In annual reports, check financial highlights page

Andrew Leckey

April 09, 1993|By Andrew Leckey | Andrew Leckey,Tribune Media Services

With troubling financial returns from the recession still rolling in, more U.S. companies are chickening out in their 1992 annual reports.

The number of firms not running a financial highlights page, generally considered a report's first-read and most important feature because it spotlights performance, has increased from 10 percent in 1991 to 14 percent in 1992.

"That's not a good sign, and you should always be wary if you don't see a financial highlights page right up front," warned Sid Cato, editor and publisher of Sid Cato's Newsletter on Annual Reports.

Meanwhile, the average amount spent on each annual report has increased by a modest 2 cents per copy to reach $2.62 this year. That may be a positive economic sign, but it pales in comparison to the average of $3.35 spent in 1989 when the U.S. economy was more robust.

Creativity and earnest messages are still in evidence:

* PepsiCo Inc., featuring a delicate female dancer on the cover of its 1992 annual report, quotes chairman Wayne Calloway within as saying, "We might not be as pretty as Swan Lake, but to me we have a beauty all our own."

* The Berkshire Hathaway annual report includes self-effacing Warren Buffett's recollection of some of his earliest acquisitions before he became a world-renowned investor: "In my early days as a manager, I too dated a few toads. I kissed and they croaked."

* In its annual report, titled Turning Change into Value, Quaker Oats repeatedly uses boldface type to punch up phrases such as ". . . our overriding goal is to maximize value for our shareholders."

To back up that resolve, Bill Smithburg, Quaker's chief executive officer, is shown standing with his jacket off and his arms crossed in front of him, ready for action.

An annual report may be used to recruit new employees or market products, but the shareholder is its real target. It should clearly represent a company's strategies, goals and financial situation.

The top 10 annual reports of 1992 in terms of clarity of information, according to Cato, are Mosinee Paper Corp., Communications Satellite Corp., PepsiCo Inc., Bruncor Inc., St. Paul Cos., American General Corp. and Armco Inc. (tied for sixth place), Quaker Oats Co., CSR Limited, Unysis Corp. and American Telephone and Telegraph Co.

(Subscription to Sid Cato's Newsletter on Annual Reports is $197 annually for 13 issues. Write to P.O. Box 738, Waukesha, Wis. 53187-0738.)

"Whether a company's results are up or down, your annual report must explain that the company is not drifting aimlessly without knowing what to do," explained Donald Janis, corporate comptroller for top-rated Mosinee Paper Corp. in Mosinee, Wis., whose colorful book is printed on recycled paper.

"We place great emphasis on our management discussion and analysis in the financials in the back of the report -- eight pages to most annual reports' two or three pages -- to explain the past and where changes will occur," he said.

The chief executive's letter to shareholders is one of the parts of a report that isn't dictated by government. Also look at the auditor's opinion and make sure it is unqualified, meaning auditors agree with management. Details in the back of the book should never be overlooked.

"Even though companies are trying to make annual reports more user-friendly, accept the fact that you're essentially looking at a business document," explained Regina Dolan, senior vice president for PaineWebber Inc. "An annual report requires concentration, and you must stay with it, reading from front to back, if you are to really understand it."

An annual report's figures consist basically of a balance sheet that logs year-end assets and liabilities and an income statement comparing income from sales and investments to the costs required to run the company. When reading the balance sheet, note the difference between current assets and current liabilities. That difference is the net working capital -- the money the company has to allow it to grow.

"The most important warning signal for the reader of an annual report is that the income statements show a drop in earnings," concluded William Brennan, tax partner with Ernst & Young. "It's a clear indication that something's going wrong."

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