EXHIBIT 99.1
Audited consolidated financial statements of VCA as of and for the years ended
December 31, 2006, 2005 and 2004
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Vein Clinics of America, Inc.
Schaumburg, Illinois
We have audited the accompanying consolidated balance sheets of Vein Clinics of
America, Inc. and Consolidated Affiliates (the Company) as of December 31, 2006,
2005 and 2004, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Vein Clinics of
America, Inc. and Consolidated Affiliates as of December 31, 2006, 2005 and
2004, and the results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States of America.
As described in Note 10 to the financial statements, on January 1, 2005, the
Company changed its method of accounting for variable interest entities created
prior to December 31, 2003 to adopt Financial Accounting Standards Board
Interpretation No. 46 (revised December 2003), Consolidation of Variable
Interest Entities--an interpretation of ARB No. 51.
As described in Note 14 to the financial statements, on August 8, 2007, Vein
Clinics of America, Inc. was sold.
/s/McGladrey & Pullen LLP
Rockford, Illinois
October 22, 2007
-1-
VEIN CLINICS OF AMERICA, INC. AND CONSOLIDATED AFFILIATES
CONSOLIDATED BALANCE SHEETS
December 31, 2006 and 2005
ASSETS 2006 2005
- -------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents ..................... $ 731,658 $ 36,652
Accounts receivable, net of allowances for
uncollectible amounts of $2,669,000,
$2,719,000 and $1,332,000 in 2006,
2005 and 2004 .............................. 3,514,697 2,130,463
Notes receivable, stockholders ................ 393,157 --
Notes receivable .............................. 84,326 168,258
Inventories ................................... 605,142 545,816
Prepaid expenses and other .................... 272,422 299,440
Investments ................................... 193,811 278,897
---------- ----------
Total current assets .................... 5,795,213 3,459,526
---------- ----------
Other Assets
Deposits ...................................... 120,720 208,546
Investments ................................... 508,720 446,265
Deferred loan fees ............................ 479,474 --
---------- ----------
1,108,914 654,811
---------- ----------
Equipment and Leasehold Improvements, net .......... 1,876,056 2,756,229
---------- ----------
Total assets ............................ $8,780,183 $6,870,566
========== ==========
See Notes to Consolidated Financial Statements
-2-
VEIN CLINICS OF AMERICA, INC. AND CONSOLIDATED AFFILIATES
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) 2006 2005
- --------------------------------------------------------------------------------
Current Liabilities
Notes payable ................................ $ -- $ 651,000
Current portion of long-term debt ............ 656,249 282,677
Accounts payable ............................. 1,054,152 1,111,132
Accrued expenses:
Salaries, wages and payroll taxes ......... 2,140,902 2,144,733
Members' advances ......................... 735,904 603,858
Customer advances ......................... 990,452 2,212,424
Other ..................................... 219,566 48,824
----------- -----------
Total current liabilities .............. 5,797,225 7,054,648
----------- -----------
Professional liability ............................ -- 95,483
Deferred compensation ............................. 462,376 451,984
Long-term debt, less current portion .............. 7,122,698 1,579,400
----------- -----------
Total long-term liabilities ............ 7,585,074 2,126,867
----------- -----------
Commitments and contingencies (Notes 7 and 14)
Stockholders' Equity (Deficit)
Common stock, voting, no par value, authorized
50 shares, issued 24.52 shares ............ 6,132 6,132
Common stock, non-voting, no par value,
authorized 4,950 shares, issued 2,427.484
shares .................................... -- --
Retained earnings (deficit) .................. (4,608,248) (2,317,081)
----------- -----------
(4,602,116) (2,310,949)
----------- -----------
Total liabilities and stockholders'
equity (deficit) .................. $ 8,780,183 $ 6,870,566
=========== ===========
See notes to consolidated financial statements
-3-
VEIN CLINICS OF AMERICA, INC. AND CONSOLIDATED AFFILIATES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2006, 2005 and 2004
2006 2005 2004
- ------------------------------------------------------------------------------------------------------------------------
Operating Revenue:
Net patient service revenue ........................................ $ 28,481,428 $ 25,120,540 $ 20,313,724
Other .............................................................. 138,959 41,849 5,300
------------ ------------ ------------
Total operating revenue ......................................... 28,620,387 25,162,389 20,319,024
------------ ------------ ------------
Operating Expenses:
Salary and benefits ................................................ 13,178,648 15,143,633 11,317,458
Other direct expenses .............................................. 5,246,029 4,028,315 2,851,901
General and administrative:
Depreciation and amortization ................................... 847,456 834,209 776,209
Bad debt expense ................................................ 866,720 855,298 31,746
Other ........................................................... 5,941,925 5,525,990 4,517,010
------------ ------------ ------------
26,080,778 26,387,445 19,494,324
------------ ------------ ------------
Income (loss) from operations ................................... 2,539,609 (1,225,056) 824,700
------------ ------------ ------------
Other (Expense) Income:
Interest expense ................................................... (462,631) (126,348) (59,536)
Investment income .................................................. 137,760 60,448 394,642
Other (expense) income, net ........................................ (172,057) 840,683 (48,535)
------------ ------------ ------------
(496,928) 774,783 286,571
------------ ------------ ------------
Income (loss) from continuing operations ........................ 2,042,681 (450,273) 1,111,271
Income (loss) from operations of discontinued
component .......................................................... 88,282 (51,457) --
------------ ------------ ------------
Income (loss) before cumulative effect
of change in accounting principle ............................ 2,130,963 (501,730) 1,111,271
Cumulative effect on prior years of change in method of accounting due to
adoption of Financial Accounting Standards Board Interpretation
No. 46R (Note 10) .................................................. -- (1,197,377) --
------------ ------------ ------------
Income (loss) before minority interest .......................... 2,130,963 (1,699,107) 1,111,271
Minority interest in consolidated entities .............................. -- (180,398) 186,000
------------ ------------ ============
Net income (loss) ............................................... $ 2,130,963 $ (1,879,505) $ 1,297,271
============ ============ ============
See Notes to Consolidated Financial Statements
-4-
VEIN CLINICS OF AMERICA, INC. AND CONSOLIDATED AFFILIATES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years Ended December 31, 2006, 2005 and 2004
Retained
Common Stock - Voting Common Stock - Non Voting Earnings
Shares Amount Shares Amount (Deficit) Total
---------------------- -------------------------- --------------- ------------
Balance, December 31, 2003................. 24.52 $6,132 2,427.484 $ -- $1,717,371 $1,723,503
Net income............................ -- -- -- -- 1,297,271 1,297,271
Cash dividends........................ -- -- -- -- (1,116,072) (1,116,072)
--------------------------------------------------------------------------------
Balance, December 31, 2004................. 24.52 6,132 2,427.484 -- 1,898,570 1,904,702
Net (loss)............................ -- -- -- -- (1,879,505) (1,879,505)
Cash dividends........................ -- -- -- -- 2,336,146 (2,336,146)
--------------------------------------------------------------------------------
(2,336,146)
Balance, December 31, 2005................. 24.52 6,132 2,427.484 -- (2,317,081) (2,310,949)
Net income............................ -- -- -- -- 2,130,963 2,130,963
Cash dividends........................ -- -- -- -- (5,859,824) (5,859,824)
Deconsolidation of affiliate.......... -- -- -- -- 1,437,694 1,437,694
--------------------------------------------------------------------------------
Balance, December 31, 2006................. 24.52 $6,132 2,427.484 $ -- $(4,608,248) $(4,602,116)
================================================================================
See Notes to Consolidated Financial Statements
-5-
VEIN CLINICS OF AMERICA, INC. AND CONSOLIDATED AFFILIATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2006, 2005 and 2004
2006 2005 2004
- ----------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income (loss) .................................. $ 2,130,963 $(1,879,505) $ 1,297,271
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization ................... 847,456 834,209 776,209
Depreciation and amortization -
discontinued operations ...................... -- 246,651 --
Provision for bad debts ......................... 866,720 855,298 31,746
Undistributed losses allocated to
minority interest ............................ -- (91,102) (186,000)
Increase (decrease) in trading securities ....... 22,631 241,402 (192,526)
Amortization of deferred loan fees .............. 43,588 -- --
Cumulative effect on prior years for change
in method of accounting ...................... -- 1,197,377 --
Increase (decrease) from changes in:
Accounts receivable .......................... (2,250,547) (1,588,145) (633,335)
Inventories .................................. (177,809) (205,307) (51,361)
Prepaid expenses and other ................... 12,008 27,874 (51,048)
Deposits ..................................... -- (42,334) (43,808)
Accounts payable ............................. 297,536 (254,241) 579,273
Accrued expenses ............................. 289,589 410,572 (177,724)
Customer advances ............................ 133,908 1,256,561 --
----------- ----------- -----------
Net cash provided by operating activities 2,216,043 1,009,310 1,348,697
----------- ----------- -----------
Cash Flows From Investing Activities
Purchase of equipment .............................. (339,017) (1,087,132) (2,367,721)
Advances on notes receivable stockholders .......... (393,157) 353,742 (121,162)
Proceeds from affiliates ........................... 72,731 -- --
Collection of notes receivable ..................... 82,687 -- --
----------- ----------- -----------
Net cash used in investing activities ... (576,756) (733,390) (2,488,883)
----------- ----------- -----------
Cash Flows From Financing Activities
Payments on long-term debt ......................... (2,081,472) (115,812) (16,938)
Proceeds from long-term debt ....................... 8,050,000 739,431 1,209,768
Net borrowings (payments) from line of credit ...... (651,000) 651,000 --
Deferred loan fees paid ............................ (523,062) -- --
Proceeds from deposit refund ....................... 48,808 -- --
Cash contribution from minority interest ........... -- 91,102 186,000
Advances from stockholders ......................... 132,046 603,858 --
Payments to stockholders ........................... -- (525,654) --
Cash dividends paid ................................ (5,859,824) (2,336,146) (1,116,072)
----------- ----------- -----------
Net cash provided by (used in)
financing activities ................. (884,504) (892,211) 262,758
----------- ----------- -----------
(Continuted)
-6-
VEIN CLINICS OF AMERICA, INC. AND CONSOLIDATED AFFILIATES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 2006, 2005 and 2004
2006 2005 2004
- -------------------------------------------------------------------------------------------------------------------
Cash received in consolidation of related entity........................ $ -- $ 393,401 $ --
Cash from deconsolidation of affiliate ................................. (59,777) -- --
----------- ----------- -----------
Net increase (decrease) in cash ............................. 695,006 (222,900) (877,428)
Cash and cash equivalents:
Beginning ......................................................... 36,652 259,552 1,136,980
----------- ----------- -----------
Ending............................................................. $ 731,658 $ 36,652 $ 259,552
=========== =========== ===========
Supplemental Disclosure of Cash Flow Information
Cash payments for:
Interest ....................................................... $ 513,849 $ 139,884 $ 59,506
=========== =========== ===========
Supplemental Schedule of Noncash Investing and
Financing Activities
Balance sheet consolidation of variable interests in
an affiliate, Hair Today, Gone Tomorrow LLC
Assets:
Current ........................................................... $ -- $ 626,063 $ --
Long-term ......................................................... -- 406,329 --
----------- ----------- -----------
$ -- $ 1,032,392 $ --
=========== =========== ===========
Liabilities:
Current ........................................................... $ -- $ 2,098,468 $ --
Long-term ......................................................... -- 131,301 --
Members' deficit, cumulative effect of
change in method of accounting .................................... -- (1,197,377) --
----------- ----------- -----------
$ -- $ 1,032,392 $ --
=========== =========== ===========
Balance sheet deconsolidation due to a reconsideration event of variable
interests in an affiliate, Hair Today, Gone Tomorrow, LLC
Assets:
Current ........................................................... $ 125,073 $ -- $ --
Lone-term ......................................................... 410,752 -- --
----------- ----------- -----------
$ 535,825 $ -- $ --
=========== =========== ===========
Liabilities:
Current ........................................................... $ 1,932,670 $ -- $ --
Long-term ......................................................... 40,849 -- --
Members' equity ........................................................ (1,437,694) -- --
----------- ----------- -----------
$ 535,825 $ -- $ --
=========== =========== ===========
See Notes to Consolidated Financial Statements
-7-
VEIN CLINICS OF AMERICA, INC. AND CONSOLIDATED AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 1. Nature of Business and Summary of Significant Accounting Policies
Nature of business: Vein Clinics of America, Inc. (VCA) is a Delaware
corporation that provides management services for professional corporations
(P.C.'s) through various contractual arrangements further described in Note 2.
These P.C.'s provide medical services for the treatment of varicose veins,
spider veins, ulcers, and other forms of vein disease.
Members of VCA's management also hold interests in the following affiliated
companies:
o Hair Today, Gone Tomorrow, LLC (HTGT), an Illinois limited liability company
whose operations consist of hair removal. o BK Aviation Group, LLC (BK), a
Delaware limited liability company whose operations consist of chartered
flights.
The P.C.'s and the two affiliated entities are consolidated in these financial
statements. HTGT was deconsolidated as of August 10, 2006 (see Note 10).
A summary of VCA (Parent Company) and its affiliates' (collectively the Company)
significant accounting policies follows:
Principles of consolidation: The accompanying consolidated financial statements
include the financial information of the Company. All significant intercompany
accounts and transactions have been eliminated.
Use of estimates: The preparation of financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates. The use
of estimates and assumptions in the preparation of the accompanying consolidated
financial statements is primarily related to the determination of net accounts
receivable. Due to uncertainties inherent in the estimation and assumption
process, it is at least reasonably possible that changes in these estimates and
assumptions in the near term would be material to the consolidated financial
statements.
Net patient service revenue: Net patient service revenue is recognized in the
period when the services are performed.
Cash and cash equivalents: For purposes of presenting the cash flow statement
the Company includes highly liquid investments with original maturities of three
months or less at the date of purchase in cash equivalents.
The Company may have amounts on deposit with financial institutions in excess of
those insured by the FDIC. The Company has not experienced any losses in such
accounts and believes it is not exposed to any significant credit risk.
-8-
VEIN CLINICS OF AMERICA, INC. AND CONSOLIDATED AFFILIATES
Note 1. Nature of Business and Summary of Significant Accounting Policies
(Continued)
Accounts receivable and allowance for uncollectible accounts: The collection of
receivables from third-party payors and patients is the Company's primary source
of cash for operations and is critical to its operating performance. The primary
collection risks relate to uninsured patient accounts and patient accounts for
which the primary insurance payor has paid, but patient responsibility amounts
(deductibles and copayments) remain outstanding. Patient receivables, where a
third-party payor is responsible for paying the amount, are carried at a net
amount determined by the original charge for the service provided, less an
estimate made for contractual adjustments or discounts provided to third-party
payors.
Patient receivables due directly from the patients are carried at the original
charge for the service provided less amounts covered by third-party payors and
less an estimated allowance for uncollectible receivables. Management estimates
this allowance based on the aging of its accounts receivable and its historical
collection experience by clinic and for each payor type. Recoveries of
receivables previously written off are recorded as a reduction of bad debt
expense when received.
The past due status of receivables is determined on a case-by-case basis
depending on the payor responsible. Interest is generally not charged on past
due accounts.
Inventories: Inventories (principally pharmaceuticals and supplies) are stated
at the lower of cost (first-in, first-out method) or market.
Investments: Investments consist entirely of mutual funds and are carried at
fair value based upon quoted market prices. These investments have been
purchased to fund deferred compensation agreements and are considered by the
Company to be trading securities. Trading income for investments held at year
end included in investment income on the statement of operations was $71,817,
$99,192 and $23,928 for the years ended December 31, 2006, 2005 and 2004,
respectively.
Deferred loan fees: Fees related to the issuance of long-term debt are
capitalized and amortized over the life of the debt using the straight-line
method, which approximates the effective interest method. Accumulated
amortization as of December 31, 2006 was approximately $44,000.
Equipment and leasehold improvements: Equipment and leasehold improvements are
stated at cost and include major expenditures which increase their value or
extend their useful lives. Depreciation and amortization are computed using the
straight-line method based on estimated useful lives. Estimated useful lives for
leasehold improvements are over the life of the lease and for equipment range
from 3 to 10 years.
Long-lived assets: Management evaluates its long-lived assets for possible
impairment whenever events or circumstances indicate that the carrying amount of
the asset, or related group of assets, may not be recoverable from estimated
future cash flows.
Members' advances: Members' advances consist of amounts due to the members for
advances paid to fund the operations of BK.
Notes receivable: Notes receivable consist of notes due from the stockholders
and others. Management considers the notes to be fully collectible and no
allowance is included in these financial statements.
Advertising: Advertising costs are expensed as incurred and are included in
operation expenses. Advertising expenses were approximately $2,400,000,
$2,850,000 and $1,700,000 for the years ended December 31, 2006, 2005 and 2004,
respectively.
-9-
VEIN CLINICS OF AMERICA, INC. AND CONSOLIDATED AFFILIATES
Note 1. Nature of Business and Summary of Significant Accounting Policies
(Continued)
Minority interest in consolidated entities: Since VCA has no ownership interest
in the VIEs, all income and loss to the extent of minority interest equity are
allocated to the minority interests and are reported as minority interest in the
consolidated entities in the consolidated statement of operations, and no
amounts with respect to these interests are included in stockholders' equity
(deficit). Distributions to the minority interests in excess of these capital
accounts are reflected as additional income allocated to minority interests in
the statement of operations.
Income taxes: Except for the P.C.'s, which are professional service "C"
corporations, VCA and its affiliates are organized as a group of "S"
corporations and limited liability companies and are taxed as "pass-through"
entities for federal and state income tax purposes under the Internal Revenue
Code and various state statutes. As such, all income is taxable directly to the
stockholders and members and no provisions have been made for income taxes in
the accompanying consolidated financial statements. The P.C.'s distribute all
their income and thus have no income tax provisions, or associated deferred tax
assets (liabilities).
Reclassification: Certain items on the 2006 financial statements have been
reclassed to conform with the 2005 and 2004 presentation. The reclassifications
had no effect on the reported total assets, liabilities, equity or net income.
Note 2. Clinic Operating Agreements
Under the terms of agreements with various P.C.'s, VCA has granted the P.C.'s
nonexclusive and nontransferable licenses to use the proprietary treatment
method developed by VCA. In addition, the agreements make VCA the sole and
exclusive manager and administrator of all P.C. business functions, including
billings, collections and disbursements. The P.C.'s are included in the
consolidated financial statements due to meeting the requirements outlined in
Emerging Issues Task Force Issue No. 97-2.
Note 3 Net Patient Service Revenue
The Company has agreements with third-party payors that provide for payments to
the Company at amounts different from its established rates. Payment
arrangements include prospectively determined rates for reimbursed cost and
discounted charges. Net patient service revenue is reported at the estimated net
realizable amounts from patients and third-party payors.
A summary of the payment arrangements with major third-party payors follows:
o Medicare: Most outpatient services related to Medicare beneficiaries
are paid at prospectively determined rates per service.
o Other: Estimates for contractual allowances under managed care health
plans are based primarily on the payment terms of contractual
arrangements, such as predetermined rates per diagnosis, per diem rates
or discounted fee for service rates.
Approximately 21%, 8% and 5% of gross patient revenues for the years ended
December 31, 2006, 2005 and 2004, respectively, relates to services rendered to
patients covered by the Medicare program.
Laws and regulations governing the Medicare program are complex and subject to
interpretation. Management believes that it is in compliance with all applicable
laws and regulations and is not aware of any pending or threatened
investigations involving allegations of potential wrongdoing. While no such
regulatory inquiries have been made, compliance with such laws and regulations
can be subject to future government review and interpretation.
-10-
VEIN CLINICS OF AMERICA, INC. AND CONSOLIDATED AFFILIATES
Note 4. Equipment and Leasehold Improvements
Equipment and leasehold improvements consist of the following at December 31,
2006 and 2005:
2006 2005
--------- ----------
Leasehold improvements .................... $ 912,273 $ 942,669
Furniture and fixtures .................... 3,397,441 5,251,222
Aircraft and other transportation equipment 1,705,269 1,705,269
Data processing equipment ................. 785,877 821,387
---------- ----------
6,800,860 8,720,547
Less accumulated depreciation ............. 4,924,804 5,964,318
---------- ----------
$1,876,056 $2,756,229
========== ==========
Note 5. Notes Payable and Pledged Assets
Notes payable consist of the following at December 31, 2006 and 2005:
2006 2005
------ ---------
Line of credit, collateralized by the assets of VCA,
variable interest, 6.75% at December 31, 2005,
$800,000 available, through December 31, 2049........... $ -- $ 505,000
Line of credit, collateralized by the assets of HTGT,
variable interest, 6.75% at December 31, 2005,
$250,000 available, through June 23, 2007............... -- 146,000
-------- ----------
$ -- $ 651,000
======== ==========
-11-
VEIN CLINICS OF AMERICA, INC. AND CONSOLIDATED AFFILIATES
Note 6. Long-Term Debt and Pledged Assets
Long-term debt consists of the following at December 31, 2006 and 2005:
2006 2005
------------ ------------
Term loan, collateralized by the assets of VCA,
variable interest, 11.25% at December 31, 2006
payable in monthly installments of principal
ranging from $52,083 to $104,166, plus
interest, due August 1, 2011................................. . $4,739,583 $ --
Term loan, collateralized by the assets of VCA,
variable interest, 12.25% at December 31, 2006,
interest only due monthly, principal due
August 1, 2011................................................ 2,000,000 --
Term loans, collateralized by the assets of VCA.
these loans were paid in total in 2006........................ -- 768,121
Term loan, collateralized by the assets of VCA.
This loan was paid in total in 2005........................... -- --
Term loan, collateralized by the assets of BK.
this loan was paid off with the proceeds
of the note due August 18, 2008............................... -- 1,093,956
Term loan, collateralized by the assets of BK,
variable interest, 8.25% at December 31, 2006,
interest only due in monthyly installments, due
August 18, 2008............................................... 1,039,364 --
---------- -----------
Total ................................................... 7,778,947 1,862,077
Less current maturities....................................... (656,249) (282,677)
----------- -----------
$7,122,698 $1,579,400
=========== ===========
VCA stockholders have pledged stock as collateral on the VCA term loans under
pledge agreements. The VCA term loans were subject to certain financial
covenants. VCA also has a $2,000,000 revolving credit facility available from a
finance company. There were no borrowings outstanding against that facility at
December 31, 2006.
-12-
VEIN CLINICS OF AMERICA, INC. AND CONSOLIDATED AFFILIATES
Note 6. Long-Term Debt and Pledged Assets (Continued)
Aggregate maturities on long-term debt as of December 31, 2006 are due as
follows:
Year Ending December 31,
------------------------
2007 $ 656,249
2008 1,997,698
2009 1,177,080
2010 1,197,920
2011 2,750,000
-------------
$ 7,778,947
Note 7. Operating Leases
The Company's leases are primarily noncancelable obligations for office and
clinic space and generally include provisions requiring VCA to pay a
proportionate share of real estate taxes and operating expenses.
Future minimum payments under the Company's noncancelable operating leases are
as follows:
Year Ending December 31,
------------------------
2007 $ 922,500
2008 773,500
2009 528,500
2010 447,700
2011 358,800
Thereafter 413,600
-------------
$ 3,404,600
Rental expense, principally for office space, was approximately $1.2 million,
$0.9 million and $0.8 million for the years ended December 31, 2006, 2005 and
2004, respectively, and is included in other general and administrative expenses
on the consolidated statements of income.
Note 8. Defined Contribution Plan
The Company maintains a section 401(k) defined contribution plan covering
substantially all employees. The plan allows for a discretionary contribution
from the Company. No Company contributions were made for 2006, 2005 or 2004.
-13-
VEIN CLINICS OF AMERICA, INC. AND CONSOLIDATED AFFILIATES
VEIN CLINICS OF AMERICA, INC. AND CONSOLIDATED AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 9. Deferred Compensation Arrangements
The Company has entered into employment agreements with physicians at clinic
sites providing for deferred compensation to be accumulated over a physician's
first five years of employment. Accumulated balances are paid out during the
year following this term. These obligations are funded in physician designated
investment accounts and are recorded as accrued liabilities. At December 31,
2006, 2005 and 2004, these obligations totaled $638,532, $734,454 and $691,023,
respectively.
The deferred compensation at December 31, 2006 is due as follows:
2007 $ 176,156
2008 46,522
2009 74,067
2010 112,555
2011 229,232
----------
$ 638,532
Note 10..Variable Interest Entities and Adoption of Accounting Standard
The Company adopted the provisions of Financial Accounting Standards Board
Interpretation No. 46R (FIN 46R), Consolidation of Variable Interest Entities.
Management of the Company determined that Hair Today, Gone Tomorrow, LLC (HTGT)
and BK Aviation Group, LLC (BKA) are variable interest entities (VIEs) since
they require subordinated financial support. The Company and its related parties
have variable interests in these VIEs consisting of debt guarantees and
advances. These variable interests subject the Company to a majority of any
potential losses in these VIEs and, therefore, require the Company to
consolidate in these VIEs. BKA was formed in 2004 and is consolidated effective
on its formation date. Effective January 1, 2005, the Company was required to
consolidate in HTGT, and the difference between the carrying value of HTGT's
assets and liabilities of $1,197,377 at that date was recognized as a cumulative
effect of an accounting change.
On August 10, 2006, VCA entered into a debt agreement with Capital Source that
no longer permitted any financial support of HTGT by VCA. As a result, VCA no
longer is subject to any losses of this VIE and, thus, HTGT was deconsolidated
as of that date. The difference between the carrying value of HTGT's assets and
liabilities of $1,437,694, which were removed at the time of deconsolidation,
was recognized as an addition to retained earnings.
The results of operations for these VIEs have been included in the statement of
operations for the period they were consolidated.
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VEIN CLINICS OF AMERICA, INC. AND CONSOLIDATED AFFILIATES
Note 10. Variable Interest Entities (Continued)
The following table illustrates the relative significance of the VIEs as of and
for the years ended December 31:
BKA HTGT**
--- ----
2006
Revenue ................................. $ 138,959 $ 3,365,180 *
Net Income (loss) ....................... (385,709) 88,282 *
Assets, primarily property .............. 448,072 --
Liabilities, primarily note payable, bank 1,015,896 --
2005
Revenue ................................. $ 41,849 $ 6,167,752
Net Income (loss) ....................... (861,943) (51,457)
Assets, primarily property .............. 145,322 751,991
Liabilities, primarily note payable, bank 1,102,349 2,272,325
2004
Revenue ................................. $ 5,300 $ --
Net Income (loss) ....................... (722,186) --
* Through August 10, 2006.
**Results for all periods presented have been reported as a discontinued
operation.
The assets that are collateral for the debt of BKA consist of an airplane with a
net carrying value of $447,000. The creditors of the VIEs do not have recourse
to the general credit of the Company.
Note 11..Concentrations of Credit Risk
The Company grants credit without collateral to its patients, most of whom are
local residents and are insured under third-party agreements. The mix of
receivables from patients and third-party payors are as follows at December 31,
2006, 2005 and 2004:
2006 2005
---- ----
Medicare............................................ 13% 8%
Third-party payors and patients..................... 87% 92%
-----------------------
100% 100%
======================
Note 12..Professional Liability Risks
The Company insures for professional liability claims subject to applicable
deductible amounts through claims-made insurance coverage. Practicing physicians
maintain their own professional liability insurance coverage.
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VEIN CLINICS OF AMERICA, INC. AND CONSOLIDATED AFFILIATES
Note 13. Employment and Incentive Agreements
The Company has entered into employment and incentive agreements with key
executives and physicians. These agreements provide for certain payments based
on defined events or achievements of stated business objectives. Such amounts
are recorded as compensation expense as earned under the agreements.
Approximately $2 million, $1.9 million and $1 million, respectively, was
recorded as current liabilities, accrued salaries, at December 31, 2006 and
2005, respectively, under these agreements.
Note 14. Contingency and Subsequent Events
A former stockholder of two consolidated entities filed suit in 2005 against
those entities and their stockholders for damages related to the buy out of his
interests. Vein Clinics of America is not named in the suit. The former
stockholder was claiming damages of approximately $1.5 million with continuing
future rights. The Company believed at the time the 2006 consolidated financial
statements were issued that any obligation would be nominal and that its
position had merit and therefore no liability was recognized. Subsequent to the
issuance of the 2006 consolidated financial statements, the Company voluntarily
arbitrated this matter. Based on the arbitration and the sale of the Company
discussed below, the Company agreed to a settlement of approximately $1,050,000
in order to resolve this matter.
On August 8, 2007, Vein Clinics of America, Inc. was purchased by IntegraMed,
Inc.
Note 15. New Accounting Standards
In June 2006, the FASB issued Fin No. 48, Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109. The interpretation
clarifies the accounting and financial statement reporting for uncertainty in
income taxes recognized by prescribing a recognition threshold and measurement
attribute for a tax position taken or expected to be taken in a tax return. The
interpretation is effective for the Company for the year beginning January 1,
2007. The Company has not yet completed its analysis of the effects of this
interpretation and has not determined if the adoption of FIN 48 will have a
material impact on its financial statements.
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