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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 QUARTERLY PERIOD ENDED SEPTEMBER 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 Identification No.)
incorporation or organization)
5280 SOLAR DRIVE, SUITE 300
MISSISSAUGA, ONTARIO L4W 5M8
(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 November 13, 2003 there were 66,112,000 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 nine months ended September 30, 2003 and
2002
Consolidated Balance Sheets at September 30, 2003 and
December 31, 2002
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2003 and 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Revenues
Refractive
Owned................................. $ 12,386 $ 13,231 $ 40,649 $ 40,679
Managed............................... 12,546 10,895 41,443 42,695
Access................................ 8,861 9,684 29,437 17,349
Other healthcare services.................. 12,221 9,992 35,607 23,128
--------- ---------- ---------- ---------
Total revenues............................... 46,014 43,802 147,136 123,851
--------- ---------- ---------- ---------
Cost of revenues
Refractive
Owned................................. 10,412 11,714 33,128 31,427
Managed............................... 9,827 9,732 30,290 30,478
Access................................ 6,558 6,864 20,201 11,866
Reduction in fair value of capital
assets............................... -- -- -- 1,487
Other healthcare services.................. 7,752 6,185 23,182 14,950
--------- ---------- ---------- ---------
Total cost of revenues....................... 34,549 34,495 106,801 90,208
--------- ---------- ---------- ---------
Gross margin............................... 11,465 9,307 40,335 33,643
--------- ---------- ---------- ---------
General and administrative................... 8,023 9,478 24,355 26,539
Marketing.................................... 3,118 3,688 10,275 10,732
Amortization of intangibles.................. 1,665 1,556 5,015 6,343
Research and development 975 2,000 975 4,000
Impairment of goodwill and other intangible
assets..................................... -- -- -- 81,720
Adjustment to the fair value of investments
and long-term receivables ................. 231 -- (217) 5,003
Restructuring and other charges.............. -- 1,064 1,720 8,055
--------- ---------- ---------- ---------
14,012 17,786 42,123 142,392
--------- ---------- ---------- ---------
Operating loss............................... (2,547) (8,479) (1,788) (108,749)
Other income and (expense):
Other income, net ......................... 74 6,627 640 6,627
Interest expense, net ..................... (325) (258) (1,086) (902)
Minority interests......................... (1,110) (132) (3,612) (822)
--------- ---------- ---------- ---------
Loss before income taxes..................... (3,908) (2,242) (5,846) (103,846)
Income tax expense........................... (182) (290) (627) (1,158)
--------- ---------- ---------- ---------
Net loss..................................... $ (4,090) $ (2,532) $ (6,473) $(105,004)
========= ========== ========== =========
Net loss per share - basic and diluted....... $ (0.06) $ (0.04) $ (0.10) $ (2.05)
========= ========== ========= =========
Weighted average number of common shares
outstanding - basic and diluted............ 64,743 64,056 63,888 51,220
See the accompanying notes to unaudited interim consolidated financial
statements.
TLC VISION CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
ASSETS
Current assets
Cash and cash equivalents................................ $ 25,328 $ 36,081
Restricted cash - current ............................... 3,211 --
Short-term investments ................................. 769 1,557
Accounts receivable...................................... 18,800 14,155
Prepaids and other current assets ...................... 10,758 9,820
---------- ----------
Total current assets.................................... 58,866 61,613
Restricted cash - non-current.............................. 1,349 3,975
Investments and other assets............................... 2,308 2,442
Intangibles, net........................................... 24,575 29,326
Goodwill, net.............................................. 47,990 40,697
Fixed assets............................................... 57,175 58,003
---------- ----------
Total assets............................................... $ 192,263 $ 196,056
========== ==========
LIABILITIES
Current liabilities
Accounts payable......................................... $ 11,579 $ 13,857
Accrued liabilities...................................... 29,540 28,911
Current portion of long-term debt........................ 9,602 6,322
---------- ----------
Total current liabilities.............................. 50,721 49,090
Other long-term liabilities................................ 3,394 9,630
Long term-debt, less current maturities.................... 16,633 15,760
Minority interests......................................... 10,354 9,748
SHAREHOLDERS' EQUITY
Capital stock.............................................. 396,884 388,769
Treasury stock............................................. (2,429) (2,623)
Option and warrant equity.................................. 8,532 11,035
Accumulated deficit........................................ (291,826) (285,353)
---------- ----------
Total shareholders' equity................................. 111,161 111,828
---------- ----------
Total liabilities and shareholders' equity................. $ 192,263 $ 196,056
========== ==========
See the accompanying notes to unaudited interim consolidated financial
statements.
TLC VISION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) (In thousands)
NINE MONTHS ENDED
-----------------------
SEPTEMBER 30
------------
2003 2002
---- ----
OPERATING ACTIVITIES
Net loss for the period ................................................ $ (6,473) $(105,004)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization ......................................... 16,807 16,341
Intangible impairment ................................................. -- 81,720
(Gain) loss on disposal of fixed assets ............................... (538) 2,122
Impairment of fixed assets and adjustment to the value of
investments and notes receivable ..................................... (171) 6,287
Write off of investment in research and development arrangements ...... 975 4,000
Restructuring and other costs ......................................... 527 2,402
Minority interests and other .......................................... 3,612 446
Changes in operating assets and liabilities:
Accounts receivable ................................................... (4,348) (1,154)
Prepaid expenses and other current assets ............................. (307) 7,207
Accounts payable and accrued liabilities .............................. (7,766) (2,215)
--------- ---------
CASH PROVIDED BY OPERATING ACTIVITIES .................................. 2,318 12,152
INVESTING ACTIVITIES
Purchase of fixed assets ............................................... (3,724) (2,458)
Investment in research and development arrangements .................... (975) (4,000)
Proceeds from sale of fixed assets ..................................... 548 721
Proceeds from the sale of investments .................................. 221 690
Cash acquired with LaserVision Centers acquisition ..................... -- 7,319
Acquisitions and investments ........................................... (7,457) (11,319)
(Purchase) sale of short-term investments .............................. 788 (6,914)
Other .................................................................. 305 (111)
--------- ---------
CASH USED IN INVESTING ACTIVITIES ...................................... (10,294) (16,072)
FINANCING ACTIVITIES
Restricted cash ........................................................ (585) 59
Principal payments of debt financing and capital leases ................ (5,565) (8,300)
Distributions to minority interests .................................... (3,593) (1,082)
Purchase of treasury stock ............................................. -- (50)
Proceeds from debt financing ........................................... 1,450 304
Proceeds from the issuance of capital stock ............................ 5,516 236
--------- ---------
CASH USED IN FINANCING ACTIVITIES ...................................... (2,777) (8,833)
--------- ---------
Net decrease in cash and cash equivalents .............................. (10,753) (12,753)
Cash and cash equivalents, beginning period ............................ 36,081 42,993
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ............................... $ 25,328 $ 30,240
========= =========
See the accompanying notes to unaudited interim consolidated financial
statements.
5
TLC VISION CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED) (In thousands)
OPTION
COMMON STOCK AND TREASURY STOCK
----------------- 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
employee benefit plans.......... 49 147 196 194 341
Exercise of stock options........ 1,444 5,369 5,369
Option and warrant reductions.... 2,503 (2,503) --
Shares issued for acquisition.... 100 96 96
Net loss for the period.......... (6,473) (6,473)
------ -------- --------- ---- -------- ---------- ---------
Balance September 30, 2003....... 66,387 $396,884 $ 8,532 (583) $ (2,429) $ (291,826) $ 111,161
====== ======== ========= ==== ======== ========== =========
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)
September 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
nine-month periods ended September 30, 2002 include certain reclassifications
to conform with classifications for the three- and nine-month periods ended
September 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 nine months ended September 30, 2002 excludes
outstanding options and warrants (because they would be anti-dilutive),
treasury stock and 712,500 outstanding 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 nine-month periods ended September
30, 2003 and 2002. 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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net loss, as reported...................... $ (4,090) $ (2,532) $ (6,473) $(105,004)
Adjustments for SFAS No. 123............... (227) (270) (755) (1,165)
-------- --------- -------- ---------
Pro forma net loss......................... $ (4,317) $ (2,802) $ (7,228) $(106,169)
======== ========= -------- ---------
Pro forma net loss per share - basic and
diluted.................................. $ (.07) $ (.04) $ (.11) $ (2.07)
======== ========= ======== =========
3. ACQUISITIONS
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.
On September 2, 2003, OR Partners, Inc. a subsidiary of TLC Vision, acquired
58% of Phoenix Eye Surgical Center, LLC, which operates an ambulatory surgery
center primarily performing cataract surgery. The Company paid $3.8 million
in cash for its interest and received net assets with a book value of $0.2
million. The $3.6 million balance was recorded as intangible assets,
primarily goodwill.
The results of operations for both acquired companies have been included in
the consolidated statements of operations of the Company since the respective
dates of acquisition.
4. EQUIPMENT FINANCING
During the nine months ended September 30, 2003, the Company entered into
two- and three-year financing agreements with two of its laser suppliers for
equipment to upgrade its laser technology. Payments related to this financing
will total $6.7 million over the next two to three years. Amounts payable are
based on the number of procedure cards acquired during the month with any
remaining balance due at the end of the financing period or on a flat monthly
payment basis over the term of the loan.
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 services
specifically for the surgical treatment of cataracts. The Company acquired
the cataract segment in the LaserVision acquisition, therefore only
transactions since the date of acquisition are represented for that segment
in the three-month and nine-month periods ended September 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.
7
Doctor's compensation as presented in the segment information of the
financial statements represents the cost to the Company of engaging
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 following tables set forth information by segments (in thousands):
THREE MONTHS ENDED SEPTEMBER 30, 2003 REFRACTIVE CATARACT OTHER TOTAL
- ------------------------------------------------- ---------- -------- ---------- ----------
Revenues......................................... $ 33,793 $ 6,531 $ 5,690 $ 46,014
Expenses
Doctor compensation............................ 2,424 -- 31 2,455
Operating...................................... 29,890 5,272 3,978 39,140
Research and development -- -- 975 975
Depreciation................................... 3,518 620 (43) 4,095
Amortization of intangibles.................... 1,461 95 109 1,665
Write down in the fair value of investment and
long-term receivables........................ 231 -- -- 231
--------- -------- ---------- ----------
37,524 5,987 5,050 48,561
--------- -------- ---------- ----------
Income (loss) from operations.................... (3,731) 544 640 (2,547)
Interest (expense) income, net and other......... 5 (39) (217) (251)
Minority interests............................... (422) -- (688) (1,110)
Income taxes..................................... (85) -- (97) (182)
--------- -------- ---------- ----------
Net income (loss)................................ $ (4,233) $ 505 $ (362) $ (4,090)
========= ======== ========== ==========
THREE MONTHS ENDED SEPTEMBER 30, 2002 REFRACTIVE CATARACT OTHER TOTAL
- ------------------------------------------------ ---------- -------- ---------- ----------
Revenues........................................ $ 33,810 $ 5,519 $ 4,473 $ 43,802
Expenses
Doctor compensation........................... 3,063 -- -- 3,063
Operating..................................... 32,294 4,253 3,984 40,531
Research and development -- -- 2,000 2,000
Depreciation.................................. 3,359 488 220 4,067
Amortization of intangibles................... 1,361 91 104 1,556
Restructuring charge.......................... 1,064 -- -- 1,064
--------- -------- ---------- ----------
41,141 4,832 6,308 52,281
--------- -------- ---------- ----------
Income (loss) from operations................... (7,331) 687 (1,835) (8,479)
Interest (expense) income, net and other........ 5,604 (26) 791 6,369
Minority interests.............................. (42) -- (90) (132)
Income taxes.................................... (100) (1) (189) (290)
--------- -------- ----------- ----------
Net income (loss) before cumulative effect of
accounting change............................. $ (1,869) $ 660 $ (1,323) $ (2,532)
========= ======== ========== ==========
NINE MONTHS ENDED SEPTEMBER 30, 2003 REFRACTIVE CATARACT OTHER TOTAL
- ------------------------------------------------- ---------- -------- ---------- ----------
Revenues......................................... $ 111,529 $ 18,103 $ 17,504 $ 147,136
Expenses
Doctor compensation............................ 8,007 -- 117 8,124
Operating...................................... 94,178 15,152 12,185 121,515
Research and development -- -- 975 975
Depreciation................................... 9,637 1,760 395 11,792
Amortization of intangibles.................... 4,396 299 320 5,015
Write down in the fair value of investments
and long-term receivables.................... (217) -- -- (217)
Restructuring charge........................... 1,720 -- -- 1,720
--------- -------- ---------- ----------
117,721 17,211 13,992 148,924
--------- -------- ---------- ----------
Income (loss) from operations.................... (6,192) 892 3,512 (1,788)
Interest (expense) income, net and other......... 257 (40) (663) (446)
8
Minority interests............................... (1,576) -- (2,036) (3,612)
Income taxes..................................... (134) 18 (511) (627)
--------- -------- ---------- ----------
Net income (loss)................................ $ (7,645) $ 870 $ 302 $ (6,473)
========= ======== ========== ==========
NINE MONTHS ENDED SEPTEMBER 30, 2002 REFRACTIVE CATARACT OTHER TOTAL
- ------------------------------------------------ ---------- -------- ---------- ----------
Revenues........................................ $ 100,723 $ 7,403 $ 15,725 $ 123,851
Expenses
Doctor compensation........................... 8,527 -- -- 8,527
Operating..................................... 88,002 5,659 14,405 108,066
Research and development 1,000 -- 3,000 4,000
Depreciation.................................. 7,822 645 810 9,277
Reduction in fair value of capital assets..... 1,487 -- -- 1,487
Amortization of intangibles................... 6,011 121 333 6,465
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.......................... 8,055 -- -- 8,055
--------- -------- ---------- ----------
193,596 6,425 32,579 232,600
--------- -------- ---------- ----------
Income (loss) from operations................... (92,873) 978 (16,854) (108,749)
Interest (expense) income, net and other........ 4,932 (38) 831 5,725
Minority interests.............................. (387) -- (435) (822)
Income taxes.................................... (554) (1) (603) (1,158)
--------- -------- ---------- ----------
Net income (loss) $ (88,882) $ 939 $ (17,061) $ (105,004)
========= ======== ========== ==========
6. SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash transactions:
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2003 2002
-------- --------
Capital assets financed and leased......... $ 7,450 $ 112
Option and warrant reductions.............. 2,503 720
Treasury stock to employee benefit plan 194 --
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:
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2003 2002
-------------- --------------
Interest ............................ $ 2,168 $ 1,439
Income taxes......................... 115 1,913
7. RESTRICTED/UNRESTRICTED CASH
During the quarter ended September 30, 2003, $3.2 million was reclassified from
restricted cash (a non-current asset) to restricted cash - current. A total of
$2.7 million of these funds were used to pay a legal settlement in October 2003,
and the remaining $0.5 million was returned to the Company as cash and cash
equivalents with no restrictions regarding its usage. The Company also
reclassified the related liability from non-current to current during the
quarter ended September 30, 2003.
8. RESEARCH AND DEVELOPMENT
In June and September 2003, TLC Vision Corporation agreed to advance up to $6.0
million in convertible ($3.5 million) and non-convertible ($2.5 million) debt to
Vascular Sciences Corporation ("Vascular Sciences") from time to time and invest
an additional $0.5 million in the common stock of Vascular Sciences. Diamed, a
German company that performs rheopheresis in Germany, will be making similar and
simultaneous debt and stock investments in Vascular Sciences.
Vascular Sciences will use these funds to obtain the clinical trial information
necessary to file for approval from
9
the Food and Drug Administration for the rheopheresis procedure to treat dry
age-related macular degeneration (AMD) in the U.S. The $975,000 amount disbursed
and expensed during the quarter ended September 30, 2003 was part of this $6.0
million commitment. Since Vascular Sciences technology is in the development
stage in the U.S., the Company accounts for its investment as a research and
development arrangement whereby investments are expensed as amounts are expended
by Vascular Sciences. During the quarter ended September 30, 2002, the Company
disbursed and expensed $2.0 million for Vascular Sciences common stock. During
the nine months ended September 30, 2002, the Company disbursed and expensed
$3.0 million for Vascular Sciences common stock and $1.0 million for a
refractive research and development investment.
When and if Vascular Sciences obtains FDA approval for the rheopheresis
procedure in the U.S., the Company expects to adopt the equity accounting method
for its Vascular Sciences investment. The rheopheresis procedure for dry AMD has
been approved in Canada (where the Company operates a rheopheresis center) and
Germany.
9. RESTRUCTURING CHARGES
The Company incurred no restructuring costs during the three months ended
September 30, 2003. During the nine months ended September 30, 2003, the Company
recorded a $1.7 million restructuring charge primarily related to 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 during the nine months
ended September 30, 2003.
In the three months ended September 30, 2002, the Company recorded restructuring
charges of $1.1 million for severance costs related to the elimination of 36
full-time equivalent positions in marketing and general administration. During
the nine months ended September 30, 2002, the Company recorded a total of $8.1
million in restructuring charges. These charges consisted of cash payments of
$5.8 million, primarily for severance, lease costs, and other center closure
costs, and $2.3 million in non-cash costs related to the write-off of fixed
assets at closed centers.
10. OTHER INCOME, NET
Other income, net for the three and nine months ended September 30, 2002
includes $6.8 million of income from the settlement of an antitrust lawsuit. In
August 2002, the Company received $14.8 million (net of minority interests) from
a class action antitrust lawsuit involving two laser manufacturers. The Company
had previously recorded a receivable for $8.0 million in connection with the
acquisition of LaserVision. The remaining $6.8 million was recorded as a gain.
During the quarter ended March 31, 2003, the Company received another $0.2
million related to this antitrust settlement.
11. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2003, FASB issued Interpretation No. 46, "Consolidation of Variable
Interest Entities" (FIN 46), which requires the consolidation of variable
interest entities, as defined. The Company is still evaluating what effect, if
any, FIN 46 and its related interpretations will have on the Company.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Quarterly Report on Form 10-Q (herein, together with all amendments,
exhibits and schedules hereto, referred to as the "Form 10-Q") contains certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which
statements can be identified by the use of forward looking terminology, such as
"may," "will," "expect," "anticipate," "estimate," "plans," "intends" or
"continue" or the negative thereof or other variations thereon or comparable
terminology. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including but not limited to those set forth elsewhere in this Form 10-Q in the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and in the Company's Transition Report on Form 10-K
for the seven-month period ended December 31, 2002. Unless the context indicates
or requires otherwise, references in this Form 10-Q to the "Company" or "TLC
Vision" shall mean
10
TLC Vision Corporation and its subsidiaries. References to "$" 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.
Over the past 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 decreased consumer confidence. Also contributing to the
industry-wide procedure volume decline was a wide range in consumer prices for
laser vision correction procedures, bankruptcies 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 recent approval and development of
Custom LASIK has generated more positive news stories.
During the nine-month period ended September 30, 2003, the Company served
surgeons who performed over 175,000 procedures, including refractive and
cataract surgery procedures, at the Company's centers or using the Company's
laser access.
The Company continues to assess patient, optometric and ophthalmic industry
trends and develop 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 initiatives
focusing on future development opportunities for the Company in other healthcare
services.
RECENT DEVELOPMENTS
On September 2, 2003, OR Partners, Inc. a subsidiary of TLC Vision, acquired 58%
of Phoenix Eye Surgical Center, LLC, which operates an ambulatory surgery center
primarily performing cataract surgery. The Company paid $3.8 million in cash for
its interest and received net assets with a book value of $0.2 million. The $3.6
million balance was recorded as intangible assets, primarily goodwill.
11
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2002
As used herein, "existing TLC Vision" refers to TLC Vision locations in
existence prior to the merger with LaserVision in May 2002. Due to the completed
integration of the existing TLC Vision and LaserVision businesses, it is no
longer practical to distinguish revenues or cost of revenues between the two
businesses.
Total revenues for the three months ended September 30, 2003 were $46.0
million, an increase of $2.2 million, or 5% over revenues of $43.8 million for
the three months ended September 30, 2002. Approximately 73% of total revenues
for the three months ended September 30, 2003 was derived from refractive
services compared to 77% during the three months ended September 30, 2002.
Revenues from the refractive segment for the three months ended September 30,
2003 and 2002 were each $33.8 million. The constant level of revenue between
quarters was due to higher average pricing associated with the introduction of
Custom LASIK in June 2003, offset by a decline in procedures from the prior year
period, largely due to the closure of approximately 12 underperforming sites
subsequent to September 30, 2002 and to a gradual decline in access procedures
and volume.
Revenues from owned centers for the three months ended September 30, 2003
were $12.4 million, a decrease of $0.8 million or 6% from the revenues of $13.2
million for the three months ended September 30, 2002. This decrease was
primarily due to lost revenue at five centers that were closed subsequent to
September 30, 2002.
Revenues from managed centers for the three months ended September 30, 2003
were $12.5 million, an increase of $1.6 million, or 15% from the revenues of
$10.9 million for the three months ended September 30, 2002. This increase
resulted from higher pricing and procedure volume at managed centers partially
offset by lost revenue at five unprofitable centers that were closed subsequent
to September 30, 2002.
Revenues from access services for the three months ended September 30, 2003
were $8.9 million, a decrease of $0.8 million or 8% from revenues of $9.7
million for the three months ended September 30, 2002. The access business
continued to decline from increased competition, primarily from laser
manufacturers, which negatively impacted procedure volumes and average pricing
during the quarter.
Approximately 39,600 refractive procedures were performed in the three months
ended September 30, 2003, compared to approximately 40,700 procedures for the
three months ended September 30, 2002. This 1,100 or 3% decrease in procedures
was primarily due to centers that closed within the past year and a general
decline in the access business, partially offset by growth in remaining owned
and managed centers.
The cost of refractive revenues for the three months ended September 30, 2003
was $26.8 million, a decrease of $1.5 million, or 5% over the cost of refractive
revenues of $28.3 million for the three months ended September 30, 2002. This
decrease was primarily attributable to decreased procedure volume and cost
savings associated with of the Company's cost reduction initiative plan,
partially offset by the higher costs associated with Custom LASIK.
The cost of revenues from owned centers for the three months ended September
30, 2003 was $10.4 million, a decrease of $1.3 million or 11% from the cost of
revenues of $11.7 million from the three months ended September 30, 2002. This
decrease results from reduced procedure volumes at owned centers, largely due to
closing unprofitable centers during the past year.
The cost of revenues from managed centers for the three months ended
September 30, 2003 was $9.8 million, an increase of $0.1 million, or 1% from the
cost of revenues of $9.7 million from the three months ended September 30, 2002.
This minimal increase, despite a 15% increase in revenue from managed centers,
demonstrates the positive effect on profitability of controlling costs and
increasing procedure volumes.
The cost of revenues from access services for the three months ended
September 30, 2003 was $6.6 million, a decrease of $0.3 million or 4% from the
cost of revenues of $6.9 million during the three months ended September 30,
2002. This decrease primarily resulted from a decline in procedure volume.
12
Revenues from other healthcare services for the three months ended September
30, 2003, were $12.2 million, an increase of $2.2 million or 22% from revenues
of $10.0 million for the three months ended September 30, 2002. Approximately
27% of the total revenues for the three months ended September 30, 2003 were
derived from other healthcare services compared to 23% during the three months
ended September 30, 2002. The growth in other healthcare services revenue and
the higher mix of other healthcare services for the quarter was 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 September 30, 2003 was $7.8 million, an increase of $1.6 million or 26%
from cost of revenues of $6.2 million for the three months ended September 30,
2002. The increase in cost of revenues primarily relates to incremental costs
incurred related to the increased revenue of the other healthcare service
business.
General and administrative expenses decreased to $8.0 million for the
three-months ended September 30, 2003 from $9.5 million for the three months
ended September 30, 2002. The $1.5 million or 16% decrease reflected the
Company's success in reducing overhead costs in conjunction with the Company's
cost reduction initiative program that began in 2002. As a result, the combined
infrastructure cost of TLC Vision and LaserVision is significantly lower them
the prior year. General and administrative expenses as percentage of revenue
decreased to 17% from 22% compared to the prior year quarter.
Marketing expenses of $3.1 million decreased by $0.6 million or 16% for the
three months ended September 30, 2003 from $3.7 million for the three months
ended September 30, 2002. The Company monitors marketing spending closely and
adjusts expenditures as necessary based upon procedure volume.
Amortization expenses increased to $1.7 million for the three months ended
September 30, 2003 from $1.6 million for the three months ended September 30,
2002. This expense was largely due to intangible Practice Management Agreement
assets.
Research and development expenses of $1.0 million for the three months ended
September 30, 2003 decreased by $1.0 million from the $2.0 million expense for
the three months ended September 30, 2002. Both periods reflected expenditures
made to fund research and development efforts by Vascular Sciences to achieve
Food and Drug Administration approval for medical treatments related to dry
age-related macular degeneration. Since the technology is in the development
stage and has not received FDA approval, the Company accounted for this
investment as a research and development arrangement whereby investments were
expensed as amounts are expended by Vascular Sciences.
During the three months ended September 30, 2003, the Company recorded a $0.2
million write-down of its declared investment in the common stock of Lasersight
Incorporated. Lasersight declared bankruptcy during the quarter.
The Company recorded no restructuring charges during the quarter ended
September 30, 2003. The Company had recorded a $1.1 million restructuring charge
during the three months ended September 30, 2002 related to severance payments
resulting from the elimination of several marketing and administrative
positions, all payments of which have now been made.
Other income and expense for the three months ended September 30, 2003 of
$0.1 million resulted from the gain on sale of assets from previously closed
centers. During the three months ended September 30, 2002, the Company recorded
$6.6 million in other revenue, consisting of $6.8 million of income from the
settlement of an antitrust lawsuit plus $0.8 million of income from the
termination of the agreement to purchase Aspen Health Care from the Company,
less $1.0 million of expense for the loss of the disposition of lasers.
Interest expense, net of $0.3 million for the three months ended September
30, 2003 and 2002 reflected interest expense from debt and lease obligations,
partially offset by interest income from the Company's cash position. Interest
income has decreased since the Company has reduced cash and cash equivalent
balances during the three months ended September 30, 2003 compared to the
corresponding period in the prior year.
Minority interest expense increased to $1.1 million for the three months
ended September 30, 2003 from $0.1 million for the three months ended September
30, 2002. This $1.0 million increase represents higher profits at the Company's
subsidiaries in which the Company has a shared interest with minority partners.
13
Income tax expense of $0.2 million for the three-month period ended September
30, 2003 decreased by $0.1 million from $0.3 million for the three months ended
September 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 September 30, 2003 was $4.1 million
or $0.06 per share compared to a loss of $2.5 million or $0.04 per share for the
three months ended September 30, 2002. Excluding the one-time settlement of $6.6
million in other revenue primarily related to proceeds from an antitrust legal
settlement during the three months ended September 30, 2002, the $1.6 million
increase in net loss for the quarter would have represented a $5.0 million
improvement in net loss.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 2002
Results from the LaserVision business are included for operations subsequent
to the date of acquisition in May 2002 only. This merger significantly impacted
the variances in results between the nine months ended September 30, 2003 and
2002. Due to the completed integration of TLC Vision and LaserVision, it is no
longer practical to distinguish revenues or cost of revenues between the two
companies.
Total revenues for the nine months ended September 30, 2003 were $147.1
million, an increase of $23.2 million, or 19% increase over revenues of $123.9
million for the nine months ended September 30, 2002. Approximately 76% of total
revenues for the nine months ended September 30, 2003 was derived from
refractive services compared to 81% during the nine-months ended September 30,
2002.
Revenues from the refractive segment for the nine months ended September 30,
2003 were $111.5 million, an increase of $10.8 million or 11% over revenues of
$100.7 million from refractive activities for the nine months ended September
30, 2002. This increase was largely due to a full year of LaserVision revenues
in 2003 offset by closed owned, managed and access sites that were
underperforming.
Revenues from owned centers for the nine-months ended September 30, 2003 were
$40.6 million, a decrease of $0.1 million from $40.7 million from the prior year
period. This decrease resulted from decreased volume, largely due to the closure
of approximately eight underperforming owned centers that were operational in
the nine months ended September 2002, offset by growth in the centers that
remain open and the higher revenues associated with Custom LASIK.
Revenues from managed centers for the nine months ended September 30, 2003
were $41.4 million, a decrease of $1.3 million or 3% from the revenues of $42.7
million for the nine months ended September 30, 2002. As LaserVision does not
have a managed service product, the LaserVision acquisition had no effect on
revenues for managed centers. This decrease resulted from decreased procedure
volume and was also largely due to the closure of eight managed centers that
were operational in the nine-months ended September 30, 2002, offset by growth
among centers that remain open.
Revenues from access services for the nine months ended September 30, 2003
were $29.4 million, an increase of $12.1 million from the revenues of $17.3
million for the nine months ended September 30, 2002. Because access revenues
are a product offering of LaserVision only, the Company has no access revenue
for the existing TLC Vision business. Therefore, the increase in revenue was
substantially impacted by prior years revenue only including revenue subsequent
to the date of acquisition in May 2002.
Approximately 137,400 refractive procedures were performed in the nine months
ended September 30, 2003, compared to approximately 102,900 procedures for the
nine months ended September 30, 2002. The increase in procedure volume of 34,500
or 34% was largely due to a full year of operation for LaserVision in 2003 and
growth in owned and managed centers offset by procedures lost to centers closed
during the past year.
The cost of refractive revenues for the nine months ended September 30, 2003
was $83.6 million, an increase of $8.3 million, or 11%, over the cost of
refractive revenues of $75.3 million for the nine months ended September 30,
2002. This increase was related to the increase in procedure volume and the
higher costs associated with Custom LASIK.
14
The cost of revenues from owned centers for the nine months ended September
30, 2003 was $33.1 million, an increase of $1.7 million or 5% from the cost of
revenues of $31.4 million from the nine months ended September 30, 2002. This
increase was related to rising costs, specifically due to higher royalty fees
and doctor compensation resulting from the introduction of Custom LASIK.
The cost of revenues from managed centers for the nine-months ended September
30, 2003 was $30.3 million, a decrease of $0.2 million, or 1%, from the cost of
revenues of $30.5 million from the nine months ended September 30, 2002, due to
lower procedure volume. As LaserVision does not have a managed service product,
the LaserVision acquisition had no effect on the managed center cost of revenue
for the year.
The cost of revenues from access services for the nine months ended September
30, 2003 was $20.2 million, up $8.3 million from $11.9 million subsequent to the
LaserVision merger in May 2002. Access services are a product offering of
LaserVision only and therefore, were significantly impacted by the inclusion of
LaserVision only from the date of acquisition in May 2002.
During the nine months ended September 30, 2002, the Company recorded $1.5
million in charges to reflect the reduction in the value of certain capital
assets. No adjustments have been recorded in the nine months ended September 30,
2003.
Fluctuations in cost of revenue were consistent with significant changes to
doctor compensation, royalty fees on laser usage, and personnel and medical
supplies that are highly dependent on procedural volume. 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 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 through May 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 nine months ended September
30, 2003, were $35.6 million, an increase of $12.5 million from revenues of
$23.1 million for the nine months ended September 30, 2002. Approximately 24% of
the total revenues for the nine months ended September 30, 2003 were derived
from other healthcare services compared to 19% during the nine months ended
September 30, 2002. The increase was indicative of the Company's stated
diversification strategy to increase non-refractive eye care services and
included a full year of business gained in conjunction with the LaserVision
acquisition, while the previous year only includes revenue since the date of
acquisition in May 2002.
The cost of revenues from other healthcare services for the nine months ended
September 30, 2003 was $23.2 million, an increase of $8.2 million from cost of
revenues of $15.0 million for the nine months ended September 30, 2002. The
increase in cost of revenues primarily related to incremental costs incurred
resulting from the increased revenue of the other healthcare service business.
General and administrative expenses decreased to $24.4 million for the nine
months ended September 30, 2003 from $26.5 million for the nine months ended
September 30, 2002. The $2.1 million decrease primarily was a result of the
Company's cost reduction initiatives. Because the Company has reduced its
overhead cost structure, the combined infrastructure cost of TLC Vision and
LaserVision continues to be lower than the overhead cost of TLC prior to the
Laser Vision acquisition despite a 34% increase in refractive procedure volume
for the nine months ended September 30, 2003. As a result, general
administrative expenses as percentage of revenue decreased to 17% from 21%
compared to the prior year period.
Marketing expenses decreased to $10.3 million for the nine months ended
September 30, 2003 from $10.7 million for the nine months ended September 30,
2002. Marketing expenses decreased by $0.4 million despite a full year of
marketing expenses related to LaserVision, whereas the prior year period only
include expenses subsequent to the date of acquisition in May 2002.
Amortization expenses decreased to $5.0 million for the nine months ended
September 30, 2003 from $6.3 million for the nine months ended September 30,
2002. The decrease in amortization expense of $1.3 million was largely a result
of the significant impairment charges in 2002 that reduced the fair value of
practice management
15
agreements and the related ongoing amortization.
Research and development expenses of $1.0 million for the nine months ended
September 30, 2003 decreased by $3.0 million from $4.0 million for the nine
months ended September 30, 2002. In conjunction with a recent partnership with
Diamed Medizintechnik GmbH ("Diamed"), the Company elected to renew its
investment commitment to research and development efforts by Vascular Sciences.
As a result, the Company paid $1.0 million to Vascular Sciences to further its
efforts to achieve FDA approval for medical treatments related to dry
age-related macular degeneration. Since the technology is in the development
stage and has not received Food and Drug Administration approval, the Company
accounted for this investment as a research and development arrangement whereby
investments were expensed as amounts are expended by Vascular Sciences. During
the nine months ended September 30, 2002, the Company made payments of $3.0
million to fund research by Vascular Sciences and paid $1.0 million to Tracey
Technologies for custom ablation-related research and development.
The Company's operating results for the nine months ended September 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 during
2002, current period operating or cash flow losses 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 $31.0 million during the nine months
ended September 30, 2002.
During the nine months ended September 30, 2003, the Company recorded a $0.2
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 $0.4 million during the nine
months ended September 30, 2003 due to an other than temporary decline in its
value. The Company also recorded a $5.0 million expense related to adjustments
to the value of investments and long-term receivables in the nine months ended
September 30, 2002 using similar valuation analyses.
The Company recorded $1.7 million of restructuring charges during the nine
months ended September 30, 2003, primarily relating to the closing of four
unprofitable centers. The Company recorded a $8.1 million restructuring charge
during the nine months ended September 30, 2002, primarily relating to costs
associated with closing several unprofitable centers and severance costs
incurred in conjunction with the Company's cost reduction initiatives plan.
Other income and expense for the nine months ended September 30, 2003 of $0.6
million primarily resulted from the gain on sale of assets from previously
closed centers. During the nine months ended September 30, 2002, the Company
recorded $6.6 million in other revenue, consisting of $6.8 million of one-time
income from the settlement of an antitrust lawsuit plus $0.8 million of income
from the termination of the agreement to purchase Aspen Health Care from the
Company, less $1.0 million of expense for the loss of the disposition of lasers.
Interest expense, net of $1.1 million for the nine months ended September 30,
2003 reflected interest expense from debt and lease obligations partially offset
by interest income from the Company's cash position. Interest income has
decreased since the Company has reduced cash and cash equivalent balances during
the nine months ended September 30, 2003 compared to the corresponding period in
the prior year. Accordingly, interest expense, net increased $0.2 million from
$0.9 million in the prior year period.
16
Minority interest expense increased to $3.6 million for the nine months ended
September 30, 2003 from $0.8 million for the nine months ended September 30,
2002. This $2.8 million increase represented higher profits reported by the
Company's subsidiaries in which the Company has a shared interest with minority
partners.
Income tax expense of $0.6 million for the nine-month period ended September
30, 2003 decreased $0.6 million from $1.2 million for the nine months ended
September 30, 2002 due to the favorable change in the taxable status of two
subsidiaries. The $0.6 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.
Net loss for the nine months ended September 30, 2003 was $6.5 million or
$0.10 per share compared to a loss of $105.0 million or $2.05 per share for the
nine months ended September 30, 2003.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 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 $30.7 million at September 30, 2003 compared to $41.6
million at December 31, 2002. Working capital at September 30, 2003 was $8.1
million, a decrease of $4.4 million compared to the December 31, 2002 balance of
$12.5 million. Reductions in working capital were primarily due to payments made
for acquisitions, debt repayments, litigation settlements, and investments in
fixed assets and in a research and development arrangement with Vascular
Sciences. These reductions were partially offset by funds received from
operating cash flow and proceeds received from the issuance of capital stock and
debt financing.
The Company's principal cash requirements during the period have included
normal operating expenses, debt repayment, distributions to minority partners,
capital expenditures, and the purchase of the AEI and Phoenix cataract surgery
businesses. 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 nine months ended September 30, 2003, the Company invested $3.7
million cash in fixed assets and received vendor lease financing for an
additional $7.5 million of fixed assets, primarily equipment for Custom LASIK.
The Company does not expect to purchase or lease more than two 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 the exercise of
stock options, will be sufficient to fund the Company's anticipated level of
operations, debt service and expansion plans for at least the next 12 to 18
months. The Company is also actively pursuing a $15 million line of credit with
a major financial institution.
At December 31, 2002 the Company reported $4.2 million of exit liabilities
primarily related to costs associated with closing underperforming centers
subsequent to the LaserVision merger. During the nine months ended September 30,
2003 the Company made cash payments of $2.0 million, resulting in a $2.2 million
exit liability at September 30, 2003.
CASH PROVIDED BY OPERATING ACTIVITIES
Net cash provided by operating activities was $2.3 million for the nine
months ended September 30, 2003. The cash flows provided by operating activities
during the nine months ended September 30, 2003 were primarily due to non-cash
items including $16.8 million of depreciation and amortization, $3.6 million for
minority interests, and $0.5 million of non-cash restructuring costs offset by a
$6.5 million net loss and a $12.4 million increase in net operating assets. The
increase in net operating assets consisted of a $0.3 million increase in prepaid
expenses primarily due to annual insurance premiums, a $4.3 million increase in
accounts receivable due primarily to higher prices associated with newly
approved Custom LASIK, higher sales taxes and timing differences related to
collection of accounts receivable compared to December 2002, and a $7.8 million
decrease in accounts payable and accrued liabilities. This decrease in
liabilities related to the payment of a brokers fee related to the LaserVision
17
acquisition, settlement of disputed amounts with a major vendor and state taxing
agencies, and severance payments, offset by the reclassification of a litigation
reserve from a long-term liability to a current liability. Payment of a
litigation settlement or payments of accrued liabilities in future periods could
reduce cash without affecting working capital or profitability.
CASH USED IN INVESTING ACTIVITIES
Net cash used for investing activities was $10.3 million for the nine months
ended September 30, 2003. Cash used in investing during the nine-month period
ended September 30, 2003 primarily included $7.5 million for business and
investment acquisitions, $3.7 million for the acquisition of equipment and $1.0
million for investment in the research and development with Vascular Sciences,
offset by $0.5 million from the sale of fixed assets and $1.0 million from the
sale of investments. During the next 12 months, the Company expects to invest
$2.6 million in research and development and at least $0.7 million to increase
its ownership in an ambulatory surgery center. The Company's total future
research and development obligation as of September 30, 2003 is $5.5 million
(including the $2.6 million expected to be invested during the next 12 months).
CASH USED IN FINANCING ACTIVITIES
Net cash used for financing activities was $2.8 million for the nine months
ended September 30, 2003. Net cash used for financing activities during the nine
months ended September 30, 2003 was primarily utilized for repayment of certain
notes payable and capitalized lease obligations of $5.6 million, distributions
to minority interests of $3.6 million, and a change in restricted cash of $0.6
million offset by $1.5 million in proceeds from debt financing and $5.5 million
in proceeds from the issuance of common stock. During October and early November
2003, the Company received almost $1.5 million from the exercise of stock
options. During the next six months, stock options with exercise prices ranging
from $3.15 to $6.31 (average $4.95) will expire and, if exercised, the Company
will receive an additional $3.1 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.
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.
18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In August 2003 the Company received the decision of the California Court of
Appeals affirming the 1999 arbitration decision against the Company in the case
of Clearview Eye and Laser Medical Center v. TLC Network Services, et al. The
Company determined that further appeal would not likely be successful and in
October 2003 paid the judgment, including interest and attorney fees in the
amount of $2.7 million from the escrow account that had been established during
the appeal of this matter. This judgment had previously been expensed and
accrued.
There have been no other changes in legal proceedings other than those
reported in the Company's annual report on Form 10-K for the year ended December
31, 2002 and subsequent Quarterly 10-Q reports for the quarters ended March 31,
2003 and June 30, 2003.
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 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
b. Reports on 8-K:
On August 18, 2003 the Company filed a Current Report on Form 8-K
announcing the Company's financial results for the quarter ended June 30, 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
November 13, 2003
By: /s/ B. Charles Bono III
-------------------------------------
B. Charles Bono III
Chief Financial Officer
November 13, 2003
19
EXHIBIT INDEX
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
20