proposition? It would be foolish to continue
down the same path if doing so will lead to a paltry stock price or bankruptcy. Thus,
in cases where a substantial pivot in strategy must be made, a company should
certainly do so. However, it is worthwhile to first reach out to key investors and
analysts for their opinions about what this pivot will do to the perception of the
company’s intrinsic value. It is entirely possible that heading off in a certain
direction will be viewed poorly by investors, who will sell their shares in droves. If
the management team were to instead incorporate the views of the market into any
necessary change in direction, and then explain its new value proposition
thoroughly, the result may be accepted with much less fuss.

23

The Value Proposition

The level of self-examination that goes into creating a value proposition may
result in an actual change in strategic direction. A company may find that it does not,
in fact, exactly fit the operational profile that its preferred value proposition implies.
If so, it may make considerable sense to shed some operations and invest in other
areas in order to arrive at a repositioned business that does fit the value proposition.

A special situation arises when management has a vision for the direction of the
company, but the business is not currently positioned properly to communicate a
matching value proposition. In this case, it may not be useful from a competitive
standpoint to divulge the company’s long-term plans. Instead, consider a gradual,
long-term series of incremental changes to the stated value proposition, until the
company actually reaches the point where it can justify the value proposition that it
has been striving for all along. If investors see that the company efficiently meets the
expectations set by each incremental change in value proposition, they will be more
likely to accept subsequent changes in the proposition.

In short, the value proposition should be maintained over a long period of time,
whenever the financial results of doing so are sustainable. This requires consistent
support from the CEO, as well as a well-founded system of accountability for
implementing plans. When a value proposition does not prove to be financially
sustainable, obtain the input of the investment community before heading off in a
new direction. The worst possible situation is for a company to continually swap out
its value proposition, to the point where investors and analysts dismiss them as being
“the flavor of the week,” and derive their own valuations of the business,
irrespective of what the company says about itself.

Tip: If the investor relations officer is hired into a situation where the value
proposition has changed constantly, expect to spend several years of intensive
communications with investors to convince them that the company’s most recent
announced path is one that it intends to follow.

Summary

The investor relations officer can use the concept of a value proposition to create a
central theme about why a company exists. The investor relations department then
uses this value proposition to show the investment community how to formulate a
stock price that relates to the underlying intrinsic value of the business. A company
should construct a value proposition that shows how a business has the potential to
maximize the return to investors of their shareholdings, without making such
outrageous claims that it is clearly evident that the company is making claims
beyond its ability to fulfill them. Thus, the value proposition represents a balance
between the realities of a company’s current capabilities and the prospects to which
it aspires.

The concept of the value proposition forms the foundation of the communica-
tions that a company generates for the outside world. In the following chapters, we
describe the different types of communications that a business can employ.

24

Chapter 3
Communicating the Message

Introduction

A critical role for the investor relations department is to convey information about a
company to the investment community. There are a large number of tools available
for doing so. In this chapter, we discuss some of those tools, including the press
release, annual report, fact sheet, conference presentation, and other forms of
communication. We also describe how to set up relations with members of the
media and how to deal with negative news. The investor relations staff should be
well-versed in all of the tools discussed in this chapter.

The Press Release

A press release is a brief statement about a company event that is released for
outside consumption. It is one of the most important tools of the investor relations
officer, since it can be constructed almost entirely within the investor relations
department (subject to the approval of corporate counsel); this is not the case for
many other forms of corporate communication, such as mandatory filings with the
SEC.

Tip: Restrict a company’s attorneys to reviewing press releases for compliance with
disclosure regulations. If they were to write press releases, they would minimize the
amount of information conveyed in order to reduce the company’s liability.

The investor relations officer can use press releases to issue many kinds of
information that may be of interest to the investment community, such as:

• New hires into senior management, along with their resumes. Investors can
use this information to estimate the impact of a new hire on a company’s
operations.

• The receipt of a contract award, along with the amount of associated
revenue and the period over which the revenue is to be earned. Investors can
incorporate this information into their valuation models for the business.

• New facility openings, which is of particular importance when the facility is
a new store location. Investors can then estimate the likely revenue to be
generated by the new location.

• New product launches, including enough specifics for investors to estimate
likely revenue levels that will result, and the extent to which the new prod-
uct sales may cannibalize the sales of existing products.

Communicating the Message

In a press release, the event being described is placed within the first one or two
sentences, followed by a management statement about the event, followed by
general information about the company. This level of brevity is needed to reduce the
distribution cost of a press release, which is typically priced by word count. A
sample press release is:

Date FOR IMMEDIATE RELEASE

Hegemony Awarded Gaming Contract

Boston, Massachusetts – Hegemony Toy Company has been awarded a contract by the U.S.
Naval War College to develop a gaming platform that can be used to train members of the
U.S. Navy and other members of NATO in how to deal with open ocean threat situations.
The contract is for $5 million, and is to be completed within 24 months.

“Hegemony is bringing its expertise in developing military-oriented games to the
professional military,” states Hegemony president Douglas Bradley. “We will use our Nelson
seaborne gaming software to provide a unique solution for the War College. This patented
system is uniquely designed for the multi-player distributed environment that the War
College envisions for this critical tool.”

About Hegemony Toy Company

Hegemony is a provider of military-oriented toys and games to the under-20 age group. Its
primary offerings are in the areas of board games and multi-player on-line games.

Forward-Looking Statements
[See the Forward-Looking Statement chapter for more information]

Contact Information

Gerry Patton
123 Bastogne Way
Boston, Massachusetts 02203
Phone: 617-330-8900
E-mail: [email protected]

In the sample press release, the event summarization states the name of the
customer, the amount of revenue expected, and the time period over which the
revenue is to be earned. Investors can use this information to alter their estimates of
company financial performance. In addition, the press release points out the
existence and use of intellectual property, which improves investor perceptions of
the company’s intangible assets.

Additional examples of the primary content of a press release are:

(1) Hegemony Toy Company has just licensed its Napoleon Wars board game to a
distributor in the United Kingdom. As a result of this agreement, Hegemony

26

Communicating the Message

expects to build recognition for its other products in its target age group in the
United Kingdom market.

(2) Hegemony Toy Company has just hired Mr. Dale Trotsky as its vice president
of manufacturing. Mr. Trotsky has deep experience in lean manufacturing prac-
tices, which Hegemony expects him to use to drive down costs within the He-
gemony manufacturing facilities.

(3) Hegemony Toy Company has just released its new Thirty Years War multi-
player online gaming platform. The game is available to users worldwide, and
is paid for with a $15 per month subscription fee.

In the first example, the press release is used to announce a potential increase in the
company’s target market. In the second example, the press release tells investors that
the company intends to reduce costs through the revision of its manufacturing
practices. The third example reveals that the company intends to create a recurring
revenue stream with a subscription-based sales model. Thus, each press release
conveys a specific message that the investment community would likely consider to
be valuable.

Where possible, quantify the information conveyed in a press release. A greater
level of detail is more useful to investors, since they can use it to more accurately
estimate the timing and amount of a company’s earnings. Examples of the requisite
level of detail are:

(1) The contract has maximum funding of $5 million. The customer has the option
to extend the contract for an additional five years, with maximum funding of $3
million in each of the additional years.

(2) The outsourcing agreement provides that the company will pay the supplier $15
million per year for the next ten years for outsourced IT services, with a built-in
inflation adjustment that is capped at 5% per year.

(3) The company recognized a charge of $25 million associated with the facility
shutdown for employee terminations and environmental remediation. These
payments should be completed within the next six months.

It is most efficient to distribute press releases through a press release distribution
service. Though relatively expensive, they have massive distribution networks that
can issue press releases to thousands of newspapers, radio stations, television
stations, and any number of Internet-based services. Also, their in-house
proofreaders examine every press release prior to distribution, which can result in
minor improvements to the presentation and content of a release. See the Third Party
Investor Relations Services chapter for more information.

Tip: Since the distribution fee for a press release is based on its word count,
consider storing the bulk of the press release information on the company website,
and simply linking to it from the press release. This has the added advantage of
driving investors to the company website.

27

Communicating the Message

The Earnings Press Release

The earnings press release summarizes a company’s financial results, usually for the
preceding quarter. It is typically released immediately after filing a Form 10-Q with
the SEC. An earnings release usually mentions key financial items, such as
revenues, net profit, and earnings per share, sometimes in comparison to the results
for the same period in the preceding year. The format of the earnings release is
typically copied forward from the last such release, and so leaves little room for
expansion on any topics. A sample earnings press release is:

Hegemony Toy Company (NYSE: HETC), a provider of military-oriented toys and
games, today announced its financial results for the third quarter ended September
30, 20x2:

• Revenue of $120,000,000, up from $112,000,000 in the third quarter of
20x1

• Net income of $13,500,000, up from $8,200,000 in the third quarter of
20x1

• Basic and diluted net profit per share of $0.12 and $0.11, respectively, as
compared to $0.09 and $0.08 in the third quarter of 20x1

At a more informative level, the earnings press release can be expanded to include a
company’s summarized financial statements, as well as management’s discussion of
those results. If this latter approach is used, additional information may include:

• Changes in accounting standards that impacted results
• Explanations of extraordinary items and other unusual revenue and expense

items
• Seasonal or industry trends impacting results

A limited example of this expanded format follows.

Hegemony Toy Company (NYSE: HETC), a provider of military-oriented toys and
games, today announced its financial results for the third quarter ended September
30, 20x2:

• Revenue of $120,000,000, up from $112,000,000 in the third quarter of
20x1. The primary cause of the change was a 7% across-the-board increase
in product prices at the beginning of the quarter.

• Net income of $13,500,000, up from $8,200,000 in the third quarter of
20x1. The aforementioned price increase was the primary cause of the net
income change, though it was partially offset by a one-time $3,000,000
charge caused by a change in accounting standards related to the compa-
ny’s pension plan.

• Basic and diluted net profit per common share of $0.12 and $0.11, respec-
tively, as compared to $0.09 and $0.08 in the third quarter of 20x1. There
were no changes in the company’s shares outstanding during the two com-
parison periods.

28

Communicating the Message

Hegemony is hosting an earnings call today, October 31, 20x2, at 5:15 p.m. EST to
expand upon the results described in this press release. Once completed, a transcript
of the call will be posted on the Hegemony website at
www.hegemonytoys.com/IR/earningscalls.

The earnings press release is constructed by the accounting department, since this
group has the most knowledge of financial information. The investor relations staff
should review earnings releases before they are issued, to be aware of any issues that
investors or analysts may inquire about. The investor relations officer may also
suggest that additional explanatory information be included in an earnings release,
especially if there are unusual items that impacted the reported results.

The Annual Report

The annual report has traditionally been a hefty, multi-colored assemblage of
information about the operations and financial results of a business, which is sent to
its shareholders once a year. The report used to be a massive production that was
considered one of the key methods used by the investor relations officer to
communicate with the investment community. It was carefully constructed, with
input from many parts of the company, and stylishly presented. However, the flood
of on-line information that is now available makes the annual report a much less
critical source of information for the investment community.

Given the decline in importance of the annual report, companies have tended to
deal with it in one of two ways:

• As a marketing tool. A company may continue to invest a considerable
amount of time and money in its annual report, with the intent of using the
report as a marketing tool that can be handed out to anyone interested in the
company. It can also be posted as a PDF file or even a series of full HTML
web pages on the company website.

• As a regulatory requirement. Public companies are required to issue an
annual report, so some organizations treat the requirement as an annoyance
that must be dealt with by the least expensive means. This is most easily
accomplished by issuing a wrap report. A wrap report is the annual Form
10-K that a company is already required to issue, accompanied by a small
amount of commentary and an annual report cover. This option provides no
new information about the company to the recipient.

Of these two options, we recommend the first one. An active investor relations
officer should be meeting with investors and analysts constantly, and needs a
handout that explains the company. A well-designed annual report is one of the
better methods for conveying this information.

Assuming that the investor relations department wants to produce a complete
annual report and has the budget to do so, what should it contain? The following list
addresses the more common components of the annual report:

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