Academy Financial Statements and Auditors' Report

December 31, 1987 and 1986

AUDITORS'REPORT

Board of Directors American Academy of Ophthalmology, Inc.

We have examined the balance sheets of the American Academy of Ophthalmology, Inc. (a nonprofit Minnesota corporation) as of December 31 , 1987 and 1986, and the related statements of revenues, expenses and changes in fund balance, and cash flows for the years then ended. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

In our opinion, the financial statements referred to above present fairly the financial position of the American Academy of Ophthalmology, Inc. at December 31, 1987 and 1986, and its revenues, expenses and changes in fund balance and cash flows for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis.

San Francisco, California March 16, 1988

Grant Thornton

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American Academy of Ophthalmology, Inc. BALANCE SHEETS

ASSETS

CASH AND CASH EQUIVALENTS INVESTMENTS-AT COST (NOTES A2 AND B) DUES AND ACCOUNTS RECEIVABLE, NET OF ALLOWANCE FOR DOUBTFUL

ACCOUNTS OF $144,000 IN 1987 AND $45,000 IN 1986 (NOTE A5) INVESTMENT INCOME RECEIVABLE INVENTORY (NOTE A3) PREPAID EXPENSES

FURNITURE, EQUIPMENT, LEASEHOLD IMPROVEMENTS AND LEASEHOLDS-at cost, less accumulated depreciation and amortization (notes A4 and C)

OTHER ASSETS

LIABILITIES AND FUND BALANCE

ACCOUNTS PAYABLE ACCRUED EXPENSES DEFERRED REVENUE (NOTES A5 AND D)

OTHER LIABILITIES

Total liabilities

COMMITMENTS AND CONTINGENCIES (note F) FUND BALANCE

The accompanying notes are an integral part of these statements.

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Year ended December 31

1987 1986

$ 435,025 $ 1,163,620 7,115,702 6,263,765

853,933 910,677 89,557 122,644

876,825 455,282 247,272 148,651

2,642,636 2,773,515 211,097 168,505

$12,472,047 $12,006,659

$ 973,750 $ 1 ,098,513 167,797 206,392

3,273,025 2,935,193 211,097 168,505

4,625,669 4,408,603

7,846,378 7,598,056

$12,472,047 $12,006,659

American Academy of Ophthalmology, Inc. STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN FUND BALANCE

Revenues Membership Education Meetings Ophthalmology Communications Personnel and Office Management Interest and dividends Gain on sale of long-term investments Other income

Total revenues

Expenses Membership Education Meetings Ophthalmology Communications Personnel and Office Management Governmental Relations Controller Planning State and Subspecialty Relations Health Policy Research Executive Vice Presidents Presidential Board of Councillors Board of Directors and Committees of the Board Standing Committees Special Committees Representatives Legal Loss on disposition of furniture, equipment, leasehold

improvements and leaseholds

Total expenses

Excess of revenues over expenses Fund balance, beginning of year

Fund balance, end of year

The accompanying notes are an integral part of these statements.

1987

$ 4,882,907 2,020,928 4,384,394

300,703 1,446,270

40,320 441,267 230,468 584,687

14,331,944

552,189 1,982,714 1,755,401

473,404 2,167,817 1,526,576

871,432 1,685,873

168,783 327,223 192,910 779,183 20,648 28,699

410,255 503,197 222,670

28,654 385,994

14,083,622

248,322 7,598,056

$ 7,846,378

Year ended December 31 1986

$ 4,649,264 1,686,288 3,686,131

323,793 1,087,134

531,608 229,754 182,121

12,376,093

530,795 1,789,355 1,747,639

561 ,171 1,607,904 1,490,840

771 ,557 1,444,635

110,352 279,645 131,033 722,417

2,074 10,263

340,640 156,762 112,905 31 ,673

200,022

7,315

12,048,997

327,096 7,270,960

$ 7,598,056

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American Aca~emy of Ophthalmology, Inc. STATEMENTS OF CASH FLOWS

Cash flows from operating activities Excess of revenues over expenses

Adjustments to reconcile net revenues over expenses to net cash provided by (used in) operating activities .

Depreciation and amortization Gain on sale of investments Loss on disposition of furniture, equipment, leasehold improvements

and leaseholds (Increase) in accounts receivable Increase (decrease) in allowance for doubtful accounts Decrease in investment income receivable (Increase) in inventory (Increase) decrease in prepaid expenses (Increase) in other assets (Decrease) increase in accounts payable (Decrease) increase in accrued expenses Increase in deferred revenue Increase in other liabilities

Net cash provided by operating activities

Cash flows from investing activities Proceeds from sale of investments Payment for purchases of investments Proceeds from sale of furniture Payments for purchase of furniture

Net cash used in investing activities

Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

The accompanying notes are an integral part of these statements.

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Year ended December 31 1987 1986

$ 248,322 $ 327,096

359,409 307,290 (205,107) (229,754)

7,315 (42,256) (491,100) 99,000 (9,352) 33,087 28,783

(421,543) (115,052) (98,621) 41,887 (42,592) (39,973)

(124,763) 213,234 (38,595) 71,336 337,832 375,237 42,592 39,973

(101,557) 199,824

146,765 526,920

3,946,277 2,854,301 (4,593,107) (2,475,210)

15,096 (228,530) (612,174)

(875,360) (217,987)

(728,595) 308,933 1,163,620 854,687

$ 435,025 $1,163,620

American Academy of Ophthalmology, Inc. NOTES TO FINANOAL STATEMENTS December 31, 1987 and 1986

NOTE A-SUMMARY OF BUSINESS AND ACCOUNTING POLICIES The American Academy of Ophthalmology, Inc. (the Academy) is the largest national organization for ophthalmologists. Its primary focus is to

provide continuing education opportunities for ophthalmologists through its annual scientific meeting, regional meetings, slide and videotape programs, and publications. The Academy also works to educate other health care providers and the public about eye care and represents ophthalmologists and their patients before the government and other organizations that influence the provision of eye care.

A summary of the significant accounting policies consistently applied in the preparation of the accompanying financial statements follows. The prior year information has been reclassified to conform to the current year presentation.

1. Accrual Basis The financial statements have been prepared on the accrual basis of accounting.

2. Investments Investments including cash or cash equivalents are stated at cost which approximates market.

3. Inventory Inventory consists of educational publications and manuals and is stated at the lower of cost or market. Cost is determined by the first-in, first-out method.

4. Depreciation and Amortization Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives using straight-line methods. Leasehold improvements and leaseholds are amortized over the lives of the leases or the service lives of the respective assets, whichever is shorter.

5. Revenues from Members • Dues are recorded by the Academy as revenues in the applicable membership period. • Subscription revenues are recognized when publications are issued.

6. Tax Exempt Status The Academy has been granted tax exempt status by the Internal Revenue Service, the California Franchise Tax Board and the Minnesota Department of Revenue as a professional association. The Academy is subject to tax on unrelated business income. Tax expense for 1987 and 1986 was $95,501 and $12,137, respectively.

NOTE B-INVESTMENTS Investments consist of the following at December 31:

1987 1986

Cost Market Cost Market

Liquid money market funds $2,843,313 $2,843,313 $ 871,207 $ 871,207

Corporate stocks 1,650,121 1,550,083 1,747,296 2,084,828 Corporate bonds 400,083 402,814 400,217 416,515 U.S. bonds and notes 2,222,185 2,267,460 3,245,045 3,387,800

$7,115,702 $7,063,670 $6,263,765 $6,760,350

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American Academy of Ophthalmology, Inc. NOTES TO FlNANCIAL STATEMENTS December 31, 1987 and 1986 (cont inued)

NOTE C-FURNITURE, EQUIPMENT, LEASEHOLD IMPROVEMENTS, AND LEASEHOLDS Furniture, equipment, leasehold improvements, and leaseholds are stated at cost and consist of the following at December 31:

Furniture and equipment Library Leasehold improvements-Vermont Avenue, Washington, D.C. Leasehold-Beach Street, San Francisco

Less accumulated depreciation and amortization

NOTE D-DEFERRED REVENUE

1987

$2,393,231 1,557

26,892 1,658,917

4,080,597 1,437,961

$2,642,636

1986

$2,189,060 1,557

26,892 1,634,558

3,852,067 1,078,552

$2,773,515

Amounts billed or received in the current year and which will be reflected as revenue in the following year are as follows at December 31:

1987 1986

Membership dues $2,915,004 $2,638,450 Module subscriptions 197,106 150,918 Candidate fees 32,650 49,200 Other 128,265 96,625

$3,273,025 $2,935,193

NOTE E-PENSION PLAN The Academy provides retirement benefits to its employees through an annuity purchase plan which became effective January I, 1979. There are

no past service costs, and pension costs are paid as incurred. Vesting commences after five years of service and participants are fully vested after ten years of service. Vested benefits do not exceed the amounts contributed to the plan. Pension plan expense for 1987 and 1986 approximated $250,600 and $259,700, respectively.

NOTE F-COMMITMENTS AND CONTINGENCIES The Academy conducts a portion of its operations in leased facilities under noncancelable operating leases expiring at various dates through 2005.

Rental expense for 1987 and 1986 approximated $1,165,233 and $1,109,900, respectively.

Minimum rental commitments under operating leases are as follows:

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Year ending December 31

1988 1989 1990 1991 1992

1993 through 2005

Total minimum payments required

$ 1,121,158 967,252

1,008,820 1,103,244 1,103,244

14,750,372

$20,054,090

American Academy of Ophthalmology, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 1987 and 1986 (continued)

During 1985 the Academy entered into an equity participation lease of a commercial building at 655 Beach Street. The term of the lease is twenty years with two renewal options of seven years each. Included in the schedule of lease payments above are annual lease payments (including common area maintenance) of approximately $962,000 for each of the next two years and approximately $1, 103,000 for each of the remaining fifteen years. Under the terms of the equity participation agreement, the Academy has certain rights, including the right offirst refusal for expansion of office space, participation in certain rental income and participation in any gains realized from the sale or refinancing of the property. The Academy's cost of approximately $1,600,000 for the leasehold will be amortized over the life ofthe lease. Any gains on sale or refinancing will be deferred and amortized over the remaining life of the lease. Annual rental income will be treated as a reduction of rent expense in the year received. The Academy's equity participation interest is secured by a deed of trust which is subordinated to any and all collateralized debt on the property.

The Academy has been named a defendant in an antitrust litigation which is expected to come to trial in 1988. The maximum exposure to the Academy cannot be estimated at this time, and management believes that the action will not have a material adverse effect on its financial position or results of operations.

NOTE G-RELATED PARTY TRANSACTIONS The Academy had the following transactions with affiliates:

During the years ended December 31, 1987 and 1986, the Academy contributed $150,470 and $126,712, respectively, to the Foundation of the American Academy of Ophthalmology (the Foundation). In addition, at December 31,1987 and 1986, $21,476 and $94,495, respectively, was receivable by the Academy from the Foundation for operating expenses the Academy had paid on the Foundation's behalf.

The Academy pays the administrative expenses for the American Academy of Ophthalmology, Inc. Political Committee (OPHTHPAC), a separate segregated fund of the Academy, organized exclusively to solicit, receive, and make contributions for the purpose ofinfiuencing the federal election of persons who have indicated an interest and favorable attitude towards the views and objectives ofOPHTHPAC and the Academy. These expenses approximated $42,700 and $49,000, in 1987 and 1986, respectively.

The Academy uses the electronic mail service of Academy Services, a wholly owned for-profit subsidiary. In addition, the Academy advanced certain operating expenses for Academy Services which will be reimbursed as cash becomes available. As of December 31, 1987 and 1986, Academy Services owed the Academy $47,358 and $3,559, respectively.

During 1987, the Academy paid certain operating expenses of Academy Insurance Management Services, Inc. (AIMS), a wholly-owned subsidiary of Academy Services, Inc. As of December 31, 1987 AIMS owed the Academy $67,696, which will be reimbursed as cash becomes available.

The Academy is under contract to provide management services for the American Society of Ophthalmic Registered Nurses, Inc. (ASORN). At December 31, 1987, ASORN owed the Academy $4,179 for these services.

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