Bottom Line on Reports: Looks Count

It would be hard to find a simpler, more direct annual report than the document pumped out each year by Price Co., the San Diego-based operator of the Price Club membership warehouse chain.

The highly profitable company has produced a string of plain, to-the-point annual reports that contain basic information required by the U.S. Securities and Exchange Commission--but no photographs and only a handful of simple charts.

Unlike Price, which chooses to publish stark reports, financially troubled Western Health Plans recently was forced to abandon the sleek kind of reports it published during healthier years.

Got Message Across

The 1987 report, a bare-bones, economy model, “clearly got our message across,” according to WHP President Robert Erra, who acknowledged that it would have been “ludicrous” for the ailing company to produce a glossy, four-color report.

“The first question we’d get from our shareholders, 70% of whom are doctors, is why we didn’t skip the report and pass along another nickel to each of them for (patient treatment) reimbursement,” Erra said. “Besides, if we haven’t sold our shareholders by now, we’re wasting our time and money with an expensive annual report.

“Annual reports are more public relations than anything else,” he said.

But companies have learned that a glossy annual report can be an effective public relations tool, according to Richard A. Lewis, chairman of New York-based Corporate Annual Reports, which produced about 40 annual reports last year for large and small corporations.

Lewis’ clients, including General Motors and Philip Morris, regularly print “three to four times as many annual reports as they have shareholders because, in 99% of the cases, their No. 1 audience is now the professional portfolio managers and securities analysts.”

Although the reports contain information that is mandated by federal law, “companies are trying to create a favorable impression upon a key audience, so it’s a sales document, it’s not unbiased financial data,” according to Lewis. “If you want an unbiased report, go to a securities analyst whose job is to analyze pluses and minuses.”

Companies that publish elaborate reports do so to “help the company make a favorable impression with its audiences, to give the company a clear identification and to help the chief executive officer communicate ideas,” Lewis said.

Given today’s rapidly changing business environment, including the continuing wave of corporate mergers and realignments, “annual reports have evolved into a yearly snapshot” that gives observers an updated explanation of what companies are doing, Lewis said.

W. R. Grace, which spent the past year buying new businesses and shedding old ones, tried to explain all of that movement by beginning its 1987 report with a “question-and-answer” piece by Chairman Peter Grace.

Companies such as Price “have decided to discount the sales value of the annual report,” according to Lewis.

However, simple reports sometimes generate complex problems: Lewis recalled a healthy company that dropped its four-color glossy report in favor of a simple report with black-and-white photography.

“The chairman was deluged with calls from people who thought the company was teetering on the brink of financial disaster,” according to Lewis. A company shouldn’t put out a report, he said, “that suggests you’re going down for the third time.”

Pictures and seemingly unnecessary information serve another purpose, according to Irving Katz, director of research for Thomas Green/San Diego Securities.

“You’ve got to have other stuff in there, because no one actually reads annual reports, not even shareholders,” said Katz, who receives as many as 40 reports a day during spring, when most reports are mailed out.

Notes in the Back

Katz dismisses the photographs and precisely written prose as window dressing, and concentrates on the notes in the back of each report or in annual meeting proxies.

There, “some companies go out of their way to supply information beyond what the government requires,” Katz said. “Or, if they’ve got any bad news, they try to hide it back there.”

Most corporations hope to publish aesthetically pleasing documents that are chock-full of pictures and graphs, along with a capsulized history of the past year and a fairly general prediction on where the company is headed.

However, “there are an awful lot of well-designed but pretentious annual reports, and 90% of them are dull and really very similar in nature,” according to Lewis, who credited Litton Corp. with creating the modern annual report during the 1960s.

To escape that trap, many corporations tie their reports together with themes that set them apart from the pack.

Home Federal Savings & Loan’s 1987 report uses drawings of the “ribbed vault . . . the hallmark of Gothic architecture” to illustrate the strength of its corporate planning and performance.

Great American, which in recent years has expanded beyond California, used some great American photographs--of Mt. Olympus in Washington, Red Rock Crossing in Arizona and Big Sur in Northern California--to portray its growing marketplace.

Other local companies have become known for distinctive annual reports.

Humphrey Inc., which manufactures precision control and measuring systems, regularly prints one of the briefest reports--12 pages for 1987, including the back cover.

San Diego Trust & Savings published a smart, four-color report for 1987--but used the cover that has been on every annual report for 12 years. The company sticks with the cover because “it’s simple and effective,” according to a spokesman.

BSD Bancorp regularly prints eight chairman’s reports--including remarks by BSD Chairman James Brown and the chairmen of its seven banking subsidiaries.

Besides numbers, annual reports usually include wit, wisdom or an outright sales pitch:

* Pacific Commerce Bank noted that two nationally recognized bank rating services had awarded the bank high marks for 1987.

* Southwest Bank acknowledged that it “remains alert to profitable opportunities in all facets of the financial industry.”

* Heartland Savings & Loan used the centerfold of its 1987 report to hawk its varied services--from credit cards and automatic teller machines to IRA accounts and single-family loans.

* First National Bank quoted Will Rogers--”Even if you’re on the right track, you’ll get run over if you just sit there”--and Helen Keller--”One can never consent to creep when one feels an impulse to soar.”

* Scripps Bank included Leroy (Satchel) Paige’s pithy warning to “inch along, steal a base, bunt a man along, hit behind the runner, thread a needle and don’t look back.”

The baseball star’s advice is “a valid operating principle--especially for these days,” according to the report.