As a service to our public company clients we routinely perform an extensive review of the other information included in their annual report. While completing a large number of such reviews recently for our clients with December 31 year-ends we became aware of opportunities that are regularly over-looked by issuers. In preparing Management’s Discussion and Analysis there are some critical elements that will make them more effective.
Attitude – your MD & A is an opportunity to tell the story of the company in a positive way. As is your web page, your SEC filings are the ‘face’ of the company to potential shareholders, investors and others considering doing business with you. Do not minimize this opportunity by viewing it primarily as an obligation. We all have a tendency to spend less time on things we view as ‘necessary evils’ as opposed to ‘opportunities’.
Approach – the primary purpose of the MD & A is to allow the reader to “look at the company through the eyes of management by providing both a short and long-term analysis of the business of the company” (SEC Financial Reporting Policies sec. 501). The MD & A is intended to be entirely prospective, not historical. Too frequently we see comments like “As of 12/31/x1 revenues declined $xxx,xxx which was a reduction of x% over revenues of $xxx,xxx as of 12/31/x0”. That’s historical, not prospective, and anyone could calculate it from the financials. It provides no additional information of any value to the reader.
Executive Level Overview – Sec. 501.12 is a gift from the SEC that most issuers don’t open. This is a chance to tell your story. Because many companies have become larger, global and more complex, and the disclosure rules correspondingly so, MD & A has become lengthy and complex and correspondingly, boring and so not read as thoroughly as it should be. In an effort to improve clarity and understandability many company’s are incorporating an Executive Level Overview (ELO) as an introductory section summarizing the most significant areas of the MD & A that management wants to emphasize. Typically this includes: economic or industry wide factors; how the company earns revenues and generates cash; lines of business, locations, principle products, services; and provide insight into material opportunities, challenges and risks which management is most focused on.
It is a ‘highlight’ of those things that are important to the company, reported elsewhere as well (e.g. Risk Factors, or Business Description).
Liquidity, Capital Resources, Results of Operations – You must address each of these areas specifically. When drafting these comments keep in mind that you should address three questions for the reader: (1) What happened? (2) Why did it happen? and most importantly (3) Is it expected to continue? That last one is the crux of the MD & A. Remember – the reader is entitled to assume that “past performance is indicative of future performance” unless you tell him different.
Other Tips – (1) If you’ve previously discussed it in your Form 10k you don’t need to keep beating it to death unless it applies to new information in the current interim filing . Most companies over disclose information that they’ve previously discussed numerous times. The unwelcome result is that the points you want to make get buried in the irrelevant. (2) Discussion for interim reports should be limited to material changes occurring subsequent to the last annual report. Over disclosure, again, can result in burying relevant information in the minutiae. (3) The SEC requires that it be “presented in clear and understandable language”. That means you need to lose the ‘legalese’. (4) In the words of an internationally recognized securities attorney with whom we’ve worked – “Disclosure is too important to leave up to only the attorneys”. While their focus is compliance, as it should be, this is more than a compliance document. It is the public face of your company. Remember it is an opportunity to ‘sell’ to investors, financiers and those people you want to do business with. (5) Finally, sentence structure, grammar and spelling are critical. If your MD & A is sloppy, those reading it will assume the company is run the same way.
You have a great company with a great business plan and outlook for the future. Tell the world in your MD & A.