Our company, VCA Antech, Inc. (“VCA”) is a Delaware corporation formed in 1986 and is based in Los Angeles, California. We are an animal healthcare company with three strategic segments: animal hospitals (“Animal Hospital”), veterinary diagnostic laboratories (“Laboratory”), and veterinary medical technology (“Medical Technology”).

 

Our animal hospitals offer a full range of general medical and surgical services for companion animals. Our animal hospitals treat diseases and injuries, provide pharmaceutical products and perform a variety of pet-wellness programs, including health examinations, diagnostic testing, vaccinations, spaying, neutering and dental care. At December 31, 2010, we operated 528 animal hospitals throughout 41 states.

 

We operate a full-service veterinary diagnostic laboratory network serving all 50 states and certain areas in Canada. Our laboratory network provides sophisticated testing and consulting services used by veterinarians in the detection, diagnosis, evaluation, monitoring, treatment and prevention of diseases and other conditions affecting animals. At December 31, 2010, we operated 50 laboratories of various sizes located strategically throughout the United States and Canada.

 

Our Medical Technology segment sells digital radiography and ultrasound imaging equipment, provides education and training on the use of that equipment, provides consulting and mobile imaging services, and sells software and ancillary services to the veterinary market.

 

 

 

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, and include the accounts of our parent company, all majority-owned subsidiaries where we have control and certain veterinary medical groups to which we provide services as discussed below. We have eliminated all intercompany transactions and balances.

 

We provide management services to certain veterinary medical groups in states with laws that prohibit business corporations from providing or holding themselves out as providers of veterinary services. At December 31, 2010, we operated 166 animal hospitals in 15 of these states. In these states, we provide administrative and support services to the veterinary medical groups. Pursuant to the management agreements, the veterinary medical groups are each solely responsible for all aspects of the practice of veterinary medicine, as defined by their respective state.

 

We have determined that the veterinary medical groups are variable interest entities as defined by the Financial Accounting Standards Board (“FASB”), and that we have a variable interest in those entities through our management agreements. We also determined that our variable interests in these veterinary medical groups, in aggregate with the variable interests held by our related parties, provide us with the power to direct the activities of these groups that most significantly impact their economic performance and obligate us to absorb losses that could potentially be significant or the right to receive benefits from the veterinary medical groups that could potentially be significant. Based on these determinations, we consolidated the veterinary medical groups in our consolidated financial statements. In June 2009, the FASB issued new accounting guidance on consolidations; see Note 2v, Recent Accounting Pronouncements, for a discussion of the January 1, 2010 adoption of this new guidance.

 

 

The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and contingent liabilities at the date of our consolidated financial statements and our reported amounts of revenue and expense during the reporting period. Actual results could differ from our estimates.

 

 

We recognize revenue, barring other facts, when the following revenue recognition criteria are met:

 

 

Revenue is reported net of sales discounts and excludes sales taxes.

 

We generally recognize revenue and costs as follows:

 

 

We account for revenue in our Medical Technology business as follows, depending upon the item sold:

 

 

 

 

In certain transactions we sell our ultrasound imaging equipment and related services together with our digital radiography imaging equipment and related services. In these transactions, we account for each item under its respective literature and allocate revenue based upon the relative selling prices.

 

We defer revenue for certain transactions in our Medical Technology business as follows:

 

 

As a result of these policies, we have deferred revenue and costs at December 31, 2010 and 2009 consisting of the following (in thousands):

 

 

 

 

 

Direct costs are comprised of all service and product costs, including but not limited to, salaries of veterinarians, technicians and other hospital-based and laboratory-based personnel, transportation and delivery costs, facilities rent, occupancy costs, supply costs, depreciation and amortization, certain marketing and promotional expenses and costs of goods sold.

 

 

We consider only highly liquid investments with original maturities of less than 90 days to be cash equivalents. We maintain balances in our bank accounts that are in excess of FDIC insured levels.

 

 

Our inventory consists primarily of finished goods and includes imaging equipment, pet food and products and medical supplies. It is valued at the lower of cost or market using the first-in, first-out method and is adjusted for estimated obsolescence and written down to net realizable value based upon estimates of future demand, technology developments and market conditions.

 

 

Property and equipment is recorded at cost. Equipment held under capital leases is recorded at the lower of the present value of the minimum lease payments or the fair value of the equipment at the beginning of the lease term.

 

We develop and implement new software to be used internally, or enhance our existing internal software. We develop the software using our own employees and/or outside consultants. Costs associated with the development of new software are expensed as incurred. Costs related directly to the software design, coding, testing and installation are capitalized and amortized over the expected life of the software. Costs related to upgrades or enhancements of existing systems are capitalized if the modifications result in additional functionality.

 

Depreciation and amortization are recognized on the straight-line method over the following estimated useful lives:

 

 

Depreciation and amortization expense, including the amortization of property under capital leases, in 2010, 2009 and 2008 was $36.7 million, $31.8 million and $25.9 million, respectively.

 

Property and equipment at December 31, 2010 and 2009 consisted of (in thousands):

 

 

Accumulated amortization on buildings and equipment held under capital leases amounted to $4.6 million and $3.7 million at December 31, 2010 and 2009, respectively.

 

 

Most of our facilities are under operating leases. The minimum lease payments, including predetermined fixed escalations of the minimum rent, are recognized as rent expense on a straight-line basis over the lease term as defined in the FASB’s accounting guidance pertaining to leases. The lease term includes contractual renewal options that are reasonably assured based on significant leasehold improvements acquired. Any leasehold improvement incentives paid to us by a landlord are recorded as a reduction of rent expense over the lease term.

 

 

Goodwill represents the excess of the cost of an acquired entity over the net of the fair value of identifiable assets acquired and liabilities assumed.

 

In accordance with the FASB’s accounting guidance pertaining to goodwill and other intangibles, we have determined that we have three reporting units, Animal Hospital, Laboratory and Medical Technology, and we estimate annually, or sooner if circumstances indicate an impairment may exist, the fair value of each of our reporting units and compare their estimated fair value against the net book value of those reporting units to determine if our goodwill is impaired.

 

Our estimated fair values are calculated in accordance with generally accepted accounting principles related to fair value and utilize valuation methods consisting primarily of discounted cash flow techniques, and market comparables, where applicable. These valuation methods involve the use of significant assumptions and estimates such as forecasted growth rates, valuation multiples, the weighted-average cost of capital, and risk premiums. We provide no assurance that forecasted growth rates, valuation multiples, and discount rates will not deteriorate. We will continue to analyze changes to these assumptions in future periods.

 

In 2010, 2009 and 2008, we determined that the estimated fair value of each of our reporting units exceeded their respective net book value, resulting in a conclusion that none of the goodwill of our reporting units was impaired. However, changes in our estimates, such as forecasted cash flows, would affect the estimated fair value of our reporting units and could have resulted in a goodwill impairment charge particularly for our Animal Hospital and Medical Technology reporting units. The fair value of our Laboratory reporting unit significantly exceeded its respective book value. However, the calculated fair value of our Animal Hospital and Medical Technology reporting units exceeded their respective carrying values by a much narrower margin. There is approximately $966.0 million and $29.7 million of goodwill associated with the Animal Hospital and Medical Technology reporting units respectively. While management does not believe that impairment is probable, the performance of these business units requires continued improvement in future periods to sustain their carrying value. The amount of any future impairment is dependent on the performance of the business which is dependent upon a number of variables, especially revenue growth, which cannot be predicted with certainty.

 

We adopted the end of October as our annual impairment testing date, which allows us time to complete our impairment testing process in order to incorporate the results in our annual financial statements and timely file those statements with the Securities Exchange Commission in accordance with our accelerated filing requirements. We have not had an impairment charge since the adoption of current accounting guidance related to goodwill impairment.

 

The following table presents the changes in the carrying amount of our goodwill for 2010 and 2009 (in thousands):

 

 

 

 

 

In addition to goodwill, we have amortizable intangible assets at December 31, 2010 and 2009, as follows (in thousands):

 

 

Amortization is recognized on the straight-line method over the following estimated useful lives:

 

 

The following table summarizes our aggregate amortization expense related to other intangible assets (in thousands):

 

 

The estimated amortization expense related to intangible assets for each of the five succeeding years and thereafter at December 31, 2010 is as follows (in thousands):

 

 

 

We account for income taxes under the FASB’s accounting guidance on income taxes. In accordance with the guidance, we record deferred tax liabilities and deferred tax assets, which represent taxes to be recovered or settled in the future. We adjust our deferred tax assets and deferred tax liabilities to reflect changes in tax rates or other statutory tax provisions. We make judgments in assessing our ability to realize future benefits from our deferred tax assets, which include operating and capital loss carryforwards. As such, we have a valuation allowance to reduce our deferred tax assets for the portion we believe will not be realized. Changes in tax rates or other statutory provisions are recognized in the period the change occurs. We also assess differences between our probable tax bases and the as-filed tax bases of certain assets and liabilities.

 

We account for unrecognized tax benefits also in accordance with the FASB’s accounting guidance on income taxes which prescribes a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation, based solely on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. We did not have any unrecognized tax benefits on December 31, 2010.

 

 

Notes receivable are financial instruments issued in the normal course of business and are not market traded. The amounts recorded approximate fair value and are shown net of valuation allowances. There were no valuation allowances recorded as of December 31, 2010 and December 31, 2009. The notes bear interest at rates varying from 3.9% to 8.0% per annum.

 

 

Deferred financing costs are amortized using the effective interest method over the life of the related debt. Accumulated amortization of deferred financing costs was $574,000 and $1.9 million at December 31, 2010 and 2009, respectively.

 

 

The carrying amount reported in our consolidated balance sheets for cash, cash equivalents, trade accounts receivable, accounts payable and accrued liabilities approximates fair value because of the immediate or short-term maturity of these financial instruments. Our policy is to place our cash and cash equivalents in highly-rated financial instruments and institutions, which we believe mitigates our credit risk. Concentration of credit risk with respect to accounts receivable is limited due to the diversity of our customer base. We routinely review the collection of our accounts receivable and maintain an allowance for potential credit losses, but historically have not experienced any significant losses related to an individual customer or groups of customers in a geographic area.

 

Our operations depend, in some cases, on the ability of single source suppliers or a limited number of suppliers, to deliver products and supplies on a timely basis. We have in the past experienced, and may in the future experience, shortages of or difficulties in acquiring products and/or supplies in the quantities and of the quality needed. Shortages in the availability of products and/or supplies for an extended period of time will have a negative impact on our operating results.

 

 

In accordance with the FASB’s accounting guidance pertaining to derivatives and hedging, all investments in derivatives are recorded at fair value. A derivative is typically defined as an instrument whose value is “derived” from an underlying instrument, index or rate, has a notional amount, requires little or no initial investment and can be net settled. Our derivatives are reported as current assets and liabilities or other non-current assets or liabilities as appropriate.

 

We use interest rate swap agreements to mitigate our exposure to increasing interest rates as well as to maintain an appropriate mix of fixed-rate and variable-rate debt. If we determine that contracts are effective at meeting our risk reduction and correlation criteria, we account for them using hedge accounting. Under hedge accounting, we recognize the effective portion of changes in the fair value of the contracts in other comprehensive income and the ineffective portion in earnings. If we determine that contracts do not, or no longer meet our risk reduction and correlation criteria, we account for them under a fair-value method recognizing changes in the fair value in earnings in the period of change. If we determine that a contract no longer meets our risk reduction and correlation criteria or if the derivative expires, we recognize in earnings any accumulated balance in other comprehensive income (loss) related to this contract in the period of determination. For interest rate swap agreements accounted for under hedge accounting, we assess the effectiveness based on changes in their intrinsic value with changes in the time value portion of the contract reflected in earnings. All cash payments made or received under the contracts are recognized in interest expense.

 

Credit exposure associated with non-performance by the counterparties to derivative instruments is generally limited to the uncollateralized fair value of the asset related to instruments recognized in the consolidated balance sheets. We attempt to mitigate the risk of non-performance by selecting counterparties with high credit ratings and monitoring their creditworthiness and by diversifying derivative amounts with multiple counterparties.

 

The contractual or notional amounts for derivatives are used to calculate the exchange of contractual payments under the agreements and are not representative of the potential for gain or loss on these instruments. Interest rates affect the fair value of derivatives. The fair values generally represent the estimated amounts that we would expect to receive or pay upon termination of the contracts at the reporting date. The fair values are based upon dealer quotes when available or an estimate using values obtained from independent pricing services, costs to settle or quoted market prices of comparable instruments.

 

 

Marketing and advertising costs are expensed as incurred. Total marketing and advertising expense included in direct costs amounted to $21.7 million, $19.9 million and $17.5 million for 2010, 2009 and 2008, respectively. Total marketing and advertising expense included in selling, general and administrative expense amounted to $2.8 million, $2.0 million and $2.1 million for 2010, 2009 and 2008, respectively.

 

 

We use a combination of insurance and self-insurance with high retention or high-deductible provisions for a number of risks, including workers’ compensation, general liability, property insurance and our group health insurance benefits.

 

Liabilities associated with these risks are estimated at fair value on an undiscounted basis by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions.

 

 

We accrue the cost of basic product warranties included with the sale of our digital radiography imaging equipment and our ultrasound imaging equipment at the time we sell these units to our customers. Our warranty costs are primarily for our assistance in helping our customers resolve issues with the warranties they have with the original equipment manufacturers. We estimate our warranty costs based on historical warranty claim experience. Accrued warranty costs at December 31, 2010 and 2009 were $66,000 and $108,000, respectively.

 

 

Basic earnings per share is calculated by dividing net income by the weighted-average number of shares outstanding during the period. Diluted earnings per share is calculated by dividing net income by the weighted-average number of common shares outstanding after giving effect to all potentially dilutive common shares outstanding during the period. Basic and diluted earnings per share were calculated as follows (in thousands, except per share amounts):

 

 

For the years ended December 31, 2010, 2009 and 2008, potential common shares of 11,763, 48,008 and 51,462, respectively, were excluded from the computation of diluted earnings per share because their inclusion would have had an anti-dilutive effect.

 

 

We account for share-based compensation in accordance with FASB’s accounting guidance on stock compensation. Accordingly, we measure the cost of share-based payments based on the grant-date fair value of the equity instruments and recognize the cost over the requisite service period, which is typically the vesting period.

 

Our company’s share-based employee compensation plans are described further in Note 8, Share-Based Compensation.

 

 

Effective January 1, 2009, we adopted the provisions of the FASB’s revised accounting guidance on business combinations, which retained the underlying concepts in that all business combinations continued to be accounted for at fair value under the acquisition method of accounting, however changed the application of the acquisition method in a number of significant respects. Acquisition costs will generally be expensed as incurred; non-controlling interests will be valued at fair value at the acquisition date; restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. The revised business combination guidance was effective on a prospective basis for all of our business combinations for which the acquisition date is on or after January 1, 2009, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. The revised business combination guidance amends the FASB’s accounting guidance pertaining to income taxes such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of the revised business combination guidance would also apply the provisions of the FASB’s business combination guidance.

 

 

In January 2010, the FASB amended accounting guidance pertaining to fair value measurements and disclosures to improve the disclosure requirements and increase the transparency in financial reporting. The amended guidance requires new disclosures as follows: separate disclosure of significant transfers in and out of Level 1 and 2 fair value measurements along with a description of the reasons for the transfers; and in the reconciliation for fair value measurements using significant unobservable inputs (Level 3) present separately information about purchases, sales, issuances, and settlements. Additionally, this new accounting guidance clarifies the level of disaggregation required and the required disclosures about inputs and valuation techniques. The new disclosures and clarifications of existing disclosures were effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this new guidance did not impact our consolidated financial statements.

 

 

Certain reclassifications have been made herein to prior year balances to conform to the 2010 financial statement presentation.

 

 

We incurred marketing expense for vaccine reminders and other direct mail services provided by ThinkPets, a company that is majority owned by Robert L. Antin, our Chief Executive Officer and Chairman. We purchased services of $2.8 million, $2.7 million and $2.1 million for 2010, 2009 and 2008, respectively. Arthur J. Antin, our Chief Operating Officer, owns an 8% interest in ThinkPets.

 

In 2003, we entered into an agreement with ThinkPets pursuant to which we acquired all of ThinkPets’ right, title, and interest in and to certain software in exchange for all our preferred stock of ThinkPets then held by us. Concurrent with the purchase of the software, we granted to ThinkPets a limited royalty-free, non-exclusive license to this software in exchange for ThinkPets providing certain support for the software. Both we and ThinkPets have a right to make modifications to the software, but all modifications and derivative works are owned by us. The software is hosted at our expense at a third-party hosting facility for the benefit of both parties.

 

 

Frank Reddick joined our company as a director in February 2002 and is a partner in the law firm of Akin Gump Strauss Hauer & Feld, LLP (“Akin”). Akin provided legal services to us during 2010, 2009 and 2008. The amount paid by our company to Akin for these legal services was $2.3 million, $1.3 million and $600,000 in 2010, 2009 and 2008, respectively.

 

 

In 2006, we entered into a pharmacy distribution agreement with Strategic Pharmaceutical Solutions, Inc. (“VetSource”) a start-up pharmacy distribution company. Pursuant to the terms of this agreement we are entitled to one representative on the VetSource Board of Directors. Under the agreement we promote the use of VetSource as the preferred provider of pharmaceutical products to VCA animal hospitals. The agreement has a five-year term and will renew for one year terms unless either party provides written notice of termination to the other party at least 120 days prior to expiration of the then current term. The amount paid by our company to VetSource for pharmaceutical products was $41.9 million, $38.3 million and $22.7 million in 2010, 2009 and 2008, respectively.

 

On April 8, 2010, pursuant to our warrant agreement we purchased 34% of the outstanding preferred stock of VetSource for $1.0 million. We account for this investment using the cost basis method. In addition, we entered into a consulting agreement whereby VCA received a fee of $1.0 million for advisory services provided to VetSource management in 2010.

 

Other accrued liabilities consisted of the following (in thousands):

 

 

Long-term obligations consisted of the following at December 31, 2010 and 2009 (in thousands):

 

 

The annual aggregate scheduled maturities of our long-term obligations for the five years subsequent to December 31, 2010 are presented below (in thousands):

 

 

Senior Credit Facility

 

In May 2005, we entered into a senior credit facility with various lenders for $550.0 million of senior secured credit facilities with Goldman Sachs Credit Partners, L.P. as the syndication agent and Wells Fargo Bank, N.A. as the administrative agent. At the time of entering into the senior credit facility, it included $475.0 million of senior term notes and a $75.0 million revolving credit facility.

 

In June 2007, we amended our senior credit facility to allow for additional senior term notes in the amount of $160.0 million. The funds borrowed from the additional senior term notes were primarily used to fund the acquisition of Healthy Pet on June 1, 2007. The terms, including the interest rate, of these additional senior term notes are the same as the senior term notes existing prior to the amendment. In connection with this amendment, we paid financing costs in the amount of $926,000.

 

In August 2010, we entered into a new senior credit facility with various lenders for $600 million of senior secured credit facilities with Bank of America, N.A. as the syndication agent and Wells Fargo Bank, N.A. as the administrative agent, collateral agent, issuing bank and swing line lender. The new credit facility provided $500 million of senior term notes and a $100 million revolving credit facility, which may be used to borrow, on a same-day notice under a swing line, the lesser of $10 million and the aggregate unused amount of the revolving credit facility then in effect. The terms of the new senior credit facility are discussed below in this footnote. The funds borrowed under the new senior term notes were used to retire our existing senior term notes described above in the principal amount of $505.4 million. In connection with the refinancing transactions, we wrote off previously deferred financing costs and paid financing costs. We incurred $9.4 million in debt retirement costs, of which approximately $2.1 million, or $1.3 million after tax were recognized as part of income from continuing operations and approximately $7.3 million were capitalized as deferred financing costs. Included in the $2.1 million of debt retirement costs included in income from continuing operations was approximately $192,000 in previously deferred financing costs that were written off as part of the transaction.

 

Interest Rate.  In general, borrowings under the senior term notes and the revolving credit facility bear interest, at our option, on either:

 

 

 

The base rate for the previous senior term notes existing from May 2005 to August 2010 is the higher of (a) Wells Fargo’s prime rate or (b) the Federal funds rate plus 0.5%. The base rate for the new senior term notes existing since August 2010 is a rate per annum equal to the greatest of Wells Fargo’s prime rate in effect on such day, the Federal funds effective rate in effect on such day plus 0.5% and the adjusted Eurodollar rate for a one-month interest period commencing on such day plus 1.0%. The adjusted Eurodollar rate is defined as the rate per annum obtained by dividing (1) the rate of interest offered to Wells Fargo on the London interbank market by (2) a percentage equal to 100% minus the stated maximum rate of all reserve requirements applicable to any member bank of the Federal Reserve System in respect of “Eurocurrency liabilities.”

 

Maturity and Principal Payments.  The new senior term notes mature on August 19, 2015. Principal payments on the senior term notes are paid quarterly in the amount of $6.3 million for the first two years beginning on December 31, 2010, quarterly payments of $9.4 million for the two years following, and quarterly payments of $12.5 million for the three quarters prior to maturity at which time the remaining balance is due. The following table sets forth the remaining scheduled principal payments for our senior term notes (in thousands):

 

 

The revolving credit facility has a commitment fee equal to 0.50% per annum on the unused portion of the commitment. The revolving credit facility matures on August 19, 2015. Principal payments on the revolving credit facility are made at our discretion with the entire unpaid amount due at maturity. At December 31, 2010, we had no borrowings under our revolving credit facility.

 

Guarantees and Security.  We and each of our wholly-owned subsidiaries guarantee the outstanding debt under the senior credit facility. These borrowings, along with the guarantees of the subsidiaries, are further secured by substantially all of our consolidated assets. In addition, these borrowings are secured by a pledge of substantially all of the capital stock, or similar equity interests, of our wholly-owned subsidiaries.

 

Debt Covenants.  The senior credit facility contains certain financial covenants pertaining to fixed charge coverage and leverage ratios. In addition, the senior credit facility has restrictions pertaining to capital expenditures, acquisitions and the payment of cash dividends on all classes of stock. At December 31, 2010, we had a fixed charge coverage ratio of 1.61 to 1.00, which was in compliance with the required ratio of no less than 1.20 to 1.00, and a leverage ratio of 1.94 to 1.00, which was in compliance with the required ratio of no more than 3.00 to 1.00.

 

Interest Rate Swap Agreements

 

In the past we have entered into interest rate swap agreements whereby we pay the counterparty amounts based on a fixed interest rate and set notional principal amount in exchange for the receipt of payments from the counterparty based on current LIBOR and the same set notional principal amount. We use interest rate swap agreements to mitigate our exposure to increasing interest rates as well as to maintain an appropriate mix of fixed-rate and variable-rate debt.

 

During 2010, all of our interest rate swap agreements had expired and we have not entered into any new agreements.

 

The following table summarizes cash received or cash paid and unrealized gains or losses recognized as a result of our interest rate swap agreements (in thousands):

 

 

 

 

 

On January 1, 2008, we adopted the applicable provisions of the new accounting guidance on fair value measurements which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements related to financial instruments. On January 1, 2009, we adopted the new guidance for our non-financial assets and non-financial liabilities measured on a non-recurring basis. As of December 31, 2010, we do not have any applicable non-recurring measurements of non-financial assets and non-financial liabilities.

 

Current fair value accounting guidance includes a hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions. The current guidance establishes a three-tiered fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:

 

 

Fair Value of Financial Instruments

 

The FASB accounting guidance requires disclosure of fair value information about financial instruments, whether or not recognized in the accompanying consolidated balance sheets. Fair value as defined by the guidance is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value estimates of financial instruments are not necessarily indicative of the amounts we might pay or receive in actual market transactions. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

 

Cash and Cash Equivalents.  These balances include cash and cash equivalents with maturities of less than three months. The carrying amount approximates fair value due to the short-term maturities of these instruments.

 

Receivables, Less Allowance for Doubtful Accounts, Accounts Payable and Certain Other Accrued Liabilities.  Due to their short-term nature, fair value approximates carrying value.

 

Long-Term Debt.  The fair value of debt at December 31, 2010 is based upon the ask price quoted from an external source, which is considered a Level 2 input. At December 31, 2009, due to changes in the credit markets, we did not believe current pricing levels provided a reasonable estimate of fair value. As such, we estimated the fair value of our variable-rate debt using discounted cash flow techniques utilizing current market rates, which incorporated our credit risk.

 

The following table reflects the carrying value and fair value of our variable-rate long-term debt (in thousands):

 

 

Interest Rate Swap Agreements.  We use the market approach to measure fair value for our interest rate swap agreements. The market approach uses prices and other relevant information generated by market transactions involving comparable assets or liabilities. As of December 31, 2010 all of our interest rate swap agreements had expired.

 

The following table reflects the fair value of our interest rate swap agreements, which is measured on a recurring basis as defined by the FASB accounting guidance (in thousands):

 

 

 

We have not paid cash dividends on our common stock and we do not anticipate paying cash dividends in the foreseeable future. In addition, our senior credit facility places limitations on our ability to pay cash dividends or make other distributions in respect of our common stock. Specifically, our senior credit facility dated August 19, 2010 prohibits us from declaring, ordering, paying, or setting apart any sum for any dividends or other distributions on account of any shares of any class of stock, other than dividends payable solely in shares of stock to holders of such class of stock. Any future determination as to the payment of dividends will depend on our results of operations, financial condition, capital requirements and other factors deemed relevant by our Board of Directors, including the General Corporation Law of the State of Delaware, which provides that dividends are only payable out of surplus or current net profits.

 

Stock Incentive Plans

 

At December 31, 2010, there were stock options, non-vested shares and restricted stock units outstanding under our existing stock incentive plans. We maintain three plans: the 1996 Stock Incentive Plan; the 2001 Stock Incentive Plan; and the 2006 Equity Incentive Plan (“2006 Plan”). New options and other stock awards may only be granted under the 2006 Plan. At December 31, 2010, the sum of the shares previously issued pursuant to awards under the 2006 Plan and the shares of common stock remaining available for future issuance under the 2006 Plan to our employees, directors, consultants and those of our affiliates is 6,670,435 shares. The number of shares of common stock remaining available for future issuance under the 2006 Plan may increase by any shares of common stock underlying prior outstanding options that expire, are forfeited, cancelled or terminate for any reason without having been exercised in full. The number of shares available for issuance at December 31, 2010 was 4,561,931. Outstanding options and non-vested shares granted under our plans typically vest over periods that range from two to five years, and outstanding options typically expire between five and ten years from the date of grant.

 

Stock Option Activity

 

A summary of our stock option activity for 2010 is as follows (in thousands, except weighted-average exercise price and weighted-average remaining contractual term):

 

 

The weighted-average grant-date fair value of our stock options granted during 2008 was $5.85. There were no stock options granted during 2010 and 2009. The aggregate intrinsic value of our stock options exercised during 2010, 2009 and 2008 was $3.3 million, $7.3 million and $5.8 million, respectively. The actual tax benefit realized on options exercised during 2010, 2009 and 2008 was $1.3 million, $2.8 million and $2.2 million, respectively. The total fair value of options vested during 2010, 2009 and 2008 was $2.1 million, $72,000 and $3.1 million, respectively.

 

The following table summarizes information about the options outstanding at December 31, 2010 (in thousands, except per share amounts and the weighted-average remaining contractual life):

 

 

At December 31, 2010, there was $1.6 million of total unrecognized compensation cost related to our stock options. This cost is expected to be recognized over a weighted-average period of over one year.

 

Calculation of Fair Value

 

The fair value of our options is estimated on the date of grant using the Black-Scholes option pricing model. We amortize the fair value of our options on a straight-line basis over the requisite service period. There were no options granted during 2010 and 2009.

 

We use historical data to estimate pre-vesting option forfeitures. We recognize share-based compensation only for those awards that we expect to vest.

 

The compensation cost that has been charged against income for stock options was $2.6 million, $1.9 million and $1.7 million for 2010, 2009 and 2008, respectively. The corresponding income tax benefit recognized in the income statement was $1.0 million, $0.8 million and $0.6 million for 2010, 2009 and 2008, respectively.

 

Non-Vested Shares

 

Additionally, under our 2006 Plan, we have issued non-vested stock awards in our common stock to certain employees and members of our Board of Directors. The non-vested stock awards to employees and executives generally vest as follows: 25% on the second anniversary of the grant date; 50% on the third anniversary of the grant date; and 25% on the fourth anniversary of the grant date. The non-vested stock awards to members of our Board of Directors generally vest in equal annual installments over three years from the date of grant. Total compensation expense related to non-vested stock awards was $6.7 million, $6.0 million and $5.5 million in 2010, 2009 and 2008, respectively. The corresponding income tax benefit recognized in the income statement was $2.6 million, $2.3 million and $2.1 million for 2010, 2009 and 2008, respectively. As of December 31, 2010 there was $8.7 million of unrecognized compensation cost related to these non- vested shares that will be recognized over a weighted-average period of three years. A summary of our non-vested stock activity for 2010 is as follows: