THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Monday, May 13, 1996 TAG: 9605110230
SECTION: BUSINESS WEEKLY PAGE: 10 EDITION: FINAL
TYPE: Cover Story
SOURCE: BY TOM SHEAN, BUSINESS WEEKLY
LENGTH: Long : 239 lines
It's been only two months since Norfolk Southern Corp.'s 1995 annual report hit shareholders' mailboxes.
But more than 1,000 of the company's 53,400 shareholders have responded to a questionnaire asking how they use the magazine-sized report and what they think about its organization and readability.
In recent weeks, Rebecca Burcher has been sifting through their comments. Preparation for next spring's annual report is already under way.
By early June, Burcher and a handful of other Norfolk Southern employees will toss around ideas for the 1996 report: What sort of theme should it have? What kind of photographs should be used?
Production costs, too, will be a consideration.
``In the last several years, we've asked ourselves, `Do we want to keep putting out a rather elegant report?' said Robert C. Fort, assistant vice president for public relations at Norfolk Southern. ``You hear from some shareholders who ask, `Why do you spend this money?' ''
By law, the 15,000 U.S. companies whose stock is publicly traded must provide shareholders with a summary of their financial performance during the past year.
For a few thousand large companies like Norfolk Southern, the glossy reports are more than financial documents. They've become marketing tools and are provided to customers and job applicants, as well as shareholders and securities analysts.
But the availability of advanced technology has prompted several companies to investigate faster, less costly ways for disseminating the contents of their reports. Some, including Norfolk Southern, have posted much of the information in their annual reports on Internet home pages.
Meanwhile, some corporate executives have complained to federal securities regulators that requirements for more financial detail in annual reports have become burdensome.
The Securities and Exchange Commission responded last year by soliciting public comments about ways it might scale back its reporting requirements. The commission has not yet announced the conclusions of its study.
This drive to reduce the detail in annual reports doesn't sit well with some securities analysts and money managers.
``I don't think it's a good move,'' said Wayne F. Wilbanks, president of the investment advisory firm Wilbanks Smith & Thomas Asset Management Inc. in Norfolk.
When his firm held shares in Quaker State Corp. a few years ago, footnotes in its annual report raised questions about environmental problems.
``It was evident that the Environmental Protection Agency was going after the company,'' Wilbanks recalled. ``The footnotes were helpful at pointing it out. We ended up calling the EPA to get their spin on the issue.''
The length of Norfolk Southern's annual report has swelled by 50 percent since the late 1980s to 60 pages because of requirements for additional financial detail. Still, that hasn't been a major concern for the company, said Fort, its public relations officer.
In fact, Norfolk Southern was lauded last November for the quality of its report and other financial communication. The Association for Investment Management and Research, a Charlottesville-based organization of securities analysts, said the quality of Norfolk Southern's financial reporting during 1994 surpassed that of eight other large railroads.
``Norfolk Southern has improved dramatically, moving to first place after finishing fifth in the prior two years,'' the association's committee of rail analysts said. ``The company's published materials earned the highest marks of any railroad . . . ''
One of the few shortcomings in Norfolk Southern's annual report, the committee said, was the chairman's letter, which ``could have benefited from more details about the company's goals.''
While companies must comply with specific SEC requirements for the financial parts of their annual reports, they have great leeway with the information they provide elsewhere in these documents.
Lowe's Companies Inc., the North Wilkesboro, N.C.-based chain of home-improvement stores, included a lengthy description in its 1995 annual report of home-ownership patterns in the United States and the outlook for sales of home-improvement materials.
``It gives you a lot of analysis,'' Wilbanks said. ``You could get a fantastic education about the home-building industry by reading the Lowe's annual report.''
Other annual reports have attracted attention because of their quirky features. One was the 1993 report from Richmond-based Eskimo Pie Corp., which took the shape of an ice-cream bar on a stick. The chocolate-colored report came in a white wrapper with an Eskimo Pie label and a wooden tongue depressor attached to the bottom.
Because of their products, a few companies can resort to clever devices and succeed, said Bill Gravitt, president of the Richmond graphics design firm Beatley Gravitt Communications Inc. But gimmicks can be risky, he said, because the annual report still has to be treated as a serious document.
After a phase in the late 1980s that emphasized the marketing value of annual reports, many companies have sought to make their reports more useful to shareholders, said Gravitt, whose company produced reports for 20 companies this spring.
Whatever a company's intent, an annual report can be expensive to produce. ``The average cost today is in the range of $4 a copy, from about $3.50 to as high as $5,'' Gravitt said.
Norfolk Southern printed 195,000 copies of its latest annual report at a cost of $1 each. This was substantially lower than the average because the company uses an in-house staff that also puts together other publications for Norfolk Southern customers and employees, Fort said.
One company whose annual report attracted attention this spring was First Union Corp. Inside its report, the Charlotte-based banking company included a computer disk containing the contents of First Union's 1995 report, additional financial tables and information about its lines of business and products.
``The traditional annual report costs us about $2.50 to produce, while the CD-ROM version costs only about a third of that,'' said Marianna Sheridan, a First Union spokeswoman. ``If in the future we weren't required to provide the paper version as well, there could be a significant cost savings for the bank.''
At Norfolk Southern, the process of compiling an annual report for 1996 will accelerate in November. That's when Burcher and Mary McNeeley will interview eight of the company's senior executives about their ideas for the document.
What they hope to capture during these interviews is a single, simple message.
``There are all kinds of readers, from the person who flips through a few pages to the one who reads the annual report from cover to cover,'' said Burcher, manager of external communications. ``You've got to have one message'' that can catch the attention of both types.
Burcher and McNeeley, corporate manager for visual communications, will meet with senior executives again in early January. McNeeley will bring along hundreds of photographs for executives to consider using in the upcoming report. These will have been culled from a couple of thousand photos being taken throughout 1996.
By mid-January, Norfolk Southern's financial results for 1996 should be complete, and the company's accountants will make their contribution to the annual report. The lawyers, too, will have a role.
``The lawyers might say, `We've got to disclose even more in that environmental footnote this year,' so we will need more pages,'' Burcher said.
By early February, she and McNeeley will have a completed version of the 1996 report in hand. They will hold a telephone conference call with the senior management and the participating departments to consider possible changes.
One week later, Norfolk Southern's full board of directors will review the report. ``If they are satisfied, we send it to the printer,'' Burcher said.
Then the cycle will begin again. MEMO: YOUR GUIDE TO WHAT'S INSIDE
The least inviting parts of any annual report are in the back. The
dense footnotes and long rows of numbers lack exciting photos, but they
often provide valuable information about a company's financial condition
and its prospects.
Securities analysts, money managers and others who regularly use
annual reports say they often begin in the back and skip around.
``I tend to read some of the financial statement and then go to the
footnotes,'' said Guy W. Ford, research director at the Richmond-based
brokerage firm Scott & Stringfellow Inc.
At the investment advisory firm Wilbanks Smith & Thomas Asset
Management Inc. in Norfolk, ``we principally use the footnotes and the
management's discussion of operations,'' said Wayne F. Wilbanks, the
firm's president. ``We don't spend much time in the front of the
report.''
Annual reports vary widely in their appearance and message, but all
have some key parts worth checking:
Footnotes to the financial statements.
These describe the ways that a company arrived at the numbers it
reported. They shed light on such details as taxes, methods of
depreciation, and retirement benefits. Some footnotes also disclose
environmental problems and other difficulties a company may be facing.
The management's discussion and analysis of financial condition and
results of operations.
``Go to the back and read the management's discussion, even if you
don't understand all of it,'' said Wilbanks. ``Second, look at the
company's financial ratios. If the gross margins have been declining for
the last three years and the costs have been rising, that to me is a lot
more important than what the management says at the front of the
report.''
The report of the independent auditors.
The job of outside auditors is to verify that the company's
accounting methods comply with generally accepted accounting
principles.
Auditors also check the company's internal controls for protecting
its assets and curbing dishonesty. If they determine that the company's
financial statements don't conform to generally accepted accounting
principles or discover other serious problems, auditors will mention
this in their letter.
The company's proxy statement.
This is a separate document listing issues being put to a shareholder
vote. The proxy statement provides abundant information about the
compensation of executives and outside directors, ownership of large
blocks of stock, and business relationships that officers and directors
have with company.
Scott & Stringfellow's Ford said he regularly checks proxy statements
to determine who the company's biggest shareholders are, who the
directors are, and how much of the company's stock they own.
Proxy statements also include a chart comparing the price performance
of the company's stock with broader stock-market measures, such as the
Standard & Poor's 500 index.
ILLUSTRATION: YEARBOOK STAFF
A GOOD ANNUAL REPORT CAN TELL A LOT ABOUT A COMPANY
LAWRENCE JACKSON
The Virginian-Pilot
ON THE COVER: Norfolk Southern's Mary C. McNeeley, corporate manager
for visual communications; Rebecca Burcher, manager of external
communications, and Robert Fort, assistant vice president for public
relations, are responsible for the company's annual report.
CUTE
Richmond-based Eskimo Pie Corp. made its 1993 report in the shape
of an ice-cream bar on a stick, complete with a white wrapper with
an Eskimo Pie label and a wooden tongue depressor attached to the
bottom.
Some companies can resort to clever devices But gimmicks can be
risky, , said Bill Gravitt, president of the Richmond graphics
design firm Beatley Gravitt Communications Inc., because the annual
report still has to be treated as a serious document.
CUTTING EDGE:
Charlotte-based First Union Corp included a included a computer
disk in its 1995 report. The disk had the contents of the report,
additional financial tables and information about its lines of
business and products.
``The traditional annual report costs us about $2.50 to produce,
while the CD-ROM version costs only about a third of that,'' said
Marianna Sheridan, a First Union spokeswoman. ``If in the future we
weren't required to provide the paper version as well, there could
be a significant cost savings for the bank.''
[Cover of Norfolk Southern 1995 Annual Report, Thoroughbred
Momentum]
KEYWORDS: ANNUAL REPORT by CNB