The world's 10 best and 10 worst annual reports.

The onset of a new era - electronic annual reports - can't disguise the weakness of this year's print crop. They are characterized by slipshod graphics and lots of hot air.

The 171st year since the first printed annual report marks the birth of an epoch: the Electronic Age. Roll over, Herr Gutenberg.

But the gilt and flash can't disguise that this year's crop of traditional print reports is the worst in recent memory. In fact, it represents a devolution of the genre, with standards falling to the lowest level in the 12 years I've evaluated reports in conjunction with Chief Executive magazine.

Only a handful of companies attempted the delicate, sensitive task of producing their 1994 reports on CD-ROM. (That's partly because of the relatively small percentage of computer users that own or have access to the machines required to read the disks.) Dozens more set out on the Information Superhighway, making their communiques available on line.

In both categories, the results are uneven, at best (see sidebar). For the least effective of these New Age motorists, it is back to driver's ed.

Overall, we analyzed 768 print reports from the U.S. and abroad, using our 135-point criteria (see box). That's far more than the minimum 110 required for a scientific sampling.

To be sure, even the weakest crops yield a number of prizewinners. Laggards fail to tarnish this year's world-class reports. The front-runners share several features in common, including financial disclosure that exceeds the minimum five-year data required by the SEC; forthrightness in explaining a lackluster bottom line or unfavorable market developments; and complete biographical data on officers and directors.

Yet, fewer reports than ever were on target. Less than 7 percent scored 100 points or better. That's a definite decline from the nearly 10 percent of 1990 annuals that hit the century mark.

International reports, too, degenerated markedly, including those from such countries as Pakistan, Poland, Germany, and Mexico.

All of which makes this year's winners so much more valuable as informational tools and benchmarks for the competition. Charlatans take note.

THE BEST: FIRST (TIE) (130 POINTS)

For the second time in six years, the annual report competition ends in a dead heat. Mosinee Paper, a specialty- and pulp-products manufacturer, and telecommunications giant Ameritech each finish with 130 points, five short of a perfect score.

While Chicago-based Ameritech takes its place among the leaders for the first time, Mosinee consistently has made the grade since its initial first-place finish in 1989. In fact, this year's No. 1 finish is its third overall - earning Mosinee a spot in the Cato Hall of Fame and excluding it from future consideration for the top 10.

The Ameritech report picks up points for reader friendliness. Its cover, featuring a photograph of a young mother with an infant on her lap and a computer nearby, is a personal touch in a telecommunications world dominated by digital 1s and 0s. A glossary near book's end sheds light on concepts and products such as the Integrated Services Digital Network and Personal Communications Services.

Mosinee, meanwhile, again hits all the hot buttons with a report that is informative, accessible, and visually appealing. The company's propensity to distribute throughout the "AR" relatively large pictures of officers at work - along with extensive biographical data - bucks the tendency to shrink such pictures to thumbnail size, group them together, and bury them near the back of the book.

Mosinee takes its name from a Wisconsin town that serves as its home base. The report exudes a rugged quality with a cover photo of a mountain climber silhouetted against the sun. The nearby theme, "Reaching for higher levels... niche by niche," demonstrates the company's willingness to grind it out in a hardscrabble business as removed as any from that of its Baby Bell co-honoree.

THIRD (129 POINTS)

How to attract shareholder attention? Kick off an annual report by talking about the topic that concerns them most - how corporate performance impacts their pocketbooks.

The St. Paul Cos. does just that. On p. 1, the headline of the consolidated financial highlights trumpets: "Record Results in 1994." In addition, a graph at the bottom of the page, entitled, "Total Return to Shareholders," tracks the steady rise of St. Paul's stock price, noting that a $100 investment in the Minnesota-based company in 1989 was worth $182 and change at the end of 1994. Placing the gain in context, the graph illustrates how St. Paul's has outpaced both the Standard & Poor's 500 Composite Index, and the combined S&P Property-Casualty and Multiline Insurance indexes.

Graphically arresting, the cover sports the silhouette of a desktop globe superimposed with translucent images of the world's continents - apparently cast by a slide projector. The pictures eclipse a second, pinkish-gold light source, which creates the image of a rising sun and dovetails with the cover theme: "Building Shareholder Value in a New World."

A three-page, fold-out grid outlining operations is credible, though it fails to reveal customers and competitors.

FOURTH (127 POINTS)

A name change from Southwestern Bell Telephone to SBC Communications did not prevent this San Antonio-based telecom firm from returning to the top 10.

Though primarily a communications tool, a successful annual report also advances a company's marketing agenda, clearly delineating either its market position or intended position. On this count, SBC hits dead center, detailing its ongoing effort to emerge from the shadow of Ma Bell. "Our accomplishments have earned us the right to be viewed not just as a former Bell company but as a blue-chip company," Chairman and CEO Edward E. Whitacre Jr. argues in his letter to shareholders.

The SBC table of contents features customers in action, doing what the company wishes they'd do more of over its 13.6 million access lines in Texas, Missouri, Oklahoma, Kansas, and Arkansas - talking on the phone. Perhaps most telling about SBC's strategic agenda, the top two photos show customers talking on cellular phones: Like other regional Bell operating companies, SBC is gearing up for a major thrust into wireless communications.

Anxious to document double-digit percentage increases in profitability the last three years, SBC takes the unusual - though effective - step of plastering a graph in bold red, white, and blue right on the cover. Nearby is its new corporate logo, helping to underscore its new identity.

FIFTH (126 POINTS)

Big. That was the title of a 1988 box-office blockbuster that thrust Tom Hanks into the cinematic spotlight. Big also characterizes Bartlesville, OK-based Phillips Petroleum's annual report, which features on the cover an up-close photograph of a towering ethylene processing plant in Texas, naturally, the biggest state in the continental U.S.

To its credit, the report takes pains to match size with content: It's chock full of information on strategies, projects, competitors, and corporate performance. Demerits for graphics that are neither innovative nor attractive.

SIXTH (125 points)

You would expect London-based Reuters Holdings plc. to know how to grab readers' attention: The company is, after all, a news and financial-information concern. Reuters doesn't disappoint: The cover of its annual report shows excited brokers on the trading floor with the headline, "Filipino brokers cheer as the Makati Stock Exchange closes at a record high." Appropriately, the annual's theme is "Opening New Markets."

The 72-page report features a two-page Q&A with Chief Executive Peter Job, detailing the performance of recent acquisitions. A grid names competitors and customers, and outlines both the company's principal businesses and their market shares.

Photography - partly culled from Reuters' news files - is among the best of this year's reports. In content, graphics, and layout, Reuters has produced an extremely readable report.

SEVENTH (124 points)

Chevron's slick annual report is a stand-out yet again for readability, organization, and disclosure. True to form, the San Francisco-based diversified petroleum company devotes considerable space (this year, 13 pages) to a policy statement that explains its "strategic intents." The section identifies goals, challenges, and progress made in eight critical areas. Chevron intends to generate $1 billion in cash annually from U.S. exploration and production operations, improve financial performance in chemicals, and reduce costs across all activities.

The two-page "Chevron at a Glance" section identifies, in a highly organized format, core businesses, areas of operation, statistics, competitive advantages, and new opportunities.

EIGHTH (123 points)

The theme of Atlanta-based Southern Co.'s annual report is "Today's Success...A Powerful Future." This idea is repeated like a mantra throughout the diversified electric company's report.

In a brief corporate goals section on the first page, three areas (financial performance, competitive cost, and customer satisfaction) are assessed (though in some instances superficially). For each area, the company reports its 1994 goal, how it performed relative to that goal, and its aspirations for 1995. The 1994 goal was to "continue...getting our cost of service into the lowest quartile of Southeastern utilities." How the company actually performed in 1994, relative to that particular goal, is rather vague: The explanation states, "We cut costs aggressively...and are closer to the lowest quartile..." It's a start, though, and the company earns points for including it.

NINTH (121 points)

Accountability is where Pittsburgh-based Armco's annual report makes its mark. Of course, accountability is easier in a turnaround year, and this steel company rebounded in 1994, after a bottom-line loss the year before. In each operational area, the report reiterates previous goals, reviews 1994 performance, and outlines objectives for both 1995 and 1996.

For a "bricks-and-mortar" corporation, Armco knows how to humanize itself in the pages of its annual report. Photos of the company's senior managers are peppered throughout, accompanied by their observations on financial performance, operations, and market prospects.

TENTH (120 points)

AT&T's annual report opens with an innovative cover: On a stark white background, a small fish "feeds" on one sentence of type that reads, "With 5% of the $1.5 trillion global information industry, AT&T is a small fish with lots of room to grow." Extremely clever. In striking a note of opportunity, the company simultaneously disarms traditional prejudices against big companies.

Indeed, growth is the subliminal message of the report, and the New York-based company clearly presents its avenues of expansion in the multifaceted, fast-paced telecommunications and information-technology marketplace. In sectors as varied as infrastructure equipment, communications services, integrated solutions, and programming, the report outlines the company's growth opportunities and names competitors.

AT&T takes the human factor to new heights: Many of its products are shown being used in context. Paramedics transmit information from an accident scene to a hospital. A wheelchair-bound, working mother keeps tabs on her office using a cellular phone. You get the idea.

THE WORST:

There's a faceless, politically correct, blob of color named "Bob." There's a CEO so in love with his own image that he approved no less than 10 photos of himself - one in the letter to shareholders and the remainder in the three pages of the discussion with him. There's egotism, ignorance, subterfuge, questionable ethics, shabby design, and enough hot air to fill the Goodyear blimp.

It's all in a year's labor for your annual report standard-bearer, working ceaselessly to separate the wheat from the chaff.

If nothing else, in assembling this year's list of the worst (with No. 1 being the world's worst; unlike the best, this list is not based on score), one thing is clear: At least in the following 10 instances, the average half-a-million dollars spent on an annual report couldn't buy quality.

Besides, somebody's got to rank as the worst of the worst.

Better luck next year.

FIRST

"Bob is normal," proclaims the cover of Progressive Corp.'s report in hand-lettered words underneath a red silhouette of a boy's head. This annual report certainly isn't. It must be seen to be disbelieved.

Choosing a "diversity" theme, the Mayfair Village, OH-based auto insurer commissioned an artist to "create a large series of silhouette drawings with text inspired by his interest in daytime TV talk shows." Each drawing is unique; some have dreadlocks, others have baseball caps and glasses.

The text describing the residents of this politically correct universe includes pithy pearls such as:

* Meagan: Married to two men at the same time.

* Walter: Has foot fetish.

* Martha: Husband prefers her to loose [sic] weight.

How does the talking heads concept relate to the insurance business? It is explained in another silhouette on a page facing interlocking, multi-colored text. The company's "Golden Rule Core Value" requires us to respect all people, value the differences among them and deal with them in the way we want to be dealt with... 'Diversity' is about...embracing and nurturing our changing mosaic of people, customers, strategies, culture and environment." The blurb goes on to say that the pictures are "not intended to represent any Progressive person."

Progressive would have done better to include photos of its executives and start the letter to shareholders a lot sooner than p. 16. That letter, running over 12 pages, concludes with Chairman, President, and CEO Peter B. Lewis' greeting-card wishes, "Joy love and peace."

Ah, diversity.

SECOND

Can you keep a secret? Archer Daniels Midland can. This Decatur, IL-based agricultural company fails to mention an 11 percent decline in net earnings in the first 23 pages of its report, burying the information deep in the financials. Between 1990 and 1994, sales jumped 46.7 percent, but earnings remained flat. So the rapid growth referred to in the letter to shareholders depends on the benchmark you select.

That letter, written by Chairman and CEO Dwayne O. Andreas and President James R. Randall, euphemistically addresses "important changes in the way the company operates." Maybe next year such changes will correct mistakes such as this: ADM's ethanol production "drastically reduces carbon dioxide in the air of Sao Paulo, Brazil and other cities," according to the letter to shareholders. To rectify incorrectly printing "carbon dioxide," the company literally glued onto the page an ugly butter-scotch-colored snippet of paper bearing the words "carbon monoxide."

Oops.

THIRD

Egocentricity is no newcomer to the corporate suite - in fact, it is sometimes pre-requisite - but it achieves new depths in the Washington Water Power Co. annual report.

The three-page "Conversation with Paul A. Redmond" contains nine pictures of the Spokane-based energy-services company's chairman, president, and CEO, plus another one in the letter to shareholders - an unconscionable act of narcissism. Not only that, but the report is the third-hardest-to-read - with the letter to shareholders averaging nearly 30 words per sentence.

The communique opens by serving up a knuckleball: "This past year was one of the most significant in the long history of our company." Only midway through the letter do readers discover that the company saw an 11 percent earnings decline on record revenues.

It's not nice to fool shareholders. The annual report should be the equivalent of a batting-practice fastball: meaty, down-the-middle, and easy-to-handle.

FOURTH

Based on its annual report, San Diego Gas & Electric Co. seems pretty excited about the deregulation sweeping California's electric utility industry. Unfortunately, the company carries its enthusiasm a little too far, bolding the word in navy blue in the letter to shareholders and using the image of a key opening a rusty lock.

The book reeks of California-kicky design elements, including an abundance of surprinted type in various colors and shades and cutesy artwork, such as a mostly eaten pizza to demonstrate how company executives spent "late nights in endless debate, awash in fluorescent lights and the smell of hours-old pizza." The tan- and gray-tinted signatures of three top executives, including Chairman, President, and CEO Thomas A. Page, are magnified to about 200-point type and sprawl across both the letter to shareholders and the message from two executive VPs.

FIFTH

After countless years of producing the world's best-written annual report, Fairfax, VA-based Mobil falls from grace with a thud. Those responsible for the previous annual reports' high marks fell victim to Mobil's massive cutback in personnel.

The report contains no grid or matrix detailing the diversified oil, gas, and petrochemical company's structure, no biographical data on officers and little on directors, and no theme. And the photographs appear to be culled from dusty files.

Combined with the lack of forthrightness throughout the entire report, this earns it a woeful score of 48 points of a possible 135.

SIXTH

A year ago, Dallas-based Coda Energy made the list of world's worst annuals for accepting - nay, soliciting - advertisements from its various vendors.

The malignancy spreads. Charlotte, NC-based American City Business Journals is proud that its chairman and CEO, Ray Shaw, "chose this format [tabloid, printed on newsprint] because it's used by all our business journals." So far so good. But...

"It was also much less expensive to produce, costing less than $1 per copy," Shaw wrote in a letter to CE. "And that cost was covered by our selling advertising into the report. We grossed $16,000 in ad sales!"

Such misguided enthusiasm. This year's annual reports have enough troubles without the burden of trying to be profit centers. ACBJ should leave the numbers to its salespeople and concentrate a little more on readability. The average 24.6 words per sentence cost it four points - shameful for those "in the business."

SEVENTH

The good news is that Chairman Edgar S. Woolard Jr. appears to have authored his own letter to shareholders in Wilmington, DE-based DuPont's annual report. The bad news is that it was incredibly difficult to understand.

Inscrutability extends to the design. Much of the text is printed in a pale shade of green, hard to see, much less read. Text in the letter to shareholders goes from readably large to ultra-tiny in the space of six lines. Combined with triple-spacing between lines of type, and text running across the entire page, readers will find the going tough.

The opening sentence is a tip-off of an amateur author: "Last year was an excellent year..." It goes downhill from there as the letter continues with an average 29 words per sentence.

The chemical conglomerate zigzags in the financials - conveniently opting for the "less-is-more" approach. Only the bare-minimum, five-year financial data appear in eye-straining type. Magnifying glass, anyone?

Nah.

EIGHTH

Westboro, MA-based Banyan Systems' annual report is rather pleasant, with sepia-toned photographs and computer-generated art. But it all starts to unravel with a seemingly innocuous footnote in the earnings declaration on p. 2. The footnote advises that the reported $0.87 earnings per share does not include a one-time charge of $10.9 million after taxes, due to the acquisition of another software-solutions firm, Beyond Inc., in the first quarter of 1994. Only after perusing the income statement in the back of the book, do readers discover that the charge plunged per-share earnings to $0.27 at Banyan, from $0.70 the year before and $0.50 in 1992.

Some companies prefer to highlight operating income net of taxes or charges rather than net income, a practice certainly not improper under SEC regulations and generally accepted accounting principles. Nevertheless, in financial highlights early in an annual report, we think companies should report both and leave the reader to decide which is more important. Granted, the footnote is there in the beginning of the Banyan report, and diligent readers can calculate for themselves that net income is one-third of operating income, but that's a step they shouldn't have to take.

Shareholders' equity also declined, and working capital hit its lowest mark in three years. Chairman, President, and CEO David C. Mahoney's letter to shareholders conveniently omits this information. Perhaps no one ever told him that in annual reports, forthrightness is always the best policy.

NINTH

We don't deny there's valuable information in Salt Lake City-based Questar's annual report, including a list of detailed strategic objectives for each of the natural gas company's three areas of operation.

Unfortunately, the report also runs on and on without coming up for air. Take a deep breath and recite the following sentence: "At the outset, we were confronted by record-warm weather, which sharply reduced gas consumption in our utility's service area; a disappointing rate case that, among other things, lowered our gas distribution utility's allowed return on equity; and unusually low oil prices, which impacted our oil and gas exploration and production units."

Wake up. We're moving on to No. 10.

TENTH

Zero. Zilch. Nada. That's how many points Pleasanton, CA-based plastic and resin composites company Hexcel's annual report received.

It has no pictures, no letter to shareholders, no graphs. The report is nothing more than a plain white cover with blue lettering wrapped around the legalistic Form 10-K, required by the SEC. It is among the 9 percent to go that route up from 7 percent in '93 and 6 percent in '92. This is a disturbing trend for those who believe stockholders deserve better than down-and-dirty statistics printed in one color on lightweight paper stock.

RELATED ARTICLE: What Constitutes A GOOD Annual Report

After 12 years of spotlighting annual reports on these pages, it's clear the good ones contain certain essentials. For instance, text should be forthright - that is, there should be no long, slow windup before the news, even if disappointing. At the same time, a report should be informative and contain full financial disclosure.

Contributing Editor Sid Cato's copyrighted criteria for judging the best and worst annuals are based on a 135-point-maximum scorecard that rewards those possessing the following characteristics:

1. Action. The cover should lure the recipient into opening the report and turning the pages. The report should use various readership-enhancing devices - an intriguing cover statement, textual callouts, boldfaced lead-ins, subheads, bulleted paragraphs. Its layout should be open and inviting, and the descriptive table of contents should be comparable to that in every newspaper and magazine. (20 points)

2. Readability. Write clear, sprightly copy, eschewing gobbledygook. (10 points)

3. Information. Inform the reader fully through a special section, mission statement, or glossary of terms. (10 points)

4. Prospects. In a grid or matrix, identify customers and competitors and provide market position and market share, a breakdown of operations, results, and prospects. (5 points)

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

6. Responsibility. Assume responsibility, alongside the auditors, for the financials. (points currently allocated to category 1)

7. Biographies. Present biographical data on officers and directors - more than simply their age and the year they joined the board or company. (10 points)

8. Innovation. Break new ground. Ensure the report is not run-of-the-mill. (5 points)

9. Focus. Display a discernible point of view and a clearly stated, tautly executed theme. (5 points)

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

11. Disclosure. Include more financial data than what's customary or required by the Securities and Exchange Commission (five years). Supplement all graphs with succinct, understandable captions. (15 points)

12. Honesty, Rhetorical commitment is where it's at. (10 points)

13. Involvement. Exhibit CEO involvement, at a minimum, in the letter to shareholders. (10 points)

14. Articulation. Present the CEO's view of the company's present and future mission and goals. (15 points)

15. Likeability. Does the report have redeeming qualities? (5 points)

RELATED ARTICLE: Is The World Ready For The CYBER-REPORT?

This is the Year of the Electronic Annual Report (Y.E.A.R.). Nearly two centuries removed from the advent of the world's first print AR (Baltimore Gas & Electric's in 1823), more companies than ever tried something modern, progressive, zippy.

The results, on balance, are just plain...well, zappy.

Investors - and insomniacs - this year can access several dozen reports on the Internet and, in a few instances (IBM, R.R. Donnelley & Sons, Oklahoma Gas and Electric, and Adobe), on CD-ROM. Often, the reports are enlivened by music, visuals, and, speaking chiefs.

To be sure, talk is big - and cheap - in both venues. Clearly, a gap exists between intentions and current technology. Take Armonk, NY-based IBM's effort, one of the few available on both the Internet and CD-ROM: The computer giant issued a press kit containing several color slides and a news release heralding the two hours of original music it commissioned for its report. The CD-ROM version, the press release told us, is "available in three platforms" (translation: for DOS, Windows, and Macintosh systems). Despite its "11,700 custom graphics, 15 minutes of digital video and 16-bit stereo audio," the entire package at best failed to live up to advance billing. At worst, it would try the patience of a computer technician when it sent him or her to a page containing eight arcane commands necessary to view the financials.

Mountain View, CA-based Adobe Systems' multimedia attempt is the most frustrating of all. The package containing the disk claims the software company's AR is contained therein, but even a skilled technician couldn't locate the report, let alone download it. What hope is there for the superficially proficient?

The Internet poses challenges of a different kind. The well-hidden index of annual reports includes obscure Olicom as well as the more familiar Adobe, Ameritech, AT&T, General Electric, IBM, Monsanto, Motorola, and NEC. But that's not all: There's an advertisement from an annual report producer who wants to help you put your report on line.

Monsanto meantime offers such material as a graph of stock prices as well as copies of the St. Louis-based chemical company's SEC EDGAR filing and financial speeches by top company executives. Also included is a telephone number for automated information, along with the company's latest earnings. However prosaic that may sound, it is far preferable to the other offerings.

Take AT&T's report: To view it on the Internet, you must download data - a lot of it. The task took the better part of an hour even after midnight, hardly rush hour on the Superhighway.

Initially, New York's AT&T replicated the catchy cover on its printed report. A good move. Still, even accessing that electronically proved more than a tad slow. The key file required downloading 892,800 bytes (a byte being the amount of computer memory needed to store one character). It helps if you know the address: http://www.att.com/AR 1994/audio/allen.aif. Let's face it: It's not one that rolls off the tongue. After an hour of impatient waiting, at least one user was informed that the file could not be accessed. Try later. Grrrrr.

Chicago-based Ameritech's report presented other hurdles for this viewer. The telecom's report on the Internet lacked sound. The program offered eight choices, the first of which was wrong. The second replicated the glossary of terms but didn't show any charts. Another try - 12,388 bytes later - was rewarded with a far more graphically pleasing result but still without sound or motion.

While the company provides viewers with a chance to give feedback, leaving one's name alone requires downloading 2,489 bytes. Plus 10,492 bytes plus 12,671, PLUS 1,865 bytes, plus 2,377 bytes. So much for establishing a dialogue with investors.

From a subjective point of view, accessing a report on the Internet wasn't worth the effort or money (100 hours online researching the dozen reports listed in the index for a $250 America Online tab). Only an intrepid researcher would go to such extremes, or an insomniac willing to devote countless early morning hours for lack of more essential things to do. Like clip one's toenails.

Sid Cato

Sid Cato, a former corporate officer and author, has been at this stand for the last 12 years, currently monitoring the world's annuals from his vantage point in Kalamazoo, MI. He is president of Cato Communications, as well as editor/publisher of Sid Cato's Newsletter on Annual Reports, now in its 13th year of publication.