The 10 best annual reports of 1991 ...and the 10 worst.

There were few "happy faces" in the 1991 crop of annual reports: In terms of image and appearance, fewer than three of four companies met our criteria of excellence. Perhaps it's difficult to dress up poor financial performances, of which there were many in a year marked by belt-tightening, downsizing, and lingering recession at home and abroad. Nonetheless, many of those at the corporate helm apparently didn't feel good about their companies, and that pessimism found tangible representation in their annual reports.

This year we analyzed 662 annual reports from the U.S. and abroad. As those who've followed our annual ratings for the past eight years in Chief Executive know, we grade on more than just appearance. To be included among the world's 10 best, an annual report must be exceptional across the board.

It must contain detailed biographical data on officers and directors, so shareholders and other readers can gain an intimate knowledge of the men and women who are minding the tore on their behalf. Financial disclosure must be extensive. Five-year data is the minimum required by the Securities and Exchange Commission, although half the companies in this year's survey published data for six years or more.

Imperative, too, is involvement of the CEO in the preparation of the report. On top-rated efforts, the boss not only is inclined to write the letter to shareholders (overall, more than half the world's CEOs take up this task), but also defines the entity and its prospects. Each of this year's top 10 reports also established a theme and forcefully supported it. By contrast, many bottom dwellers scrapped for the title of most amorphous.

Likewise essential among the leaders is probity of the highest order. (This year exceptional honesty was an attribute of some nine of 10 corporate chieftains.) Finally, a report should appear to be a seamless whole assembled by one set of specialists--not the product of professional communicators, assigned the front of the book, and financial experts, who claim as their domain the remainder.

FIRST (129 POINTS)

This year's accomplishment extraordinaire comes from The St. Paul Companies, a worldwide property-liability industries organization with a presence in investment banking and asset management.

On the cover, Minnesota's oldest corporation showcases a forward-looking theme: "The Business of Risk--There's a Future in It." The theme is supported forcefully inside. One effective twist: A three-dimensional representation of the word "RISK" casts the likeness of a shadow over the cover--as indeed does the concept over the industry.

Such innovative graphics carry over to the inside, where dynamic layouts and photos abound. Upwards of a dozen managers of individual operating areas are pictured in quarter-sized, black-and-white circles, each accompanied y salient quotes. A "Review of Operations" describes the business' customers, the company's 1991 highlights, and its outlook. Following are five full-page close-ups of various customers--the size of the photos lends them immediacy--with testimonials about the importance of St. Paul businesses overlaid in orange type.

Features abound, including an interview with EVP and CFO Patrick Thiele on how the company handles operating, financial, and investment risk. Biographical data on officers and directors is thorough; both groups are pictured. On the last text page, a glossary of insurance terms defines the basics of a business renowned for its complexity. Novice industry watchers and prospective investors will find helpful definitions of reinsurance (coverage that insurance companies buy from reinsurance companies to limit their potential claim losses on a particular risk or on a group of risks), loss reserves, and expense ratios.

SECOND (127 POINTS)

None can compete with Knight-Ridder for consistency: Its annual report has staked a claim in our top 10 for nine years running. More specifically, the report has finished in the money--win, place or show--for six consecutive years.

Annually, this global information company harnesses its communications expertise to present an accessible product. Employees on the cover with no-nonsense countenances--one with a copy of a Knight-Ridder newspaper tucked under his arm--convey the image this company is all business. Blurred, time-lapse photos of figures in the background also communicate this is a company on the move.

Knight-Ridder hits the beach on page two with vibrant graphics depicting a 10-year comparison of its net income, distribution of operating revenues, and stockprice, earnings, and dividends. Global maps in shades of deep blue--with continents cut in angular, purplish forms--illustrate K-R's operations bases.

In an interview, James K. Batten, chairman and CEO, summarizes the firm's prospects in areas including newspapers, contact television, and information services. Sketches of vice presidents anchor the back of the book.

THIRD (125 POINTS)

As well as any company, Chevron makes its annual report a must-read for stockholders of every stripe, from casual readers to statmongers who devour the consolidated financial statements. The company's current effort is overflowing with information, conveniently highlighted either in bold type or--as in the back-of-the-book "Management's Discussion & analysis of Operations"--in italic red. To Chevron's credit, graphics are used to facilitate disclosure: One shows annual fire losses in millions of dollars, the sort of information a less forthright company might tuck away in the fine print.

"Outlook" summaries apprise the reader of the company's plans. "In the U.S.," we are told, "Chevron plans to improve performance by aggressively selling non-strategic properties and cutting operating costs." A feature spread is devoted to the company's more than six decades of international operations.

Never has Kenneth T. Derr, chairman and CEO, communicated more personably and candidly. "Chevron weathered a difficult year," he says, biting the bullet at the beginning of his letter to stockholders. Casting a vote in favor of employee empowerment, Derr hails the firm's 55,123 employees, who, he says, "make our strategies work."

Biographical data is provided on the company's officers and directors. Condoleezza Rice, Chevron's newest director, is pictured wearing a hard hat on an inspection tour of a company facility in Japan--an unusual action shot for a company director.

FOURTH (124 POINTS)

A year ago, Mosinee Paper had the world's best annual report. A year prior, it tied with Knight-Ridder for the honor.

In the wake of a huge falloff in profits--down 40.1 percent to $1.3 million--this year's outing is a touch more conservative. It's hard to talk bullishly when all isn't coming up roses.

Yet, the Mosinee report continues to impress. Its horizontal grid, which became the industry standard, breaks down operations and shows principal products--and main markets and distribution methods for each. Also in the grid, the company names its chief competition in each area: It is one of the few to take this step.

The report again features informative biographies, along with photographs of officers, paper products, and production facilities. Looking for a candid assessment of the company's performance and prospects? Consider this is President and CEO Richard L. Radt's letter to shareholders: "The recession will continue into this year . . . None of us realized just how difficult it was to become." Want stats at a glance? In its selected financial data, the report states five- and 10-year compound growth rates.

The financials--soporific in many other efforts--are brightened with a dozen graphs and four-color photos of operations and products. In sum, this continues to be one of the world's more deftly produced reports.

FIFTH (123 POINTS)

It's back, and it's big and bold. And as always, its horizontal. Quaker Oats made its first appearance on the 10 best list the initial year of this competition: Its 1983 report was judged to be best in the world. In the interim, however, it has experienced ups and downs.

But this year's Quaker report returns with a vengeance. This has to be Wall Street's favorite, if more than a little complicated for the financial novice. But compensating for that, the report's disclosure is matchless, and its graphs are succinctly captioned. A pie chart, for example, entitled, "Sales From Brands in Growing Categories," includes this coda: "Quaker's portfolio of brands is well-positioned for strong continued sales growth as brands in growing categories contributed 82 percent of worldwide sales in fiscal 1991."

A regular feature is an in-depth interview with Quaker's seemingly ageless chairman, president, and chief executive, William D. Smithburg. His commentary touches on the company's spin-off of non-grocery operations and brand management strategies. A three-page shareholder letter is good, if a bit wordy. That cost it a point for readability.

Colorful logos of such well-known Quaker brands as Aunt Jemima, Rice-A-Roni, the oatmeal man himself, and Gatorade appoint the book. The latter--with its vibrant orange lightning bolt--tops a page with a large color photo of children posting up around towering basketball star Michael Jordan.

SIXTH (122 POINTS)

The Manitowoc Company's annual gets right to the point: The company's net income declined a substantial 26.6 percent to $15.4 million, according to a graph on page one.

But that's just one of the pluses of this report, among the four tied for the year's most positive (the others are the top three in the competition). There's a reader-friendly contents listing, more-than-adequate financial disclosure, a glossary of terms, and some of the year's best bios on officers and directors, including fine, natural photographs of the men and listings of other directorships they hold.

The report is among the one in 10 worldwide to include a "business profile" grid, which cross-references such categories as business entities, products/services, and outlook with each of the company's core areas: cranes, food service products, and marine operations. It also contains a Q&A with Fred M. Butler, president and CEO.

SEVENTH (121 POINTS)

You have to admit: No one supports a theme like PepsiCo.

To put it mildly, the themes in its annual reports over the last four years have been out of the ordinary: babies in diapers; canines galore; last year, a sumo wrestler. And this time around, a multitude of rabbits!

By actual count, there are four dozen bunnies pictured (in addition to 29 butterflies and too-many-to-count posies). In the words of Wayne Calloway, chairman and CEO, in his letter to shareholders: "Not very subtle, I guess, but our pink-eyed friends on the cover are the best way we know to symbolize 'rapid growth,' something as natural to us as it is to them."

Along with fuzzy white critters there are slender-bodied insects (order Lepidoptera), flowers (daisies and tulips are among the choices), and headlines of pink, purple, and sea foam green (the pastel colors grace graphs and color-coded sections, as well). Perhaps inevitably, photos of rabbits are captioned with puns such as, "Let's hop to it," and "This should perk up your ears."

Calloway--CE's 1991 Chief Executive of the Year--is the consummate communicator. His letter, however, averages 20 words per sentence, which prompted a two-point deduction for readability. The PepsiCo chief also contributes an "outlook" section accompanying text on the company's operations in soft drinks, snack foods, and restaurants. That earned him a perfect score for CEO involvement.

If only the rabbits had been caged--the concept, that is. But as one reporter noted, "Rabbits, shmabbits--Wall Street only cares about the bottom line." And who can deny that PepsiCo's profits are proliferating like, well . . . you-know-what.

EIGHTH--(TIE 119 POINTS)

That ARCO Chemical's annual report made it onto the list of world's best is especially surprising, since it included only the minimum, five-year financial data. Had it presented figures for the 11 years we recommend, the report would have flirted with a top spot.

Perhaps like no other, this company pays attention to the basics. The result is a report that is decidedly low-key. Reflecting the firm's technical roots are esoteric elements, including a "process flow chart" that tracks the refinement of such raw materials as methanol and butane into core products and, in turn, their sales in key markets. In a nod to the company's international scope, the report's theme--"Building Value"--is printed on the cover in English, Dutch, Chinese, French, and Japanese.

Who would ever have thought the other eight-place finisher, Battle Mountain Gold--a company that digs inside the earth--would produce such an externally oriented document?

But it has--with flair and insight. Not only is Chairman and CEO Karl E. Elers' letter to shareholders one of the year's most readable, but he sat for an interview entitled, "Why Gold?"--a look at "some of the variables weighing on the market." A nice touch: the addition of a hint of gold color to what appears to be the CEO's wedding band in an otherwise black-and-white photograph.

The report's design is solid but unfortunately, its doesn't carry over to the financials.

TENTH (118 POINTS)

Northwest Natural Gas has turned out one of the year's more congenial reports.

In some instances, the company uses ultralarge, multicolored, magazine-style headlines to introduce such feature segments as "Our People Perform." There are also large photographs of employees pursuing outdoor activities, and callout quotes in which they reflect on the meaning of service. (Bob Meyers, a customer serviceman shown rafting down the rugged McKenzie River, observes, "Our best form of advertising |is~ word of mouth.")

On the cover, shown scaling a near-vertical mountain face, are twins who have participated in more than 200 wilderness rescues. The two are a pipeman joiner and a meter installer with Northwest. Another employee, a senior operating clerk, skis, parachutes, and bungee jumps. Yet another NNG worker competes nationally as a barefoot water skier.

This is the froth to a substantive if deceptively simple presentation that features full-bodied financial disclosure and 11-year comparative statistics for both financial and operating data.

WHAT CONSTITUTES A GOOD ANNUAL REPORT?

Over nine years of spotlighting annual reports on these pages, we've come to the conclusion that the good ones contain certain essentials.

The copyrighted criteria for judging this year's crop of annual reports is based on a 135-point scorecard that rewards those possessing the following attributes.

1. INTEREST QUOTIENT. A report must entice a recipient to read it. Toward that end, the cover is particularly important. A report should use various readership-enhancing techniques, including text callouts, boldface lead-ins, action subheads, and bulleted paragraphs. Its layout should be open and inviting, and its usually prosaic table of contents supplemented with pictures, interesting typefaces, and other devices that "speak" to the reader. Back-of-the-book financials must be as inviting as the earlier part of the document. (10 points)

2. READABILITY. Ensure the text is clear and lively. (10 points)

3. INFORMATION. Inform the reader thoroughly, perhaps through the use of special sections, mission statements, and glossaries of terms. (10 points)

4. PROSPECTS. Detail the company's competition--by name, if possible--along with its market position and market share, and provide a breakdown of operations, results, and prospects. (5 points)

5. CEO PHOTO. Picture the CEO, ideally, leading off the letter to shareholders. (5 points)

6. RESPONSIBILITY. Assume responsibility--alongside the auditors--for financial data. (10 points)

7. BIOGRAPHIES. Present biographical data on officers and directors--more than simply their age and the year they signed on. (10 points)

8. INNOVATION. Break new ground. Eschew formula. (5 points)

9. FOCUS. Make the report meaningful by taking a point of view or choosing a tautly executed theme. (5 points)

10. IMPRESSION. Communicate a favorable image of the organization. (10 points)

11. DISCLOSURE. Include more data than that required by the SEC. Ensure that graphs--and their captions--are attractive, complete, and easy to understand. (15 points)

12. HONESTY. Should there be any other approach? (10 points)

13. INVOLVEMENT. CEO participation must be evident, at a minimum, in the shareholder letter. (10 points)

14. ARTICULATION. The CEO must define the company's core competency, mission, and goals. (15 points)

15. YECCH. Is the report likeable? (5 points)