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AKC - MARCH CHAIRMAN'S REPORT

New York, NY - Ensuring that the AKC has a solid financial foundation in order to achieve our mission and fund important new programs--both now and in the future--is integral to the continuation of our organization and sport. This is a fundamental responsibility of the Board of Directors. The Board has adopted a policy that it will evaluate all of our operations and, where appropriate, assess reasonable costs to users. As members of the dog fancy, we have every right to focus on our dogs and the sport, but it is often easy to forget about where the money comes from to pay the bills.

We are all aware that litter and dog registrations have declined for the past ten years and, as a result, we have had to increase registration fees to meet our budget goals. However, this is a double-edged sword since we now believe that some of the decline in litter registrations is due to the increased fees. Revenues from registration have always represented a significant portion of our overall operating income and fund not only the sport but also many important programs such as Canine Legislation, Communications, the AKC/Canine Health Foundation, and the AKC Museum of the Dog.

Our auditors have told us that a not-for-profit organization of our size should have operating reserves of approximately $30 million dollars, which equates to 50% of annual expenses. We are far short of this goal with less than half of this amount in reserve. This fact and the decline in registration revenues has the Board focused on evaluating and improving the AKC's financial health through seeking alternative revenues. The first step in looking for alternate revenue opportunities was to determine the actual cost of providing sport-related services such as event processing and judging approvals. It should come as no surprise that expenses for processing events far exceed AKC's revenues associated with these activities.

In fact, the losses from events have increased each year and are seriously impacting the AKC's bottom line -- to the tune of nearly $10 million in 2002 alone. The AKC is not in a financial position to absorb losses of this magnitude given that our primary source of revenues - registrations - continues to decline. The ultimate users of our events, the exhibitors, must step forward and assume a reasonable portion of AKC event costs.

The significance of this matter was underscored by our consultant, PricewaterhouseCoopers, through their review of our pricing and cost structure for events services. One of their immediate observations and recommendations was that the $.50 recording fee, which has not been raised since 1983, dramatically fails to cover a reasonable portion of AKC costs in recording event results. Any inflation index would justify a much higher fee.

AKC's Historical Recording Fee

The PricewaterhouseCoopers report goes further to recommend that the recording fee be increased to $3.00 in order to adequately cover a larger portion of the event costs. It probably makes more sense for the Board to require an event entry fee, which responds to the totality of AKC event costs, not just the recording of wins.

To maintain the financial stability of the AKC, we must address as soon as possible the pricing structures that are negatively affecting our bottom line, and continue to identify alternative sources of revenue. As a not-for-profit organization with a mission of "taking whatever actions necessary to ensure the sport of purebred dogs," we must not put our heads in the sand when it comes to financial matters. Having a strong and healthy financial position will benefit all of us in the sport, as well as improve and protect the welfare of all dogs. Your Board is committed to a strong AKC today and an even stronger AKC 25 years from today.