Putting on a happy face - annual reports

Putting on a happy face

The sky looked to be the limit. Big makers of commercial passenger jets had become hot growth companies in the past two years as airlines competed to buy a record number of planes.

McDonnell Douglas Corporation was enjoying a surge in orders and the booming Douglas Aircraft Company unit, which makes the popular MD-80 for commercial airlines, was reaping the benefits of successful plane-selling ploys and cut-rate leases.

The forecast may have called for clear and sunny weather, but that fat order book with some US $15 billion in backlog planes quickly brewed into one of the industry's worst storms. Last year's startling operating loss at McDonnell Douglas commercial aircraft division sent the stock spiraling and investors reeling from company woes.

McDonnell's troubles stemmed from its own success as the company had doubled its work force but still struggledc with slack production and a slow response from suppliers in the metal-forging industry. Amidst the turmoil, McDonnell's fix-it strategy included a difficult reorganization at the Long Beach, Calif. plant, reducing layers of management and dividing workers into production teams.

Neither the stock price nor the company's fortunes have rebounded, and the company now expects to lay off 17,000 workers this year. The bad news for shareholders may continue well into the nineties as the stormy horizon remains darkened, but company executives are hoping for a brighter future.

The slick cover of McDonnell's latest annual report, at least, captures the brilliant reflection of sunlight on the wings of its new MD-11 widebody aircraft. And inside the 1989 report, an innovative format mimics a magazine style with a full-page table of contents showing snapshots and photo bullets.

Chairman John McDonnell's letter sets a friendly tone as he addresses "shareholders and teammates" with candor and confidence. He begins right off by stating the bad news of a 37 percent decline in net earnings for the year and quickly sums up the bottom line for investors: 1989 was not a good year financially.

All McDonnell took was one paragraph -- one skillfully written and painfully honest graph that confirms each shareholder's worst fear. The remaining 36 paragraphs describe new competitive strategies and business goals. And having told "the worst of the bad news: up front, McDonnell captures the attention and confidence of his reachers.

"The best reasons for publishing a top quality annual report don't just go away because your company's been experiencing big problems," says Andrew Wilson, director of financial public relations at McDonnell Douglas. "On the contrary, bad news gives you even more of a reason to give an honest account of those problem, telling where your company's been and where it's going."

McDonnell appeared to have swept nothing under the rug, coming clean on net losses in the opening remarks and admitting "painful consequences" the company faces because of production shortfalls. But the push is forward to pages filled with high performance jet fighters, sleek transport planes and the smiling faces of folks in management.

"We use pictures of people who look to really be at work," comments Wilson. "Their suit jackets are off and they reflect our stand as a team of working leaders. We need our pictures to be credible just as the editorial content relies on credibility."

Wilson tells his own annual report parable about a highly successful businessman who leaves for an extended vacation in the Caribbean and places his company into the competent hands of his son or daughter. The man instructs them to run the business with integrity and asks only that they send an annual letter to update him on all corporate activities.

"Don't try to snow me," quips the father. "Tell it like it is. Give me straightforward news about how our company is doing, what the problems are, what's new and where wer're going." Corporate annual reports should be nothing less than an intimate correspondence between team players, between management and ownership, explains Wilson. And since McDonnell Douglas employees collectively own nearly 35 percent of all company stock, team players are working together across corporate levels.

"An annual report must be realistic since this is our one chance to give our own view of how we are doing," says Wilson. "Lots of others write and express their views... business reports, analysts and critics. But in an annual report, you can really tell your own story about the year."

Every major corporation has run into a slump from time to time. Profits have taken a nosedive... real estate loans force loss of reserves... assets decline... litigation tarnishes corporate reputation... slowing sales and suffering products.

Nobody likes to hear bad news like this, especially not shareholders. Publichly traded corporations are required by law to fully disclose financial losses, but they often use strategies that make th bad news appear less damaging than it really is. Some corporate executives buyr the bodies where the fewest readers will find them -- in the fine print or in the final pages of supplemental information. Presumably shareholders won't pay as much attention to "Notes to Consolidated Financial Statements" as they will to an opening letter.

Pfizer Doesn't Want

Bad News to Dominate

Pfizer Inc., a diversified research-based health care company with businesses in more than 140 countries, intended the opening address of its 1989 annual report to dispel fears about the liability impact relating to Shiley heart valves. The company was under investigation by an FDA subcommittee for potentially faulty heart devices, which was said to be the cause of death in nearly 250 implant recipients.

Executives of this pharmaceutical company were slow to comment on the legal actions and had essentially created an investor relations crisis because of their stony silence. In the final few comments from Pfizer's Chairman Edmund Pratt and President Gerald Laubach, they blamed "incomplete and inaccurate media reports for doing a disservice to heart valve patients by causing needless anxiety." The specifics of Pfizer's bad news are detailed only in the final notes on litigation and cash flows.

"We don't want a bit of bad news in just one of our subsidiaries to dominate our annual report, especially when the real news is our tremendous product rollout," says Andrew Heath, director of corporate communication at Pfizer. "Our purpose is to keep negative news in perspective and to give a positive twist to our account of the year."

Indeed the high-gloss graphics and photographs used in Pfizer's most recent annual report focus on research momentum and product development. Internationalism is another predominant theme, with a Japanese teacher who was cured of infection by a Pfizer drug pictured ont he front cover.

"We don'tset out to write fluff about Pfizer, bit it doesn't take any stretch of the imagination to write positively about our company because we are into so many advanced areas of health and technology," adds Heath. "Rather, the objective is to give a credible picture of the company. Credibility means perspective in the long run. This is essential or we will lose public trust."

Adobe "Refocuses away

from the Negative"

The financial replay of 1989 for Adobe Systems Incorporated contained a slice of the bad news pie with the stock price taking a 30 percent nosedive after Apple Computer announced last September that it would develop and release its own font scaling technology and sold its 3.4 million share investment in Adobe. This meant that Adobe's biggest customer was jumping ship and that Apple was taking its 25 percent of font scaling business elsewhere.

But Adobe's annual report for 1989 would hardly give readers a sense of doom and gloom. It is a work of computerized graphic art produced solely with Adobe technology and design. Each page is loaded with phenomenal visual impact resulting from the software company's own precision graphics.

"Although our stock price had not rebounded, we dealt with the competitive threat in a matter-of-fact way because our primary goal in the annual report was to demonstrate the very best of Adobe technology," remarks Linda Prosser, Adobe's director of corporate communication. "We felt our business fundamentals had remained the same and focused on the clear recovery. The look and the feel of Adobe's report was really a vital element in our design, even as important as any impact created in the text and recap of last year."

Prosser adds that surrounding the bad news in pretty pictures and fancy graphics is not so much an effort to minimize the severity of a problem as it is a refocusing away from the negative.

"The focus is on next year's outloock and on what activities will keep Adobe involved as a significant player in the software industry."

Negative Press All But

Ignored in Annual Report

Dave Leland, president and CEO of Plum Creek Timber Company, distributed an additional press release with each copy of his company's first annual report. As a spinoff of Burlington Northern Resources, Plum Creek is struggling to polish a tarnished reputation. Some environmentalists and politicians have accused the loggers of ravaging US timberland, touting Plum Creek as the "darth Vader" of the state of Washington.

No bad news in the company's 1989 profits, just in the scrutiny of negative media campaigns. Lelland's addendum stresses his company's commitment to "the joint pursuit of both financial and ecological" goals. He claims the media misrepresented PC's intentions, ignored accomplishments and mischaraterized policies.

However, small mention of this can be found in the actual report. Only in a page-five quote where a Cascade regional director addresses people's concern that Plum Creek" may not be in the forest-management business for the long term... and may eliminate all the timber in one area and then move on." But the rest of this attractive report is the picture of a healthy, growing company detailed in a friendly, narrative style.

Leland opted for a question-and-answer format to his comments rather than the usual shareholders letter. Likewise, most copy in the report is written in interview style with actual employees telling the company's story in their own words.

"We did not use this first annual report as a response to bad news or to bad publicity," explains Rick Holley, Plum Creek vice president. "Our intent was to stress what good things our company is doing and to educate interested parties about our business."

And then there are those rare companies who really come out with it, bad news and all, straight and simple, completely void of any high gloss treatments. This unprotected and unadorned treatment of bad news iw more often a matter of necessity than it is a matter of choice.

"Our Balance Is Quite Bleak..." --- Great

American Bank

The Communication department at Great American Bank found their company in such dire straights last February that the exchange of time and energy was not worth the benefit of producitng a slick report. Short-term interest rates had risen sharply for the San Diego-based bank, the eighth largest thrift inthe US, which has a huge exposure to residential real-estate loans in the Southwest, and which has been forced to add heavily to its loan-loss reserves.

Investors who held shares in Great American Bank, which continues to be plagued by bad real estate loans, didn't even get the change to feast their eyes on a beguilding fron cover, let alone peruse impressive pages of graphics in an annual report fantasyland.

Instead, what crowded their mailboxes just a few months ago was quite simply a carbon copy of the distressed company's lengthy from 10K. This cut-and-dry financial statement that public corporations must file annually with the Securities and Exchange Commission certainly gave a comprehensive picture of this ailing bank's financial status. That is, if investors were willing to crunch through endless tables of numbers and legal jargon.

"Our balance is quite bleak, and we are running leand and mean these days," explains Brian Luscomb, vice president of public relations for the company. "Although we had done some preliminary work and intended to publish an annual report, the project was not feasible or cost effective. You might say that a funny thing happened on the way to publish our annual report."

Great American posted losses for 1989 of more than US $260 million and has continued with first and second quarter record losses this year. Caught in an industry-wide spiraling thrift crisis, Great American's chairman penned a heartfelt shareholders letter as an addendum to the 118-page dossier.

"As much as we would like to report otherwise, many challenges remain ahead of us," wrote Gordon C. Luce, on behalf of the board of trustees, the management and the employees of Great American. "I assure you that we place the highest value on the trust and faith you have shown in us. We shall do everything we possibly can to earn that trust and faith every single day."

With just a single splash of color surrounding the bank's logo amidst pages of black print on stark white pages, the overall effect is almost touching. In some ways, this bare bones approach worked to the benefit of Great American's public relations.

"A fancy full-color annual report could have done no more than this did to accurately reflect the corporation's predicament at this time," Luscomb adds. "The decision to circulate Form 10K was out of our hands, but now we can see that it was the best way to handle our bad news story. And nobody can say we tried in any way to make a bad situation look better. This was the truth, nothing more."

Anne Marie Taylor is a freelance writer, Walnut Creek, Calif.

COPYRIGHT 1990 International Association of Business Communicators
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