PR TECHNIQUE: Annual reports must reflect the times

With an uncertain economy and corporate governance a necessity, annual reports must clearly show how a company sees its prospects and challenges.

With an uncertain economy and corporate governance a necessity, annual reports must clearly show how a company sees its prospects and challenges.

The ongoing economic doldrums and tense regulatory environment continue to force companies to focus on how they approach their annual reports. But, experts say, judging from the 2002 reports issued by companies on a calendar fiscal year, there is still some way to go in terms of openness and use of plain language. Rather than creating glossy annual reports, more companies appear to be simply sending out their SEC form 10-K with a chairman's letter and perhaps some other materials - a so-called "10-K wrap." Recent regulations, such as Sarbanes-Oxley, don't actually require much of annual reports - as with all financial disclosures, any use of pro forma numbers must be reconciled with GAAP figures (that rule went into effect March 28 of this year). The CEO and CFO must certify the financials in the 10-K document filed with the SEC, not necessarily those in the annual report. But if an annual report takes the form of a 10-K wrap, the sign-offs would be there anyway. However, it appears the new law's spirit of disclosure is not exactly being fulfilled. "They're using Sarbanes-Oxley to clam up," says Sid Cato, editor and publisher of the monthly Newsletter on Annual Reports. "They're saying, 'We've got the 10-K, and there it is.'" Others say jargon and confusing writing continue to plague reports. Worse still, L. J. Rittenhouse, president of andBeyond Communications, who conducts a survey of annual reports' letters to shareholders, says that last year one-third of the companies that mentioned earnings in the letter used figures different from those in the back-of-the-book tables. "Mostly it happens because the corporate communications people work with the CEO to write the letter, and the financial people do the financials," she says. Cato believes the problem can also stem from the letter being written and approved before the final numbers are in. Corporate governance is a front-page issue these days, and it should be addressed in a substantial - not perfunctory - manner. This is an important reason Cato praises the annual report of Leggett & Platt, the Carthage, MO-based diversified manufacturer. In it, the company states, "Leggett shines under the light of close examination. First, our pension plan remains over-funded in the aggregate despite three years of stock-market declines. Few Fortune 500 firms can make that statement." Annual reports offer the perfect vehicle for explaining how a company sees its prospects, but with the uncertain economy, companies appear to be doing that less. "If you're trying to attract a portfolio manager with a 20% turnover - that's [a total turnover] every five years - you have to articulate where you see the company in five years," says Gregory Pettit, SVP and director of financial services at Hill & Knowlton. Eric Leeds, executive director at G.A. Kraut Company, says in this environment companies should start with their "status." "In the '90s, the status was 'growth, growth, growth,'" says Leeds. "Now the status is 'declining' or 'stabilizing' or 'stabilized.' That would be the first thing to look at, and then go from there." Some reports do stand out. Donald E. Kieso, co-author of the textbook Accounting Principles, says the next edition will feature (among 200 candidates) PepsiCo's 2002 annual report, both because the company is so well known and because the report is packed with information about PepsiCo's product line and competition. The document is also written clearly. Elaine Palmer, manager of corporate information at PepsiCo, says the company worked hard to revamp its report this year for ease of use and comprehension. "Our financials are both written and designed in a totally different way," she says. The report also has two new sections: one on corporate governance and one on health and wellness, discussing both the challenges and opportunities that obesity concerns present. In a study last year, the National Investor Relations Institute (NIRI) found that 29% of companies used 10-K wraps for their 2001 annual reports, up from 14% in 1999. NIRI president and CEO Lou Thompson suggests that number may be even higher this year, "given that many are still in austerity mode." Indeed, a 10-K wrap used to signal a company in financial distress, but now it may signal positive frugality. Another popular format is the annual report that looks like a magazine. Banking company KeyCorp's report this year looks like a business publication, and includes a masthead that lists the board of directors. The report is easy to navigate by reading headlines and captions. "We saw an opportunity to make the report work for us as a marketing tool," says Christine Thompson, KeyCorp SVP of public affairs and executive writer. "We have a lot of retail shareholders. It's modeled after the business magazines they're used to." Other companies have explored technology. 4Kids Entertainment, a media and entertainment company, used a CD-ROM with its annual report to better explain through video what the company does. The report is actually a plain-paper 10-K with the glossy-paper chairman's letter and cover wrapped around it. "We thought it would be fun to put the TV shows on a medium so they could see them," says chairman and CEO Alfred Kahn. "Some of these people don't watch kids' shows, and don't know what they look like on TV." Online versions of reports are also becoming more sophisticated. This year, about 100 clients of online IR company CCBN - including PepsiCo, The Gillette Company, and Bank of America - are using Mobular Technologies' Interactive Annual Report system that makes their online versions more navigable than a PDF, with drop-down tables of contents and keyword searches. It also allows users to download the tables into an Excel spreadsheet. Finally, despite contentions that a more serious business environment and the bursting of the tech bubble have led to the death of casual dress, Cato says that in this year's reports, 33.9% of CEOs are pictured in casual attire (no jacket, no tie, or neither), compared with 27.1% last year and 26% the year before. ----- Technique tips Do address corporate governance. It's such a hot issue, its absence will be noticed Do explain the company's status. Has it recently stabilized? Is it still in the process? Do make sure numbers used in the shareholders letter or elsewhere match the figures in the tables Don't avoid talking about the company's future just because the economic situation is uncertain. Investors and potential investors must know your story Don't use pro forma numbers without reconciling them with GAAP figures. It's now the law Don't use jargon and confusing language. Be straightforward

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