It's annual report time again.
Like those other traditional flowers (weeds?), the W-2 and the 1040, the annual report heralds the vernal equinox of the financial world. By the millions, these documents spread out across the land, ostensibly to tell you the stockholder how well- or, occasionally, how poorly - your company is doing.
That news, it is sometimes said, is crouhed in ancient Greek, tabulated in Roman numerals and illustrated with photographs from the Bull Moose Party memorial album. But, before you consign Consolidated General's 1977 message to the wastebasket - along with this article - pause a moment, and reflect:
Annual reporting has become a $120-million-a year business, according to Dun's Review. The magazine estimates the 15,000 publicy held companies distribute a minimum of 50 million copies a year at an average cost of $2.40 a copy. One-fifty of the dollars expended on producing and mailing them are wasted because they go unread. (Most corporations insist their polls show their reports are well read by stockholders: Dun's findings on lack of readership therefore may apply to nonstockholders.)
Dun's polled two dozen financial analyst and business editors across the county and found they each received at laeast 20 reports a year that were of no interest to them as well as many duplicate copies. Litton Industries, the publication noted, sends copies to 2,500 media persons; Great Western Financial Corp., 3,000. And what about the innumerable unsolicited copies that gather dust on the shelves of brokerage firms, libraries and government offices? The Securities and Exchange Commission receives approximately 9,000 annual reports a year; back to back, they stretch 936 feet.
By law any public corporation that holds an annual stockholders meeting is required to issue an annual report. It must send a proxy statement out a month before that meeting, and the two often are sent together. The annual report usually is prepared in conjunction with the 10K report all corporations must file with the SEC within 90 days after the end of the fiscal year. Becasue 65 percent of U.S. corporations take stock each year on Dec. 31 compared with only 15 percent in June, and because lead time for preparing and printing is six to eight weeks, the race to get out annual reports is now on.
The SEC requires that the annual report contain financial statements for the last five fiscal years, a summary of operations, an explanation of any diversion from generally accepted accounting principles, a brief description of the corporation's business and subsidiaries, a list of officers and directors, and the price of the stock and dividend amount. Recently the SEC also breakout and "segment" reporting, or a breakdown by division or line of business.
As if that weren't enough - and many analysts and even corporations agree it isn't - a small but growing number of corporations, encouraged by the SEC, are including their 10K contains much more complete information, including competitive conditions, backlog of unfiled orders, sources of raw materials, patents, trademarks and franchises, research and development estimates, environmental effects, material properties (including oil and gas reserves), complete identification of all parents and subsidiaries, and suits filled against the corporation.
In the wake of the illegal payoff scandals and Watergate, corporate gadflies and consumer activists also have demanded to know once undisclosed facts as a chief executives's pension and profit sharing, along with corporate positions and activities of his family and directors. Footnotes no longer have to be read through a magnifying glass. Disclosure, whether mandatory or voluntary, is in.
In addition to its basic purpose of informing the shareholder, the annual report has become an important marketing tool for promoting the company. Marriott Corp., for example, says it uses its report for "recruiting, marketing its hotel and food services, news media, responding to inquiries, information needs of friends and potential investors, and communicating with governmental authorities, business schools, students, civis leader, etc."
To this end, Marriott, which has about 65,000 stockholders and benefit cial owners, printed 100,000 copies of its 1977 annual report. Singer Co., with 65,000 stockholders, is printing 150,000. Other corporations print up to three annual reports for every stockholder. Although the other two recipients may be indifferent to the report's cost, the stockholer often has been known to complain.
Marriott's cost per copy in 71 cents, not including mailing costs. Expense are kept low by having the design and writing done by Marriott employes and the report printed locally. The printer is Stephenson Inc. in Northeast Washington. Nationally the cost of an annual report ranges from 25 cents up to $4 or $5 a copy, depending on the quantity and quality.
In 1974 Corporate Annual Reports, a New York firm that turns out 35 to 45 reports a year, estimated the median cost of designing and pringting (but not mailing) 100,000 or more copies was 55 cents each; today that figure would be 88 cents. Similarly, 30,000 to 50,000 copies, which cost $1.02 each then, is now up to $1.63. And for fewer than 10,000, the unit price has risen to $2.29.
American Telephone & Telegraph has more copies printed (4 million) than the next two corporations combined. AT & T does its own design. Bulk mailing rate hold the unit cost to 45 cents. The presses of Empire Color Lithographers of New Yord run a month to put it out.
Annual reports are getting longer and costlier. Gallagher's Reports says SEC regulations will require four extra pages. There may be as much length again added voluntarily. In an effort not to overburden the poor stockholder, some corporations such as Bendix have begun breaking up the annual report by issuing a "year in review" in November with unaudited results, followed by an abbreviated annual report a month later with audited figures. Another mails a lay summary along with its voluminous annual report, and a third breaks open its quarterly reports to reduce the yearend bulge.
But the trend is stell toward bigger and better. The vast majority of the Fourtune 500 have their corporate documents prepared by outside disign firms, And that runs up costs considerably. In New York City, a topflight photographer charges bewteen %750 and $1,000 a day plus expenses. Such talent is deemed necessary to produce the slick, four-colourd annual reports now in vogue.
Arnold Saks is a leading NEw York annual report ddesigner whose clients include Seagram's Burlington Industries. Bristol Meyers. Irving Trust, Chase Manhattan, Squibb and Colt Industries. Between one fifthand tow-fifths of the material in the reports of large companise are for pprmotional purposes and not required by the SEC, he says. This year he urged RCA to add 8-to 10-page section describing the corporation's universe in "poetic language." Bristol-Myers had a special section on antibiotics last year, and Seagram's ran one on how drinking preference have changed.
Annual report covers fall into several general categories: a plain cover with only the corporate name; photographs of company headquarters, employes, products or services: unrelated scenes such as a sunset or an abstract design; and fantasy, involving cut-outs or odd shapes and sizes. People in the industry still remember the food company that turned its annual report into a ham sandwich: each cover simulated the size and texture of bread. Such treatment, however, remains rare in the 8 1/2 by 11, largely standardized world of the annual report.
This year's batch of annual reports will include lots of four-color pictures, a good measure of the country's economy last year, according to William Dunk, executive vice president of Corporate Annual Reports. There will also be lots of people. That means middle management as well as chief honchos, women and minorities in executive positions. And there will be fewer shots of widgets without people using them. Along with the vogue for people journalism, corporations want to show they care about people - even if they may not be able to raise capital investment or do much for their stockholders this coming year.
Norman Sanders, whose New York agency designs about 50 reports a year, recalls "the good old days when the pictures were referred to as mooseheads." Now business such as Azcon Corp. show their employes' community activities like the Boy Scouts to build a good-guy image. Another company goes so far as to list the hobbies of a division manager. "You would never have seen that five years ago," Sanders said.
Raised to such an art form, the annual report has engendered prize competitions, plus volumes and courses on how to write and read it.
The "Oscar" for annual reports has been awarded for the past 38 years by Financial World. The award is weighted on 50 percent content for shareholders, 25 percent for detail of special interest to analysts, and 25 percent for graphic art. The jury, consisting of persons from business schools, the financial press and graphic arts industry. awards on the basis of completeness. Last year's winner was Singer Co., which included extensive financial disclosure. but not its 10K. Other past winners are Philip Morris, Citicorp. Ford and General Electric (twice).
Singer's annual report. written in house and designed by an outside art director, was printed by Case-Hoyt Corp., of Rochester. Case-Hoyt, which does 40 to 50 reports a year, won the largest number of awards in the 1977 Graphic Arts Competition sponsored by Printing Industries of America. Case-Hoyt's clients include top corporations such as Bristol-Myers, Eastman KodaK, Martin Marietta, Continental Life, IBM, Mobil, Xerox, General Electric, and Coca-Cola.
On the West Coast, the big name in printing annual reports is Graphic Press of Los Aneles. Its clients include Ford, Chrysler, Burroughs, Occidental Petroleum, Security Pacific Bank, and Memorex. With the exception of the Fortune 500, annual reporting is generally a local undertaking. Because of the highly seasonal nature of the work, concentrated in the spring, these reports must be turned out by many printers.
In the Washington area, Hennage Creative Printers does between 30 and 35 each spring. Clients include American Security Corp., International Band, and Woodward & Lothrop. Cost range from 48 cents to $2 a copy. Joseph Hennage notes great changes in annual reports in the past decade.These include financial highlights up front, expressed concern for social problems, foreign language reports, and a more meaningful message from the president.
One who does not believe that annual reports are getting better is Arthur R. Roalman, a lecturer at the College of Journalism, University of South Carolina. Roalman teaches a seminar for corporate executives on how to write an annual report. "There is too much tradition; they are written by committees," he said. "Clarity has a long way to go. I can cut 20 percent of the words without destroying the clarity."
Corporate surveys of stockholders reveal that the most confusing part of the annual report is the tabular matter. Merrill Lynch has put together a handy booklet, "How to Read a Financial Report." It explains figures on esoteric subjects such as net working capital, capitalization ratios, leverage, and cash flow. The booklet's parting advice: Read the footnotes. They have been known to contain such "dynamite" data as stock options granted to officers and changes in the method of depreciation.
In this era of maximum disclosure, how do annual reports stack up? The blue chips do well, despite their initial reluctance to lay their corporate souls bare. Yet designers and printers acknowledge that subtle deception by marginal companies continues. Juggleng figures can land a company president in jail, but shading photographs and text can't. To impress potential investors, a manufacturer of church pews, for example, shows a magnificent catherderal on the cover, not a bench.
A year before W.T.Grant went bankrupt - the biggest retail bankruptcy ever - its president, James K. Kendrick, wrote in the annual report: "A spirit of enthusiasm and confidence now characterizes the entire organization. While management anticipates a loss for both the first and second quarters of 1975, it believes that operations will become profitable in the second half of this fascal year."
A final work of advice from Corporate Annual Reports: beware of a company that sends out a 10K report to shareholders in place of an annual report. The company is almost surely betting the shareholder won't be able to or bother to read it and thus won't discover the company is in trouble.