How 21 companies handled their summary annual reports.
How condensed have summary annual reports proven to be? Is the change to the summary format more apparent on financial pages than on non-financial pages? How different were the approaches that companies took to the summary format? The authors recently conducted a study of the "Enterprising 21" - those firms identified in the July/August, 1988, issue of Financial Executive as having issued summary annual reports for 1987. The companies were Adobe Resources Corp.; American Fructose Corp.; American Maize-Products Co.; American Management Systems, Inc.; Avery International Corp.; Banc One Corp.; Becton Dickinson & Co.; Branch Corp.; Compugraphic Corp.; ENSERCH Corp.; First Interstate Corp. of Wisconsin; Iowa Resources, Inc.; The Kroger Co.; Maxus Energy Corp.; Marine Midland Banks, N.A.; McKesson Corp.; Prime Computer; Society Corp.; Sound Advice, Inc.; TW Services, Inc.; and Weyerhaeuser Co. Interestingly, only four companies actually used the heading "summary annual report." Fourteen continued to use the title "annual report," two used the title "annual review," and one used the title "1987 report."
While Banc One called its publication an "annual report," the company's disclosure that it was issuing a summary annual appeared on the inside front cover: This is the first summary annual report to be issued by Banc One Corporation. You will note that, unlike previous reports, much of the traditional financial information has been reduced or summarized. Full disclosure of all financial information is detailed in the 10-K and proxy statement, which is available to shareholders, and the 1987 financial statements have been filed with the Securities and Exchange Commision.
How many pages did it take?
Our research revealed that the summary annual reports for the 21 companies consisted of an average of 42 percent fewer pages than did the companies' prior annual reports. (See the figure on page 47). Non-financial pages were reduced 16 percent, while financial pages were reduced 57 percent. However, the averages hide some diverse reporting practices. For example, Compugraphic Corp. actually increased its number of pages from the prior annual report by 12 percent, using 21 percent more non-financial pages with no change in the number of financial pages. Banc One Corp. reduced its number of pages by 54 percent, increasing non-financial pages by 24 percent and reducing financial pages by 88 percent. And Prime Computer reduced its number of pages by 43 percent, reducing non-financial pages by 69 percent and reducing financial pages by 21 percent.
In general, the prior annual reports had more financial than non-financial pages. With two exceptions, the summary annual reports had more non-financial than financial pages.
In terms of total pages, the summaries ranged from a low of 12 pages to a high of 48. Pages of non-financial data ranged from a low of six to a high of 33. Pages of financial data ranged from a low of one to a high of 15.
The Kroger Company's summary annual report had the most unusual distribution - 18 total pages, 17 of which were non-financial and one that was financial. Kroger's financial data included only information about sales, earnings, return on average equity from continuing operations, dividends per common share, and capital expenditures.
Paul Bernish, director of public relations at Kroger, reported that the summary annual report was well received by stockholders. Three weeks after the summary annual reports were mailed to stockholders, Kroger mailed a combined 10-K/proxy statement. Thus, stockholders and security analysts received more comprehensive financial data in the combined 10-K/proxy than they had received in the full annual reports issued in prior years.
A look at the tables of contents
The 10 major sections found in summary annual reports are the financial highlights, the president's letter, a business review, a financial review, selected financial information, management's responsibility statement, the audit report, the income statement, the balance sheet, and a statement of changes in financial position. Of these sections, the three most commonly omitted are the financial review (omitted in four reports), a statement of management's responsibility (omitted in 12 reports), and the statement of changes in financial position (omitted in six reports).
Interestingly, the financial reviews ranged from being exactly the same or nearly the same as the Management's Discussion and Analysis (MD&A) section in the 10-K/proxy for six companies, to being a simplified version for eight companies, to bearing no resemblance to the 10-K/proxy MD&A for three companies. Four companies did not present a financial review.
Nineteen of the 21 firms presented an audit report. The wording of the audit report was specifically designed for the summary format and was similar from firm to firm.
The audit report referred to the auditors' opinion on the comprehensive financial statements and indicated where the comprehensive statements could be found. It concluded with a paragraph saying that the statements in the summary annual report were fairly stated in all material respects in relation to the financial statements from which they had been derived.
Since financial statements already represent a summarization of financial data, how much further summarization was used in these summary annual reports? We compared the number of lines of data in the summary annual report financial statements with the number in the 10-K/proxy financial statements. These lines of data were counted through "Income from Continuing Operations," excluding totals and subtotals. We found that reductions in the income statement ranged from three firms with more than 60-percent reductions to six firms with no reductions. The reduction in the balance sheet ranged from two companies with more than 60-percent reductions and four with more than 50 percent to five firms with no reductions. The reduction in the statement of changes in financial position ranged from one company each with 70-and 60-percent reductions to no reductions for five firms. And six firms did not present any statement of changes.
A review of the footnotes for the 21 companies reveals that two firms included a summary of substantially all footnotes presented in the 10-K/proxy, nine firms presented a small amount of footnote information, and 10 firms did not present any footnote information. In the latter case, the footnote-type information that was presented was included with either the financial statements or the financial review. Therefore, essentially 19 of the 21 firms did not present footnote information in any substantial manner. As anticipated, the reduction or elimination of footnotes was the primary reason for fewer pages of financial information in the summary annual report.
A word of advice
Given the review of the 21 summary annual reports, it appears that the best route to take in preparing a summary is first to call the report a "summary annual report," then to indicate that the complete financial data is available in the 10-K/proxy and to issue that 10-K/proxy jointly. Companies must keep in mind that the SEC's guidance on preparing annual reports using the summary format emphasizes the need for appropriate timing in releasing the report and the expanded proxy - that is, the proxy should be sent at the same time as or before the summary report. Also, the SEC warns about omitting footnotes, the auditor's report, or condensed information from one or more of the three basic financial statements - all vital information for report readers.
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|Author:||Gibson, Charles H.|
|Date:||Nov 1, 1989|
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