Annual Reports

This sort of publicity also can be valuable when a company is making plans to move into a new community. Companies seek warm welcomes in new communities (including tax breaks and other incentives). Communities will woo a company perceived as a "good" corporate citizen more zealously than one that is not. The good corporate citizen also will receive less resistance from local interest groups. The company's annual report will be one document that all affected parties will pore over in evaluating the business.

READING AN ANNUAL REPORT

People read annual reports for widely different purposes and at dramatically different levels. Generalizations, however, are difficult. The stockholder with five shares might be as careful and discriminating a reader of an annual report as the financial analyst representing a firm owning one million shares.

It may require an MBA to understand all the details buried in an annual report's footnotes. Nevertheless, a good understanding of a company is possible by focusing on some key sections of the report.

Company Description

Most companies will include a description of their business segments that includes products and markets served. Formats vary from a separate fold-out descriptive section to a few words on the inside front cover. A review of this section provides readers with at least a basic understanding of what the company does.

The Letter

Whether contained under the heading of Letter to Shareholders, Chairman's Message, or some other banner, the typical executive message can often provide some informative data on the company's fortunes during the previous year and its prospects for the future. Readers should always bear in mind that it is invariably in the executive's best interests to maintain a fundamentally upbeat tone, no matter how troubled the company may be. This is often the most widely read portion of the entire annual report, so business owners and managers should make a special effort to make it both informative and engaging.

Management's Discussion and Analysis (MD&A)

This section of an annual report provides, in a fairly succinct form, an overview of the company's performance over the previous three years. It makes a comparison of the most recent year with prior years. It discusses sales, profit margins, operating income, and net income. Factors that influenced business trends are outlined. Other portions discuss capital expenditures, cash flow, changes in working capital, and anything "special" that happened during the years under examination. The MD&A is also supposed to be forward-looking, discussing anything the company may be aware of that could affect results either positively or negatively. An MD&A can be written at all different levels of comprehension, but business consultants generally urge companies to make the information—from balance sheets to management analysis—comprehensible and accessible to a general readership. This means forsaking jargon and hyperbole in favor of clear and concise communication.

Financial Summary

Most companies will include a five-, six-, ten-, or eleven-year summary of financial data. Sales, income, dividends paid, shareholders' equity, number of employees, and many other balance sheet items are included in this summary. This section summarizes key data from the statements of income, financial position, and cash flow for a number of years.

Management/Directors

A page or more of an annual report will list the management of the company and its board of directors, including their backgrounds and business experience.

Investor Information

There almost always is a page that lists the company's address and phone number, the stock transfer agent, dividend and stock price information, and the next annual meeting date. This information is helpful for anyone wanting additional data on the company or more information about stock ownership.

PACKAGING THE ANNUAL REPORT

For most companies, large or small, the financial information and the corporate message are the most important aspects of an annual report. Many companies also want to be sure, however, that their targeted audiences are going to read and understand the message. This is less essential for privately owned businesses that do not need to impress or soothe investors, but they too recognize that disseminating a dry, monotonous report is not in the company's best interests.

The challenge for producers of annual reports is to disseminate pertinent information in a comprehensible fashion while simultaneously communicating the company's primary message. In many ways the annual report serves as an advertisement for the company, a reality that is reflected in the fact that leading business magazines now present awards to company reports deemed to be of particular merit. In recent years, companies have also chosen to make their annual reports available in a variety of electronic media that lend themselves to creative, visually interesting treatments.

Of course, the personality of the company—and perhaps most importantly, the industry in which it operates—will go a long way toward dictating the design format of the annual report. The owner of a manufacturer of hospital equipment is far less likely to present a visually dramatic annual report to the public than are the owners of a chain of suntanning salons. The key is choosing a design that will best convey the company's message.

SUMMARY ANNUAL REPORTS

Few major trends have shaken the tradition of annual reports, but one is the "summary annual report." In 1987, the SEC eased its annual reporting requirements. It allowed companies to produce a summary annual report, rather than the traditional report with audited statements and footnotes. Public disclosure of financial information was still required, but with the new rulings, filing a Form 10-K—provided it contained this information and included audited financial data and other required material within a company's proxy statement (another SEC-mandated document for shareholders)—met SEC requirements. Promoters of the summary annual report see it as a way to make the annual report a true marketing publication without the cumbersome, detailed financial data. Financial data are still included, but in a condensed form in a supporting role. Since its use was approved, however, the summary annual report has not gained widespread support.

In some respects, annual reports are like fashions. Certain techniques, formats, and designs are popular for a few years and then new ideas displace the old. Several years later, the old ideas are back in vogue again. Other formats are "classic," never seeming to go out of style or lose their power. A key to a successful annual report is not getting caught up in a trend, and instead deciding what works best for conveying the message.