Chairman's Report

September 2007

It is sometimes beneficial in both our personal and our professional lives to step back and take a longer perspective of what we have achieved and what we seek. Our natural inclination is to focus on just today and tomorrow.

Today I want to share with you some longer range evaluation of just how AKC is doing and more specifically, how we are doing financially.

In the year 1995 our annual report recorded a total income, both realized and unrealized, of $32.4 million dollars. Our 2006 figure was $70 million dollars. In this period we have never reported a net annual loss.

We have a legal and fiduciary duty to maintain a pension fund sufficient to meet our employees' retirement rights. While many U.S. corporations, both profit and non-profit, are facing serious deficits in their pensions funds, I am proud to say that our AKC pension fund is well over 100% funded.

For many years AKC produced very adequate income to fund its basic programs; however, we failed to prepare for the uncertainties of the future. In 1995 we had no Operating Reserve although our auditors advised that an organization such as ours should have an operating reserve of at least fifty percent of its annual budget. Today, in 2007, we have an operating reserve of $32 million dollars.

As the nature of our revenue has shifted, it becomes increasingly clear that it is wise for us to develop an endowment reserve. In 1995 we had no endowment reserve. Today our endowment reserve stands at $22 million dollars.

In the past eleven years we have seen a modernization of our administration and our financial operations. There has been major investment in the IT capability of our organization. The AKC of today is far different from the "Mom and Pop" operations of the AKC of years past.

In this eleven-year period it is useful to note the new and improved programs and expenditures:
1. We created the AKC Canine Health Foundation and have contributed almost $16 million to it.

2. We have contributed $1.7 million to the AKC Museum of the Dog.

3. Through AKC/CAR, we have funded grants totaling $1.5 million for Canine Support & Relief.

4. We have increased our PR advertising almost $10 million.

5. We have almost doubled our capital expenditures for information technology resulting in a 20% reduction of headcount.

6. Online registration of dogs now has reached over 60% of litter registrations.

7. We have added a full-time archivist and have created a Breeders Newsletter.

8. AKC and AKC/CAR have contributed $400,000 to the Parent Club conferences.

9. The AKC/Eukanuba National Championship was created and is now considered among the three most prestigious dog shows in the world. Forty percent of our entries are bred-by-exhibitor.

10. AKC now is considered a "first call" for disaster relief for dogs.

11. We have awarded hundreds of thousands of dollars in scholarships.

12. We have created a "Breeder of the Year" program and have established significant online breeder services.
These only highlight what is a very long list of AKC achievements. We have consciously strived to increase the quality and scope of our sport, and to do so in a financially responsible manner.

I have spoken thus far of AKC's record of progress. We are proud of its financial stability and have every reason to believe that under enlightened management it will continue.

However as useful as it is to evaluate an organization in grand terms, it is also necessary to cast a discerning eye on the distinct parts of our club which help make up the whole. In this regard I have two areas of caution.

We are all aware of the serious decline in AKC registrations from 1990 to today. Serious efforts have been made, and must continue to be made, to address this problem. While some of the decline surely can be attributed to the development of more competitive registries, the full explanation is yet to be understood. Business and social patterns change and we must be aware of those changes and develop a positive response. The revenue experience of 1990 is not that of 2007 and we can expect that there will be a changing revenue experience ten years from now.

The second area of my concern is the gap which continues in the cost of our Event Department and the income which it generates. While we have never expected this department to generate excess income, I am concerned that it continues to cost so much.

The fees that are assessed in this department impact clubs and exhibitors alike. Yet, when analyzed over the years and compared with annual inflation figures, we find that these fees have failed to keep up. Most employees of an organization would be very unhappy if their annual wages did not at least keep up with inflation. The same standard must be applied to company costs.

Part of the shift in revenue has required that those who participate in our sport share a larger portion of its cost. The days when 100% of the cost of our sport was paid by others are over. This does not mean that your board and management will not continue to vigorously seek new revenues to support AKC. It does mean that those of us who involve ourselves in AKC activities will have a greater responsibility for "pay to play."

In the past eleven years we have met some very serious challenges and it is likely that in the next eleven years we will face unknown challenges. We may be required to spend large sums of money to meet those challenges. Our revenue sources may change even more dramatically than they have since 1995.

While the future is unknown, our commitment to facing it squarely and creatively is known. I am convinced that your board and your management are making decisions today which will bear the scrutiny of time and will ensure that the AKC of tomorrow will be as vigorous and dynamic as it is today.

Sincerely,


Ron Menaker
Chairman