A Fashioned Statement : Annual Reports Do Much More Than Chart the Bottom Line. Done Properly, They Convey Where a Company Is Going, Not Just Where It’s Been

The cover of CKE Restaurants Inc.’s new annual report says it in one word: Wow!

“If you glanced at it you wouldn’t necessarily know whose report it is,” acknowledged Suzanne Brown, spokeswoman for the Anaheim-based parent company of the Carl’s Jr. chain. “But that’s what we want. We want the ‘Wow!’ to entice you, to draw you in.”

Welcome to the world of annual reports, where how the message is delivered is often as important as what is being said.

Critics contend that annual reports are dubious sources of information, given the seeming ease with which corporate numbers crunchers can bury potential land mines beneath layers of convoluted footnotes.

But observers who wade through thousands of reports each year maintain that, when properly handled, the books can serve as sophisticated marketing vehicles that deliver far more than a tired message from the corporate chieftains.

“Annual reports are the most important single publication that a company will put out during the year,” said Barry Murphy, marketing director for the Detroit-based National Assn. of Investors Corp., a nonprofit group that each year reviews and grades more than 1,000 annual reports.

And with a majority of the reports mailed to shareholders from March through May, this is annual report season.

The federal government first ordered corporate executives to present an annual report on their stewardship to shareholders in 1933. But experts agree that the annual report should do more than simply rehash last year’s financial picture.

“There are an awful lot of people spending huge sums of money to put out information that’s already dated by the time it hits the street,” said Robert Ghelardi, editor of Chicago-based Corporate Annual Reports Newsletter, which reviews and grades corporate reports.

“What the potential shareholders really want to know is if this company is in a good position to make money,” Ghelardi said. “And, only in the last couple of years have corporations started getting really good at doing it the right way.

Some annual reports fail because executives use them as soapboxes to deliver the company line--even when it’s contradicted by the bottom line. Others are turned into platforms for glitzy graphs and dubious designs that overwhelm or contradict the boss’ message.

And, as cutting-edge companies start zapping electronic versions of their reports to shareholders via Web sites and CD-ROMs, investor relations executives are grappling with a whole new set of problems.

Experts agree that the best annual reports tell a story about where the company has been as well as the strategy that management has crafted to meet investors’ demands for a return on their investment.

“Ten years ago when I started doing annual reports, they were simply historical pieces,” said Elaine Franklin, manager of corporate information at PepsiCo Inc. “You ran pictures of trucks and the plant and gave the required data.

“You can’t do that anymore,” Franklin said. “It has to be done in a way that’s interesting, in a way that makes them want to pick it up.”

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While the accountants and lawyers have a big say in how a report looks, individual corporations have found ways to make their personalities shine through.

* Harley-Davidson Inc.’s fiscal 1994 report, for example--one of 24 winners culled from more than 500 entries in the 1995 Mead Corp. annual report show--blended charts, pictures and a poster to move beyond a simple recitation of the company’s accomplishment.

“It describes more than a company--it portrays a culture,” judges wrote. “One thing Harley-Davidson has is noise and volume. The poster added these elements to the annual report.”

* Aliso Viejo-based Armor All, a marketing-driven company, occasionally tucks a $1 coupon into its report that shareholders can redeem at the automotive store.

* FHP International Corp. won praise from the Orange County chapter of the National Investor Relations Institute for a recent report that incorporated a glossary that investors could use to decipher the health-care industry’s increasingly complex jargon.

* Marvel Entertainment Group conducts its shareholder letter in a comic-book setting, with the chairman and other executives appearing in comic-book strips, talking to the company’s star comic book characters.

* PepsiCo Inc., which regularly incorporated a light touch in its reports, recently hired supermodel Cindy Crawford--a PepsiCo shareholder--to act as a corporate tour guide.

“Sit back, pop open a Pepsi and, along with Cindy, read about your company,” invited Pepsico Chairman Wayne Calloway, who also eschews the formal “To Our Shareholders” greeting in favor of a folksy “Dear Friends.”

* Jacor Communications Inc., a Cincinnati-based radio station holding company, surprised shareholders by inserting an audio CD inside its annual report that includes a digital sampler from its nationwide string of radio stations.

* First Union Bank in Charlotte, N.C., features its Web site address on the front cover and a CD-ROM version of the shareholder report that includes sights and sounds from around the company.

“Some of these annual reports become collectors’ items,” said Jim Milner, manager of the San Francisco-based Annual Reports Library, which has nearly 1 million reports in its collection. “We have to keep the Marvel report under lock and key.”

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Despite what your mother told you, it’s probably OK to judge these books by their covers.

“The cover has to have impact because it’s the one page that everyone, including the postman, is going to see,” Ghelardi said.

“The tone of the book has to immediately be apparent,” said Jim Comer, corporate communications manager for Fountain Valley-based FHP, which is now readying a report that will be mailed in October to shareholders.

Comer hasn’t designed the cover for its upcoming report, but it will mirror the reality of FHP’s ongoing restructuring. “It won’t be a flashy report,” Comer said, “but it will be one that says, ‘We know what’s important and we’re doing it.’ ”

CKE Restaurants tried to send a similar message with its fiscal 1995 report, which was issued at a time when the company’s stock was stuck at a near-record low. Unlike past efforts, the book had a somber cover and the inside was bereft of four-color art.

“CKE had to walk a fine line. It didn’t want to look extravagant because that would fly in the face of what their financial results were,” said Kimberly Baer, a Venice-based designer who’s handled the company’s past seven reports.

The upcoming “Wow!” report will pump up the volume, with an upbeat presentation that focuses on a stock price that’s more than tripled.

“It’s important to remember that this document doesn’t only go to people who already hold our stock,” Brown said. “It’s also a tool to attract new shareholders, and if the annual report doesn’t reflect the current momentum at the company, that’s not going to happen.”

Los Angeles-based Kaufman and Broad, which has won awards for its past annual reports, also is using one word on its new report’s cover.

The home builder’s stark, black-and-white cover is dominated by the phrase “[r]evolution.” Inside, a cutting-edge design, coupled with black-and-white photographs and understated charts drives home Kaufman and Broad Chairman Bruce Karatz’s message that this is one forward-thinking home builder.

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Bold designs and themes work, experts say, when a company is rebounding or believes it is perfectly situated to take advantage of an impending market shift. But when the picture isn’t so bright, designers must scramble to craft a report that delivers a suitably frugal message.

That’s the case with Troy, Mich.-based Kmart, the struggling retailer.

In the past, Kmart’s reports were chock full of four-color photographs and snazzy graphics that augmented an upbeat theme. But the new report, with its conservative blue cover, is, in industry parlance, a wrap-around for a report that includes a minimalist message from the chairman’s office and the company’s mandatory 10K annual report to the SEC.

There’s little in the way of color inside Kmart’s annual report. Kmart Chairman Floyd Hall, who delivers a sober message about “biting the bullet,” merits the only four-color photograph, and there’s little in the way of charts and graphs.

Observers say that, given paper prices and the inherent design costs of producing an annual report, it can often be just as expensive to produce a book that looks like it cost little to produce.

Costs of annual reports vary widely, and the expenditures are driven by what the company wants to say--and how it wants to say it.

The entry form for an annual report contest held by the National Investor Relations Institute’s Orange County Chapter includes categories for books that cost less than $2 per copy to produce as well as a category for books that cost a staggering $15 per copy.

FHP spent about $3 per book to publish 55,000 reports last year. PepsiCo Inc. has budgeted about $1.20 per copy for its current report, and CKE Restaurants will spend about $3 per book.

Some companies maintain that they can produce annual reports for far less by handling production internally.

Santa-Ana-based GT Bicycles Inc., which made its initial public stock offering in 1995 and in early April mailed its first annual report, boasts of spending less than 30 cents per copy.

GT Bicycles marketing coordinator Todd Huffman acknowledged that the figure doesn’t include the company’s “soft costs” of using staff photographers and designers.

But Huffman says that the internally produced book “cost far less than what we were quoted when we first started talking about doing it outside. We were getting estimates of $35,000 to $40,000 before we even got to the printer, which would have meant at least another $10,000 to $15,000.”

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Corporate executives have been sending shareholders annual reports on their stewardship for at least 60 years. But practice doesn’t always make for perfect reports, according to experts who wade through hundreds of them each year.

One public relations executive tells of a former boss who urged her to spend freely so that the upcoming report--the last to be published on his watch--would snare a long-coveted design award.

The woman used attractive photographs and charts to dress up the requisite data, producing a well-designed piece that easily won a blue ribbon. But shortly after the proud executive retired, his successor appeared in her office with a succinct rejoinder to the costly effort.

“He said, ‘Great report, don’t ever do it again.’ ”

Other frequent problems citied by Murphy, Ghelardi and others who judge annual report competitions include:

* Using colored paper--particularly silver or gold--that makes it difficult to read type.

* Typefaces that are difficult for older investors to read.

* Failing to number pages. “How are you supposed to direct someone to an important line?” Murphy asked. “By saying look for the page next to the orange chart?”

* Failing to state the ages of directors and officers.

* Charts and graphs that overwhelm--or simply repeat--information in the chairman’s letter or the MDA--management, discussion and analysis--section.

But the mortal sin of annual reports, experts say, is simply limiting the report to information that’s dated by the time it hits the street.

“The key thing to remember is that these reports go to shareholders and analysts,” Franklin said. “And that audience is interested in learning how their investment will do tomorrow.”

Investor relations experts are still uncertain how annual reports will look when the ongoing electronic revolution runs its course.

SEC officials say there’s definite interest in electronic access to corporate documents. Each day, SEC officials say, the agency’s EDGAR electronic filing system gets 80,000 hits.

PepsiCo has averaged 7,000 “hits” daily since activating a corporate Web site on April 30. But while a third or more of people who request annual reports have computers and modems, Lynn A. Tyson, director of PepsiCo’s investor relations, isn’t yet sure how many of the hits are, say, from students who simply need data to complete a school report.

Brud Jones, president and co-founder of Corporate Document Systems, is betting that the electronic age will change the way corporations deliver annual reports. The Kansas City-based company’s Web site includes full versions of more than 50 annual reports from large companies, including Boeing Inc. and General Electric.

Jones argues that electronic distribution will grow rapidly as Internet access spreads and technology catches up with users’ expectations.

“Roughly 3,000 people are coming to our Web site to look for annual reports each day,” Jones said. “And we think there’s a huge potential because it’s getting so easy for even a novice to plug in.”

Others aren’t sure how quickly electronic distribution will grow.

“I think this is a transition period,” said Clark McCann, director of advertising and executive communication at Boeing, which also posts its annual report and updated financial data on its own corporate Web site.

“There’s relatively little downside, as far as cost, to putting reports on the Web,” McCann said. “But it’s pretty much a ‘brave new world’ at this point in time.”

PepsiCo’s Franklin maintains that paper reports aren’t likely to become dinosaurs any time soon.

“Maybe someday they will be extinct, when we’re all wearing mini-computers strapped to our wrists,” Franklin said. “But people seem to want something that they can hold in their hands.”