Worst annual reports.

As never before, companies in their annual reports have come up with inventive attempts to avoid the obvious: disastrous years at the box office. Oftentimes they choose simply to ignore the unpleasantness.

Honesty among the current crop of reports is perceived as having slipped a bit. While historically, nine of 10 reports are appraised as forthright, the figure dipped to 88.5 percent--nearly back to the level (88.1 percent) of three years earlier. That slippage may not represent a mind-boggling decline in directness, but for some it's certainly grounds for discomfiture.

A lack of forthrightness aside, here are some other foolproof ways to make the grade as one Cato's 10 worst: Compose a letter to shareholders awash in gobbledy-gook. Obscure hard-to-swallow, bottom-line figures with puffery about "strategic changes" and "significant synergies." Use lots of ill-defined acronyms and unreadable typefaces. Plead economic hard times and care little about how your annual report--arguably the single most important public communique you engage in--appears to outsiders.

For laggards in the annual report derby, there's good news and bad news. If you make the "10 Worst" list any three years, you qualify for our "Hall of Shames," along with the likes of Citicorp, Colgate-Palmolive, the Toronto Sun, chewing gum company Wm. Wrigley Jr., and the latest companies to be enshrined, Waste Management and Time Warner--the latter, this year's worst of the worst.

The good news? Hall of Shamers are exempted from our brickbats and barbs, it being pointless to shoot dead horses.

Speaking of which ...

FIRST

Time Warner is the no-doubt-weary wearer of the crown of thorns as the world's worst report three years in succession. Reasons for the return trip abound.

For one thing, the company appears to have turned the reins over to its graphic designers. In the minds of many, that's akin to giving the inmates the keys to the asylum.

The report's positive/negative rating--with 100 percent being the most favorable--is zero percent. In other words, its negatives completely outweigh its positives. Another blemish: This communications colossus continued to hemorrhage in 1991, posting a net loss of $99 million. Even so, at the start of its letter to shareholders it opts to focus on the fact that it is "in the business of ideas" (one of which, obviously, is to play down its abysmall performance).

There's more. The inside back cover contains credits, listing, among other things, the names of those responsible for this aesthetic abomination. These are printed in dark type on a steel-blue background, making them impossible to see.

The report concludes with what appears to be a picture of an eclipse, its meaning lost on all but these denizens of disinformation. An inside joke, perhaps. Maybe you had to be there.

SECOND

You've had a bad year, Bucky. Earnings of your Amerada Hess have fallen out of bed--to a level about a sixth of last year's. What to do?

That's easy: Dissemble.

Emphasize in large, green type that your "capital projects proceeded on schedule and within budget in 1991." That certainly sounds upbeat.

Then, Bucky, drop in a reference to your "long-term strategic plan," formulated five years earlier. Sounds like you know what you're doing.

Then take the high road--talk about the fourth consecutive annual increase in production of crude oil and natural gas liquids worldwide. And hey, listen to this: Only graph the items that are reaching for the sky--like the ever-popular "total proved reserves."

Wait until paragraph 15 of the shareholder letter--the tedious, column-long, penultimate paragraph--to slip in that net income plunged a whopping 82.6 percent to $84 million. Then, in the last paragraph, throw in a warm fuzzy about "building for the future."

Lest there be some wiseacres out there, scribble the signatures--no, no, don't typeset their names--so no one can identify the culprits. And for good measure, run a bunch of gorgeous color photographs. People always go for pictures.

If that doesn't obscure the horrific performance, Bucky--the company's worst in six years--I don't know what will.

THIRD

Nothing egregious or underhanded here, just a case of exceedingly bad judgment. Bell Atlantic became one of the more important corporate entities to produce a bare-bones document more befitting a proxy statement than an annual report. Paper stock is shoddy, the use of color restrained, and excitement non-existent. This telecom titan pleaded "a climate of economic uncertainty" as a rationale to denigrate a document most concede is a corporation's premier communications tool.

Perhaps anticipating shareholder catcalls, at the outset of his message to shareholders, Raymond W. Smith, chairman and CEO, says, "As you can see, we're communicating with you in a new way this year." (No kidding.) He goes on to describe the lackluster product as "one small example of our commitment to prudent management ... and constant innovation."

Far from an innovative response to tough times, skimping on the annual report indicates a lack of sensitivity about both the needs of consumers and stockholders and a company's obligation to communicate professionally and well.

Bell Atlantic produced another, more colorful document--entitled, "1991: A Year in Review"--that's lively, stimulating, and even contains condensed financial statements. But it's available by written request only. Our experience shows precious few will take advantage of the offer.

Near-term, Bell Atlantic's approach may save some bucks. But over the long haul, it could prove to be little more than backsliding, a costly compromise some would say hardly befits a revered offshoot of Ma Bell.

FOURTH

From the beginning, retailer Hartmarx was a candidate for inclusion on this year's list of the world's worst--even before the directors sacked Harvey A. Weinberg, chairman and CEO.

Weinberg's hand-wringing letter to shareholders, which gives new meaning to the term "hangdog," bemoans the company's "worst year since the Depression." As if that isn't bad enough, the letter is awash with jargon and garbled prose.

For example, Weinberg touts the "significant synergies" between various Hartmarx units. Sound hopeful? Think again. He adds those benefits "insufficiently rationalize below-standard performance" in any individual company.

Thanks for clearing that up.

Minor typographical foul-ups also abound. (When "wholesale-manufacturing" is used as an adjective, a dash is used to separate the elements instead of a hyphen.) There's a lack of precision here, too. Stockholders are told they can expect a "performance recovery from the retail segment." The economic engine of said recovery? Undefined "marketing initiatives."

Weinberg resigned following an announcement that the company posted a hefty deficit of $5.7 million in the fiscal second quarter, exceeding analysts' projections. If nothing else, consistency was one of the company's attributes: It had failed to post a profit for nine consecutive quarters on the former CEO's watch, which began early in 1990.

The final parting must have come as little surprise. Harvey, baby: You're outta here!

FIFTH

Wang Laboratories' annual report is attractive. Its progressive theme, "Offices That Work," is posted on the cover and drilled home on the inside. How well they work is an open question, given that Wang recently filed for Chapter 11.

To divert attention from a sorely wanting bottom line, the letter to shareholders focuses on "a series of bold initiatives," launched to "reshape" the company--not on a net loss of $385.5 million. Perhaps predictably, Richard W. Miller, chairman and CEO, chooses to play up a modest net profit ($2.6 million) in the quarter ended September 30, 1990. Relegated to the back-of-the-book financials, however, are the three sizable quarterly losses that followed.

The obfuscation quotient here is uncomfortably high. Wang is among the 10 percent of corporations worldwide to eschew running financial highlights up front in their annual report. When such figures are missing, we detect a snow job is coming. That's the case here.

To its credit, the Wang report describes the company's attempt to meet the needs of its customers. Still, in not taking a more forthright stance on its subpar performance in recent years, Wang earns a spot in the dungeon.

To ignore reality is to insult the reader.

SIXTH

Its employees call it "Waste." Some would suggest that's an appropriate designation for the annual report of Waste Management, the nation's largest trash hauler--oops, environmental services concern.

The report makes its third--and mercifully, its final--visit to the list of world's worst.

Let's start with the company's letter to stockholders. The page-wide text appears with barely a hair's breadth between paragraphs. (In production lingo, that means there's precious little "white" space.) For one thing, that makes the letter daunting to read, not, perhaps, by accident. Further reducing readability, the type is set against a gray background.

In the sixth paragraph, patient readers--or those with excellent eyesight--discover Waste's earning dropped on a 25 percent increase in revenues. The company provided the revenue hike's percentage but neglected to calculate that on its profit decline (17 percent).

Syntax in the text often is tangled. For example, one cause of the earnings decline: an after-tax charge of $181 million related to "current estimates of future liability associated with our share of the cost of remediating disposal sites" used or operated by Waste subsidiaries or their predecessors. Translation: The company anticipates having to clean up garbage dumps. It falls back on such gibberish most frequently in describing sticky or profit-draining situations.

Visually, the report also is misleading. If its photos are to be believed, most Waste employees--bright-eyed and bushy-tailed--work in dust-free environments and are clad in laboratory smocks. Operations are conducted in antiseptic surroundings with nary a hint of week-old garbage wafting on the scene. Right.

Whatever the reason for its identity crisis, this is a garbage company, pure and simple. And one, at that, no more precise than the law requires.

SEVENTH

To its credit, Cortex Pharmaceuticals was forthright in the back of the book, if not in the front. In the much-later "Management's Discussion & Analysis of Operations," Cortex is described as "a development stage enterprise" expected "to continue to incur substantial operating losses for the next several years."

Would that the company's top officers had been similarly forthcoming earlier on.

Instead, Harvey S. Sadow, chairman, and Vaughan H. J. Shalson, president and CEO, concentrate on the company's "significant advances toward its primary goal of developing novel drug products for the treatment of age-related degenerative diseases and disorders of the brain." (Perhaps mitigating such poor judgment in the text, the company includes a financial highlights listing on page one, revealing a net loss of $2.6 million, up 18.6 percent from the year earlier.)

Is geography to blame for the company's indiscretions? Cortex is headquartered in Irvine, CA, an Orange County city in which a disproportionate number of subpar annual reports are produced. Of all the firms based there--approximately 75--fewer than a handful produce an annual approaching acceptability.

Admittedly, it's difficult for doctors and Ph.D.s to become wordsmiths. Thus it's not surprising the Cortex report contains material more appropriate in a Physician's Desk Reference, including a photomicrograph showing "brain slices from a rat subjected to a 10-minute simulated stroke." Not the kind of thing one routinely encounters in an annual report.

EIGHTH

The letter in Century Communications' report--written by Leonard Tow, chairman and chief executive--is as believable as they come. But someone forgot to tell the cellular and cable operator's CEO to include an upfront financial listing, inevitably cause for concern.

In this case, the suspicions were justified: Back-of-the-book numbers show per-share losses have risen steadily over the last five years--from two cents a share to the current $1.17. All that's graphed, though, are revenues, primary basic subscribers," and operating cash flow. All, by coincidence, on the rise.

NINTH

If federal regulators had your operation under a microscope, you'd probably be as forgetful as Downey Savings and Loan Association, yet another Orange County occupant.

The Newport Beach, CA-based financial institution pictures two men to lead off its letter to shareholders, but neglects to identify them. One can guess they're the former CEO and president, promoted to vice chairman and chairman.

Commendably, Downey runs detailed biographical information on their replacements. New CEO and Director Robert L. Kemper, 63, has the somewhat-disconcerting curriculum vitae of most recently having served only 14 months as chairman and CEO of Great American Bank in San Diego. "His longest tenure spanned 27 years |dating back to 1956~ at Wells Fargo Bank."

Downey posted a net income of $25 million for the year, down some 40 percent from the nearly $42 million a year earlier. The company neglected to mention the plunge in its letter to shareholders.

At least Downey identified its report as a "summary." It's one of fewer than a dozen 1991 reports to offer stockholders an abbreviated version.

But perhaps that's understandable for an S&L whose 28-point score (of a possible 135) is one of the year's lowest.

TENTH

I pick up the latest annual report by Oracle Corporation. What's my impression?

Hmmm. Admirable graphics, including a bold, red bar chart on page one that shows revenues bolting through the roof. Check out that dramatic, larger-than-life color photograph of Oracle's Lawrence J. Ellison, chairman, president, and CEO.

Opposite the photo, there's a nifty letter to shareholders, too. Did you know Oracle is one of only three software companies in the world to have topped the $1 billion mark in revenues? Or that the company--whose international clients include Merck, Texaco, Credit Lyonnais, and Sony--became the first software company to receive Sematech's prestigious Partnering for Total Quality Award?

What a company! What a report!

Not!

This annual falls dreadfully short in forthrightness. Buried in the financials on page 33--in print some 30 percent smaller than that in the rest of the book--I find award-winning Oracle lost a whopping $12.4 billion in 1991. That's nine cents a share, but who cares?

The balance sheet, accountant's report, and list of directors follow. But having seen enough, I quietly close the report.

Bad form, boys.

WHY ANNUALS FROM AROUND THE GLOBE AREN'T AMONG THE WORLD'S BEST

More so than their U.S. counterparts, annual reports produced by companies around the world reflect an increasing globalization and a burgeoning sophistication concerning international matters.

Despite that refinement, most don't show to advantage in the selection of the world's 10 best reports. The probable reason: Annuals produced abroad aren't required to adhere to the same criteria as companies under the purview of the U.S. Securities and Exchange Commission. What's more, some firms--those based in Denmark, for instance--maintain they're not obligated to produce quarterly reports, let alone a revelatory annual.

So it's doubly encouraging that London-based Reuters Holdings PLC each year performs admirably, by whatever measure. (It's one of the six percent--year after year, it seems--of annual reports from corporations headquartered outside the U.S. Annuals from Pakistan to Poland and from Africa to Australia are reviewed, though most flow from the U.S. and Canada.)

Reuters currently has the highest-ranked non-North American annual report. If its quality remains high in coming years, the report may be the first since AB Volvo in 1983 to crack the top 10. The 1991 Reuters report is lively and inviting, with easily understood graphs. Its focus is the August 1991 Soviet coup attempt that, in its words, "touched off a chain of events that left the world a different place." Among other things, the event--including its live coverage by worldwide television and other news media--made many view the world as a smaller place.

In this smaller world, Basle, Switzerland-based Sandoz fails to satisfy our criteria on what constitutes a good report. On the flip side, the company most assuredly succeeds with its letter to shareholders. Labeled "Introduction by the chairman of the board," the letter (by Marc Moret, chairman, president, and CEO) articulately begins, "It could well be that 1991 will go down in history as the year of unfulfilled promises. The performance of the Sandoz Group, I am happy to report, stands out in gratifying contrast against |a~ background of gloom and foreboding." His letter concludes: "You will find that the Sandoz Group presented to you in the pages that follow is in good shape, and I have every reason for assuming that it will remain so."

In dramatic contrast, Finland's Repola (result of the merger of United Paper Mills and Rauma-Repola Oy) in its "first full year of operations ... in its present form" simply appears to go through the motions. The resultant lackluster labor (if that is the correct word) is meaningless and fails to communicate much of a message--forceful or otherwise. Indicative of its lack of rapport with the reader is an illegible signature at the end of the shareholder letter, with nary a typeset clue to the author's identity. One must turn to the board of directors' photograph to learn that the signature presumably belongs to Tauno Matomaki, president and CEO of the new entity.

Contrast such a lack of precision with the forthright approach taken by SKF's Mauritz Sahlin, president and CEO. He appears to be one of the foremost champions of literate communications by the chief executive. He achieved his exemplary effort despite a decline in his company's sales and profits.

In his letter to shareholders, Sahlin indicated he's a no-nonsense CEO, not given to circumlocution. The letter's opening typified his directness:

"The year 1991 was one of rapid adjustments dictated by severely reduced customer demand. Capacity reduction, staff cutbacks, cost reduction, and lower inventories were key words in our daily operations during the year."

Overall, foreign-produced annuals don't meet our vaunted requirements. Nonetheless, at least in terms of honesty and tone, some U.S. companies could learn a thing or two looking outside their own backyard.

LETTERS ALMOST ASSUREDLY AUTHORED BY THE BOSS

While some CEOs specialize in chimera and obfuscation, others strive to achieve high standards of honesty in their annual reports. To a larger measure than any time in recent memory, many succeeded.

Unisys' James A. Unruh, chairman and CEO, opens his letter to shareholders by saying, "Adversity reveals character." More than a little prophetic for the world's corporate chiefs.

Thomas C. Theobald, chairman of Continental Bank in Chicago, notes: "Everyone knows that 1991 was a tough year for U.S. businesses and the banks that serve them. For Continental, the year was pivotal. We had an awful third quarter ... We ended the year strongly, however."

One of the best, most topical letters of the year is by John F. McDonnell, chairman and CEO of McDonnell Douglas. It's a bit long--just under four pages--but is replete with direct, forceful language. McDonnell acknowledges at the outset that during 1991 his company "faced a multitude of difficulties. Our cash requirements were mounting. External sources of funds were extremely limited."

Making a bad situation even more difficult, short sellers set their sights on the aerospace company. But McDonnell observes: "They were wrong. Dead wrong. Like Saddam Hussein, who made the mistake of anticipating a weak U.S. response to an act of aggression, they underestimated the willingness or ability of our company to take strong, effective action in the face of adversity."

Though less stirring, Varity's Victor Rice, chairman and CEO, says plainly: "We fared poorly in 1991."

Trinova's Darryl F. Allen, chairman, president, and CEO, bites the bullet as well. Instead of masking his misery, he opens his letter with the confession: "In 1991 we lost money."

Perhaps summing up the feelings of all beleaguered CEOs, International Paper's John A. Georges, chairman and CEO, notes that in 1991, the company, "together with the rest of American industry, waited for the economic recovery that never came."

Not everyone appears downcast, though. A youthful-looking, broadly smiling Alan G. Hassenfeld, chairman, president, and CEO of Hasbro, is pictured with an infant on his lap and surrounded by three other youngsters. Here's how he opens his letter:

"I can't tell you how proud I am to be able to say this, so I'll just say it ... 1991 was a terrific year."

KUDOS AND BRICKBATS: APPAREL WITH APPEAL

Within limits, fashion has been a matter of individual choice. But some, well ... quirks have crept into the corporate suite--and into annual reports.

Isco of Lincoln, NE, proudly proclaimed that sales reached a record $37.1 million, with earnings topping $4 million. Perhaps to celebrate, Robert W. Allington, chairman, president and CEO, showed up for his annual report photograph wearing what appears to be a short-sleeved, white turtleneck under his dark jacket.

As usual, Morrison Knudsen's folksy chairman and CEO, William J. Agee, appears sweater-clad. What's different this time around is the degree of ostentatiousness of his apparel. "Bill" Agee, as he signs his letter to shareholders, appears in a V-neck sweater, patterned in cream, white, and red; his tie is also red.

Two pages later, pictured with a blue-suit-clad board (one director wearing a sports jacket and slacks stands beside Agee), he enlivens his dark blue suit with a crew-neck sweater, blue with broad red-and-orange stripes, his hands clasped, choir-boy like. Boise's answer to Dick Clark continues smiling, despite the lowest EPS in three years.

NEC draws attention to its annual report by featuring, on the cover, the host of "a daily teatime radio show for the BBC." Identified as Jakki Brambles, she shows lots of teeth at use of NEC's "P3 hand-held portable phone, an indispensable part of my work."

Ms. Brambles, her blond hair teased, is pictured wearing a silk blouse that's not tucked in--though at least one aspiring fashion critic thinks it should have been. But that's not the half of it: She displays a feminine feature seldom seen in an annual report--legs.

Sartorially, the two men who head up OEA march to their own drummer. In this year's annual report, Ahmed D. Kafadar, chairman and CEO, again favors the cardigan sweater which has become his trademark. Charles B. Kafadar, president and CIO, continues to sport a short-sleeved shirt, which may or may not be de rigueur in Denver.

Sid Cato, a former corporate officer and author, has been at this stand the last nine years, monitoring the world's annual reports from his vantage point in Waukesha, WI. He's president and chief executive of Sid Cato Communications, as well as editor/publisher of his self-named Newsletter on Annual Reports.