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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD FROM JANUARY 1, 2003 TO MARCH 31, 2003
COMMISSION FILE NUMBER: 0-29302
TLC VISION CORPORATION
(Exact name of registrant as specified in its charter)
NEW BRUNSWICK, CANADA 980151150
(State or jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5280 SOLAR DRIVE, SUITE 300 L4W 5M8
MISSISSAUGA, ONTARIO (Zip Code)
(Address of principal executive offices)
Registrant's telephone, including area code: (905) 602-2020
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. __X__ Yes ____ No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). __X__ Yes ____ No
As of May 12, 2003 there were 64,132,250 of the registrant's Common Shares
outstanding.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Statements of Operations for the
three months ended March 31, 2003 and 2002
Consolidated Balance Sheets at March 31, 2003 and
December 31, 2002
Consolidated Statements of Cash Flows for the three
months ended March 31, 2003 and March 31, 2002
Consolidated Statement of Stockholders' Equity
Notes to Interim Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market
Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matter to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on 8-K
Signatures
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
TLC VISION CORPORATION
CONSOLIDATED STATEMENTS OF
OPERATIONS (UNAUDITED)
(In thousands except per share amounts)
THREE MONTHS ENDED MARCH 31,
-------------------------------------
2003 2002
-------- --------
Revenues
Refractive
Owned ........................... $ 15,276 $ 14,574
Managed ......................... 15,647 18,096
Access .......................... 10,929 --
Other healthcare services .............. 11,738 4,272
-------- --------
Total revenues ............................ 53,590 36,942
-------- --------
Cost of revenues
Refractive
Owned ........................... 11,897 10,541
Managed ......................... 10,646 11,223
Access .......................... 7,162 --
Reduction in fair value of
capital assets ................ -- 572
Other healthcare services ............... 7,480 2,350
-------- --------
Total cost of revenues .................... 37,185 24,686
-------- --------
Gross margin ............................ 16,405 12,256
-------- --------
General administrative
and development.......................... 8,019 7,833
Marketing ................................. 3,661 3,342
Amortization of intangibles ............... 1,672 2,398
Write down in the fair value of
investments ............................. 203 501
Restructuring charge ...................... -- 651
-------- --------
13,555 14,725
-------- --------
OPERATING INCOME (LOSS) ................... 2,850 (2,469)
Other income, net ....................... 368 --
Interest expense, net ................... (368) (351)
Minority interests ...................... (1,541) (623)
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES ......... 1,309 (3,443)
Income tax expense ........................ (239) (246)
-------- --------
NET INCOME (LOSS) ......................... $ 1,070 $ (3,689)
======== ========
Weighted average number of common shares
outstanding - basic and diluted ......... 64,060 38,099
BASIC AND DILUTED INCOME (LOSS) PER SHARE $ 0.02 $ (0.10)
See the accompanying notes to unaudited interim consolidated financial
statements.
3
TLC VISION CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2003 2002
--------- ---------
ASSETS
Current assets
Cash and cash equivalents .............. $ 29,508 $ 36,081
Short-term investments ................. 1,795 1,557
Accounts receivable .................... 17,929 14,155
Prepaids and other current assets ...... 9,623 9,820
--------- ---------
Total current assets ................. 58,855 61,613
Restricted cash .......................... 3,925 3,975
Investments and other assets ............. 2,157 2,442
Intangibles, net ......................... 27,788 29,326
Goodwill, net ............................ 42,773 40,697
Fixed assets ............................. 59,515 58,003
--------- ---------
Total assets ............................. $ 195,013 $ 196,056
========= =========
LIABILITIES
Current liabilities
Accounts payable ....................... $ 14,169 $ 13,857
Accrued liabilities..................... 24,578 28,911
Current portion of long-term debt ...... 7,501 6,322
--------- ---------
Total current liabilities ................ 46,248 49,090
Other long-term liabilities .............. 9,314 9,630
Long term-debt, less current maturities .. 15,648 15,760
Minority interests ....................... 10,803 9,748
SHAREHOLDERS' EQUITY
Capital stock ............................ 389,386 388,769
Treasury stock ........................... (2,623) (2,623)
Option and warrant equity ................ 10,520 11,035
Accumulated deficit ...................... (284,283) (285,353)
--------- ---------
Total shareholders' equity ............... 113,000 111,828
--------- ---------
Total liabilities and shareholders' equity $ 195,013 $ 196,056
========= =========
See the accompanying notes to unaudited interim consolidated financial
statements.
4
TLC VISION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
THREE MONTHS
ENDED
MARCH 31,
----------------------
2003 2002
-------- --------
OPERATING ACTIVITIES
Net income (loss) for the period ............................................. $ 1,070 $ (3,689)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization ............................................. 5,554 5,082
Loss on sale of fixed assets .............................................. -- (52)
Impairment of fixed assets and write down of investments .................. 203 2,133
Minority interest and other ............................................... 1,541 623
Changes in operating assets and liabilities
Accounts receivable ....................................................... (3,774) (542)
Prepaid expenses and other current assets ................................. 282 1,462
Accounts payable and accrued liabilities .................................. (4,350) (1,246)
-------- --------
CASH PROVIDED BY OPERATING ACTIVITIES ........................................ 526 3,771
-------- --------
INVESTING ACTIVITIES
Purchase of fixed assets ..................................................... (1,613) (976)
Proceeds from sale of fixed assets .......................................... -- 52
Proceeds from the sale of investments ........................................ 144 4
Acquisitions and investments ................................................. (2,090) (483)
Purchase of short-term investments ........................................... (238) --
Other ........................................................................ 53 42
-------- --------
CASH USED FOR INVESTING ACTIVITIES .......................................... (3,744) (1,361)
-------- --------
FINANCING ACTIVITIES
Restricted cash movement ..................................................... 50 8
Principal payments of debt financing and capital leases ...................... (2,781) (3,423)
Distributions to minority interests .......................................... (630) (322)
Proceeds from the issuance of common stock ................................... 6 133
-------- --------
CASH USED IN FINANCING ACTIVITIES ............................................ (3,355) (3,604)
-------- --------
Net decrease in cash and cash equivalents .................................... (6,573) (1,194)
Cash and cash equivalents, beginning period .................................. 36,081 42,993
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ..................................... $ 29,508 $ 41,799
======== ========
See the accompanying notes to unaudited interim consolidated financial
statements.
5
TLC VISION CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(In thousands)
TREASURY STOCK
----------------------
COMMON STOCK
---------------------
OPTION
AND
WARRANT ACCUMULATED
SHARES AMOUNT EQUITY SHARES AMOUNT DEFICIT TOTAL
--------- --------- --------- --------- --------- --------- ---------
Balance December 31, 2002 ....... 64,794 $ 388,769 $ 11,035 (779) $ (2,623) $(285,353) $ 111,828
Shares issued as part
of the employee
share purchase plan........... 19 6 6
Options expired................. 515 (515)
Shares issued on acquisition.. 100 96 96
Net income for the period....... 1,070 1,070
--------- --------- --------- --------- --------- --------- ---------
Balance March 31, 2003.......... 64,913 $ 389,386 $ 10,520 (779) $ (2,623) $(284,283) $ 113,000
========= ========= ========= ========= ========= ========= =========
See the accompanying notes to unaudited interim consolidated financial
statements.
6
TLC VISION CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
March 31, 2003
(Unaudited)
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. The unaudited interim consolidated financial
statements included herein should be read in conjunction with the December
31, 2002 Transition Report on Form 10-K for the seven-month period ended
December 31, 2002 filed by TLC Vision Corporation (the "Company" or "TLC
Vision") with the Securities and Exchange Commission. In the opinion of
management, all normal recurring adjustments and estimates considered
necessary for a fair presentation have been included. The results of
operations for the interim periods are not necessarily indicative of the
results that may be expected for the entire year ending December 31, 2003.
The unaudited interim consolidated financial statements include the
accounts and transactions of the Company and its majority-owned
subsidiaries. The ownership interests of other parties in less than wholly
owned consolidated subsidiaries are presented as minority interests.
On May 15, 2002, the Company merged with Laser Vision Centers, Inc.
("LaserVision"), and the results of LaserVision's operations have been
included in the consolidated financial statements since that date.
LaserVision provides access to excimer lasers, microkeratomes, other
equipment and value-added support services to eye surgeons for laser
vision correction and the treatment of cataracts.
The unaudited interim consolidated financial statements for the
three-month period ended March 31, 2002 include certain reclassifications
to conform with classifications for the three-month period ended March 31,
2003.
Net income (loss) per share was computed using the weighted average number
of common shares outstanding during each period. The diluted average
shares outstanding calculation for the three months ended March 31, 2002
excludes outstanding options and warrants because they would be
anti-dilutive.
2. ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation under the provisions of
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock
Issued to Employees," and its related interpretations. Accordingly, the
Company records expense over the vesting period in an amount equal to the
intrinsic value of the award on the grant date. The Company recorded no
compensation expense during the quarter ended March 2003. The following
table illustrates the pro forma net income (loss) and net income (loss)
per share as if the fair value-based method as set forth under SFAS No.
123 "Accounting for Stock Based Compensation," applied to all awards:
THREE MONTHS ENDED MARCH 31,
---------------------------
2003 2002
------- -------
Net income (loss), as reported ...................... $ 1,070 $(3,689)
Adjustments for SFAS No. 123 ........................ (269) (483)
------- -------
Pro forma net income (loss) ......................... $ 801 $(4,172)
======= =======
Pro forma income (loss) per share - basic and diluted $ .01 $ (.11)
======= =======
3. ACQUISITION
On March 3, 2003, Midwest Surgical Services, Inc. a subsidiary of TLC
Vision, entered into a purchase agreement to acquire 100% of American Eye
Instruments, Inc., which provides access to surgical and diagnostic
equipment to perform cataract
7
surgery in hospitals and ambulatory surgery centers. The Company paid $2.0
million in cash and issued 100,000 of its common shares of TLC Vision. The
Company also agreed to make additional cash payments up to $1.9 million
over a three-year period if certain financial targets are achieved. Net
assets acquired were $2.1 million, which included $2.0 million of
goodwill. The results of operations have been included in the consolidated
statements of operations of the Company since the acquisition date.
4. EQUIPMENT FINANCING
During the quarter ended March 31, 2003, the Company entered into a
three-year capital lease for equipment to upgrade its laser technology.
Monthly payments for the three year period will total $3.2 million,
payable based on the number of procedure cards acquired during the month
with any remaining balance due at the end of the financing period.
5. SEGMENT INFORMATION
The Company has two reportable segments: refractive and cataract. The
refractive segment is the core focus of the Company and is in the business
of providing corrective laser surgery specifically related to refractive
disorders, such as myopia (nearsightedness), hyperopia (farsightedness)
and astigmatism. This segment is comprised of Company-owned laser centers,
Company-managed laser centers and the access and mobile refractive
business of LaserVision, acquired May 15, 2002. The cataract segment
provides surgery specifically for the treatment of cataracts. The Company
acquired the cataract segment in the LaserVision acquisition, therefore no
amounts are shown for that segment in the three month period ended March
31, 2002. The other segment consists of healthcare businesses that provide
network marketing and management to optometrists, manage cataract and eye
care centers and develop and manage professional healthcare facilities.
None of these activities meet the quantitative criteria to be disclosed
separately as a reportable segment.
Doctor's compensation as presented in the segment information of the
financial statements represents the cost to the Company of engaging
experienced and knowledgeable ophthalmic professionals to perform laser
vision correction services at the Company's owned laser centers. Where
the Company manages laser centers due to certain state requirements, it
is the responsibility of the professional corporations or physicians to
whom the Company furnishes management services to provide the required
professional services and engage ophthalmic professionals. In such cases,
the costs associated with arranging for these professionals to furnish
professional services are reported as a cost of the professional
corporation and not of the Company.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different management and marketing strategies. The
Company's business units were acquired or developed as a unit, and
management at the time of acquisition was retained.
The following tables set forth information by segments:
THREE MONTHS ENDED MARCH 31, 2003
(IN THOUSANDS) REFRACTIVE CATARACT OTHER TOTAL
---------- -------- ----- -----
Revenues............................................. $ 41,852 $ 5,376 $ 6,362 $ 53,590
Expenses
Doctor compensation............................... 3,001 -- 36 3,037
Operating......................................... 32,749 4,607 4,590 41,946
Depreciation expense.............................. 3,095 561 226 3,882
Amortization of intangibles....................... 1,576 96 -- 1,672
Write down in the fair value of investments....... 203 -- -- 203
-------- -------- -------- --------
40,624 5,264 4,852 50,740
-------- -------- -------- --------
Income from operations............................... 1,228 112 1,510 2,850
Interest expense, net and other...................... 248 (40) (208) --
Minority interest.................................... (893) -- (648) (1,541)
Income taxes......................................... (82) -- (157) (239)
-------- -------- -------- --------
Net income (loss).................................... $ 501 $ 72 $ 497 $ 1,070
======== ======== ======== ========
THREE MONTHS ENDED MARCH 31, 2002
(IN THOUSANDS) REFRACTIVE CATARACT OTHER TOTAL
---------- -------- ----- -----
Revenues............................................. $ 32,670 $ -- $ 4,272 $ 36,942
Expenses
Doctor compensation............................... 3,071 -- 3,071
Operating......................................... 26,578 3,549 30,127
Depreciation...................................... 1,940 -- 151 2,091
Reduction in carrying value of fixed assets....... 572 -- 572
Amortization of intangibles....................... 2,289 -- 109 2.398
Write down in fair value of investments........... 501 -- 501
Restructuring charge.............................. 651 -- 651
-------- -------- -------- --------
35,602 -- 3,809 39,411
-------- -------- -------- --------
Income (loss) from operations........................ (2,932) 463 (2,469)
Interest expense, net and other...................... (383) -- 32 (351)
Minority interest.................................... (482) -- (141) (623)
Income taxes......................................... 17 -- (263) (246)
-------- -------- -------- --------
Net income (loss).................................... $ (3,780) $ -- $ 91 $ (3,689)
======== ======== ======== ========
8
6. SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash transactions:
THREE MONTHS ENDED MARCH 31,
------------------
2003 2002
---- ----
Capital assets financed and leased .... $3,639 --
Options expired ....................... 515 --
Common stock issued for acquisition ... 96
Cash paid for the following:
THREE MONTHS ENDED MARCH 31,
--------------------
2003 2002
---- ----
Interest ........... $1,016 $ 911
Income taxes ....... 109 1,468
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Quarterly Report on Form 10-Q (herein, together with all amendments,
exhibits and schedules hereto, referred to as the "Form 10-Q") contains certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which
statements can be identified by the use of forward looking terminology, such as
"may," "will," "expect," "anticipate," "estimate," "plans," "intends" or
"continue" or the negative thereof or other variations thereon or comparable
terminology. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including but not limited to those set forth elsewhere in this Form 10-Q in the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and in the Company's Transition Report on Form 10-K
for the period ended December 31, 2002. Unless the context indicates or requires
otherwise, references in this Form 10-Q to the "Company" or "TLC Vision" shall
mean TLC Vision Corporation and its subsidiaries. References to "$" or "dollars"
shall mean U.S. dollars unless otherwise indicated. References to "C$" shall
mean Canadian dollars. References to the "Commission" shall mean the U.S.
Securities and Exchange Commission.
OVERVIEW
TLC Vision Corporation (formerly TLC Laser Eye Centers Inc.) and its
subsidiaries ("TLC Vision" or the "Company") is a diversified healthcare service
company focused on working with physicians to provide high quality patient care
primarily in the eye care segment. The Company's core business revolves around
refractive surgery, which involves using an excimer laser to treat common
refractive vision disorders such as myopia (nearsightedness), hyperopia
(farsightedness) and astigmatism. The Company's business model includes
arrangements ranging from owning and operating fixed site centers to providing
access to lasers through fixed site and mobile service relationships. The
Company also furnishes independent surgeons with mobile or fixed site access to
cataract surgery equipment and services through its Midwest Surgical Services,
Inc. ("MSS") subsidiary. In addition, the Company owns a 51% majority interest
in Vision Source, which provides optometric franchise opportunities to
independent optometrists. Through its OR Partners and Aspen Healthcare
divisions, TLC Vision develops, manages and has equity participation in
single-specialty eye care ambulatory surgery centers and multi-specialty
ambulatory surgery centers. In 2002, the Company formed a joint venture with
Vascular Sciences Corporation ("Vascular Sciences") to create OccuLogix, L.P., a
partnership focused on the treatment of an eye disease, known as dry age-related
macular degeneration, via rheopheresis (Rheo), a process for filtering blood.
The Company also owns and manages a Rheo clinic in Canada.
Effective June 1, 2002, the Company changed its fiscal year-end from May
31 to December 31.
In accordance with an Agreement and Plan of Merger with LaserVision, the
Company completed a business combination with LaserVision on May 15, 2002, which
resulted in LaserVision becoming a wholly owned subsidiary of TLC Vision.
Accordingly, LaserVision's results are included in the Company's statement of
operations beginning on the date of acquisition. LaserVision is a leading access
service provider of excimer lasers, microkeratomes and other equipment and value
and support services to eye surgeons. The Company believes that the combined
companies can provide a broader array of services to eye care professionals to
ensure these individuals may provide superior quality of care and achieve
outstanding clinical results. The Company believes this will be the long-term
determinant of success in the eye surgery services industry.
The Company serves surgeons who performed over 62,000 procedures including
cataract procedures at the Company's centers or using the Company's laser access
during the three-month period ended March 31, 2003.
9
The Company is assessing patient, optometric and ophthalmic industry
trends and developing strategies to improve laser vision correction revenues and
procedure volumes. The Company's cost reduction initiatives continue to target
the effective use of funds and the Company is also pursuing growth initiative's
focusing on future development opportunities for the Company in other healthcare
services.
RECENT DEVELOPMENTS
On March 3, 2003, Midwest Surgical Services, Inc. a subsidiary of TLC
Vision, entered into a purchase agreement to acquire 100% of American Eye
Instruments, Inc., which provides access to surgical and diagnostic equipment to
perform cataract surgery in hospitals and ambulatory surgery centers. The
Company paid $2.0 million in cash and issued 100,000 of its common shares of TLC
Vision. The Company also agreed to make additional cash payments up to $1.9
million over a three-year period if certain financial targets are achieved. Net
assets acquired were $2.1 million, which included $2.0 million of goodwill.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2002
As used herein, "existing TLC Vision" refers to TLC Vision locations in
existence prior to the merger with LaserVision in May 2002.
Total revenues for the three months ended March 31, 2003 were $53.6
million, a $16.7 million increase over revenues of $36.9 million for the three
months ended March 31, 2002. During the three-month period ended March 31, 2003,
LaserVision added $21.9 million of revenues while the existing TLC Vision
revenue decreased by $5.2 million or 14%. Approximately 78% of total revenues
for the three months ended March 31, 2003 were derived from refractive services
compared to 88% during the three months ended March 31, 2002.
Revenues from the refractive segment for the three months ended March 31,
2003 were $41.9 million, an increase of $9.2 million or 28%, over revenues of
$32.7 million from refractive activities for the three months ended March 31,
2002. LaserVision added $15.6 million of refractive revenues, while the existing
TLC Vision refractive revenue decreased by $6.4 million, or 20%.
Revenues from owned centers for the three months ended March 31, 2003 were
$15.3 million, an increase of $0.7 million, or 5%, from the revenues of $14.6
million for the three months ended March 31, 2002. LaserVision accounted for
$4.7 million of such revenues, while the existing TLC Vision revenue decreased
by $4.0 million, or 27%.
Revenues from managed centers for the three months ended March 31, 2003
were $15.6 million, a decrease of $2.5 million, or 14%, from the revenues of
$18.1 million for the three months ended March 31, 2002. As LaserVision does not
have a managed service product, there was no contribution from LaserVision for
the three months ended March 31, 2003.
Revenues from access services for the three months ended March 31, 2003
were $10.9 million. Because access revenues are a product offering of
LaserVision only, the Company did not report any associated access revenue in
the three months ended March 31, 2002 for the existing TLC Vision business.
Approximately 53,500 refractive procedures were performed in the three
months ended March 31, 2003, compared to approximately 26,300 procedures for the
three months ended March 31, 2002. LaserVision accounted for 29,000 procedures
while procedures from the existing TLC Vision decreased by 1,800 to 24,500. The
Company believes that the reduction in procedure volume was indicative of
overall conditions in the laser vision correction industry. The laser vision
correction industry has experienced uncertainty resulting from a number of
issues. Being an elective procedure, laser vision correction volumes have been
depressed by economic and stock market conditions, rising unemployment and the
uncertainty associated with the war on terrorism currently being experienced in
North America which are reflected in the consumer confidence index. Also
contributing to the decline was a wide range in consumer prices for laser vision
correction procedures, the bankruptcies of a number of deep discount laser
vision correction companies, the ongoing safety and effectiveness concerns
arising from the lack of long-term follow-up data and negative news stories
focusing on patients with unfavorable outcomes from procedures performed at
centers competing with the Company.
The cost of refractive revenues from eye care centers for the three months
ended March 31, 2003 was $29.7 million, an increase of $7.4 million, or 33%,
over the cost of refractive revenues of $22.3 million for the three months ended
March 31, 2002.
10
LaserVision cost of revenue for 2002 was $11.2 million while the existing TLC
Vision's cost of revenue decreased by $3.8 million, or 17%.
The cost of revenues from owned centers for the three months ended March
31, 2003 was $11.9 million, an increase of $1.4 million, or 13%, from the cost
of revenues of $10.5 million from the three months ended March 31, 2002.
LaserVision cost of revenue for 2002 was $4.0 million while the existing TLC
Vision cost of revenue decreased $2.6 million, or 25%.
The cost of revenues from managed centers for the three months ended March
31, 2003 was $10.6 million, a decrease of $0.6 million, or 5%, from the cost of
revenues of $11.2 million from the three months ended March 31, 2002. As
LaserVision does not have a managed service product, the Company did not report
any additional cost from LaserVision for the three months ended March 31, 2002.
The cost of revenues from access services for the three months ended March
31, 2003 was $7.2 million. Access services are a product offering of LaserVision
only, therefore, there was no associated access cost of revenue in the three
months ended March 31, 2002 from the existing TLC Vision business.
Reductions in cost of revenue were consistent with reduced doctor
compensation resulting from lower procedure volumes, reductions in royalty fees
on laser usage and reduced personnel costs. The cost of revenues for refractive
centers include a fixed cost component for infrastructure of personnel,
facilities and minimum equipment usage fees which has resulted in cost of
revenues decreasing at a slower rate than the decrease in the associated
revenues. Most refractive equipment was depreciated using 25% declining balance
method in 2003 compared to a 20% declining balance method in 2002. If the
Company had used a 25% declining method in the prior year then the depreciation
expense for the prior year would have been approximately $0.5 million higher.
Revenues from other healthcare services for the three months ended March
31, 2003, were $11.7 million, an increase of $7.4 million from revenues of $4.3
million for the three months ended March 31, 2002. LaserVision accounted for
$6.3 million of the increase while the existing TLC Vision revenue increased by
$1.1 million, or 26%. The increase in existing TLC revenues reflected revenue
growth in the network marketing and management and the professional healthcare
facility management subsidiaries. Approximately 22% of the total revenues for
the three months ended March 31, 2003 were derived from other healthcare
services compared to 12% during the three months ended March 31, 2002. The
higher mix of other healthcare services for the quarter is indicative of the
Company's stated diversification strategy to increase non-refractive eye care
services.
The cost of revenues from other healthcare services for the three months
ended March 31, 2003 was $7.5 million, an increase of $5.1 million, from cost of
revenues of $2.4 million for the three months ended March 31, 2002. LaserVision
accounted for $4.3 million of the increase while the existing TLC Vision cost of
revenues increased by $0.8 million. The increase in cost of revenue reflected
the increase in revenue growth in the network marketing and management and the
professional healthcare facility management subsidiaries.
General, administrative and development expenses increased to $8.0 million
for the three months ended March 31, 2003 from $7.8 million for the three months
ended March 31, 2002. Because the Company has reduced overhead, infrastructure
and development cost as part of the Company's cost reduction initiatives, the
combined infrastructure cost of TLC Vision and LaserVision was only 2% higher
than cost incurred by TLC Vision during the three months ended March 31, 2002
despite the 103% increase in refractive procedure volume. As a result general
administrative expenses as percentage of revenue decreased to 15% from 21%
compared to the prior year quarter.
Marketing expenses increased to $3.7 million for the three months ended
March 31, 2003 ( including Laservision) from $3.3 million for the three months
ended March 31, 2002 (excluding Laservision).
Amortization expenses decreased to $1.7 million for the three months ended
March 31, 2003 from $2.4 million for the three months ended March 31, 2001. The
decrease in amortization expense was largely a result of the significant
impairment charge in May 2002, which reduced the fair value of Practice
Management Agreements and the related ongoing amortization.
TLC Vision management wrote down its investment in a marketable equity
security by $0.2 million during the three months ended March 31, 2003 due to an
other than temporary decline in its value.
Other income and expense for the three months ended March 31, 2003
consisted primarily of $0.4 million from the settlement of a class-action
lawsuit.
11
Interest expense, net reflects interest income from the Company's cash
position offset by interest expense from debt and lease obligations. Interest
income has decreased since the Company has reduced cash and cash equivalent
balances during the three months ended March 31, 2003 compared to the
corresponding period in the prior year.
Income tax expense was flat at $0.2 million for the three-month period
ended March 31, 2003 from $0.2 million for the three months ended March 31,
2002. The $0.2 million tax expense consisted of federal and state taxes of $0.2
million for certain of the Company's subsidiaries where a consolidated federal
and state tax return cannot be filed.
The income for the three months ended March 31, 2003 was $1.1 million or
$0.02 per share compared to a loss of $3.7 million or $0.10 per share for the
three months ended March 31, 2003. This improvement reflects the increase in
revenue and margin from the acquisition of Laservision and a positive impact of
the cost-cutting initiatives in rationalizing the operations of the combined
company with the goal of maximizing future profitability.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 2003, the Company continued to
focus its activities primarily on increasing procedure volumes at its centers
and reducing operating costs. Cash and cash equivalents, short-term investments
and restricted cash were $35.2 million at March 31, 2003 compared to $41.6
million at December 31, 2002. Working capital at March 31, 2003 was $12.6
million an increase of $0.1 million compared to December 31, 2002.
The Company's principal cash requirements have included normal operating
expenses, debt repayment, distributions to minority partners, capital
expenditures, and the purchase of a cataract surgery business. Normal operating
expenses include doctor compensation, procedure royalty fees, procedure and
medical supply expenses, travel and entertainment, professional fees, insurance,
rent, equipment maintenance, wages, utilities and marketing.
During the three months ended March 31, 2003, the Company invested $1.6
million in fixed assets and received vendor lease financing for $3.6 million of
fixed assets.
The Company does not expect to purchase additional lasers during the next
12 to 18 months, however, existing lasers may need to be upgraded. The Company
has access to vendor financing at fixed interest rates or on a per procedure fee
basis and expects to continue to have access to these financing options for at
least the next 12 months.
The Company estimates that existing cash balances and short-term
investments, together with funds expected to be generated from operations and
credit facilities, will be sufficient to fund the Company's anticipated level of
operations and expansion plans for the next 12 to 18 months.
At December 31, 2002 the Company had $4.2 million of exit liabilities
primarily related to the restructuring of operations in connection with the
LaserVision merger. During the three months ended March 31, 2003 we made cash
payments of $0.9 million for these exit liabilities.
CASH PROVIDED BY OPERATING ACTIVITIES
Net cash provided by operating activities was $0.5 million for the three
months ended March 31, 2003. The cash flows provided by operating activities
during the three months ended March 31, 2003 are primarily due to the net income
of $1.1 million in the period plus non-cash items including depreciation and
amortization of $5.6 million, $0.2 million of non-cash write-offs related to
investment write downs and $1.5 million for minority interest, offset by the
increase of net operating assets of $7.9 million. The increase in net operating
assets consist of a decrease in prepaid expenses of $0.3 million and a $3.8
million increase in accounts receivable due primarily to higher procedure volume
and timing differences related to collection of accounts receivable from
professional corporations compared to December 2002 and a $4.4 million decrease
in accounts payable and accrued liabilities due to the settlement of disputed
amounts with a major vendor and state agencies, severance payments and timing
differences. Settlement of litigation or payment of accrued liabilities in
future periods could reduce cash without affecting working capital.
CASH USED FOR INVESTING ACTIVITIES
Net cash used for investing activities was $3.7 million for the three
months ended March 31, 2003. Cash used in investing during the three-month
period ended March 31, 2003 included $2.0 million for business acquisitions,
$1.6 million for the acquisition of equipment and $0.2 million for a purchase of
a short term investment, offset by $0.1 million from the sale of investments and
subsidiaries.
12
CASH USED FOR FINANCING ACTIVITIES
Net cash used for financing activities was $3.4 million for the three
months ended March 31, 2003. Net cash used for financing activities during the
three months ended March 31, 2003 was primarily utilized during the period for
repayment of certain notes payable and capitalized lease obligations of $2.8
million and distribution to minority interests of $0.6 million.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the ordinary course of business, the Company is exposed to interest rate
risks and foreign currency risks, which the Company does not currently consider
to be material. These exposures primarily relate to having short-term
investments earning short-term interest rates and to having fixed rate debt. The
Company views its investment in foreign subsidiaries as a long-term commitment,
and does not hedge any translation exposure.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's reports under
the Securities Exchange Act of 1934, as amended (the "Exchange Act") is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms, and that such
information is accumulated and communicated to the Company's management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c)
of the Exchange Act). Based on the foregoing, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures were effective, in all material respects, to ensure that
information required to be disclosed in the reports the Company files and
submits under the Exchange Act is recorded, processed, summarized and reported
as and when required.
In the Company's Annual Report on Form 10-K for the year ended December 31,
2002, the Company identified and reported upon certain aspects of its internal
control procedures and processes that resulted in inefficiencies in processing
of certain financial transactions for such period. As part of the Company's
overall evaluation of the Company's controls and procedures conducted in
connection with the completion of this Quarterly Report on Form 10-Q for the
three months ended March 31, 2003, the Company has concluded that the processing
of certain financial transactions during the period were again negatively
impacted by certain transitional issues related to the relocation of the
Company's finance department from Toronto to St. Louis, temporary reductions in
staffing levels caused by unfilled positions in the finance department and
implementation of a new financial accounting software package. The Company has
implemented or is in the process of implementing, a number of improvements which
will improve these procedures, including enhanced staffing levels, additional
training on accounting system software, implementation of a pre-review system of
monthly operating results by field management and establishment of a
cross-functional team to streamline various payments and process.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect the internal controls subsequent
to the date the Company completed its evaluation, except for the ongoing actions
described above.
13
Many of the ongoing actions described above were initiated prior to the
evaluation date and the Company expects that many of the additional processes
and controls implemented will serve to enhance existing processes and controls.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no changes in legal proceedings from that reported
in the Company's annual report on Form 10-K for the year ended
December 31, 2002.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON 8-K
a. Exhibits:
99.1 CEO's Certification of periodic financial report pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, U.S.C. Section
1350.
99.2 CFO's Certification of periodic financial report pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, U.S.C. Section
1350
b. Reports on 8-K:
None
14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TLC VISION CORPORATION
By: /s/ Elias Vamvakas
--------------------
Elias Vamvakas
Chairman and Chief Executive Officer
May 15, 2003
By: /s/ B. Charles Bono III
-------------------------
B. Charles Bono III
Chief Financial Officer
May 15, 2003
15
CERTIFICATIONS
CHIEF EXECUTIVE OFFICER
I, Elias Vamvakas, certify that:
1. I have reviewed this quarterly report on Form 10-Q of TLC Vision
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 15, 2003
/s/ Elias Vamvakas
Elias Vamvakas
16
CHIEF FINANCIAL OFFICER
I, B. Charles Bono III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of TLC Vision
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 15, 2003
/s/ B. Charles Bono III
---------------------------
B. Charles Bono III
17
EXHIBIT INDEX
No. Description
- --- -----------
99.1 CEO's Certification of periodic financial report pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, U.S.C. Section
1350.
99.2 CFO's Certification of periodic financial report pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, U.S.C. Section
1350