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Finance 1, The President's Message in the Annual Report: Part II of "Learnin's From My MBA" Series


L ast week, I started a new series called " Learnin's From My MBA." The series is meant to take business concepts I've learned in my MBA program and present them to you, an audience of scientists with no business background.

This week is the second part of the section of the series where we dissect an Annual Report. Here, we'll be looking at the "President's Message" section: what it's trying to say and what information we can gain by reading into it. Again, we'll be using a real live Annual Report, from a real live company called "Alta Genetics Inc." Its Annual Report is available in PDF format if you want to follow along.

The President's Message

The President's Message is the introduction to just about any company's Annual Report. It's written in a language pretty close to English, with very little finance-speak, and is meant to be something close to what the president of the company would say as an introductory speech at the company's annual shareholders meeting. It'll give an overview of what the president is most proud of, give excuses or reasons for poor performance, and try to give a broad outline of why the company is where it is and where it's going.

In our example Annual Report, the president of Alta Chemicals starts out with a brief summary of the events of 1997. He outlines the company's two "new" strategies for growth, claims that the company looks better financially in 1997 than it did in 1996, and explains why the company had lower Canadian revenues in 1997 than it did in 1996. Then he outlines some of the company's core strengths, giving the reader an insight into the "big picture" of what the company does, how it's competing, and where it sees itself in the years to come.

The president claims that the company is going back to its basics--refocusing its energy and efforts on its core business. It is likely that he is claiming this because it expanded, unsuccessfully, into a whole bunch of side businesses in 1997. By claiming "a renewed focus on its core business," the president sends a clear message to the shareholders: Anyone buying this stock as speculation on new businesses Alta might be going into should sell it right away. And anyone angry that the company's gone into a whole bunch of crazy, money-losing schemes last year should hang on, because the president has stated that they're not going to do that anymore.

The second claim made by the president is that they're aggressively pushing their marketing program: The president uses the phrase "aggressively promoting the depth of our product line to respond to the unique needs of individual markets" to explain this. If you read that statement carefully, though, you can see as well as I do that all that means is that they're coming up with a bunch of new products. Having a bigger selection of products means that the customer can get what they want. This, combined with "market research" (which really just means that now they understand what the customer wants a little better than before), will help Alta sell more stuff in 1998. At least, that's their strategy.

The president then goes into a lot of detail about this marketing initiative and what different markets (European, Canadian, etc.) are looking for. He does this for three reasons. First, he's letting his shareholders know that he's got the situation in hand: He understands what his customers want, and he's giving it to them. Second, he's talking about this in detail because the major acquisitions and company restructuring that went on in 1997 was due to changes in the marketing strategy: The company acquired its New Zealand distributorship and set up a strategic alliance (the MBA buzzword for "partnership") with an Argentinean distributor. Remember that the President's Message should deal with all the really big things that happened in 1997: The really big things that happened in this company involved their marketing, so it gets "first billing" here in the President's Message.

The last reason for discussing marketing in detail is that the president is spending most of his efforts on marketing, now that the research and development is off the ground, they've got a product, and their production facilities are working smoothly. This sends two signals to the reader: Marketing is the key to the success of this company in the long term, and marketing is the part of the company that needs the most work. This sets the company apart from most fledgling biotech companies: This one has a product and is spending most of its efforts and energy on trying to sell that product.

The last section of the President's Message is entitled "Looking Ahead." Here, as might be expected, the president looks at the future of the company. As might also be expected based on the president's emphasis on marketing just before this, the section deals again with marketing initiatives: It's clear that the president sees marketing as the future of the company.

A lot can be gained by reading the President's Message. If you don't know anything about the company or the industry, the President's Message gives you a great introduction to both. You can get an idea of what the company does and where it's going, as well as where the industry is heading and what factors the president sees as the main hurdles they have to overcome.

If you do know something about the industry or the company, then the President's Message is even more helpful: It tells you what the president's perceptions of the problems are, both within the company and in the company's industry. If you know that they've got problems elsewhere, then the President's Message can send warning signals that they're not concentrating on the right things: For example, if a mail order company president doesn't mention the Internet in their 1998 Annual Report, it might be an indication that not only are they behind the times, but that they're not even thinking about this powerful new source of competition or potential revenue. It would be a pretty clear signal that the management team wasn't doing their job properly.

So although the President's Message usually doesn't have very many numbers in it, it is still a very important source of financial information: It tells you where the company thinks it's headed, what it's concentrating its efforts on, and why it's in the financial position it's in today. It's a good introduction to the company, and we'll be coming back to some of the comments from the president when we take a long, hard look at the financial statements, including income statements, starting next week.

Next: Finance 1, The Income Statement in the Annual ReportPart III of "Learnin's From My MBA" Series