Corporate Spin : Sometimes the Bad News Has a Way of Getting Buried in a Press Release

New Image Industries Inc. in Woodland Hills issued a 36-line press release a few months ago that began with this announcement: The company planned to market a computer system that would help beauty salons show “before” and “after” images of their customers and so presumably boost the salons’--and New Image’s--business.

There was more good news.

On line 18, New Image also announced that it had struck a deal to design a separate computer product for another company. Clearly, this arrangement might also generate future business for New Image.

But there was still more.

Four lines from the bottom, New Image also disclosed that it expected to post a loss for the latest quarter. Uh oh. For many people, especially New Image’s stockholders, this probably was the most important part of the press release. Yet New Image decided that tidbit could wait until the very end.

New Image’s way of burying the bad news was by no means unique. Corporations and trade groups routinely have their public-relations people put the best face on new developments--particularly if those developments aren’t good. In announcing financial results, for instance, companies frequently start by announcing that sales went up before eventually mentioning that their profits went down.

It’s almost as though the companies believed that by putting the bad news in oh-by-the-way fashion at the bottom of press releases, they were convinced that few people would read down that far. Why?

Because in many cases, a company’s president or other top executive doesn’t want to highlight a problem if the company can find something else to focus on, said Stephen Fox, former editor of the Los Angeles-based financial newspaper Investor’s Daily and now part-owner of CMR Group, a Woodland Hills firm that advises companies on how to deal with the media. Fox also said that public-relations personnel often are too intimidated to challenge an executive who wants to downplay the bad news.

Len Gross, editor of AD/PR Agency Report, an advertising and public relations newsletter in Kentfield, Calif., said the “basic ground rule in public relations is to be very upfront,” but that in some cases the executive “who has to approve the announcement and bear the brunt of the responses from the news media probably knows less about public relations than anyone in the company.”

So the bad news gets buried.

It’s often a moot exercise given that most analysts, business writers and investors learn early in their careers that the last paragraph of a company’s press release is often the first place to look for important information. Companies that try to bury unhappy developments only invite more scrutiny, Fox and Gross said.

Robert Gurevitch, New Image Industries’ chief executive, said the company’s decision to forecast its loss at the bottom of its news release was not intentional. (New Image eventually did post a $956,000 loss for the quarter.) He noted that New Image has been publicly owned only since August, 1989, and that it had never been in a situation where it had to inform the public that it anticipated a loss.

“We have subsequently made other news releases where we talk about the profit or loss situation prior to discussing other things,” Gurevitch said.

So why do companies bother announcing bad news at all? Sometimes they have to, or at least believe that they have to under the law. Securities and Exchange Commission rules generally require any company owned by 500 or more stockholders to publicly report any “material” developments.

Some events are overtly material, such as a change in control or a big acquisition. Whether other developments, such as a company’s knowledge that it will post a loss for the latest quarter, are material under the SEC rules is not spelled out by the rules and thus could be debated. But many companies don’t want to risk not disclosing such an event and then facing a shareholder’s lawsuit later. So they announce the news just to be sure.

For that reason and others, CMR Group’s Fox said many more companies today are forthright about announcing bad news compared with 20 years ago. But he continues to advise companies that they should be more upfront about their problems.

“If you’re going to take a shower in cold water, you want to get completely clean the first time,” Fox said. “If you’ve got bad news, you’re far better off disclosing it fully and in the process getting it over with.”

To be sure, some companies don’t mince words. Everest & Jennings International Ltd., a Camarillo maker of medical equipment that’s been struggling, got right to the point in a press release this spring: It lost more money in the latest quarter. St. Ives Laboratories Inc., a personal-products concern in Chatsworth, confessed last summer that its decision to put its shampoos in new packages bombed with consumers, cut St. Ives’ sales and forced the company to bring back the old packages.

Some companies and organizations don’t necessarily try to bury their latest news, but they don’t make it easy to find it, either.

Stockholders get a taste of this in the corporate annual reports that they receive. The detailed financial results--and any information on nasty lawsuits involving the company--is in the back section of the report. Up front are the glossy pictures of the company’s executives and products, typically accompanied by a message from the chairman that ends with an upbeat yet meaningless such as “your company is poised for future growth.”

Or consider the San Fernando Valley Board of Realtors. Last December, the board announced that “despite the beginning of the holiday season and the pervasive effects of ongoing national economic uncertainty,” 817 existing single-family houses and condominiums were sold the previous month.

Good news? It was if you were one of the sellers. But for those interested in the area’s economy, it was lousy news because those 817 sales were off 22% from October’s sales and down 40% from a year earlier.

Those percentage figures, however, weren’t anywhere in the text of the Realtors’ announcement, only in its statistics at the bottom of the press release.

But Jim Link, the board’s executive vice president, said in an interview that the board doesn’t always focus on the mere month-to-month--or even year-to-year--changes in housing sales because those changes can be misleading when compared with long-term sales trends.

“1990 was a down market, no question,” Link said. “But it appeared in some of the headlines that 1990 was a horrible real estate market, and in fact it was a slightly below-average market if you look at the statistics over the last 10-year period.”

Levy Bancorp, the Ventura-based parent of Bank of A. Levy, also began a recent press release by stressing the positive first and disclosing the negative later.

The announcement began by recounting Levy’s annual meeting, where stockholders were told that the company “is busy investing in its future” at a time when banks nationwide “are consolidating operations, cutting back on marketing efforts and struggling to meet capital requirements.”

A few sentences later, Levy disclosed that its 1990 profit rose 21% from the previous year, and then noted that its first-quarter profit was $1.5 million. But it didn’t mention that the first-quarter profit was down, by 17%, from the same period a year earlier, in part because Levy made major investments to expand its business.

The lower earnings for that one quarter doesn’t mean that Levy is poorly run. Several other gauges, such as the company’s return on average assets, show Levy still performs well.

So why not just say the latest quarterly earnings fell? (Once again, the change was only evident in the statistics at the bottom of the release.)

Mary Levinson, a Levy executive vice president who oversees its marketing department, said there was nothing intentional about not explicitly stating that earnings went down. She noted that “the main theme of this release was Levy’s annual meeting” and the bank’s performance during 1990.

“We typically have a very straightforward approach to our press releases,” she said. She also noted that the first-quarter results were included only because they had just become available. Nonetheless, the release also took pains to explain the events that had an “impact” on the bank’s first-quarter earnings, even if the text didn’t make clear that the earnings actually did tumble 17%.