Shine business shine: annual reports bring company financials to life.

Each year, thousands of publicly traded companies publish glossy annual reports to provide investors and the general public information about their business history, current performance and plans for the future. The 2005 report for KeyCorp, for example, contains slightly more than 90 well-crafted pages designed to paint a vivid picture of the company's financial health.

KeyCorp, which is based in Cleveland, Ohio, is one of the country's largest bank-based financial services companies. With consolidated total assets of about $95 billion, it posted record earnings of $1.13 billion for 2005. Key, as KeyCorp and its subsidiaries are called, maintains nearly 950 KeyCenters across 13 states, including Alaska.

Key's sleek, four-color annual report is modeled after Forbes magazine. It's the same size and is printed on the same style of paper with the same fonts. It also has bold headlines, "take-outs" and other elements to make the content more engaging to readers. There are also display advertisements promoting Key's products and services.

"It's written like Forbes would be written in really tight sentences and in a very straightforward, nonlegalistic tone," says Vice President/Corporate Relations Bill Murschel, who oversees the preparation of annual reports at Key. "We feel like a reader of Forbes is similar to one of our shareholders."

In addition to adopting a business-magazine style, Key uses a thematic approach to convey its yearly message to the public. Last year's theme--accelerated progress-resonated throughout the annual publication, from the cover to CEO & Chairman Henry Meyer's message to the graphical depiction of the financials.

The ultimate goal of the company's annual report is to bring its financial direction and performance to life for readers, Murschel says. "To me that's what the annual report is all about; it links the strategy of the company with the financials of the company," he says. "It puts those two things together so the reader understands how the company did financially within the context of its strategic imperatives."

THE LEGAL REQUIREMENTS OF ANNUAL REPORTS

Annual reports are useful tools because they outline an organization's financial and corporate conditions. They are good sources of information about a company's business history and current performance. Indirectly, annual reports indicate what is important to the organization through the topics covered and the way the information is presented.

All publicly traded companies are required to produce some type of annual report. Alaska Native corporations, universities, government bodies, and nonprofit organizations also issue annual reports. Public companies' legal requirement for financial reporting is mandated by the U.S. Securities and Exchange Commission. As the primary securities regulatory body of the U.S. government, the SEC is responsible for protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation.

In Alaska, the Alaska Division of Banking and Securities works to protect residents from potentially harmful investment activities. A division of the Alaska Department of Commerce, Community and Economic Development, the entity monitors all registered firms and individuals that sell securities or give investment advice in Alaska. And though it has no authority over publicly traded companies operating in the state, it can help Alaska investors by forwarding their complaints to the SEC, according to Mark Davis, director of Banking and Securities for the Alaska Department of Commerce, Community and Economic Development.

Public companies actually aren't legally obligated to produce high-gloss, marketing-oriented annual reports. Required SEC filings include the quarterly 10Q and annual 10K, which is a more detailed--less reader-friendly--version of the marketing-oriented annual report. Key's 2005 10K filing, for instance, has 195 pages of information compared to its 93-page annual report.

ANNUAL REPORT COMPONENTS

Annual reports have a fairly diverse audience, which includes analysts, shareholders, customers, prospective customers, employees and others wanting information about the company. Legally, annual reports must include a balance sheet, an income statement, a statement of cash flows, an auditor's report and a relatively detailed description of the company's operations and forecase for the upcoming year. Other information is included at each company's discretion.

Key's annual report has three major components. The bulk of the report--about 90 percent--is the management discussion and analysis section. "That is a very detailed accounting and explanation of all the major financial events and the financial underpinnings," Murschel says. "That section would be poured over by Wall Street, analyst, creditors and by sophisticated shareholders and institutional investors and employees.... We try to make it as reader-friendly as we can, but at the end of the day, it's written for the more detailed-desiring readers of the annual report."

Another major component of Key's annual report is the chairman's section containing Henry Meyer's perspective and analysis of the year. "That's the principle piece of information for all audiences," Murschel explains. "It tends to be more personal ... briefer, and tends to focus on the big picture."

The third element of the yearly publication consists of financial tables and analyses, which are of interest to all readers. "We take some numbers and create tables and charts that provide a graphical representation of the company's financial performance," Murschel says. "It's a much more abbreviated form than in those last 90 pages."

Last year, Key printed 160,000 annual reports, which were sent directly to shareholders or mailed upon request.

An electronic version of the report also is posted on the company intranet for employees, along with tips for reading it. "We view our annual as important information for our employees," Murschel says.

ANNUAL REPORTS BECOME LESS COMMON

Annual reports are useful tools for anyone wanting to "dig deep" into the company, according to Murschel. However, the glossy full-length publications are becoming less commonplace. The cost of printing and mailing annual reports is a considerable expense that some companies are choosing to forgo.

"My guess is that 10 years from now there will be fewer and fewer companies that mail an extensive, four-color annual report to virtually every shareholder," he says. "They will rather choose to post this information on their Web site and communicate to shareholders how to find it."

That's akin to the approach of integrated communications provider Alaska Communications Systems. Each year, ACS mails stockholders a packet with its 10K, a Letter to Stockholders (printed on the same non-glossy stock as the 10K) and other information. A colorful printed version of the letter is mailed out only by request, and all of the company's financial information can be conveniently accessed online.

"We wanted to have a document that would be easily readable, but one that would supplement additional information we provide throughout the year," says David C. Eisenberg, SVP of Corporate Strategy, Development & Marketing. "On the other hand, we're all about stockholder value, so pulling together an incredibly elaborate annual report that would focus on form rather than function is not our method of operation. We want to provide meaningful information in as complete and simple a format as possible."

The ACS 2005 Letter to Stockholders is a four-page booklet designed to give readers a quick, succinct, clear overview of the company. "It provides a nice summation of ACS' operational performance," Eisenberg says. "I think there's tremendous value in that it's concise and focuses on the main factors relevant to the community as well as our employees."

Last year's letter highlighted the company's achievements and performance against three main goals: to enhance the overall customer experience, to be known as Alaska's premier wireless provider and to grow within its cost structure. Emphasis was placed on strength and growth. Supporting charts and graphs were included to paint a numerical picture.

Perhaps the major benefit of ACS' stockholder letter lies in its easily digestible length and relaxed style. The tone is conversational and easy to read, which is the whole point of the publication. "I want the stockholders to read it," Eisenberg says. "Having read it, they will have a good feel of ACS and where we are headed."

Integrated telecommunication provider General Communications Inc. also prefers not to publish a traditional annual report. Publishing a slick, glossy annual report is an expensive, time-consuming project, says Vice President/Finance Bruce Broquet. "We'd rather expend our energies working on ways to better meet our customers' needs and pass the savings on to them in the form of holding prices low while keeping the value of our products and services high."

There's also a practical side to the issue, Broquet adds. "An annual report is really just the guts of the 10K wrapped in pretty pictures and some editorial," he says. "The communication industry moves pretty fast. By the time we publish a glossy annual report, it's out of date. We spend most of our time keeping our investors up-to-date with conference calls, personal visits and other methods."

IMPORTANCE OF INVESTOR EDUCATION

Regardless of the method companies use for financial reporting, investors should thoroughly review the information, as well as conduct their own research, advises Davis of the Alaska Division of Banking and Securities. They can access financial information through most companies' Web sites, the SEC's EDGAR database or general sources like Hoovers. Investors also can take advantage of educational programs available through efforts of the Alaska Investor Protection and Education Initiative, the Public Broadcasting Service, the Securities Division and other organizations.

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