The Academy continues to show a strong and economically positive financial picture. This year's Treasurer's Report covers the eight-month transitional period between April 30, 1997 and December 31, 1997. The AAOS Board has approved changing the Academy's fiscal year from the historical May 1-April 30, to a calendar year, January 1-December 31. The Board took this action to align projected income and spending with its annual year of activities and strategic planning.
In order to carry out the orthopaedic community's advocacy programs on health care issues, the Board of Directors has created a parallel organization named the Orthopaedic Surgeons of American (OSA). OSA has a 501(c)(6) tax status permitting increased flexibility in advocacy and lobbying activities on behalf of patients and the profession. All Fellows of the AAOS are conferred membership in OSA.
In February 1998, the Academy funded and created the Musculoskeletal Education and Research Institute. This organization has an independent Board of Directors comprised of five Academy members and six individuals from other health care-related organizations. It has been structured to position MODEMS™ (musculoskeletal outcomes data evaluation and management system) to reach the broadest possible base of health care providers.
Consistent with the Academy's traditional passion to foster education for its membership, the Orthopaedic Learning Center was enhanced with the addition of a 2,106-square foot lecture room adjacent to the laboratory area. This renovation has been completed and utilized for skills courses and programs at the OLC. The Academy has negotiated with the Hyatt Hotel Corporation and the Village of Rosemont to construct an eight-story 206-room hotel adjoining the Rosemont office. These agreements were finalized in early 1998 and do not require any Academy financial input. Construction of a four-story parking facility to service the hotel, the Academy and the Village of Rosemont is at this time nearly completed. Construction of the hotel is to begin within weeks.
The Academy has been named a defendant, along with other organizations, in a number of pedicle screw-related lawsuits filed in federal courts throughout the country. These lawsuits allege that the Academy, with others, unlawfully promoted pedicle screws for the use in certain spine surgeries. The Academy intends to vigorously defend these lawsuits and has been dismissed as a defendant in all of those cases which have come to trial in 1998.
Comparing this short transitional fiscal year to prior years is made difficult by the timing of some of the Academy's resources. No Annual Meeting occurred during the transitional period. This is a significant component of Academy revenue. The March 1997 meeting had $8.7 million in revenue and $4.7 million in expenses. In addition, membership dues are not evenly distributed throughout the calendar year. The impact of these two items has resulted in expenses exceeding revenues for the Academy's operating activities during this transitional period.
Statement of assets, liabilities, and unrestricted net assets
The Academy's assets increased $7.5 million (18 percent) from April 30, 1997 to December 31, 1997. The most significant changes were the investment portfolio balance increasing $3.3 million; the cash balance increasing $2.6 million; and prepaid expenses, primarily related to the 1998 Annual Meeting, increasing $1.1 million. Liabilities increased $5.9 million to $12.6 million. This included deferred revenues of $5.6 million collected for the 1998 Annual Meeting and deferred membership dues of $2.7 million resulting from the change in the fiscal year. The Academy's unrestricted net assets increased $1.6 million to $37 million during the eight-month period ending December 31, 1997.
Investments
The Academy's investment portfolio made another strong showing, providing $3.3 million in income and capital gains for an annualized return of 20.3 percent net of fees. A strong equity investment environment provided the opportunities for these gains. The Academy's Finance Committee regularly reviews the performance of the various investment funds within the portfolio. Several fund changes, where performance had lagged benchmarks for several quarters, were made at the direction of the Finance Committee during 1997.
Statement of Activities
Total revenues for the eight-month period ending December 31, 1997 were $14.7 million, compared to $32.1 million for the full year ending April 30, 1997. The primary reasons for the difference in these numbers has been previously addressed, that is, the lack of an Annual Meeting and the deferral of one-third of membership dues.
Particularly noteworthy in 1997 was the publication of Essentials of Musculoskeletal Care which generated more than $700,000 in revenues. This book, published in the latter part of 1997, continues to sell well into 1998.
Total operating expenses were $15.8 million for the period under review. The excess of operating expenses over revenues resulted in an operating loss of $1.1 million before investments and MODEMS activities. Investments experienced a strong year providing $3.3 million in income. MODEMS expenses were $600,000. The Academy's revenue sources and expenses led to an increase in unrestricted net assets of $1.6 million for the transitional short fiscal year.
Calendar year 1998 budget
The Board of Directors approved an expense budget of $32 million and projected revenues of $33 million. Estimated investment income has been budgeted at $1.1 million. This budget reflects a net income of $1.8 million. Membership revenues and expenses increased as a result of the expansion of the Bulletin. Outside advertising was added covering the cost of staff increases providing additional news coverage and feature articles. The 1998 Annual Meeting, in New Orleans, exceeded $9 million in revenue for the first time. An expanded product line in the Academy's electronic media and evaluation publications have been budgeted. Self-assessment programs in Pediatrics, Sports Medicine and Reconstructive Hip and Knee Surgery have been developed. Instructional course lectures on CD-ROM and a rotator cuff videotape have been budgeted. Competitive new publications and products are providing an ongoing stream of educational material.
The Academy continues to provide related specialty societies with staffing assistance. Activities of the specialty societies are growing robustly. Necessary staff increases to accommodate the increased work load have increased our expenses, and revenues have been similarly increased through billing the societies for these services. The AAOS Department of Specialty Societies reports that they provide services for 200 committee members, 15 society newsletters and 13 web sites. An increase in the budgeting for governance has been provided based upon the increased activities of COMSS, the Board of Councilors, the Board of Directors and additional Academy representations. Spending on health care policy is expected to decline slightly, through decreased funding of the Practice Expense Coalition. All current existing health policy activities will move into the new organization, the Orthopaedic Surgeons of America, during 1998.
Research and scientific affairs spending will increase in 1998. A new study, Normative Data Collection (NDC), will commence and increased activity of the Evidence Analysis work group is planned. Increased staffing in this department to accomplish these goals has been funded.
Summary
Your Academy leadership maintains a dedication to fiscal responsibility. Among its financial strengths are diversified income streams and a prioritized strategic plan to direct its budget and expenditures. This report covers a transitional eight-month fiscal year leading to alignment of both the calendar and fiscal years. The net increase in unrestricted net assets of $1.6 million has been accomplished during the reported period. The Academy's major expenditures continue to support its traditional dedication to the education of its membership.
Stuart A. Hirsch, MD
Treasurer
Statement of Assets, Liabilities and Unrestricted Net Assets
| December 31, 1997 | April 30, 1997 | ||
| Assets | Cash and temporary cash investments | $4,245,193 | $1,681,793 |
| Accounts receivable (net of an allowancefor doubtful accounts of $52,000 and $40,000, respectively) | 1,265,960 | 1,055,057 | |
| Publication and electronic media inventories | 638,429 | 947,758 | |
| Investments-at market | |||
| Permanent fund | 15,455,000 | 9,333,746 | |
| Operating Reserve Fund | 2,000,000 | - | |
| R&D fund | - | 2,794,985 | |
| Project fund | 5,639,636 | 10,119,767 | |
| Due to (from) Operating Fund | 2,429,865 | (51,191) | |
| Total investments | 25,524,501 | 22,197,307 | |
| Prepaid Annual Meeting, course and other expenses | 1,953,460 | 846,246 | |
| Deferred product costs | 835,026 | 729,877 | |
| Land, building, furniture and equipment, at cost | |||
| Land and land improvements | 1,140,011 | 1,122,929 | |
| Building and building improvements | 14,737,928 | 14,331,839 | |
| Furniture and equipment | 5,092,710 | 5,144,004 | |
| Total cost | 20,970,649 | 20,598,772 | |
| Accumulated depreciation | 5,872,799 | 6,053,177 | |
| Property and equipment net | 15,097,850 | 14,545,595 | |
| Total assets | $49,560,419 | $42,003,633 | |
| Liabilities and Unrestricted Net Assets | Liabilities: | ||
| Accounts payable and accrued liabilities | $2,581,902 | $5,209,152 | |
| Deferred subscription revenue | 42,370 | 81,918 | |
| Future course fees | 632,943 | 939,272 | |
| Deferred dues | 2,737,964 | - | |
| Deferred annual meeting revenue | 5,580,300 | - | |
| Deferred product revenue | 983,280 | 411,386 | |
| Total liabilities | 12,558,759 | 6,641,728 | |
| Unrestricted net assets: | 37,001,660 | 35,361,905 | |
| Total liabilities and unrestricted net assets | $49,560,419 | $42,003,633 |
Statement of Activities
| December 31, 1997 | April 30, 1997 | ||
| Revenues relating to member service program activities and real estate | Program revenues | ||
| Membership | $5,653,418 | $8,044,084 | |
| Annual Meeting | - | 8,681,365 | |
| Electronic media and evaluation products | 1,333,8983 | 3,028,808 | |
| Publications | 3,386,627 | 6,433,046 | |
| Continuing education | 2,887,679 | 4,095,025 | |
| Specialty society management | 839, 228 | 1,027,677 | |
| Facility management revenues | 567,824 | 778,466 | |
| Total revenues | 14,668,674 | 32,088,471 | |
| Expenses relating to member service program activities and real estate | Program expenses | ||
| Membership | 716,384 | 1,267,802 | |
| Annual Meeting | 224,090 | 4,735,411 | |
| Electronic media and evaluation products | 1,279,955 | 2,465,450 | |
| Publications | 2,586,433 | 5,343,178 | |
| Continuing education | 2,645,131 | 4,213,334 | |
| Specialty society management | 884,861 | 1,120,366 | |
| Facility management expenses | 1,464,709 | 1,523,125 | |
| Total expenses | 9,801,563 | 20,668,666 | |
| Expenses relating to supporting services | Supporting services | ||
| Governance | 1,581,884 | 2,084,563 | |
| Health policy | 929,475 | 1,921,814 | |
| Research and scientific affairs | 606,526 | 1,427,244 | |
| Education, communications and marketing programs | 1,188,381 | 1,890,637 | |
| General and administrative | 1,652,979 | 3,078,002 | |
| Total expenses for supporting services | 5,959,245 | 10,402,260 | |
| Increase (decrease) in unrestricted net assets before investment activities, MODEMS activity, and pension termination costs | (1,092,134) | 1,017,545 | |
| Investment activities | Dividend and interest income on investment funds, net of fees of $64,741 and $183,484, respectively | 749,608 | 916,325 |
| Gain on investment funds | 2,556,705 | 1,756,596 | |
| Write-off of bond issuance costs | - | (191,618) | |
| Interest expense, net of interest earned on escrow fund of $20,149 for the year ended April 30, 1997 | - | (379,558) | |
| Total investment activities | 3,306,313 | 2,101,745 | |
| MODEMS expenses, net of revenues of $61,200 for the year ended December 31,1997 | (574,424) | (334,799) | |
| Pension termination costs | - | (1,248,916) | |
| Increase in unrestricted net assets | 1,639,755 | 1,535,575 | |
| Unrestricted net assets | Unrestricted net assets at beginning of period | 35,361,905 | 33,826,330 |
| Unrestricted net assets at end of period | $37,001,660 | $35,361,905 |
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