Fiscal year 1996 was a challenging year for the American Academy of Orthopaedic Surgeons. Despite the fact that the Academy faced unexpected expenses, we completed fiscal 1996 on a positive note. The major challenges to the Academy's fiscal integrity were legal actions in which the Academy was named as a defendant. These included a suit involving joint authorship and copyright infringement and a series of suits involving use of the pedicle screw. I reported these matters to the Fellowship during our meeting in Atlanta. The joint authorship-copyright suit was concluded just after the close of fiscal 1996. The matters involving the pedicle screw are still pending as of this report.
This fiscal year also was one of positive change. Importantly, the Academy's Strategic Plan continued to be the "road map" of all Academy endeavors. Our executive staffing was completed in October 1995. Our overall staff structure was streamlined and "flattened" by the virtual elimination of a management level. Additionally, an Academy-wide staff goal-setting, performance and evaluation program was implemented to reinforce the congruence of personal initiatives with Academy objectives.
And finally, FY 1996 was a year of progress. As of April 30, 1996 the Academy had an increase of 541 members over a year ago. The Journal of the American Academy of Orthopaedic Surgeons: A Comprehensive Review continued growing and increased its advertising base. And the Academy's web site, the AAOS On-Line System, has been hugely successful, growing exponentially throughout the year.
Statement of Assets, Liabilities and Unrestricted Net Assets
The Academy's assets increased $4.2 million (9.8 percent) from April 30, 1995 to $46.7 million at April 30, 1996. The single largest increase in assets occurred in the investment portfolio whose market value increased $4.7 million, bringing the total value of the portfolio to $27.5 million. The buildings, land and equipment owned in Washington, D.C. and Rosemont, Ill. are recorded at $14.9 million. This amount declined $500,000 during FY 1996 as depreciation expense taken on these assets more than offset the property additions. The remaining assets of cash, accounts receivable, inventories, prepaid expenses and deferred product assets totaled $4.4 million at FY 1996 year-end, virtually unchanged in total from a year ago.
The Academy's liabilities increased $1 million to $12.9 million at April 30, 1996. This increase was the result of advanced registration money paid for courses scheduled to take place after April 30, 1996, advanced payments on products not yet delivered as of April 30, 1996, and accrued legal expenses. The Academy's unrestricted net assets (total assets less liabilities), which in prior years was referred to as the fund balance, increased $3.2 million during FY 1996 to a balance of $33.8 million at April 30, 1996.
FY 1996 was unprecedented in aggregate income and gains on the Academy's investment portfolio. The $805,000 in dividends and interest combined with a $3.8 million gain in the market value of the portfolio was the highest ever achieved. A strong equity investment market provided the momentum for these results. The Academy's Finance Committee regularly reviews the performance of the various investment vehicles within the portfolio. The portfolio now represents 59 percent of the Academy's assets.
Statement of Activities
The largest revenue producing area, Membership, increased 3.8 percent over FY 1995 to $7.9 million as budgeted. The Annual Meeting, the second largest revenue generating activity also increased 3.8 percent in revenues over last fiscal year to $7.4 million and was 0.7 percent higher than budget. This was primarily due to sponsoring the not-budgeted Saturday evening entertainment. Annual Meeting expenses, however, increased 17.4 percent over FY 1995 and exceeded budget by 5.1 percent due to the entertainment event. Despite a significant increase in revenues over the prior year (12.7 percent), Publications, the third largest revenue producing activity at $7.0 million, was 12.8 percent below budget. The EMT and ICL product lines sales did not reach budget projections and several new publications in managed care were delayed.
Total operating revenues of $30.3 million were 4.6 percent higher than FY 1995, but 5.5 percent under budget. Total operating expenses of $30.3 million increased 9.4 percent over the prior year, but were 5.1 percent below budget. Net operating results were essentially break-even. These totals exclude the extraordinary expense of $1 million related to the joint authorship-copyright litigation and settlement during FY 1996. As previously mentioned, strong investment results more than offset this extraordinary expense increasing unrestricted net assets by $3.2 million for the year.
Fiscal Year 1997 Budget
In May of 1996, the Board of Directors approved an expense budget of $33.6 million for fiscal year 1997, an increase of 5 percent from FY 1996 expenses.
Increases in Membership activities are due to the publication of an Annual Report and the production of the 1996 census, Orthopaedic Practice in the U.S., which is published every other year.
Increases in orthopaedic education are attributed to three new Orthopaedic Knowledge Update publications on pediatrics, hand and spine; one new symposium book and several new CD-ROMs-The Athlete's Knee; Annual Meeting symposium series and orthopaedic review course; and the coding database, Orthopaedic Code X '96. Several new Council projects were initiated this past year and are funded from the 1997 operating budget. They include two Task Forces on Faculty and Curriculum development, lab instructor videotapes and the continuation of educational effectiveness research. Additionally, the scope of the resource center has been expanded so that the Academy's publications are being represented at more meetings of domestic and international orthopaedic-affiliated societies.
Increases in the Governance budget are primarily due to a timing difference in the COMSS meetings. The total number of meetings has not changed. However, there is a variance between fiscal years because one meeting was held two months later than planned, thus being charged to the Academy's 1997 fiscal year budget. In fiscal 1996, only one meeting was charged, however, three meetings will be charged in this fiscal year.
Activities in the Health Policy area have increased over the last year. The cost increases are due to the funding of the Orthopaedic Work Force Project and two orthopaedic summit processes: Steering Committee on Collaboration Among Providers of Musculoskeletal Care and The Future Role of the Orthopaedic Surgeon.
Research activities continue their upward trend in spending as the Academy ventures into several new projects and continues with projects from the previous year. The Outcomes Data Management System will demand a high level of financial resources, but the income generated will offset a substantial portion of the costs. The two Cost Effectiveness Contracts signed with The Brigham and Women's Hospital and the Mayo Foundation will begin to incur expenses this year. Additionally the Oversight Committee on Guidelines will be more active this year and the Work Group on Evidence Analysis will incur expenses for activities, including guidelines training.
Executive and organizational services have been budgeted with
far fewer expenses this year than FY 1996. The 1997 legal expenses
continue to reflect a slightly higher level of spending due to
the ongoing pedicle screw litigation.
The financial impact of this litigation and amount of potential insurance coverage are still unknown.
The budget revenue over expenses for fiscal 1997 is $813,000. This excess will support new programs and unanticipated expenses during budget year.
The Academy's Strategic Plan and budget process are being aligned together to further the Board of Director's efforts to meet its fiscal responsibilities. This is especially important because of our recent legal expense and our possible continued exposure with the pedicle screw litigation.
James H. Herndon, MD
Pie charts of 1996 Revenues and 1996 Expenses
Graphs of Strategic Initiatives as a % of Total