American Academy of Orthopaedic Surgeons and American Association of Orthopaedic Surgeons

Transcription

1 American Academy of Orthopaedic Surgeons and American Association of Orthopaedic Surgeons Combined Financial Statements for the

2 C o n t e n t s Reference Page Independent Auditor s Report 1 Combined Statements of Financial Position Exhibit A 2-3 Combined Statements of Activities Exhibit B 4-5 Combined Statements of Cash Flows Exhibit C

3 Independent Auditor s Report Board of Directors American Academy of Orthopaedic Surgeons Rosemont, Illinois We have audited the accompanying combined statements of financial position of American Academy of Orthopaedic Surgeons as of December 31, 2009 and 2008, and the related combined statements of activities and cash flows for the years then ended. These combined financial statements are the responsibility of the American Academy of Orthopaedic Surgeons management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the combined financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of American Academy of Orthopaedic Surgeons and American Association of Orthopaedic Surgeons as of December 31, 2009 and 2008, and the changes in their net assets and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. June 28, 2010

4 Combined Statements of Financial Position Follow

5 Combined Statements of Financial Position December 31, 2009 and 2008 Assets Cash and Cash Equivalents $ 8,925,371 $ 10,083,861 Certificates of Deposit 5,897,200 3,246,624 Accounts Receivable (Net of allowance for doubtful accounts of $139,000 and $114,000 in 2009 and 2008, respectively) 4,042,666 3,244,152 Pledges Receivable 879, ,638 Publication and Electronic Media Inventories (Net of reserve of $169,000 and $188,000 in 2009 and 2008, respectively) 778, ,656 Investments - At fair value Education endowment 4,743,830 4,169,877 Advocacy endowment 5,412,589 5,044,330 Permanent fund 29,707,000 28,615,000 Project fund 13,208,858 4,373,375 Total Investments 53,072,277 42,202,582 Prepaid Expenses 2,446,549 2,830,402 Land, Building, Furniture and Equipment, at Cost Land and land improvements 1,161,007 1,161,007 Building and building improvements 17,435,021 16,673,377 Furniture and equipment 6,643,043 7,028,218 Total Cost 25,239,071 24,862,602 Accumulated Depreciation (10,978,575) (10,356,353) Net Fixed Assets 14,260,496 14,506,249 Deferred Product Costs 310, ,882 $ 90,613,774 $ 77,580,046 The accompanying notes are an integral part of the combined financial statements

6 Exhibit A Liabilities and Net Assets Liabilities Accounts payable and accrued liabilities $ 5,838,232 $ 6,390,673 Future course fees 304, ,375 Deferred dues 4,495,442 4,359,217 Deferred annual meeting revenue 9,978,012 10,461,073 Deferred product revenue 339, ,906 Total Liabilities 20,956,018 21,851,244 Net Assets Unrestricted General operating 13,436,908 12,109,424 Board designated Education endowment 4,743,830 4,169,877 Advocacy endowment 5,412,589 5,044,330 Permanent fund 29,707,000 28,615,000 Project fund 13,208,858 4,373,375 Total Board Designated 53,072,277 42,202,582 Total Unrestricted 66,509,185 54,312,006 Temporarily restricted 3,148,571 1,416,796 Total Net Assets (Exhibit B) 69,657,756 55,728,802 $ 90,613,774 $ 77,580,

7 Exhibit B (Page 1) Combined Statements of Activities Change in Unrestricted Net Assets Revenue Membership dues $ 16,945,335 $ 16,260,834 Annual meeting 16,129,087 13,991,604 Products 12,098,619 13,190,791 Course education 3,426,591 3,866,974 Specialty society management 2,696,158 2,486,120 Rental income 1,175,754 1,292,161 Other revenue 365, ,440 Satisfaction of program restrictions 2,957,597 5,122,487 Total Revenue 55,794,671 56,603,411 Expenses Program expenses Membership 3,241,961 2,928,806 Annual meeting 7,413,582 6,878,640 Products 10,938,211 10,567,222 Course education 4,054,577 4,441,063 Specialty society management 2,717,501 2,919,769 Public relations 1,640,769 1,832,174 Board of Specialty Societies 491, ,092 Board of Councilors 865, ,868 Advocacy 5,231,290 6,687,153 Medical liability reform fund 55, ,307 Education programs 980,750 1,090,804 Organizational marketing 278, ,223 International activities 605, ,454 Research and scientific affairs 1,702,263 1,550,958 Total Program Expenses 40,217,612 41,263,533 The accompanying notes are an integral part of the combined financial statements

8 Exhibit B (Page 2) Combined Statements of Activities Supporting services Facilities management $ 3,757,398 $ 3,757,820 Governance 2,502,538 3,370,659 Administration 7,737,444 7,686,752 Total Supporting Services 13,997,380 14,815,231 Total Expenses 54,214,992 56,078,764 Combined Operating Income 1,579, ,647 Investment Income (Loss) 10,617,501 (17,546,713) Change in Unrestricted Net Assets 12,197,180 (17,022,066) Change in Temporarily Restricted Net Assets Contributions 4,689,371 2,906,078 Satisfaction of program restrictions (2,957,597) (5,122,487) Total Change in Temporarily Restricted Net Assets 1,731,774 (2,216,409) Change in Net Assets 13,928,954 (19,238,475) Net Assets, Beginning of Year 55,728,802 74,967,277 Net Assets, End of Year (Exhibit A) $ 69,657,756 $ 55,728,802 The accompanying notes are an integral part of the combined financial statements

9 Exhibit C American Academy of Orthopaedic Surgeons Combined Statements of Cash Flows Cash Flows from Operating Activities Change in net assets $ 13,928,954 $ (19,238,475) Adjustments to reconcile change in net assets to net cash provided by operating activities Depreciation 1,242,004 1,285,456 Amortization 296, ,745 Realized loss on sales of investments 1,110,640 2,060,493 Change in unrealized (gain) loss on investments (10,714,118) 16,719,468 Loss on disposal of furniture and equipment 247,526 - Changes in assets and liabilities Accounts receivable (798,514) (531,200) Pledges receivable (487,172) 791,728 Publication and electronic media inventories (53,252) (83,779) Prepaid expenses 383,853 (101,009) Accounts payable and accrued liabilities (552,441) 672,580 Deferred revenues (342,785) 1,632,903 Net Cash Provided by Operating Activities 4,261,585 3,513,910 Cash Flows from Investing Activities Purchases of investments (16,525,925) (28,330,240) Proceeds from sales of investments 15,259,708 21,962,948 Purchases of certificates of deposit (2,650,576) (3,246,624) Product development costs (259,505) (247,784) Purchases of furniture and equipment (1,243,777) (957,654) Net Cash Used in Investing Activities (5,420,075) (10,819,354) Net Decrease in Cash and Cash Equivalents (1,158,490) (7,305,444) Cash and Cash Equivalents, Beginning of Year 10,083,861 17,389,305 Cash and Cash Equivalents, End of Year $ 8,925,371 $ 10,083,861 The accompanying notes are an integral part of the combined financial statements

10 Note 1 - Organization The American Academy of Orthopaedic Surgeons (the Academy) has as its primary mission, the education of health care providers on musculoskeletal health care. Education materials and continuing medical education courses (CMEs) are developed and provided for orthopaedic surgeons and allied health professionals. The American Association of Orthopaedic Surgeons (the Association) has as its primary mission, to carry on the orthopaedic community s advocacy activities on health care issues on behalf of patients and the profession of orthopaedic surgery. The Association is not a subsidiary of the Academy; rather, it shares common Board members with the Academy and maintains accounts that are under common management. Current and future fellows enjoy membership in both organizations. The American Academy of Orthopaedic Surgeons and the American Association of Orthopaedic Surgeons are collectively referred to herein as the Academy unless otherwise specified. The Association s Political Action Committee s (PAC) purpose is to support candidates for federal office who have expressed interest in issues involving care to musculoskeletal patients and the advancement of the profession of orthopaedic surgery. The funds received from members are maintained in a separately segregated bank account as required by Federal Election Commission (FEC) regulations. The PAC made $679,596 and $1,817,305 in political contributions during the years ended December 31, 2009 and 2008, respectively. The PAC had a year-end cash balance of $1,119,924 and $203,061 as of December 31, 2009 and 2008, respectively. The PAC s activity is included in these combined financial statements. Note 2 - Summary of Significant Accounting Policies Basis of Accounting The combined financial statements have been prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America (GAAPUSA). This method records revenues and related assets when earned, and records expenses and related liabilities when the obligations are incurred. Basis of Presentation The combined financial statements include the accounts of the American Academy of Orthopaedic Surgeons and the American Association of Orthopaedic Surgeons. All material intercompany balances and transactions have been eliminated in combination

11 Note 2 - Summary of Significant Accounting Policies (Continued) The combined financial statements report amounts separately by class of net assets. The separate classes of net assets are defined as follows: Unrestricted Temporarily Restricted Net assets that include all resources that are not subject to donor-imposed restrictions of a more specific nature than those that only obligate the Academy to utilize funds in furtherance of its mission. Unrestricted net assets are further segregated into general operating and Board-designated net assets. Board-designated net assets include those unrestricted funds that the Board of Directors has set aside for financial reserves (Permanent Fund), development activity and investment in capital assets (Project Fund) and to help finance orthopaedic medical education (Education Endowment) and state and federal advocacy activities (Advocacy Endowment). (See Note 5.) Net assets subject to donor-imposed stipulations that can be satisfied by actions of the Academy or by the passage of time. When a donorimposed restriction is satisfied, those temporarily restricted net assets are reclassified to unrestricted net assets and reported as net assets released from restrictions in the combined statements of activities. Revenue Recognition The Academy derives its revenue primarily from membership dues, the annual meeting, and sales of publications, educational products and services. Annual meeting revenue represents amounts earned for exhibit booth space sales and registration fees for admission and educational seminars. Revenue is recorded in the year in which it is earned. Educational product revenue is recognized when products are shipped. Course education revenue is recognized when the courses take place. Deferred revenue represents cash received for registration fees and deposits for meetings and expositions to be held in future periods, membership dues relating to future periods, and advances on publications and educational product sales, including the Journal of the American Academy of Orthopaedic Surgeons. Functional Allocation of Expenses The costs of providing the various programs and other activities of the Academy have been summarized on a functional basis in the combined statements of activities. Accordingly, all direct costs and certain indirect costs based on staff time have been allocated among the activities benefited. The Academy incurred fundraising costs of $364,753 and $377,082 during the years ended December 31, 2009 and 2008, respectively

12 Note 2 - Summary of Significant Accounting Policies (Continued) Unconditional Promises to Give Unconditional promises to give are recognized at fair value as contribution revenue and receivables in the period in which the promise is received. Promises not yet collected are classified as accounts receivable in the combined statements of functional expenses. All contributions are considered to be available for unrestricted use unless specifically restricted by the donor. Cash and Cash Equivalents Cash and cash equivalents include deposits in financial institutions and short-term investments with original maturities of 90 days or less. As of December 31, 2009, the Academy maintained $8,925,371 of cash in 10 separate bank accounts held in the following financial institutions: Northern Trust Company, Chase Bank, Virtus Investment Partners, Morgan Stanley, MB Financial Bank, UBS and RBC Wealth Management. Of the Academy s cash deposit accounts, only $1,584,233 was federally insured as of December 31, As of December 31, 2008, the Academy maintained $10,083,861 of cash in 13 separate bank accounts held in the following financial institutions: Northern Trust Company, Chase Bank, Virtus Investment Partners, Morgan Stanley, MB Financial Bank and UBS. As of December 31, 2008, only $3,903,967 of the Academy s cash deposit accounts was federally insured. The Academy has not experienced any losses in such accounts and does not believe it is exposed to any significant credit risk on cash and cash equivalents. Accounts Receivable Accounts receivable are comprised primarily of sales of educational products, royalties, and advertising. Accounts receivable reflect amounts billed to customers, net of the allowance for doubtful accounts. The Academy does not charge interest on amounts that are past due. The allowance for doubtful accounts is estimated by the Academy based on historical relationships with customers. The Academy closely reviews all outstanding accounts receivable and follows up on all delinquent amounts in a timely manner. Delinquency status is determined based on the recent payment history of the customer. Amounts are considered uncollectible only when the customer is unable to provide collateral for the amount outstanding or commit to a payment plan

13 Note 2 - Summary of Significant Accounting Policies (Continued) Fair Value Measurements During 2008, the Academy adopted the new GAAPUSA guidance on fair value measurements and disclosures for all financial assets and liabilities carried at fair value. The new guidance defined fair value, established a framework for measuring fair value and expanded disclosures about fair value measurements. In 2009, the Academy adopted the guidance for nonrecurring fair value measurements of nonfinancial assets and liabilities, which guidance had been previously deferred. The adoption of this guidance had no material effect on the Academy s financial condition or results of operations, but did require additional disclosures relating to these nonfinancial assets and liabilities. Pledges Receivable Unconditional pledges expected to be received over more than one year are recorded by the Academy as pledges receivable at their net realizable values using a discount rate commensurate with the risk involved. An allowance for uncollectible pledges is recorded when receipt is doubtful. Publication and Electronic Media Inventories Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. Inventories are comprised of Orthopaedic Knowledge Update products, exams, coding products, patient education materials and other orthopaedic products. Land, Building, Furniture and Equipment Land, building, furniture and equipment are carried at cost. The Academy provides for depreciation in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives on a straight-line basis. The cost of maintenance and repairs is charged to income as incurred; significant renewals and betterments are capitalized. The estimated useful lives used in computing depreciation are as follows: Years Land improvements 15 Building and building improvements Furniture and equipment

14 Note 2 - Summary of Significant Accounting Policies (Continued) Investments Changes in the fair value of securities owned at the end of the year are recorded as unrealized net gains (losses). The gains and losses on securities sold during the year are recorded as realized net gains (losses). Realized and unrealized gains (losses) are combined with dividends and interest and investment expenses and reflected in the combined statements of activities as investment income. (See Note 5.) The Academy s investments are exposed to various risks such as interest rate, credit and overall market volatility. Due to these risk factors, it is reasonably possible that changes in the value of investments will occur in the near term and could materially affect the amounts reported in the combined statements of financial position. The Academy places its cash, cash equivalents and investments with high-quality institutions and, accordingly, limits its credit exposure. Deferred Product Costs Production costs applicable to publications and educational materials, which the Academy expects will be sold in the future, are amortized over the economic life of the educational product, which averages approximately two years. All other editorial costs are expensed as incurred. Deferred product costs less accumulated amortization consist of the following as of December 31, 2009 and 2008: Deferred product costs $ 1,758,918 $ 1,801,612 Accumulated amortization (1,448,421) (1,453,730) $ 310,497 $ 347,882 Use of Estimates in the Preparation of Financial Statements The combined financial statements have been prepared in accordance with GAAPUSA and necessarily include amounts based on estimates and assumptions by management. Actual results could differ from those estimates

15 Note 2 - Summary of Significant Accounting Policies (Continued) Income Taxes The Academy and the Association are not-for-profit organizations, which are exempt from income taxes under Section 501(c)(3) and 501(c)(6) of the Internal Revenue Code, respectively. The Academy engages in certain activities that are considered unrelated to the exempt function of the organization; unrelated business income is taxed at corporate income tax rates. The Academy and Association s adoption of the Income Tax Topic regarding uncertain tax positions of GAAPUSA on January 1, 2009 had no effect on its financial position as management believes the Academy and Association has no material unrecognized income tax benefits, including any potential risk of loss of its not-for-profit tax status. The Academy and Association would account for any potential interest or penalties related to possible future liabilities for unrecognized income tax benefits as income tax expense. The Academy and Association are no longer subject to examination by federal, state or local tax authorities for periods before Prior to adoption of the Income Tax Topic, the Academy and Association accounted for tax positions under a contingent loss model, requiring recognition of a tax liability when it was both (1) probable that it had been incurred as of year-end and (2) the amount could be reasonably estimated. Subsequent Events The Academy has evaluated subsequent events through June 28, 2010, the date the combined financial statements were available to be issued. Note 3 - Pledges Receivable Pledges receivable due in less than one year consist of $879,810 and $392,638 as of December 31, 2009 and 2008, respectively

16 Note 4 - Fair Value Measurements GAAPUSA defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. GAAPUSA describes three approaches to measuring the fair value of assets and liabilities: the market approach, the income approach and the cost approach. Each approach includes multiple valuation techniques. GAAPUSA does not prescribe which valuation technique should be used when measuring fair value, but does establish a fair value hierarchy that prioritizes the inputs used in applying the various techniques. Inputs broadly refer to the assumptions that market participants use to make pricing decisions, including assumptions about risk. Level 1 inputs are given the highest priority in the hierarchy while Level 3 inputs are given the lowest priority. Financial assets and liabilities carried at fair value are classified in one of the following three categories based on the nature of the inputs to the valuation technique used: Level 1 - Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 2 - Observable market-based inputs or unobservable inputs that are corroborated by market data. Level 3 - Unobservable inputs that are not corroborated by market data. These inputs reflect management s best estimate of fair value using its own assumptions about the assumptions a market participant would use in pricing the asset or liability. The Academy currently uses no Level 3 inputs

17 Note 4 - Fair Value Measurements (Continued) The following table sets forth by level within the fair value hierarchy the Academy s financial assets that were accounted for at fair value on a recurring basis as of December 31, 2009 and As required by GAAPUSA, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Academy s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect their placement within the fair value hierarchy levels. Fair Value Measurements at Reporting Date Using: Quoted Prices in Active Significant Fair Values Markets for Other Significant as of Identical Observable Unobservable December 31, Assets Inputs Inputs 2009 (Level 1) (Level 2) (Level 3) Certificates of Deposit $ 5,897,200 $ - $ 5,897,200 $ - Investments Money market funds $ 3,113,804 $ 3,113,804 $ - $ - Bond fund 2,369,590 2,369, U.S. treasury bills 774, , Corporate bonds 1,707,549-1,707,549 - Equity securities 28,881,577 28,881, Bank composite equities fund 2,122,498-2,122,498 - Bank composite bond fund 11,938,076-11,938,076 - Treasury inflation protection securities 517, ,707 U.S. government agency securities 1,646,544-1,646,544 - Total Investments $ 53,072,277 $ 35,139,903 $ 17,932,374 $

18 Note 4 - Fair Value Measurements (Continued) Fair Value Measurements at Reporting Date Using: Quoted Prices in Active Significant Fair Values Markets for Other Significant as of Identical Observable Unobservable December 31, Assets Inputs Inputs 2008 (Level 1) (Level 2) (Level 3) Certificates of Deposit $ 3,246,624 $ - $ 3,246,624 $ - Investments Money market funds $ 6,854,550 $ 6,854,550 $ - $ - Bond fund 1,669,919 1,669, U.S. treasury bills 809, , Corporate bonds 973, ,774 - Equity securities 19,536,969 19,536, Bank composite equities fund 1,720,476-1,720,476 - Bank composite bond fund 9,464,420-9,464,420 - U.S. government agency securities 1,172,560-1,172,560 - Level 1 Inputs Total Investments $ 42,202,582 $ 28,871,352 $ 13,331,230 $ - Fair values for the Academy s money market accounts, bond fund, U.S. treasury bills and equity securities were based on quoted market prices

19 Note 4 - Fair Value Measurements (Continued) Level 2 Inputs Certificates of Deposit - Estimated fair values for the certificates of deposit are based upon similar certificates of deposit as of December 31, 2009 and All certificates of deposit investments of the Academy are covered by government insurance up to $250,000 in 2009 and fully in Bank Composite Equities Fund - Estimated fair values for the Academy s bank composite equities fund were based on the return characteristics of U.S. dollar-based equity indices listed on U.S and international exchanges where the underlying values of the securities are based on quoted market prices. Bank Composite Bond Fund - Estimated fair values for the Academy s bank composite bond fund were based on the return characteristics of multiple U.S. dollar-based bond indices listed on U.S and international exchanges where the underlying values of the securities are based on similar investments traded on the secondary market. Treasury Inflation Protection Securities (TIPS) Estimated fair values for the Academy s TIPS were based on similar investments that are traded on the secondary market Corporate Bonds and U.S. Government Agency Securities - Estimated fair values for the Academy s corporate bonds and U.S. government agency securities were based on similar investments that are traded on the secondary market

20 Note 5 - Investments The Academy s investments are comprised of the following as of December 31, 2009 and 2008: Money market funds $ 8,655 $ 9,214 High Yield - Money Market Fund 12,243 50,004 Tactical Asset Account - Money Market Fund 1,604, ,448 Large Cap Value Equity - Money Market Fund 64, ,548 Large Cap Growth Equity - Money Market Fund 21,244 80,359 Small Cap Equity - Money Market Fund 10,527 13,595 International Equity - Money Market Fund 84, ,156 Fixed Income - Money Market Fund 2, ,805 Bank Deposits 247, ,091 MS Active Assets Money Trust 1,056,848 5,044,330 Total Money Market Funds 3,113,804 6,854,550 High Yield - Bond Fund 2,369,590 1,669,919 Treasury Inflation Protected Securities (TIPS) 517,707 - Tactical Asset Account - U.S. Treasury Bills 774, ,914 Intermediate Term - Clearbridge/Western Asset Management Corporate Bonds 1,707, ,774 Large Cap Value Equity - ishares Russell 1,000 Value 7,720,300 6,086,008 Large Cap Growth Equity - Fundamental Large Cap Growth 8,169,827 5,917,540 Small Cap Equity - Dreyfus - Boston Small Cap 2,086,163 1,574,118 International Equity - Dodge & Cox International Stock Fund 5,924,976 4,179,451 Intermediate Term - The London Company 100,067 - Blackrock - Mutual Fund 4,582 4,039 Mid-Cap Market-Orientated - Madison Investment Advisors 531, ,582 Large-Cap Value - MFS Investment Management/Value 1,054, ,120 International Market-Orientated - Neuberger Berman 546, ,551 International Market-Oriented - Wentworth Hauser 596,383 - Large-Cap Growth - Renaissance Group LLC 1,093, ,043 Mid-Cap Value - Sterling Capital Management 584, ,668 Real Estate Securities - Newgate Capital Management 95,619 - Real Estate Securities - Invesco Capital Management 373, ,849 Total Equity Securities 28,881,577 19,536,969 Small Cap Equity - Montgomery Small Cap Growth Fund 2,122,498 1,720,476 Fixed Income - Montgomery U.S. Core Fixed Income Fund 11,938,076 9,464,420 Intermediate Term - Clearbridge/Western Asset Management Government Securities 1,646,544 1,172,560 $ 53,072,277 $ 42,202,

21 Note 5 - Investments (Continued) The composition of investment income from the Academy s investment portfolio is as follows: Investment fees $ (307,124) $ (340,499) Dividends and interest 1,321,150 1,573,747 Realized loss, net (1,110,642) (2,060,493) Change in unrealized gain (loss), net 10,714,117 (16,719,468) $ 10,617,501 $ (17,546,713) The change in unrealized loss for the year ended December 31, 2008, primarily consists of losses on the following investments: Large Cap Value Equity ishares Russell 1,000 Value, Large Cap Growth Equity Fundamental Large Cap Growth, International Equity Dodge & Cox International Stock Fund and Small Cap Equity Montgomery U.S. Cap Growth Fund. Descriptions of the board-designated funds that hold the investment securities are as follows: Education Endowment - Board-Designated The Endowment s purpose is to help finance orthopaedic medical education. Up to 5% of the fund is expected to be withdrawn annually (at the end of the calendar year) to achieve this objective. Advocacy Endowment - Board-Designated The Endowment s purpose is to generate investment growth/income to help finance advocacy efforts. Up to 5% of the fund is expected to be withdrawn annually (at the end of the calendar year) to achieve this objective. Permanent Fund - Board-Designated The Permanent Fund s purpose is to provide a financial reserve to ensure the continued operation of the essential functions of the Academy. It is a long-term investment fund, not to be used as a short-term source of funding for operational or developmental activities of the Academy. The Permanent Fund maintains a balance of either 50% of the Academy s budgeted operating expenses for that year or $25 million, whichever is higher. Project Fund - Board-Designated The Project Fund s purpose is to provide a financial resource to fund all development activity including product development and investment in capital assets. The fund is to be replenished by the amount of fixed asset depreciation, product development, amortization and operating earnings. A formal procedure governs the use and future payback of these funds for major operating activities approved by the Board of Directors. Additionally, the Project Fund is responsible for funding all operating losses

22 Note 5 - Investments (Continued) A summary of transactions within the funds for the years ended December 31, 2009 and 2008 is as follows: Education Advocacy Permanent Endowment Endowment Fund Project Fund Fund Fund Total Balance as of December 31, 2008 $ 28,615,000 $ 4,373,375 $ 4,169,877 $ 5,044,330 $ 42,202,582 Fund rebalancing 1,092,000 (1,092,000) Board designated funding Investments Dividends and interest - 1,111, ,265 24,941 1,266,219 Market value gain - 8,816, , ,318 9,603,476 Balance as of December 31, 2009 $ 29,707,000 $ 13,208,858 $ 4,743,830 $ 5,412,589 $ 53,072,277 Education Advocacy Permanent Endowment Endowment Fund Project Fund Fund Fund Total Balance as of December 31, 2007 $ 26,365,000 $ 23,173,748 $ 5,076,503 $ - $ 54,615,251 Fund rebalancing 2,250,000 (2,250,000) Board designated funding ,000,000 5,000,000 Investments Dividends and interest - 1,269, ,864 44,330 1,450,159 Market value loss - (17,820,338) (1,042,490) - (18,862,828) Balance as of December 31, 2008 $ 28,615,000 $ 4,373,375 $ 4,169,877 $ 5,044,330 $ 42,202,582 Note 6 - Retirement Savings Plan The Academy has a defined contribution plan covering substantially all employees. The Academy makes a quarterly contribution based on a percentage of each eligible participant s compensation as defined by the plan. This percentage (10% for the years ended December 31, 2009 and 2008) is designated by the Board of Directors. The Academy s retirement plan expense was $1,595,405 and $1,519,798 for the years ended December 31, 2009 and 2008, respectively

23 Note 7 - Leases The Academy leases office space to other entities under operating leases. The lease terms expire at various dates through 2013 Future minimum rent revenue under operating leases as of December 31, 2009 are as follows: Year Ending December 31: 2010 $ 955, , , ,603 $ 2,226,165 Rent income was $1,034,137 and $1,192,384 for 2009 and 2008, respectively. Note 8 - Temporarily Restricted Net Assets The Academy receives a variety of contributions. These include donations from corporations that have supported product development work, sponsored honored speakers at the Academy s annual meeting and undertaken projects such as Building Safe Playgrounds. Other orthopaedic-related organizations have contributed money in support of projects of mutual interest being administered by the Academy. Academy members themselves make contributions to the PAC. Contributions restricted for use by donors that have not been spent are recorded as temporarily restricted net assets. Temporarily restricted contributions totaled $4,689,371 and $2,901,619 for the years ended 2009 and 2008, respectively, which included pledges of $879,810 and $392,638 that were not received as of December 31, 2009 and 2008, respectively

24 Note 8 - Temporarily Restricted Net Assets (Continued) Temporarily restricted contributions received in 2009 and 2008 consist of the following: Annual meeting $ 34,000 $ - Products 513,795 15,400 Course education 770, ,500 Political Action Committee 2,085,935 1,658,927 Health policy 541, ,500 Governance 149, Public awareness and education 316, ,132 Joint Registry 268,250 - Research and scientific affairs 10,000 50,000 4,689,371 2,901,619 Change in discount - 4,459 $ 4,689,371 $ 2,906,078 During 2009 and 2008, temporarily restricted net assets were released from restrictions as the Academy incurred expenses satisfying the restricted purposes designated by the donors. Temporarily restricted net assets released from restrictions are classified as unrestricted revenue in the programs that the contributions support. Other net assets released from restrictions that support nonprograms are classified as unrestricted revenue in other revenue

25 Note 8 - Temporarily Restricted Net Assets (Continued) Temporarily restricted net assets released from restrictions in 2009 and 2008 consist of the following: Annual meeting $ 15,000 $ 51,000 Products 318, ,450 Course education 676, ,625 Political Action Committee 1,169,392 2,496,561 Health policy 278, ,286 Governance 34, ,798 Public awareness and education 380, ,647 Medical liability reform 17, ,120 Joint Registry 67,896 - $ 2,957,597 $ 5,122,487 Temporarily restricted net assets ending balances at December 31, 2009 and 2008 consist of the following: Annual meeting $ 34,000 $ 15,000 Products 348, ,220 Course education 140,125 46,250 Political Action Committee 1,120, ,841 Health policy 425,989 95,500 Governance 348, ,229 Public awareness and education 463, ,370 Medical liability reform 8,056 25,386 Joint Registry 250,354 - Research and scientific affairs 10,000 50,000 $ 3,148,571 $ 1,416,

26 Note 9 - Endowment Endowment The Academy s endowment consists of two individual funds established for education and advocacy. Its endowment includes funds designated by the Board of Directors to function as endowments. As required by accounting principles generally accepted in the United States of America, net assets associated with endowment funds, including funds designated by the Board of Directors to function as endowments, are classified and reported based on existences or absences of donor-imposed restrictions. Interpretation of Relevant Law Management of the Academy has interpreted the Uniform Prudent Management of Institutional Funds Act (UPMIFA) as requiring the preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, the Academy classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment and (b) the original value of subsequent gifts to the permanent endowment. The portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified either as temporarily restricted net assets or unrestricted, board-designated net assets until those amounts are appropriated for expenditure by the Academy. In accordance with UPMIFA, the Academy considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: 1. The duration and preservation of the fund 2. The purposes of the Academy s donor-restricted endowment funds 3. General economic conditions 4. The possible effect of inflation and deflation 5. The expected total return from income and the appreciation of investments 6. Other resources of the Academy 7. The investment policies of the Academy As of December 31, 2009 and 2008, the Academy does not have any donor-restricted endowment funds

27 Note 9 - Endowment (Continued) Return Objectives and Risk Parameters The Academy has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to programs supported by its endowments while seeking to maintain the purchasing power of the endowment assets. Endowment assets include only boarddesignated funds. As approved by the Board of Directors, the endowment assets are invested in a manner that is intended to produce results that exceed the price and yield results of the respective benchmarks for the different asset classes provided for in the Academy s investment policy. These asset classes include domestic and international equities and fixed-income securities. The use of alternative investments - hedge funds, real estate investment funds, commodities, etc. - is permitted but must be approved by the Endowment Subcommittee before any investment is made and cannot, in total, exceed 10% of the endowment fund. The Academy expects its endowment funds, over rolling five-year periods, to exceed the rate of inflation (Consumer Price Index for All Urban Consumers) by at least four percentage points on a compound annual basis. Actual returns in any given year may vary from this amount. Spending Policy and How the Investment Objectives Relate to Spending Policy The Academy has a policy of withdrawing up to 5% of its board-designated funds annually at the end of the calendar year. Strategies Employed for Achieving Objectives To satisfy its long-term rate-of-return objectives, the Academy relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends). The Academy targets a diversified asset allocation that places a greater emphasis on equity-based investments to achieve its long-term return objectives within prudent risk constraints. Endowment net asset composition by type of fund as of December 31, 2009: Temporarily Unrestricted Restricted Total Donor-restricted Endowment Funds $ - $ - $ - Board-designated Endowment Funds 10,156,419-10,156,419 Total Funds $ 10,156,419 $ - $ 10,156,

28 Note 9 - Endowment (Continued) Endowment net asset composition by type of fund as of December 31, 2008: Temporarily Unrestricted Restricted Total Donor-restricted Endowment Funds $ - $ - $ - Board-designated Endowment Funds 9,214,207-9,214,207 Total Funds $ 9,214,207 $ - $ 9,214,207 Changes in endowment net assets for the year ended December 31, 2009: Temporarily Unrestricted Restricted Total Endowment net assets, beginning of year $ 9,214,207 $ - $ 9,214,207 Investment return Investment income 155, ,212 Net appreciation (Realized and unrealized) 787, ,000 Total Investment Return 942, ,212 $ 10,156,419 $ - $ 10,156,

29 Note 9 - Endowment (Continued) Changes in endowment net assets for the year ended December 31, 2008: Temporarily Unrestricted Restricted Total Endowment net assets, beginning of year $ 5,076,503 $ - $ 5,076,503 Investment return Investment income 180, ,194 Net depreciation (Realized and unrealized) (1,042,490) - (1,042,490) Total Investment Return (862,296) - (862,296) Create board-designated endowment fund 5,000,000-5,000,000 $ 9,214,207 $ - $ 9,214,207 Note 10 - Employee Health Costs The Academy entered into a group employee health insurance plan with Blue Cross Blue Shield (BCBS), whereby BCBS provides certain administrative services and provides specific and aggregate stop loss coverage. The Academy pays a reduced monthly premium. However, the Academy is responsible for the funding of all claims up to $65,000 per individual per policy year in 2009 and 2008, and up to approximately $2,900,000 and $2,200,000 for the group as a whole during 2009 and 2008, respectively. A liability of $146,000 and $240,000 has been recorded by the Academy as of December 31, 2009 and 2008, respectively, to estimate payment of claims pending on that date. Group health insurance expense for the fiscal years ended December 31, 2009 and 2008 totaled $2,283,860 and $2,238,040, respectively. Note 11 - Commitment The Academy has an employment agreement with its Chief Executive Officer, which is renewed every five years. If the Academy terminates the agreement without good cause or fails to renew it, the Academy shall pay an amount equal to the current salary up to 24 months based on the circumstances involved

30 Note 12 - Medical Liability Reform Campaign The Medical Liability Reform campaign was started in March 2003 in response to the medical liability insurance crisis that orthopaedic surgeons are facing. Orthopaedic surgeons are asked to contribute to the campaign fund, which is part of the Association. The money is used to support state societies in their efforts to help pass laws in their states that put caps on jury awards for damages. It is also used for a public education and media campaign and a targeted grass-roots campaign. Note 13 - Contingencies The Academy is occasionally party to lawsuits and claims arising out of the conduct of its business. The Academy is of the opinion that the liabilities, if any, will not have a material effect on these combined financial statements or on the Academy s ability to continue its operations