Back to GetFilings.com
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 QUARTER ENDED JUNE 30, 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
incorporation or organization) Identification No.)
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 August 11, 2003 there were 64,620,840 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 and six months ended June 30, 2003 and 2002
Consolidated Balance Sheets at June 30, 2003 and
December 31, 2002
Consolidated Statements of Cash Flows for the six
months ended June 30, 2003 and June 30, 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 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2003 2002 2003 2002
---------- ----------- --------- ----------
Revenues
Refractive
Owned .................................. $ 12,987 $ 12,874 $ 28,263 $ 27,448
Managed ................................ 13,250 13,704 28,897 31,800
Access ................................. 9,647 7,665 20,576 7,665
Other healthcare services ................... 11,648 8,864 23,386 13,136
--------- --------- --------- ---------
Total revenues ................................ 47,532 43,107 101,122 80,049
--------- --------- --------- ---------
Cost of revenues
Refractive
Owned .................................. 10,819 9,172 22,716 19,713
Managed ................................ 9,817 9,523 20,463 20,746
Access ................................. 6,481 5,002 13,643 5,002
Reduction in fair value of capital
assets ................................ -- 915 -- 1,487
Other healthcare services ................... 7,950 6,415 15,430 8,765
--------- --------- --------- ---------
Total cost of revenues ........................ 35,067 31,027 72,252 55,713
--------- --------- --------- ---------
Gross margin ................................ 12,465 12,080 28,870 24,336
--------- --------- --------- ---------
General and administrative and development .... 8,313 11,228 16,332 19,061
Marketing ..................................... 3,496 3,702 7,157 7,044
Amortization of intangibles ................... 1,678 2,389 3,350 4,787
Impairment of goodwill and other intangible
assets ...................................... -- 81,720 -- 81,720
Write down in the fair value of investments
and long-term receivables ................... (651) 4,502 (448) 5,003
Restructuring and other charges ............... 1,720 6,340 1,720 6,991
--------- --------- --------- ---------
14,556 109,881 28,111 124,606
--------- --------- --------- ---------
Operating Income (Loss) ....................... (2,091) (97,801) 759 (100,270)
Other income and (expense):
Other income, net ........................... 198 -- 566 --
Interest expense, net ....................... (393) (293) (761) (644)
Minority interests .......................... (961) (67) (2,502) (690)
--------- --------- --------- ---------
Loss before income taxes and cumulative
effect of accounting change ................. (3,247) (98,161) (1,938) (101,604)
Income tax expense ............................ (206) (622) (445) (868)
Loss before cumulative effect of accounting
change ...................................... (3,453) (98,783) (2,383) (102,472)
--------- --------- --------- ---------
Cumulative effect of accounting change ........ -- (15,174) -- (15,174)
--------- --------- --------- ---------
Net Loss ...................................... $ (3,453) $(113,957) $ (2,383) $(117,646)
========= ========= ========= =========
Loss before cumulative effect of accounting
change per share - basic and diluted ........ $ (0.05) $ (1.93) $ (0.04) $ (2.29)
Cumulative effect of accounting change per
share - basic and diluted ................... -- (0.29) -- (0.34)
--------- --------- --------- ---------
Net Loss per share - basic & diluted .......... $ (0.05) $ (2.22) $ (0.04) $ (2.63)
========= ========= ========= =========
Weighted average number of common shares
outstanding - basic and diluted ............. 63,457 51,220 63,435 44,695
See the accompanying notes to unaudited interim consolidated financial
statements.
3
TLC VISION CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2003 2002
----------- ------------
ASSETS
Current assets
Cash and cash equivalents .................. $ 28,626 $ 36,081
Short-term investments ..................... 1,881 1,557
Accounts receivable ........................ 17,939 14,155
Prepaids and other current assets .......... 11,065 9,820
--------- ---------
Total current assets ...................... 59,511 61,613
Restricted cash .............................. 4,414 3,975
Investments and other assets ................. 2,614 2,442
Intangibles, net ............................. 26,145 29,326
Goodwill, net ................................ 43,233 40,697
Fixed assets ................................. 57,908 58,003
--------- ---------
Total assets ................................. $ 193,825 $ 196,056
========= =========
LIABILITIES
Current liabilities
Accounts payable ........................... $ 9,676 $ 13,857
Accrued liabilities ........................ 31,459 28,911
Current portion of long-term debt .......... 8,351 6,322
--------- ---------
Total current liabilities ................ 49,486 49,090
Other long-term liabilities .................. 6,221 9,630
Long term-debt, less current maturities ...... 17,003 15,760
Minority interests ........................... 10,669 9,748
SHAREHOLDERS' EQUITY
Capital stock ................................ 390,893 388,769
Treasury stock ............................... (2,623) (2,623)
Option and warrant equity .................... 9,912 11,035
Accumulated deficit .......................... (287,736) (285,353)
--------- ---------
Total shareholders' equity ................... 110,446 111,828
--------- ---------
Total liabilities and shareholders' equity ... $ 193,825 $ 196,056
========= =========
See the accompanying notes to unaudited interim consolidated financial
statements.
4
TLC VISION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) (In thousands)
SIX MONTHS ENDED JUNE 30
------------------------
2003 2002
---------- --------
OPERATING ACTIVITIES
Net loss for the period ............................................... $ (2,383) (117,646)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization ...................................... 11,047 10,454
Intangible Impairment - cumulative effect of accounting change ..... -- 15,174
Intangible Impairment .............................................. -- 81,720
(Gain) loss on disposal of fixed assets ............................ (391) 1,069
Impairment of fixed assets and write down of investments and
notes receivable .................................................... (402) 6,287
Restructuring and other costs ....................................... 527 2,402
Minority interests .................................................. 2,502 158
Changes in operating assets and liabilities:
Accounts receivable ................................................. (3,784) (999)
Prepaid expenses and other current assets ........................... (1,160) 1,124
Accounts payable and accrued liabilities ............................ (5,055) (453)
-------- --------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ....................... 901 (710)
INVESTING ACTIVITIES
Purchase of fixed assets .............................................. (2,587) (928)
Proceeds from sale of fixed assets .................................... 548 56
Proceeds from the sale of investments ................................. 221 636
Cash acquired with LaserVision Centers acquisition .................... -- 7,319
Acquisitions and investments .......................................... (2,622) (3,635)
Purchase of short-term investments .................................... (324) 529
Other ................................................................. 273 179
-------- --------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ....................... (4,491) 4,156
FINANCING ACTIVITIES
Restricted cash ....................................................... (439) (145)
Principal payments of debt financing and capital leases ............... (3,979) (4,357)
Distributions to minority interests ................................... (1,802) (273)
Proceeds from debt financing .......................................... 1,450 304
Proceeds from the issuance of common stock ............................ 905 149
-------- --------
CASH USED IN FINANCING ACTIVITIES ..................................... (3,865) (4,322)
-------- --------
Net decrease in cash and cash equivalents ............................. (7,455) (876)
Cash and cash equivalents, beginning period ........................... 36,081 42,993
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD .............................. $ 28,626 42,117
======== ========
See the accompanying notes to unaudited interim consolidated financial
statements.
5
TLC VISION CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED) (In thousands)
COMMON STOCK TREASURY 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 ............. 27 32 32
Exercise of stock
options ................... 321 873 873
Option and warrant
reductions ................ 1,123 (1,123) 0
Shares issued for
acquisition ............... 100 96 96
Net loss for the period .... (2,383) (2,383)
--------- --------- ---------- ---------- ---------- --------- ---------
Balance June 30, 2003 ...... 65,242 $ 390,893 $ 9,912 (779) $ (2,623) $(287,736) $ 110,446
========= ========= ========== ========== ========== ========= =========
See the accompanying notes to unaudited interim consolidated financial
statements.
TLC VISION CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)
June 30, 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 Company's 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 and
six-month periods ended June 30, 2002 include certain reclassifications to
conform with classifications for the three and six-month periods ended June
30, 2003.
Net 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 and six months ended June 30, 2002
excludes outstanding options and warrants because they would be
anti-dilutive as well as 712,500 common shares held in escrow.
6
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 three and six month periods ended June 30,
2003. The following table illustrates the pro forma loss and net 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net loss, as reported .................. $ (3,453) $(113,957) $ (2,383) $(117,646)
Adjustments for SFAS No. 123 ........... (259) (412) (528) (895)
--------- --------- --------- ---------
Pro forma net loss ..................... $ (3,712) $(114,369) $ (2,911) $(118,541)
========= ========= --------- ---------
Pro forma loss per share - basic and
diluted ................................ $ (.06) $ (2.23) $ (.05) $ (2.65)
========= ========= ========= =========
3. ACQUISITION
On March 3, 2003, Midwest Surgical Services, Inc. a subsidiary of TLC
Vision, acquired 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. 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 six months ended June 30, 2003, the Company entered into
three-year financing agreements with two of its laser suppliers for
equipment to upgrade its laser technology. Payments for the three year
period will total $5.0 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 service
specifically for the surgical treatment of cataracts. The Company acquired
the cataract segment in the LaserVision acquisition, therefore only 45 days
of transactions are represented for that segment in the three and six month
periods ended June 30, 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
7
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 (in thousands):
THREE MONTHS ENDED JUNE 30, 2003 REFRACTIVE CATARACT OTHER TOTAL
-------------------------------- ---------- -------- -------- --------
Revenues ........................................... $ 35,884 $ 6,196 $ 5,452 $ 47,532
Expenses
Doctor compensation .............................. 2,582 -- 50 2,632
Operating ........................................ 31,539 5,273 3,616 40,429
Depreciation ..................................... 3,024 579 212 3,815
Amortization of intangibles ...................... 1,359 108 211 1,678
Write down in the fair value of investment and
long term receivables .......................... (651) -- -- (651)
Restructuring charge ............................ 1,720 -- -- 1,720
-------- -------- -------- --------
39,573 5,960 4,090 49,623
-------- -------- -------- --------
Income (loss) from operations ...................... (3,689) 236 1,362 (2,091)
Interest (expense) income, net and other ........... 5 39 (239) (195)
Minority interests ................................. (261) -- (700) (961)
Income taxes ....................................... 33 18 (257) (206)
-------- -------- -------- --------
Net income (loss) .................................. $ (3,913) $ 293 $ 167 $ (3,453)
======== ======== ======== ========
THREE MONTHS ENDED JUNE 30, 2002 REFRACTIVE CATARACT OTHER TOTAL
-------------------------------- ---------- --------- --------- ---------
Revenues ........................................ $ 34,243 $ 1,884 $ 6,980 $ 43,107
Expenses
Doctor compensation ........................... 2,393 -- -- 2,393
Operating ..................................... 31,130 1,406 6,872 39,408
Depreciation .................................. 2,523 157 439 3,119
Reduction in fair value of capital assets ..... 915 -- -- 915
Amortization of intangibles ................... 2,361 30 120 2,511
Intangible impairment ......................... 69,705 -- 12,015 81,720
Write down in fair value of investments and
long term receivables ....................... 2,486 -- 2,016 4,502
Restructuring charge .......................... 6,340 -- -- 6,340
--------- --------- --------- ---------
117,853 1,593 21,462 140,908
--------- --------- --------- ---------
Income (loss) from operations ................... (83,610) 291 (14,482) (97,801)
Interest (expense) income, net and other ........ (289) (12) 8 (293)
Minority interests .............................. 137 -- (204) (67)
Income taxes .................................... (471) -- (151) (622)
--------- --------- --------- ---------
Net income (loss) before cumulative effect of
accounting change ............................. $ (84,233) $ 279 $ (14,829) $ (98,783)
========= ========= ========= =========
SIX MONTHS ENDED JUNE 30, 2003 REFRACTIVE CATARACT OTHER TOTAL
------------------------------ --------- --------- --------- ---------
Revenues ........................................ $ 77,736 $ 11,572 $ 11,814 $ 101,122
Expenses
Doctor compensation ........................... 5,583 -- 86 5,669
Operating ..................................... 64,288 9,880 8,206 82,375
Depreciation .................................. 6,119 1,140 438 7,697
Amortization of intangibles ................... 2,935 204 211 3,350
Write down in the fair value of investments
and long-term receivables ................... (448) -- -- (448)
Restructuring charge ......................... 1,720 -- -- 1,720
--------- --------- --------- ---------
80,197 11,224 8,942 100,363
--------- --------- --------- ---------
Income (loss) from operations ................... (2,461) 348 2,872 759
Interest (expense) income, net and other ........ 253 (1) (447) (195)
Minority interests .............................. (1,154) -- (1,348) (2,502)
Income taxes .................................... (49) 18 (414) (445)
--------- --------- --------- ---------
Net income (loss) ............................... $ (3,412) $ 365 $ 664 $ (2,383)
========= ========= ========= =========
8
SIX MONTHS ENDED JUNE 30, 2002 REFRACTIVE CATARACT OTHER TOTAL
------------------------------ --------- --------- --------- ---------
Revenues ........................................ $ 66,913 $ 1,884 $ 11,252 $ 80,049
Expenses
Doctor compensation ........................... 5,464 -- -- 5,464
Operating ..................................... 57,708 1,406 10,421 69,535
Depreciation .................................. 4,463 157 590 5,210
Reduction in fair value of capital assets ..... 1,487 -- -- 1,487
Amortization of intangibles ................... 4,650 30 229 4,909
Intangible impairment ......................... 69,705 -- 12,015 81,720
Write down in fair value of investments and
long term investments ....................... 2,987 -- 2,016 5,003
Restructuring charge .......................... 6,991 -- 6,991
--------- --------- --------- ---------
153,455 1,593 25,271 180,319
--------- --------- --------- ---------
Income (loss) from operations ................... (86,542) 291 (14,019) (100,270)
Interest (expense) income, net and other ........ (672) (12) 40 (644)
Minority interests .............................. (345) -- (345) (690)
Income taxes .................................... (454) -- (414) (868)
--------- --------- --------- ---------
Net income (loss) before cumulative effect of
accounting change ............................. $ (88,013) $ 279 $ (14,738) $(102,472)
========= ========= ========= =========
6. SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash transactions:
SIX MONTHS ENDED JUNE 30,
--------------------------
2003 2002
--------- ---------
Capital assets financed and leased .......... $ 5,592 --
Options and warrant reductions .............. 1,123 --
Common stock issued for acquisition ......... 96 111,058
Treasury stock arising from acquisition ..... -- (2,432)
Issue of options arising from acquisition ... -- 11,001
Cash paid for the following:
SIX MONTHS ENDED JUNE 30,
---------------------------
2003 2002
------ ------
Interest ................ $1,633 $ 933
Income taxes ............ 160 1,752
7. RESTRUCTURING CHARGES
During the three and six months ended June 30, 2003, the Company recorded a
$1.7 million restructuring charge for the closure of four centers.
Restructuring charges included $0.4 million of ongoing lease payment
obligations, $0.6 million of severance and other cash payments, and $0.7
million of write-downs of fixed assets and other assets. The severance and
other cash payments will be paid out in 2003 and 2004, while the lease
costs will be paid out over the remaining term of the leases.
In the three and six months ended June 30, 2002, the Company recorded
restructuring charges of $6.3 million and $7.0 million respectively. During
the three months ended June 30, 2002, charges consisted of cash payments of
$4.0 million primarily for severance, lease costs, and closure costs, and
$2.3 million in non-cash costs related to the write-off of fixed assets at
closed centers. Restructuring charges of $0.7 million incurred in the
three months ended March 31, 2002 primarily related to severance costs.
9
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Quarterly Report on Form 10-Q (herein, together with all amendments,
exhibits and schedules hereto, referred to as the "Form 10-Q") contains certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which
statements can be identified by the use of forward looking terminology, such as
"may," "will," "expect," "anticipate," "estimate," "plans," "intends" or
"continue" or the negative thereof or other variations thereon or comparable
terminology. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including but not limited to those set forth elsewhere in this Form 10-Q in the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and in the Company's Transition Report on Form 10-K
for the period ended December 31, 2002. Unless the context indicates or requires
otherwise, references in this Form 10-Q to the "Company" or "TLC Vision" shall
mean TLC Vision Corporation and its subsidiaries. References to "$" or "dollars"
shall mean U.S. dollars unless otherwise indicated.
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 120,000 procedures including
refractive and cataract surgery procedures at the Company's centers or using the
Company's laser access during the six-month period ended June 30, 2003.
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
10
On March 3, 2003, Midwest Surgical Services, Inc. a subsidiary of TLC
Vision, acquired 100% of American Eye Instruments, Inc. ("AEI"), 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. The results of AEI have been included
in the consolidated financial statements since the date of acquisition.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
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 June 30, 2003 were $47.5 million,
an increase of $4.4 million or 10% over revenues of $43.1 million for the three
months ended June 30, 2002. During the three-month period ended June 30, 2003,
LaserVision added $20.6 million of revenues, an increase of $9.3 million from
$11.3 million in the prior year. Existing TLC Vision revenue of $26.9 million
decreased by $4.9 million or 15% from $31.8 million in the prior year.
Approximately 75% of total revenues for the three months ended June 30, 2003
were derived from refractive services compared to 79% during the three months
ended June 30, 2002.
Revenues from the refractive segment for the three months ended June 30,
2003 were $35.9 million, an increase of $1.7 million or 5%, over revenues of
$34.2 million from refractive activities for the three months ended June 30,
2002. LaserVision added $13.5 million of refractive revenues, an increase of
$5.0 million from $8.5 million in the prior year. Existing TLC Vision refractive
revenue of $22.4 million decreased by $3.3 million, or 13%, from $25.7 million a
year ago. The existing TLC Vision decrease was largely due to the impact of lost
procedures at centers closed within the last year.
Revenues from owned centers for the three months ended June 30, 2003 were
$13.0 million, an increase of $0.1 million from the revenues of $12.9 million
for the three months ended June 30, 2002. LaserVision accounted for $3.8 million
of such revenues, up $3.0 million from $0.8 million the prior year, while the
existing TLC Vision revenue of $9.2 million decreased by $2.9 million, or 24%,
from $12.1 million in the prior year.
Revenues from managed centers for the three months ended June 30, 2003 were
$13.3 million, a decrease of $0.4 million, or 3%, from the revenues of $13.7
million for the three months ended June 30, 2002. As LaserVision does not have a
managed service product, there was no contribution from LaserVision for the
three months ended June 30, 2003.
Revenues from access services for the three months ended June 30, 2003 were
$9.6 million, an increase of $1.9 million from the revenues of $7.7 million for
the three months ended June 30, 2002. Because access revenues are a product
offering of LaserVision only, access revenue for the three months ended June 30,
2002 reflects sales beginning with the LaserVision acquisition on May 15, 2002.
Approximately 44,600 refractive procedures were performed in the three
months ended June 30, 2003, compared to approximately 35,900 procedures for the
three months ended June 30, 2002. LaserVision procedures of 24,100 increased by
9,000 from the 15,100 procedures performed subsequent to the LaserVision
acquisition during the second quarter of 2002 while procedures from the existing
TLC Vision of 20,500 decreased by 300 or 1% from 20,800 during the three months
ended June 30, 2002. The Company believes that the continuing reduction in
existing TLC Vision procedure volume is indicative of overall conditions in the
laser vision correction industry. Existing TLC Vision Centers that closed within
the last year also contributed to the procedure volume decrease.
Over the last few years, 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, all of
which are reflected in a deteriorated consumer confidence index. Also
contributing to the decline was a wide range in consumer prices for laser vision
correction procedures, bankruptcies
11
of a number of deep discount laser vision correction companies, 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 June 30, 2003 was $27.1 million, an increase of $2.5 million, or 10%, over
the cost of refractive revenues of $24.6 million for the three months ended June
30, 2002. LaserVision cost of revenue for the three months ended June 30, 2003
was $10.3 million, an increase of $4.7 million over $5.6 million in the prior
year. Existing TLC Vision cost of revenue of $16.8 million decreased by $2.2
million, or 12% from $19.0 million in the prior year. The existing TLC Vision
decrease was largely due to the impact of lost procedures at centers closed
within the last year.
The cost of revenues from owned centers for the three months ended June 30,
2003 was $10.8 million, an increase of $1.6 million, from the cost of revenues
of $9.2 million from the three months ended June 30, 2002. LaserVision cost of
revenue for the three months ended June 30, 2003, was $3.8 million, up $3.2
million from $0.6 million in the prior year, while the existing TLC Vision cost
of revenue of $7.0 million decreased $1.6 million, or 19%, from $8.6 million in
the prior year.
The cost of revenues from managed centers for the three months ended June
30, 2003 was $9.8 million, an increase of $0.3 million, or 3%, from the cost of
revenues of $9.5 million from the three months ended June 30, 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 June 30, 2002.
The cost of revenues from access services for the three months ended June
30, 2003 was $6.5 million, an increase of $1.5 million from the cost of revenues
of $5.0 million during the three months ended June 30, 2002. Access services are
a product offering of LaserVision only, therefore, cost of revenues represent
procedures performed subsequent to the LaserVision acquisition in May 2002.
During the three months ended June 30, 2002, the Company recorded a $0.9
million charge to reflect the reduction in the value of capital assets. No
adjustments were recorded in the current year.
Increases in overall cost of refractive revenues were primarily related to
increased procedures volume and a change in depreciation method. Doctor's
compensation, royalty fees on laser usage, personnel costs and other costs
increased due to higher volume associated with the LaserVision acquisition. Most
refractive equipment was depreciated using a 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 $0.3 million higher.
Revenues from other healthcare services for the three months ended June 30,
2003, were $11.6 million, an increase of $2.7 million from revenues of $8.9
million for the three months ended June 30, 2002. LaserVision accounted for $7.1
million, an increase of $4.3 million over a $2.8 million in the prior year,
while the existing TLC Vision revenue of $4.5 million decreased by $1.6 million
from $6.1 million, or 26%. The decrease in existing TLC revenues reflect a $0.5
million decline due to the sale of the Company's Pure Laser Hair Removal and
Treatment Clinics, Inc. ("Pure") subsidiary in July 2002 and a $0.5 million
timing difference between quarters for the network marketing and management
subsidiaries. Approximately 25% of the total revenues for the three months ended
June 30, 2003 were derived from other healthcare services compared to 21% during
the three months ended June 30, 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 June 30, 2003 was $8.0 million, an increase of $1.6 million, or 25%, from
cost of revenues of $6.4 million for the three months ended June 30, 2002.
LaserVision accounted for $4.8 million, an increase of $2.9 million from $1.9
million in the prior year, while the existing TLC Vision cost of revenues of
$3.2 million decreased by $1.3 million from $4.5 million in the prior year. The
decrease in existing TLC Vision cost of revenues primarily relates to $0.5
million resulting from the sale of Pure and a $0.6 million timing difference
between quarters for the network marketing and management subsidiary.
General, administrative and development expenses decreased to $8.3 million
for the three months ended June 30, 2003 from $11.2 million for the three months
ended June 30, 2002, a decrease of $2.9 million, or 26%. Of this $2.9 million
decrease, $1.0 million relates to development costs expensed by the Company
during the three months ended
12
June 30, 2002 for payments to Vascular Sciences. No development costs have been
incurred during 2003. The Company also recognized $0.9 million as a reduction in
general, administrative and development costs related to a litigation settlement
for eyeVantage during the three months ended June 30, 2003. Employee medical
claims of $0.5 million, a $0.2 million lease settlement and $0.3 million of
professional fees offset this reduction during the three months ended June 30,
2003. In addition, the Company has reduced overhead, infrastructure and
development cost as part of the Company's cost reduction initiative. As a
result, the combined infrastructure cost of TLC Vision and LaserVision was
significantly lower from the prior year despite a 24% increase in refractive
procedure volume. General, administrative, and development expenses as
percentage of revenue decreased to 17% from 26% compared to the prior year
quarter.
Marketing expenses decreased to $3.5 million for the three months ended
June 30, 2003 from $3.7 million for the three months ended June 30, 2002.
Marketing expenses as a percentage of revenue decreased to 7% from 9% in the
prior year.
Amortization expenses decreased to $1.7 million for the three months ended
June 30, 2003 from $2.4 million for the three months ended June 30, 2002. The
decrease in amortization expense was largely a result of significant impairment
charges in May 2002, which reduced the fair value of Practice Management
Agreements and the related ongoing amortization.
The Company's adoption of SFAS 142 resulted in a transitional impairment
loss of $15.2 million, which was recorded as a cumulative effect of a change in
accounting principle during the three months ended June 30, 2002. In addition,
the Company's operating results for the three months ended June 30, 2002
included a non-cash pretax charge of $50.7 million to reduce the carrying value
of goodwill for which the carrying value exceeded the fair value as of May 31,
2002, including $45.9 million related to the impairment of goodwill from the
acquisition of LaserVision and $4.8 million for the impairment of goodwill from
prior acquisitions.
Intangible assets whose useful lives are not indefinite are amortized on a
straight-line basis over the term of the applicable agreement to a maximum of 15
years. Current amortization periods range from 5 to 15 years. In establishing
these long-term contractual relationships with the Company, key surgeons in many
cases have agreed to receive reduced fees for laser vision correction procedures
performed. The reduction in doctors' compensation offsets in part the increased
amortization of the intangible practice management agreements.
Statement of Financial Accounting Standard No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
requires long-lived assets included within the scope of the Statement be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of those long-lived assets might not be recoverable -
that is, information indicates that an impairment might exist. Given the
significant decrease in the trading price of the Company's common stock, current
period operating or cash flow loss combined with its history of operating or
cash flow losses, the Company identified certain practice management agreements
where the recoverability was impaired. As a result, the Company recorded an
impairment charge of $31 million in during the three months ended June 30, 2002.
During the three months ended June 30, 2003, the Company recorded a $0.6
million adjustment to partially reverse a previous write down in the fair value
of long-term receivables. The Company recorded this adjustment during the
quarter due to a consistent payment history and continually improving financial
strength of the debtor.
The Company recorded $1.7 million of restructuring charges during the
quarter ended June 30, 2003 resulting from the closing of four unprofitable
centers. The Company had recorded a $6.3 million restructuring charge during the
three months ended June 30, 2002.
Other income and expense for the three months ended June 30, 2003 of $0.2
million primarily resulted from the gain on sale of assets from previously
closed centers.
Interest expense of $0.4 million 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 June 30, 2003
compared to the corresponding period in the prior year.
Income tax expense of $0.2 million for the three-month period ended June
30, 2003 decreased by $0.4 million
13
from $0.6 million for the three months ended June 30, 2002. The $0.2 million tax
expense consisted of federal and state taxes for certain of the Company's
subsidiaries where a consolidated federal and state tax return cannot be filed.
The net loss for the three months ended June 30, 2003 was $3.5 million or
$0.05 per share compared to a loss of $114.0 million or $2.22 per share for the
three months ended June 30, 2002. 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.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 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 six months ended June 30, 2003 were $101.1 million,
an increase of $21.1 million or 26% over revenues of $80.0 million for the six
months ended June 30, 2002. During the six-month period ended June 30, 2003,
LaserVision contributed revenues of $42.5 million, an increase of $31.2 million
from the $11.3 million of revenues earned from the date of acquisition in May
2002 in the prior year. Existing TLC Vision revenue of $58.6 million for the
three months ended June 30, 2003 decreased by $10.1 million or 15% from $68.7
million from the prior year. Approximately 77% of total revenues for the six
months ended June 30, 2003 were derived from refractive services compared to 84%
during the three months ended June 30, 2002.
Revenues from the refractive segment for the six months ended June 30, 2003
were $77.7 million, an increase of $10.8 million or 16%, over revenues of $66.9
million from refractive activities for the six months ended June 30, 2002.
LaserVision added $29.1 million of refractive revenues, a $20.6 million increase
over the prior year of $8.5 million, while the existing TLC Vision refractive
revenue of $48.6 million decreased by $9.8 million, or 17% from the prior year
revenue of $58.4 million. The decrease in existing TLC Vision refractive revenue
was largely due to the impact of lower procedure volumes, including lost
procedures at centers closed within the last year.
Revenues from owned centers for the six months ended June 30, 2003 were
$28.3 million, an increase of $0.9 million over $27.4 million from the prior
year. LaserVision accounted for $8.5 million of such revenues during the six
months ended June 30, 2003, an increase of $7.7 million from the prior year
revenue of $0.8 million. The existing TLC Vision revenue of $19.8 million
decreased by $6.8 million or 26% from the prior year revenue of $26.6 million.
Revenues from managed centers for the six months ended June 30, 2003 were
$28.9 million, a decrease of $2.9 million, or 9%, from the revenues of $31.8
million for the six months ended June 30, 2002. As LaserVision does not have a
managed service product, there was no contribution from LaserVision for the
three months ended June 30, 2003.
Revenues from access services for the six months ended June 30, 2003 were
$20.6 million, an increase of $12.9 million from the revenues of $7.7 million
for the six months ended June 30, 2002. Prior year LaserVision revenues are only
from the date of acquisition in May 2002. Because access revenues are a product
offering of LaserVision only, the Company did not report any associated access
revenue in the six months ended June 30, 2002 for the existing TLC Vision
business.
Approximately 98,100 refractive procedures were performed in the six months
ended June 30, 2003, compared to approximately 62,200 procedures for the six
months ended June 30, 2002. LaserVision accounted for 53,100 procedures, up
38,000 from the 15,100 procedures performed subsequent to the LaserVision
acquisition in 2002. Procedures from the existing TLC Vision of 45,000 decreased
by 2,100 from 47,100 in the prior year. As previously stated, the Company
believes that the reduction in procedure volume at existing TLC Vision centers
was partially related to centers closed during the past year, but also is
indicative of overall conditions in the laser vision correction industry.
The cost of refractive revenues from eye care centers for the six months
ended June 30, 2003 was $56.8 million,
14
an increase of $9.9 million, or 21%, over the cost of refractive revenues of
$46.9 million for the six months ended June 30, 2002. LaserVision cost of
revenue was $21.5 million, an increase of $15.9 million over $5.6 million in the
prior year, while the existing TLC Vision cost of revenue of $35.3 million
decreased by $6.0 million or 15% from $41.3 million in the prior year. The
decrease in existing TLC Vision cost of refractive revenues were largely due to
the impact of lower procedure volumes, including lost procedures at centers
closed within the last year.
The cost of revenues from owned centers for the six months ended June 30,
2003 was $22.7 million, a decrease of $3.0 million, or 15%, from the cost of
revenues of $19.7 million from the six months ended June 30, 2002. LaserVision
cost of revenue for the six months ended June 30, 2003 was $7.9 million, an
increase of $7.3 million from $0.6 million in the prior year. The existing TLC
Vision cost of revenue of $14.8 million decreased $4.3 million or 23% from $19.1
million in the prior year.
The cost of revenues from managed centers for the six months ended June 30,
2003 was $20.5 million, a decrease of $0.2 million, or 1%, from the cost of
revenues of $20.7 million from the six months ended June 30, 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 June 30, 2002.
The cost of revenues from access services for the six months ended June 30,
2003 was $13.6 million, up $8.6 million from $5.0 million subsequent to the
LaserVision merger in May 2002. Access services are a product offering of
LaserVision only, therefore, there was no associated access cost of revenue in
the six months ended June 30, 2002 from the existing TLC Vision business.
During the six months ended June 30, 2002, the Company recorded $1.5
million in charges to reflect the reduction in value of certain capital assets.
No adjustments have been recorded in the prior year.
Reductions in cost of revenue for the existing TLC Vision business
component were consistent with reduced doctor compensation resulting from lower
existing TLC Vision procedure volumes, reductions in royalty fees on laser
usage, and reduced personnel and medical supplies. The cost of revenues for
refractive centers include fixed cost components for infrastructure of
personnel, facilities and minimum equipment usage fees which caused cost of
revenues for existing TLC Vision centers to decrease at a slower rate than the
percentage decrease in the associated revenues. In addition, most refractive
equipment was depreciated using a 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 $0.8 million higher.
Revenues from other healthcare services for the six months ended June 30,
2003, were $23.4 million, an increase of $10.3 million from revenues of $13.1
million for the six months ended June 30, 2002. LaserVision revenue of $13.4
million accounted for $10.6 million of the increase while the existing TLC
Vision revenue of $10.0 million decreased by $0.3 million, or 3%. The decrease
in existing TLC Vision revenue resulted primarily from a $1.0 million decline
related to the sale of Pure in July 2002 offset by growth in the Company's
ongoing businesses. Approximately 23% of the total revenues for the six months
ended June 30, 2003 were derived from other healthcare services compared to 16%
during the six months ended June 30, 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 six months
ended June 30, 2003 was $15.4 million, an increase of $6.6 million, from cost of
revenues of $8.8 million for the six months ended June 30, 2002. LaserVision
cost of revenues of $9.1 million accounted for $7.2 million of the increase
while the existing TLC Vision cost of revenues of $6.3 million decreased by $0.6
million. The decrease in existing TLC Vision cost of revenues primarily reflects
$1.0 million related to the sale of Pure offset by growth in the Company's
ongoing businesses.
General, administrative and development expenses decreased to $16.3 million
for the six months ended June 30, 2003 from $19.1 million for the six months
ended June 30, 2002. Of this $2.8 million decrease, $2.0 million relates to
development costs expensed by the company during the six months ended June 30,
002 related to payments of $1.0 million each to Tracey Technologies and Vascular
Sciences. No development costs have been incurred during 2003. In addition, the
Company recognized $0.9 million as a reduction in general, administrative and
development costs related to a litigation settlement for eyeVantage during the
six months ended June 30, 2003. Employee medical claims of $0.5 million, a lease
settlement of $0.2 million, and $0.3 million of professional fees offset this
15
reduction. 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 lower than the
cost incurred by TLC Vision during the six months ended June 30, 2002 despite a
58% increase in refractive procedure volume. As a result, general administrative
expenses as percentage of revenue decreased to 16% from 24% compared to the
prior year.
Marketing expenses increased to $7.2 million for the six months ended June
30, 2003 from $7.0 million for the six months ended June 30, 2002. Marketing
expenses increased only $0.2 million despite LaserVision expenses that were
incurred for the entire six months in 2003 compared to 45 days of expenses
during the prior year.
Amortization expenses decreased to $3.4 million for the six months ended
June 30, 2003 from $4.8 million for the six months ended June 30, 2002. The
decrease in amortization expense of $1.4 million was largely a result of the
significant impairment charge in the six months ended June 30, 2002, which
reduced the fair value of Practice Management Agreements and the related ongoing
amortization.
The Company's adoption of SFAS 142 resulted in a transitional impairment
loss of $15.2 million, which was recorded as a cumulative effect of a change in
accounting principle during the six months ended June 30, 2002. In addition, the
Company's operating results for the six months ended June 30, 2002 included a
non-cash pretax charge of $50.7 million to reduce the carrying value of goodwill
for which the carrying value exceeded the fair value as of May 31, 2002,
including $45.9 million related to the impairment of goodwill from the
acquisition of LaserVision and $4.8 million for the impairment of goodwill from
prior acquisitions.
Intangible assets whose useful lives are not indefinite are amortized on a
straight-line basis over the term of the applicable agreement to a maximum of 15
years. Current amortization periods range from 5 to 15 years. In establishing
these long-term contractual relationships with the Company, key surgeons in many
cases have agreed to receive reduced fees for laser vision correction procedures
performed. The reduction in doctors' compensation offsets in part the increased
amortization of the intangible practice management agreements.
Statement of Financial Accounting Standard No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
requires long-lived assets included within the scope of the Statement be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of those long-lived assets might not be recoverable -
that is, information indicates that an impairment might exist. Given the
significant decrease in the trading price of the Company's common stock, current
period operating or cash flow loss combined with its history of operating or
cash flow losses, the Company identified certain practice management agreements
where the recoverability was impaired. As a result, the Company recorded an
impairment charge of $31 million in during the six months ended June 30, 2002.
During the six months ended June 30, 2003, the Company recorded a $0.4
million reduction in expenses related to the valuation of investments and
long-term notes receivable. The Company reduced a reserve by $0.6 million
related to a long-term receivable due to a consistent payment history and
continually improving financial strength of the debtor and wrote down its
investment in a marketable equity security by $0.2 million during the six months
ended June 30, 2003 due to an other than temporary decline in its value. The
Company also recorded adjustments to the value of investments and long-term
receivables in the prior year due to similar valuation analyses.
The Company recorded $1.7 million of restructuring charges during the
quarter, primarily relating to the closing of four unprofitable centers. The
Company had recorded a $7.0 million restructuring charge during the six months
ended June 30, 2002.
Interest expense, of $0.8 million for the six months ended June 30, 2003
reflects interest offset by income from the Company's cash position interest
expense from debt and lease obligations. Interest income has decreased since the
Company has reduced cash and cash equivalent balances during the six months
ended June 30, 2003 compared to the corresponding period in the prior year.
Accordingly, interest expense increased $0.2 million from $0.6 million in the
prior year.
Income tax expense of $0.4 million for the six-month period ended June 30,
2003 decreased $0.5 million from $0.9 million for the six months ended June 30,
2002 due to the favorable change in the taxable status of two subsidiaries. The
$0.4 million tax expense consisted of federal and state taxes for certain of the
Company's subsidiaries where a consolidated federal and state tax return cannot
be filed.
16
Net loss for the six months ended June 30, 2003 was $2.4 million or $0.04
per share compared to a loss of $117.6 million or $2.63 per share for the six
months ended June 30, 2003.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 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 $34.9 million at June 30, 2003 compared to $41.6 million at
December 31, 2002. Working capital at June 30, 2003 was $10.0 million, a
decrease of $2.5 million compared to the December 31, 2002 balance of $12.5
million. This decrease is primarily due to a reclassification from long term
liabilities to current liabilities of a $2.1 million liability related to a
litigation settlement related to eyeVantage.com. A reserve of $3.1 million had
previously been established for this matter and had been recorded as a long-term
liability as of December 31, 2002 and March 31, 2003.
The Company's principal cash requirements have included normal operating
expenses, debt repayment, distributions to minority partners, capital
expenditures, and the purchase of the AEI 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 six months ended June 30, 2003, the Company invested $2.6
million in fixed assets and received vendor lease financing for $5.6 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 at least the next 12 to 18 months.
At December 31, 2002 the Company had $4.2 million of liabilities primarily
related to the restructuring of operations in connection with the LaserVision
merger. During the six months ended June 30, 2003 the Company reserved an
additional liability of $1.0 million for restructuring costs related to four
center closings in 2003 and made cash payments of $1.4 million toward previous
liability obligations, resulting in a $3.8 million liability at June 30, 2003.
CASH PROVIDED BY OPERATING ACTIVITIES
Net cash provided by operating activities was $0.9 million for the six
months ended June 30, 2003. The cash flows provided by operating activities
during the six months ended June 30, 2003 are primarily due to non-cash items
including $11.0 million of depreciation and amortization, $2.5 million for
minority interests, and $0.5 million of non-cash restructuring costs offset by
$2.4 million in net loss and a $10.0 million increase in net operating assets.
The increase in net operating assets consist of a $1.2 million increase in
prepaid expenses primarily due to annual insurance premiums, a $3.8 million
increase in accounts receivable due primarily to higher procedure volume and
timing differences related to collection of accounts receivable compared to
December 2002, and a $5.0 million decrease in accounts payable and accrued
liabilities. This decrease in liabilities relates to the payment of a brokers
fee related to the LaserVision acquisition, settlement of disputed amounts with
a major vendor and state agencies, and severance payments, offset by the
reclassification of the eyeVantage litigation reserve from a long-term liability
to a current liability. Payment of litigation settlement or payments of accrued
liabilities in future periods could reduce cash without affecting working
capital.
CASH USED IN INVESTING ACTIVITIES
Net cash used for investing activities was $4.5 million for the six months
ended June 30, 2003. Cash used in investing during the six-month period ended
June 30, 2003 primarily included $2.6 million for business and investment
acquisitions, $2.6 million for the acquisition of equipment and $0.3 million for
a purchase of a short term
17
investment, offset by $0.5 million from the sale of fixed assets and $0.2
million from the sale of investments and subsidiaries.
CASH USED IN FINANCING ACTIVITIES
Net cash used for financing activities was $3.9 million for the six months
ended June 30, 2003. Net cash used for financing activities during the six
months ended June 30, 2003 was primarily utilized during the period for
repayment of certain notes payable and capitalized lease obligations of $4.0
million and distribution to minority interests of $1.8 million offset by $1.5
million in proceeds from debt financing and $0.9 million in proceeds from the
issuance of common stock.
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.
As of the end of the period covered by the 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-15(e) and 15d-15(e)
of the Exchange Act). Based on that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are 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.
There have been no significant changes in the Company's internal controls
over financial reporting that have materially affected, or are reasonably likely
to materially affect the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In September 2000, Eye Care Consultants, Inc. ("ECCI") filed a lawsuit
against eyeVantage.com, TLC Laser Eye Centers Inc., and a former officer of TLC
for breach of contract in the acquisition by eyeVantage.com of the InFocus
System. Furthermore, principals of ECCI filed separate breach of contract
claims, as well as claims purportedly arising under the Pennsylvania Wage
Payment and Collection Law, due to their alleged wrongful termination. This case
was set for trial in May 2003. Prior to trial, a settlement agreement was
reached between all parties whereby TLC and eyeVantage paid a total of $2.15
million in July 2003 as full settlement of all claims.
There have been no other 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
18
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of shareholders was held on May 29, 2003. At
the annual meeting, shareholders of the Company voted on the following
proposals: (a) to confirm certain amendments to the by-laws of the Company; (b)
to elect seven directors for the ensuing year; and (c) to appoint Ernst & Young
LLP as auditors of the Company for the ensuing year and to authorize the
directors to fix the remuneration to be paid to the auditors. Each of the
proposals, including the election of directors, was approved at the annual
meeting.
With respect to the approval confirming amendments to the by-laws of the
Company, the following votes were cast:
Votes in Favor Votes Against Abstentions
-------------- ------------- -----------
17,513,023 245,010 155,509
With respect to the election of directors, the following votes were cast:
Nominee Votes in Favor Votes Withheld or Against
------- -------------- -------------------------
Elias Vamvakas 38,345,225 1,801,410
John F. Riegert 38,346,213 1,800,422
Dr. William David Sullins, Jr. 38,354,393 1,792,242
Thomas N. Davidson 38,351,313 1,795,322
Warren S. Rustand 38,350,160 1,796,475
John J. Klobnak 38,338,134 1,808,501
Dr. Richard Lindstrom 38,350,263 1,796,372
With respect to the appointment of Ernst & Young LLP as auditors of the
Company for the ensuing year and to authorize the directors to fix the
remuneration to be paid to the auditors, the following votes were cast:
Votes in Favor Votes Against Abstentions
-------------- ------------- ------------
39,935,673 0 88,799
ITEM 6. EXHIBITS AND REPORTS ON 8-K
a. Exhibits:
31.1 CEO's Certification required by Rule 13a-14(a) of the Securities Exchange
Act of 1934, as amended
31.2 CFO's Certification required by Rule 13a-14(a) of the Securities Exchange
Act of 1934, as amended
32.1 CEO's Certification of periodic financial report pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, U.S.C. Section 1350.
32.2 CFO's Certification of periodic financial report pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, U.S.C. Section 1350
19
b. Reports on 8-K:
A report on 8-K was furnished by the company under Item 9 on May 8, 2003
announcing Company's financial results for the quarter ended March 31, 2003.
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
August 13, 2003
By: /s/ B. Charles Bono III
------------------------------------
B. Charles Bono III
Chief Financial Officer
August 13, 2003
20
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------
31.1 CEO's Certification required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended.
31.2 CFO's Certification required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended.
32.1 CEO's Certification of periodic financial report pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, U.S.C. Section 1350.
32.2 CFO's Certification of periodic financial report pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, U.S.C. Section 1350
21