October 1997 Bulletin

From the Treasurer

Fiscal year 1997 was both a challenging and productive year financially for the American Academy of Orthopaedic Surgeons. The major challenge to the Academy's fiscal integrity continues to be legal actions in which the Academy is named as defendant. While the copyright infringement suit was settled in fiscal year 1996, the series of suits involving the use of the pedicle screw continues to plague the Academy, both financially and with respect to the utilization of key personnel resources.

Fiscal year 1997 was one of positive change for the Academy. The Academy's strategic plan continues to be the road map for all Academy endeavors. Councils of the Academy have begun planning their activities consistent with and directed by the Academy's strategic plan. During fiscal year 1997, the Academy had an increase in membership of 534 over the previous year. The Journal of the American Academy of Orthopaedic Surgeons continued growing and increased its advertisement base. The Academy's website, AAOS On-Line, continues to grow and has become an integral part of the Academy's overall communications program with the fellowship, other medical associations and the public.

At the May Board of Directors meeting, the Board approved a proposal to change the Academy's fiscal year from May 1-April 30 to a calendar fiscal year (Jan. 1-Dec. 31). The Board took this action to align the Academy's fiscal planning and projection with its annual year of activities and strategic planning. This will become effective as of Jan. 1, 1998. The transition will take place through the remainder of 1997.

Statement of Assets, Liabilities and Unrestricted Net Assets

Assets. For fiscal year 1997, the total Academy assets decreased 10 percent ($4,726,860) to $42,003,633. This decrease occurred as a result of the following two significant financial transactions:

  1. The $6,700,000 repayment of the remaining industrial revenue bonds outstanding. The Academy incurred this debt in June 1992 to fund the purchase of the Rosemont headquarters facility.
  2. The termination of the Employees Defined Benefit Pension Plan, which will require $1,248,916 in estimated payout.

Academy staff now has a defined contribution pension plan. This approach enables the Academy to better project and predict its obligations to staff as they relate to pension and retirement benefits.

Land, building, furniture and equipment net of depreciation amounts to $14,545,595 (35 percent of total assets).

The Academy's investments totaled $22,197,307 (53 percent of total assets).

Liabilities. The Academy's liabilities decreased $6.3 million compared to
fiscal year 1996. This was due primarily to the payoff of the industrial revenue bonds, partially offset by an increase in accrued liabilities for the termination of the Employees Defined Benefit Pension Plan. Liabilities at April 30 are 15.8 percent of total assets for fiscal year-end 1997, compared to 27.6 percent for fiscal year-end 1996.

Unrestricted net assets. The remainder - $35.4 million - is unrestricted net assets, which in prior years had been referred to as the fund balance. The increase in unrestricted net assets from fiscal year 1996 to 1997 totaled $1,535,575.


Net gains from investments for fiscal year 1997 totaled $2,101,745. Of that amount, $1,756,596 came from gains
on the Academy's investment portfolio. An additional $916,325 was received as dividends and interest income on the investment funds. This investment income was partially reduced by interest expense and write off of unamortized bond issuance costs.

The Academy's Finance Committee reviewed and updated the Academy's investment policy and asset allocation approach.

Statement of Activities

The largest revenue-producing area, Annual Meeting, increased nearly 18 percent to $8.7 million for fiscal year 1997. The second largest revenue-generating activity, Membership, increased 2 percent to $8 million. Annual Meeting expenses increased 1.9 percent from fiscal year 1996.

Publications, the third largest revenue producer, decreased revenues by $601,000 in fiscal year 1997 vs. 1996. This was due primarily to disappointing sales of the "Orange Book" and the late publication of several productions. It is expected that revenues from the latter will be realized in fiscal year 1998.

Total operating revenues were $32.1 million, up 5.9 percent from the previous year. Total expenses for the same period increased to $31.4 million, or 3.6 percent over fiscal year 1996. Therefore, from operations there was an increase in unrestricted net assets (revenues over expenses) of nearly $683,000. Overall, actual revenues received were $1.3 million less than budget, while actual expenses were $1.4 million less than budget. Resulting income from operations was $184,000 over budget.

Fiscal Year 1998 Budget

In May 1997, the Board of Directors approved an expense budget of $30.9 million for the period of May 1, 1997, through April 30, 1998. Projected revenues for this same period are $32 million. Increases in revenue are projected for Membership ($200,000), Annual Meeting ($600,000), Facilities Management ($80,000) and Specialty Management ($130,000). Revenue decreases are projected for Publications ($1.1 million) and Course Operations ($600,000).

For the overall projected fiscal year 1998 expense budget:

Organizational spending - which includes Executive Services, Organizational Services, and a portion of Governance (Board of Directors, Board of Councilors, COMSS) - will account for 26 percent of the projected fiscal year 1998 budget. This represents almost a 1 percent increase over fiscal year 1997. Recent spending on organizational matters has declined from 32 percent reported in fiscal year 1995.

The projected budget revenue over expenses from operations for fiscal year 1998 is $1,057,000. This excess will support new programs, initiatives and unanticipated expenses during the budget year.

Because of the change in the Academy's fiscal year, there will be a second budgeting cycle in 1997. This will be a one-time activity intended to create and approve a budget for the period of May 1, 1998 to Dec. 31, 1998.

For fiscal year 1999 and thereafter, the budgeting cycle will begin in August of the prior year and conclude in December, when the Board approves the budget for the next 12 months.


With the change of the fiscal year, the Academy's strategic plan and budget are now chronologically aligned. Further, these two processes now coincide with the Academy year. The result is that the Board of Directors' efforts to meet its fiscal responsibilities and to more accurately project financial requirements will be enhanced.


Stuart A. Hirsch, MD

Statement of Assets, Liabilities and Unrestricted Net Assets

As of April 30 1997 1996

Assets Cash and temporary cash investments $1,681,793 $2,405

Accounts receivable (net of an allowance for doubtful accounts of $40,000 in 1997 and $45,000 in 1996) 1,055,057 1,326,192

Publication and electronic media inventories 947,758 1,187,164

Investments-at market:

Permanent fund 9,333,746 9,072,703

IRB fund ------ 5,945,922

R & D fund 2,794,985 2,813,505

Project fund 10,119,767 8,104,568

Due to (from) operating fund (51,191) 1,551,157

Total investments

Prepaid course and other expenses 846,246 608,329

Deferred product cost 729,877 1,246,811

Land, building, furniture and equipment, at cost:

Land and land improvements 1,122,929 1,104,861

Building and building improvements 14,331,839 14,361,693

Furniture and equipment 5,144,004 6,310,035

Total cost 20,598,772 21,776,589

Accumulated depreciation 6,053,177 6,904,852

Net land, building, furniture and equipment 14,545,595 14,871,737

Total assets $42,003,633 $46,730,493

Liabilities and Liabilities:

Unrestricted Accounts payable and accrued liabilities 5,209,152 $4,406,955
Net Assets Deferred subscription revenue 81,918 56,278

Future course fees 939,272 1,093,717

Deferred product revenue 411,386 647,213

Notes payable ------ 6,700,000

Total liabilities 6,641,728 12,904,163

Unrestricted net assets: 35,361,905 33,826,330

Total liabilities and unrestricted net assets 42,003,633 $46,730,493

Statement of Activities

As of April 30 1997 1996

Revenues Program Revenues

relating to Membership 8,044,084 $7,880,878
member service Annual Meeting 8,681,365 7,379,006
program activities Electronic media and evaluation products 3,028,808 2,138,482
and real estate Publications 6,433,046 7,034,150

Continuing education 4,095,025 3,978,145

Specialty society management 1,027,677 982,941

Facility management revenues 778,466 905,868

Total revenues 32,088,471 30,299,470

Expenses Program expenses

relating to Membership 1,267,802 1,119,816
member service Annual Meeting 4,735,411 4,646,803
program activities Electronic media and evaluation products 2,465,450 2,152,810
and real estate Publications 5,343,178 5,361,920

Continuing education 4,213,334 4,441,155

Specialty society management 1,120,366 1,132,506

Facility management expenses 1,523,125 1,386,621

Total expenses 20,668,666 20,241,631

Expenses Governance 2,084,563 1,971,246
relating to Health policy 1,921,814 2,178,023
supporting services Research and scientific affairs 1,762,043 1,565,519

Education, communications and marketing programs 1,890,637 642,454

General and administrative 3,078,002 3,711,271

Total expenses for supporting services 10,737,059 10,068,513

Increase (decrease) in unrestricted net assets
before investment activities, contributions received,
litigation/settlement expenses, and pension termination costs
682,746 (10,674)
Dividend and interest income on
investment funds, net of fees of
$183,484 in 1997 and $136,884 in 1996
916,325 804,754

Gain (loss) on investment funds 1,756,596 3,769,143

Write-off of bond issuance costs (191,618)

Interest expense, net of interest earned on escrow fund
of $20,149 in 1997 and $21,424 in 1996
(379,558) (419,581)

Total investment activities 2,101,745 4,154,316

Contributions to AAOS for learning center ------ 60,000

Pension termination costs (1,248,916) ------

Litigation/settlement expenses ------ (1,026,417)

Increase in unrestricted net assets 1,535,575 3,177,225

Unrestricted Beginning of year 33,826,330 30,649,105
net assets End of year $35,361,905 $33,826,330

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