The 10 best annual reports of 1997 ... and the 10 worst.

Annual reports are getting better. But for CEOs, and their letters to shareholders, honesty is still a lonely word.

THE BEST REPORTS Talk about improvement. Today's annual report is, by far, more substantive, more colorful, and more revealing than ever. The annual as historical document is increasingly becoming a thing of the past as CEOs recognize that it's not so much where they've been, but where they're headed that most interests analysts and shareholders. As such, more content addresses what's in store for the company, although that is generally more difficult to detail. Indeed, some companies are breaking even further out of the mold. devising new ways to gauge their financial and strategic futures (see "Beyond the Balance Sheet," page 66).

And that's not all. The percentage of annual reports judged attractive has risen to 80 percent from 64 percent in 1994. Reports are including more biographical data on officers and directors - critical information for any reader assessing the qualifications of those groups. Twenty-three percent of today's reports contain details on directors' backgrounds, up from 5 percent in 1987.

Clearly, all of this means that those making the list of "World's Best" annuals enjoy better company. Still, to be included among the best, an annual report must be exceptional across the board. It must contain detailed biographical data on officers and directors. Financial disclosure must be extensive, more than the minimum required by the SEC. The CEO must be involved in the report's preparation, particularly in the letter to shareholders. Each of the year's 10 Best articulates a memorable theme and supports it forcefully throughout the book, in both design and editorial content. Finally, the report must be a seamless whole assembled by one set of specialists and not the haphazard product of professional communicators and financial experts.

1 Aspirations aside, seldom does an annual report do well across the board, touching all the bases in this annual competition. BRUNCOR, a Canada-based telecom, is an exception; it did everything right, having vowed eight years earlier to "keep doing it" until it did.

The foundation for its perfect-scoring book is a theme that is tautly executed: "It's for customers like Brittannie that we're developing leading-edge communications." Brittannie Watson is the name of the adorable gift pictured on the cover, and she appears 22 times elsewhere in the book, including four times with president Gerry Paul.

It helps that Bruncor enjoyed a record year and a price-earnings ratio of nearly 19 (before a onetime accounting adjustment). But regardless, its financial data is easy to decipher; Bruncor's is among just half a dozen reports to feature a grid that breaks out operations, naming competitors as well as customers for each.

Directors are pictured full-length accompanied by sufficient biographical data. The company's five top officers are also pictured, along with detailed background data on each.

2 As far back as its 1990 annual, ST. PAUL stood out as a pioneer by enlivening its contents listing, captioning graphs fully, and including 11-year financial data. Today, too, its report is attractive, compelling, and reflects well on the company.

In fact, the only thing keeping this year's report from achieving a perfect score was its grid, which included a list of competitors, but not customers. That omission triggered a reaction in the software used to monitor the annuals and put it just a stone's throw from perfection.

3 With chief executive Alex Trotman at the helm, FORD, a diversified worldwide automobile manufacturer, embraced a mandate to aim for the top.

It wasn't always so; two years earlier, its report scored a measly 48 points. But last year's document earned 112 points, giving it "world-class" status, or those scoring at least 100 of a potential 135 points.

And, now, this. For starters, it places a simple but enticing phrase on the cover: "Delivering value." That approach is executed throughout, with textual sections bearing such titles as, "Delivering customer value," "Valuing your safety," and "Growing value in emerging markets."

Also, a first-of-its-kind addition: a highlights page with check marks indicating "All-time Ford records." Ten elements are spotlighted, including net income and earnings per share. The report's grid, presented on a gatefold cover, breaks down the company's various businesses, lists both its competitors and customers for each of five areas.

Furthermore, Trotman's letter was found to be world's best of the year. Its "fog index" - or level of difficulty in deciphering the letter's meaning - of a mere 3.68 is lowest among the year's 10 best.

The book contains photographs, excellently reproduced, of employees and customers. Each is explained fully; no "mystery employees" in a carload. It even strove successfully to extend the design look throughout the book, helping make the financials an integral part of rest of the report.

4 Setting an example for other companies experiencing a falloff in net income, SOUTHERN CO.'s report speaks the truth - and does so with a sense of humor.

Southern's CEO, A. W. (Bill) Dahlberg, appears on the cover as a masked "Rocket Man," clad in a silver, space-age-ish costume. Holding a lightning bolt gun, the words across his chest read: "The future ain't what it used to be." And, on the inside: "It's much better" - along with Dahlberg's smiling face and a wave of his silver-shrouded hand.

Dahlberg tackles the company's 14 percent downturn in net income right up front: "Don't get me wrong. I'm not happy with the decreases in earnings. But there are clear reasons for them." Among them are "a windfall profits tax in the United Kingdom," which reduced earnings by about $111 million, and "a mild summer in the Southeast," which affected energy sales.

But, he concludes: "Our future is better than ever. It's strong because of our traditional business. It's growing because of our international business. And it's emerging because of our energy marketing business." It's a convincing message and proves that honesty is best.

5 The annual report of this Pittsburgh-based leader in "specialty flat-rolled steel" has finished among the world's best as far back as 1990. But this year's report may well be a first: a self-covered annual that looks like a popular consumer magazine. Its subtitle is "Specialty Steel Solutions" and the clever headline of the primary article - addressing the "war on rusting exhaust systems" - is "Rust Gets Busted."

CEO Jim Will has many pluses to report to shareholders in his letter, including net income that rose 136 percent and earnings per share that nearly quadrupled. But that aside, ARMCO's report has nearly everything going for it: a design approach extended throughout, including the financials and a grid that names both customers and major competitors, as required. It also contains a glossary of product terms, as well as 11-year financial data, plus extensive background information on officers and directors, all of whom are pictured. Room for improvement: While CEO Will dealt with the future, his two-page letter wasn't as detailed regarding the business's future as some of those that finished ahead of it.

6 Insurance coverage isn't considered by most to be inherently exciting. Yet AFLAC becomes the second in this field to make the list of World's Best for its third year.

With its current report, AFLAC touched most of the bases, including biographical data on officers and an intriguing, in-depth look at the dollar versus the yen. It missed including a grid, perhaps thinking that, as a one-product operation, such a breakdown was not necessary.

One serious mistake was the decision not to incorporate the company's financials into the overall book design. Had it done so, the report would have tied for fourth-best worldwide.

7 This self-described "total energy services company" achieved, for the first time, status among the World's Best. For one thing, it provides readers with an in-depth profile of a company positioning itself for sweeping changes in the electric utility industry while merging with another utility, Allegheny Energy - a merger subsequently called off.

The book does lack a cohesive design running throughout, although it did make an effort by providing, for instance, marginalia to explain such elements as the consolidated statement of consolidated cash flows. It also included some captioned graphs nestled among the financials, as well as a back-of-the-book glossary of terms.

8 The last two years, 1996 and 1997, have been record-setting for this diversified, California-based petroleum company. In its words, this has been "an extraordinary period of achievement."

Its pluses are many, not least of which is a very direct, easy-to-read letter from chairman Kenneth T. Derr. Credentials of officers and directors are presented and financial disclosure, including financial ratios and "capital and exploratory expenditures," among others, are extensive. In addition, this is one of the small percentage of companies to make the concerned effort to keep readers interested, primarily through use of 14 graphs, all of them captioned.

"Building on Success" is the report theme, buttressed by a three-page special section that precedes a dozen pages devoted to its "Strategies for Success."

9 This year, SONOCO returns to its perch on the 10 Best list. Best list. The global packaging leader, as it describes itself on the cover, helps "our customers produce and distribute products to consumers, around the corner and around the world." That capability is illustrated attractively on the front and back covers.

It, too, used fully captioned graphs as well as a consistent design. To its credit, it shows 1997 results that include an "asset impairment charge of $174.5 million after tax." It also includes complete biographical data on both officers and directors.

10 Best non-North American annual report of the decade five years ago, and traditionally one of the World's 10 Best, REUTERS anchors this year's list.

First, big points for frankness. Up front in the book, the company presents six graphs with full captions, that clearly show a 12 percent decline in after-tax profit (and earnings per ordinary share) on an 8 percent decline in operating profit. In fact, chairman Sir Christopher Hogg assesses it as "a testing year for shareholders in Reuters, as it was for those managing the company."

"Breaking new ground" is the theme of the report, which is colorful and takes a European design approach, somewhat bigger and bolder than most U.S. annuals. Support for the report theme comes in the words of CEO Peter Job: "For many years now, we have been using photographs from our news pictures service on the pages of our annual report. This year, we have used them to represent some of our main challenges. They illustrate the drive to break new ground through the use of advanced technology."

WORST REPORTS. So there's good news and there's bad news. The good news is that, increasingly, CEOs across the global world community are realizing that the annual report to shareholders is a potent weapon in their communications arsenal. As a result, annuals overall enjoyed a soaring positive-negative rating. In fact, this year's crop of annuals set a new record for the average index rating: 15.3 percent, up from last year's rating of 9.4 percent.

That's the good news. The bad news is that, as the bar is raised and the curve skews up, companies will find their annual reports hit for lesser infractions than would have been the case in years past. Today, annuals make the list of "World's Worst" for such infractions as too many first-person references; a proliferation of photographs of the CEO; and excessive graphic design that serves to overshadow poor performance.

But while overall content of annuals has improved dramatically, honesty regarding financial returns hovers near the record low: 87 percent. More simply put, 13 of 100 CEOs are not adequately forthright in their letters to shareholders.

While it may be tempting to gloss over losses, it's not a smart move - and CEOs who make it a practice might do well to heed lessons learned recently in the Oval Office. Calculated language and artful dodging won't undo what is fact, and it won't fool anyone for long. In the end, the truth will out, and you'll be left to answer to the mob of hurt and angry shareholders.

1 First, there's the cover of CENTURY's report, printed in drab, depressing colors that run counter to the positive theme: "Delivering the Promise." Then, the message from CEO Leonard Tow that "fiscal 1997 was a stormy year of contrasts despite the fact that cable television companies continued to report excellent results." That's as specific as he gets.

President and COO Bernard Gallagher's letter said that the company "reported the most successful year in its history," setting "new record highs" "in revenue, operating cash flow, and subscriber levels."

The reality, alas, is that Century reported an ever-increasing loss, ($1.96) per share, worse even than the year-earlier loss of ($1.44) and the year prior, a loss of ($1.01). The theme, "Delivering Promises," contains a special irony: promises, yes; honesty, no. Century waited until p. 16 to present "selected financial data." What's shown there are ever-widening losses during the five years, and a loss nearly four times greater than in 1993.

2 NATIONAL SEMICONDUCTOR'S report, too, lost significant points for honesty. Each of the last four years, its annual report has regressed: Its score, with a potential 135 points, decreased from 95 in 1994 to 51 today.

Initially, this year's report held great promise, containing much that's exciting, from a progressive graphic design to a worthy theme, "Seize the moment," which was carried through to the letter to shareholders.

But the message is not accurate if shareholders also expect profits along with opportunity. On the contrary: profits declined for the third year in a row - from $1.92 a share in 1995 to the current minuscule 19 cents a share; from $185.4 million to $27.5 million.

But according to Chairman, President, and CEO Brian L. Halla, "fiscal 1997 was a banner year" for the firm. "We had four successive quarters of improvement in revenues, gross margin, and profitability, even defying the company's historical third quarter downturn in sales."

He fails to mention that sales declined 5 percent the year he was CEO, to $2.5 million from $2.6 million. Pretax profit remained disastrous, declining to $57.3 million from $247.2 million a year prior, while operating costs rose slightly.

Is the boss red-faced? It's hard to tell; the 11 men pictured in the executive photograph are aligned in such a way that identifying who's who is a challenge. But perhaps that's for the best.

3 First question: which RCN executive decided it would be a good idea to feature a Picture of a dinosaur on the cover of the company's annual report?

Chairman David C. McCourt does explain the image inside - that just as dinosaurs once ruled the earth but could not adapt to "a cataclysmic change," so too the telecommunications industry is undergoing a change, "a shirt as profound and far-reaching as the transformation from the horse and buggy to the automobile, the telegraph to the telephone." But still, it's an image best avoided.

There are other problems. The tiny Princeton, NJ, company, with sales of $127.3 million, attempts to gloss over its losses in the last two years. The current loss, $52.4 million, is approaching 10 times the year-prior deficit of nearly $6 million. On a per-share basis, RCN lost 95 cents versus 11 cents a share a year earlier. Long-term debt, meantime, grew exponentially: to nearly six times the year earlier. It marked the fourth year in the last five that RCN reported a loss instead of a profit.

Granted, it wasn't until October 1, 1997, that RCN "emerged as a separate public company." But nowhere can one find the soaring loss addressed, let alone explained. "Dinosaurs will be dinosaurs" proclaims the caption on one artist's illustration appearing on the inside front cover. And boys will be boys where veracity is concerned - at least for this start-up company.

4 INDIANA ENERGY has a vision, but its problems begin with the cover, which displays the first two of seven photographs of the boss, CEO L. A. Ferger. A bit much.

But a bigger problem is the proliferation of themes. On the cover alone, several words are printed in increasingly vague shades of color that overlap and confuse, effectively defying reader comprehension. Inside the report, the confusion continues with a new theme presented on virtually every front-of-the-book spread.

For all of the foregoing, but especially the extreme self-aggrandizement, this report makes the list of World's Worst.

5 Nick A. Caporella is a fun guy. The chairman of Florida-based NATIONAL BEVERAGE clearly gets a big kick out of what he does which is selling a "delicious family of brands." This refers to beverages, Dom Shasta to Everfresh juices to LaCroix waters, and various Faygo soft-drink flavors.

But his enthusiasm borders on strange, and ultimately, comes off as juvenile. All the company's products, he proclaims, are "DEE-licious" - a term he defines in a P.S. to his letter as "affording great pleasure; appealing to one of the bodily senses, especially of taste or smell; tantalizing flavor as it relates to National Beverage brands."

One of his "Quotables," heralded in a callout, recalls a life-altering experience in his childhood, when he awoke "to a wonderful aroma [that] was to become a ritual on those special mornings [when] a distinct flavor filled the entire house."

The wonderful aroma was not of soft drinks, but of Mom's sauce simmering on the stove. "Upon seeing me, [she] would bring the spoon to her mouth and taste, and then with much excitement on her face, she would burst out: 'DEE-licious!'" Apparently, he never recovered from that - and now seeks to inflict his haunting memories on the rest of us by making it a sappy theme in his company's annual.

6 The United Colors of BENETTON are fading.

The Italy-based company, famed for its flamboyant attitude, postponed its financial highlights listing until page 22.

Excluding its new acquisition, its "consolidated net revenues exceeded the Life 3,000 billion mark to around Lire 3,100 billion, a rise of nearly 7 percent on the year."

Needless to say, the word "around" is meaningless in a document as precise as the annual report. Points were also lost on the out-of-control graphics.

7 A year earlier, UNISOURCE was one of two Alco Standard spin-offs to make the list of "World's Class" reports, or those scoring at least 100 of a potential 135 points.

This time, its score dropped to 52 points. Moreover, among elements missing are a company description, required by the SEC, as well as, for the second consecutive year, a financial highlights page up front.

Reason: "Disappointing earnings," down to .8 percent of revenues from .9 percent a year earlier. Net income for the year and earnings per share were "both 33 percent below last year's pro forma results." To their credit, the company's two top officers do disclose, but unfortunately, it's too little, too late.

8 DEKALB GENETICS's report is among many that had trouble lighting on a single theme. DeKalb's cover presents no fewer than three theme lines.

The report also did not achieve the minimum - appearing attractive - that a standard four out of five reports achieve. Photograph identifications do not make clear which person pictured is the CEO.

All of this is somewhat moot; the company was acquired by Monsanto (#10) six months after the report was released.

9 Only one in 14 companies worldwide resort to including the legalistic Form 10-K in their annual report to shareholders. Fewer still, one in 38 produce a multi-part document.

"One of the world's largest apparel companies" shows on its opening page graphs with lines skewing skyward. Net revenues rose at a compounded growth rate of 18.1 percent, operating profit an even-steeper climb: 19.3 percent CGR.

But those not distracted by the muddled presentation of year-by-year numbers that extend from right to left - rather than the traditional presentation, with the most recent results in the far-left column - will see that earnings per share are a fraction of what was achieved in three of the previous four years. Only in '96 did the company report worse results. This year's profit, diluted, stands at 42 cents.

Granted, that's better than a negative, but hardly any great shakes when one realizes that revenues doubled during the five years prior. But for choosing to focus on the upbeat - "1997 was an outstanding year" - tossing in the confusing 10-K, this annual makes the 10 Worst list.

10 Initially, the MONSANTO report impresses. It contrasts Moore's Law with today's "Monsanto's Law." To wit: "Today, the ability to identify and use genetic information is doubling every 12 to 24 months. This exponential growth in biological knowledge is transforming agriculture, nutrition, and health care in the emerging sciences industry."

So far so good. But CEO Robert B. Shapiro was nearly halfway through a four-page letter before addressing a profit falloff, noting "some accounting complexities" and other items he felt unfairly affected earnings.

But with a hefty 20.4 average words per sentence, the letter lost two of 10 points in the writing category. And, for the Fast time in years, its Management's Discussion & Analysis of Operations (MD&A) failed to impress, another regressive sign.

What tips the scales against it is the excess of material. Every available bit of space appears crammed with material and color gradations that make text hard to read. Diagnosis: Information overload.

RELATED ARTICLE: WHAT MAKES THE BEST?

Developed in conjunction with Chief Executive, contributing editor Sid Cato's copyrighted criteria for judging the best and worst annuals are based on a system that awards each report points - up to a maximum score of 135 - for having the following characteristics:

1. Action. Graphic and text elements lure the recipient into opening the report and flipping through its pages. Effective readership-enhancing devices, including an intriguing cover statement captivating call-outs and lead-ins, snappy subheads, and bulleted paragraphs. The table of contents should be as comprehensive as that of a magazine, and the layout as compelling. (20 points)

2. Readability. Contains sprightly, clear copy rather than grandiose statements over-embellished with empty phrasework. (10 points)

3. Information. Fully informs the reader with substantive information presented in a special section, mission statement, and glossary of terms. (10 points)

4. Prospects. Uses a grid or matrix to identify customers and competitors provide market position and share, and break down operations, results, and prospects. (5 points)

5. CEO Photo. Shows the company's chief executive in a candid, congenial pose, preferably leading off the letter to shareholders. (5 points)

6. Responsibility. Assumes responsibility, alongside the auditors, for the financials. (Points are currently allocated to category 1.)

7. Biographies. The biographical data on officers and directors extends beyond age and the year the person joined the company. (10 points)

8. Innovation. Stands out for breaking new ground, rather than rehashing old approaches. (5 points)

9. Focus. Displays a discernible point of view and clearly articulated, tightly executed theme. (5 points)

10. Impression. Conveys a favorable image of the organization (10 points)

11. Disclosure. Offers more financial data than what's customary or required by the SEC and supplements graphs with succinct, explanatory captions. (15 points)

12. Honesty. Indicates strong commitment and integrity. (10 points)

13. Involvement. The letter to shareholders and copy evidences CEO involvement. (10 points)

14. Articulation. Clearly expresses the CEO's view of what the company's about and where he or she sees it headed. (15 points)

15. Likeability. Contains other elements that create or add to a positive overall impression. (5 points)

RELATED ARTICLE: THE HONEST DUCKLINGS

As too marty CEOs stealthily conceal losses and sidestep disquieting facts in letters to shareholders, GE's Jack Welch and Berkshire Hathaway's Warren Buffet - always watched dogs at annual report time - set good examples by immediately addressing the elephants in the living room.

Buffet begins the roughly 25-page letter to shareholders by downplaying the company's net worth gain of $8 billion: "any investor can chalk up large returns when stocks soar, as they did in 1997. In a bull market, one must avoid the error of the preening duck that quacks boastfully after a torrential rainstorm thinking that its paddling skills have caused it to rise in the world. A right-thinking duck would instead compare its position after the downpour to that of other ducks in the pond."

What's the company's duck rating? "Though we paddled furiously last year, passive ducks that simply invested in the S&P Index rose almost as fast as we did. Our appraisal of 1997's performance, then: Quack."

And Jack Welch, in his letter - signed also by Vice Chairmen Paolo Fresco, Eugene Murphy, and John Opie - immediately tackles the Asian crisis, telling shareholders that Asia's economic woes create both challenges and opportunities. The letter reaffirms confidence in the Far East as a future leading market and compares the crisis to the '80s recession, when GE succeeded by "refusing to buy this dismal scenario."

Bill Gates, on the other hand, another perennial favorite, glossed right over Microsoft's legal woes, even in discussing Win 98 integration with the Explorer browser - which first inspired the DoJ to take on the Redmond giant.

The letter - which outlines plans for investing $3 billion in R&D and $200 million in customer service - only cryptically alludes to the courtroom battles, concluding with: "I appreciate the unwavering support and trust of our shareholders in these exciting times." Will shareholders continue their unwavering support, even in the absence of hard facts. The jury, as they say, is still out.

- C.J. Prince

ACROSS THE SEA

One in six annual reports we analyzed - substantially more than the 6 percent previously - originates from outside the U.S. As might be expected, reports hail from all areas of the global economy - and include a Kenya Brewery, a German water technology company, a diversified Australian paper firm, a public utility in the Philippines, and corporations in the new Czech Republic, which is gearing up big-time for action on the international scene.

While non-U.S. reports tended to be slightly more positive, three times as many annuals by U.S. companies were credited, automatically by computer, as reflecting well on the firm whose name is on the cover.

A message to critics who decry the increasing length of reports: When the non-U.S. annual report is excluded, the average number of pages declines to 46 from an overall 50. That compares with 40 pages in 1983 annuals. This means the species has grown less than an average of half a page per year.

Of the worst, U.K.-headquartered EMI Group featured England's then-hugely popular Spice Girls on the cover, their appearance reminiscent of the widely criticized Calvin Klein "heroin chic" look. On the inside, Sir Colin Southgate, chairman of the entertainment conglomerate, had to compete with kicky photos of the young ladies. His letter, a near-record nine pages in length, was displayed over 16 pages and competed for attention with the likes of Garth Brooks, a shimmering Tina Turner, and country singer Deana Carter.

And one international report continues to impress: the Reuters Holdings PLC 1997 edition, which anchors this year's 10 Best.

GETTING AN E FOR EFFORT

First there was e-mail, then e-commerce. Now there are e-annuals. No, not annual reports on-line (which abound), but reports that warrant a decided "E" for effort, having some, but not all, of the stuff that makes the highest grade.

Take the Berkshire Hathaway product, the perennial preference of many "students of the species." While Warren Buffet's letter is considered a must-read, his report typically does not score favorably against our criteria.

Same with the General Electric report. GE has notably pioneered in many aspects of annual reports; four decades ago, it did a readership study and determined that a shareholder letter including a photograph of the author was more favorably received than one sans picture, and that positioning the photo at the start of the letter elicited the most favorable recall.

The most outstanding feature of this year's GE report is the immensely readable letter to shareholders from Jack Welch and three other executives. The report scored just over half, 71, of a potential 135 points. Specifically, it lacked and exciting cover or theme to draw in readers as well as a company description, as required by the SEC. It also did not include a grid to break out financials nor were director or officer bios included. But again, Welch's letter, essentially a primer for business professionals here and abroad, positioned it among the six most readable of the year.

An "E" for effort similarly goes to Tenneco. Graphic appearance of its key corporate communique' pushed it to the head of the class. Last year's book and this were designed by entirely different graphic design firms, but the impact was the same: enormous. A year ago, the report was mailed in one of the company's industrial-strength clear plastic bags. This year's outing is in the shape, and bears appearance, of an automotive license plate. It, too, is certain to walk off with copious design awards.

The company's problems, though, were two-fold, one of them a world-record seven pages left blank, save for 16 horizontal rules and the single word, "Notes," at the top of each.

Critics also can point to a decline, for the second consecutive year, involving net income applicable to the common stock, and a failure to be frank about it. On a 10 percent increase in net sales and operating revenues, net fell 21 percent-to $1.84 a share from $2.34. But, if they read only Dana Mead's letter, stockholders would be hard-pressed to guess that all was not entirely upbeat.

- S.C.

Sid Cato, an author and former corporate officer, is president of Cato Communications, and editor/publisher of Sid Cato's Newsletter on Annual Reports.