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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 JUNE 30, 2004
COMMISSION FILE NUMBER: 0-29302
TLC VISION CORPORATION
(Exact name of registrant as specified in its charter)
NEW BRUNSWICK, CANADA 980151150
(State or jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5280 SOLAR DRIVE, SUITE 300 L4W 5M8
MISSISSAUGA, ONTARIO (Zip Code)
(Address of principal executive offices)
Registrant's telephone, including area code: (905) 602-2020
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[X] Yes No [ ]
As of August 5, 2004 there were 69,186,049 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, 2004 and 2003
Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003
Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003
Consolidated Statement of Stockholders' Equity for the six months ended June 30, 2004
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; Use of Proceeds and Issuer Purchases of Equity Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 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,
--------------------------- -------------------------
2004 2003 2004 2003
---- ---- ---- ----
Revenues
Refractive
Centers ........................................ $ 36,374 $ 26,237 $ 75,212 $ 57,160
Access ......................................... 10,544 9,647 22,593 20,576
Other healthcare services ........................... 17,743 11,648 32,031 23,386
--------- --------- --------- ---------
Total revenues ........................................ 64,661 47,532 129,836 101,122
--------- --------- --------- ---------
Cost of revenues
Refractive
Centers ........................................ 24,645 20,636 50,797 43,179
Access ......................................... 7,135 6,481 15,307 13,643
Other healthcare services ........................... 10,574 7,950 19,712 15,430
--------- --------- --------- ---------
Total cost of revenues ................................ 42,354 35,067 85,816 72,252
--------- --------- --------- ---------
Gross margin ........................................ 22,307 12,465 44,020 28,870
--------- --------- --------- ---------
General and administrative ............................ 7,400 8,313 15,301 16,332
Marketing ............................................. 3,435 3,496 6,329 7,157
Research and development .............................. 350 -- 724 --
Amortization of intangibles ........................... 1,057 1,678 2,069 3,350
Adjustment to the fair value of investments
and long-term receivables ........................... (1,206) (651) (1,206) (448)
Restructuring, severance and other charges ............ 2,755 1,720 2,755 1,720
--------- --------- --------- ---------
13,791 14,556 25,972 28,111
--------- --------- --------- ---------
Operating income (loss) ............................... 8,516 (2,091) 18,048 759
Other income (expense), net ........................... (22) 198 526 566
Interest expense, net ................................. (272) (393) (675) (761)
Minority interests .................................... (2,454) (961) (4,328) (2,502)
Earnings from equity investments ...................... 613 -- 1,012 --
--------- --------- --------- ---------
Income (loss) before income taxes ..................... 6,381 (3,247) 14,583 (1,938)
Income tax expense .................................... (142) (206) (292) (445)
--------- --------- --------- ---------
Net income (loss) ..................................... $ 6,239 $ (3,453) $ 14,291 $ (2,383)
--------- --------- --------- ---------
Earnings (loss) per share - basic ..................... $ 0.09 $ (0.05) $ 0.21 $ (0.04)
========= ========= ========= =========
Earnings (loss) per share - diluted ................... $ 0.09 $ (0.05) $ 0.20 $ (0.04)
========= ========= ========= =========
Weighted average number of common shares
outstanding - basic ................................. 68,585 63,457 67,759 63,435
Weighted average number of common shares
outstanding - diluted ............................... 71,249 63,457 70,341 63,435
See the accompanying notes to unaudited interim consolidated financial
statements.
3
TLC VISION CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2004 2003
----------- -----------
ASSETS
Current assets
Cash and cash equivalents ........................... $ 47,952 $ 29,580
Short-term investments .............................. 313 748
Accounts receivable ................................. 17,721 15,617
Prepaids and other current assets ................... 12,753 11,646
--------- ---------
Total current assets ............................... 78,739 57,591
Restricted cash ....................................... 1,352 1,376
Investments and other assets .......................... 7,858 3,102
Intangibles, net ...................................... 20,327 22,959
Goodwill, net ......................................... 53,088 48,829
Fixed assets, net ..................................... 50,780 56,891
--------- ---------
Total assets .......................................... $ 212,144 $ 190,748
========= =========
LIABILITIES
Current liabilities
Accounts payable .................................... $ 7,669 $ 10,627
Accrued liabilities ................................. 25,678 25,811
Current portion of long-term debt ................... 10,058 10,285
--------- ---------
Total current liabilities ............................. 43,405 46,723
Other long-term liabilities ........................... 2,493 2,607
Long-term debt, less current maturities ............... 12,341 19,242
Minority interests .................................... 9,751 10,907
SHAREHOLDERS' EQUITY
Capital stock ......................................... 419,738 397,878
Option and warrant equity ............................. 4,877 8,143
Accumulated deficit ................................... (280,461) (294,752)
--------- ---------
Total shareholders' equity ............................ 144,154 111,269
--------- ---------
Total liabilities and shareholders' equity ............ $ 212,144 $ 190,748
========= =========
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,
--------------
2004 2003
---- ----
OPERATING ACTIVITIES
Net income (loss) ................................................................... $ 14,291 $ (2,383)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization ..................................................... 9,018 11,047
Write-off of investment in research and development arrangement ................... 724 --
Minority interests ................................................................ 4,328 2,502
Earnings from equity investments .................................................. (1,012) --
Loss (gain) on disposal of fixed assets ........................................... 742 (391)
Gain on the sale of subsidiary .................................................... (1,143) --
Compensation expense .............................................................. 575 --
Adjustment to the fair value of investments and long-term receivables
and impairment of fixed assets .................................................. (1,206) (402)
Restructuring and other costs ..................................................... -- 527
Changes in operating assets and liabilities:
Accounts receivable ............................................................... (3,772) (3,784)
Prepaid expenses and other current assets ......................................... (1,469) (1,160)
Accounts payable and accrued liabilities .......................................... (1,696) (5,055)
-------- --------
Cash provided by operating activities ............................................... 19,380 901
-------- --------
INVESTING ACTIVITIES
Purchase of fixed assets ............................................................ (3,761) (2,587)
Proceeds from sale of fixed assets .................................................. 467 548
Divestitures of investments and subsidiaries, net of cash sold ...................... (271) 221
Investment in research and development arrangements ................................. (724) --
Distributions received from equity investees ........................................ 680 --
Acquisitions and investments, net of cash acquired .................................. (4,570) (2,622)
Purchase of short-term investments .................................................. -- (324)
Other ............................................................................... 907 273
-------- --------
Cash used in investing activities ................................................... (7,272) (4,491)
-------- --------
FINANCING ACTIVITIES
Restricted cash movement ............................................................ 24 (439)
Principal payments of debt financing and capital leases ............................. (8,305) (3,979)
Distributions to minority interests ................................................. (3,715) (1,802)
Proceeds from debt financing ........................................................ -- 1,450
Proceeds from the issuance of common stock .......................................... 18,260 905
-------- --------
Cash provided by (used in) financing activities ..................................... 6,264 (3,865)
-------- --------
Net increase (decrease) in cash and cash equivalents during the period .............. 18,372 (7,455)
Cash and cash equivalents, beginning of period ...................................... 29,580 36,081
-------- --------
Cash and cash equivalents, end of period ............................................ $ 47,952 $ 28,626
======== ========
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
------------ WARRANT ACCUMULATED
SHARES AMOUNT EQUITY DEFICIT TOTAL
------ ------ ------ ------- -----
Balance December 31, 2003 ................... 65,756 $ 397,878 $ 8,143 $(294,752) $ 111,269
Shares issued as part of the
employee share purchase plan .............. 112 357 357
Exercise of stock options .................. 3,242 17,903 17,903
Options expired or exercised ............... 3,600 (3,600) --
Variable stock option expense .............. 334 334
Net income and comprehensive
income .................................. 14,291 14,291
--------- --------- --------- --------- ---------
Balance June 30, 2004 ...................... 69,110 $ 419,738 $ 4,877 $(280,461) $ 144,154
========= ========= ========= ========= =========
See the accompanying notes to unaudited interim consolidated financial
statements.
6
TLC VISION CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004 (Unaudited)
(Tabular amounts in thousands, except per share amounts)
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in
the United States 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 accounting principles generally
accepted in the United States for complete financial statements. The
unaudited interim consolidated financial statements included herein should
be read in conjunction with the Annual Report on Form 10-K for the year
ended December 31, 2003 filed by TLC Vision Corporation (the "Company" or
"TLCVision") 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, 2004.
The consolidated financial statements as of December 31, 2003 and unaudited
interim consolidated financial statements for the three and six months ended
June 30, 2003 include the accounts and transactions of the Company and its
majority-owned subsidiaries. The unaudited interim consolidated financial
statements as of and for the three and six months ended June 30, 2004
include the accounts and transactions of the Company and its majority-owned
subsidiaries that are not considered variable interest entities (VIEs) and
all VIEs for which the Company is the primary beneficiary. All significant
intercompany accounts and transactions have been eliminated.
The unaudited interim consolidated financial statements for the three- and
six-month period ended June 30, 2003 include certain reclassifications to
conform with classifications for the three- and six-month period ended June
30, 2004.
Earnings per share was computed using the weighted average number of common
shares outstanding during each period. The diluted weighted average shares
outstanding calculation for the three and six months ended June 30, 2004
includes 2.7 million shares and 2.6 million shares, respectively, for the
dilutive effect of outstanding stock options using the treasury stock method
and the average stock price during the respective periods.
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51" (FIN 46). In December 2003, the FASB modified
FIN 46 to make certain technical corrections and address certain
implementation issues that had arisen. FIN 46 provides a new framework for
identifying VIEs and determining when a company should include the assets,
liabilities, noncontrolling interests and results of activities of a VIE in
its consolidated financial statements.
In general, a VIE is any legal structure used to conduct activities or hold
assets that either (1) has an insufficient amount of equity to carry out its
principal activities without additional subordinated financial support, (2)
has a group of equity owners that are unable to make significant individual
decisions about its activities, or (3) has a group of equity owners that do
not have the obligation to absorb losses or the right to receive returns
generated by its operations.
FIN 46 requires a VIE to be consolidated if a party with an ownership,
contractual or other financial interest in the VIE (a variable interest
holder) is obligated to absorb a majority of the risk of loss from the VIE's
activities, is entitled to receive a majority of the VIE's residual returns
(if no party absorbs a majority of the VIE's losses), or both. A variable
interest holder that consolidates the VIE is called the primary beneficiary.
Upon consolidation, the primary beneficiary generally must initially record
all of the VIE's assets, liabilities and noncontrolling interests at fair
value and subsequently account for the VIE as if it were consolidated based
on majority voting interest.
FIN 46 was effective immediately for VIEs created after January 31, 2003.
The provisions of FIN 46, as revised, were adopted as of January 1, 2004,
for the Company's interests in all VIEs.
Prior to the adoption of FIN 46, the Company did not consolidate the
physician practices that were managed but not owned by the Company. These
managed physician practices were determined to be variable interest entities
for which the
7
Company is the primary beneficiary. As a result, the physician practices
have been consolidated as of January 1, 2004. The adoption of FIN 46
resulted in an increase of total assets of $48,000 as of June 30, 2004, and
an increase in revenues and cost of revenues for the managed refractive
centers, no material impact on gross margin or operating income, and no
impact on net income. Prior periods were not restated. The following pro
forma amounts reflect the effect of FIN 46 assuming it is applied
retroactively:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2004 2003 2004 2003
---- ---- ---- ----
Actual Actual Pro forma Actual Actual Pro forma
Revenues:
Refractive:
Centers $ 36,374 $ 26,237 $ 30,212 $ 75,212 $ 57,160 $ 66,018
Access 10,544 9,647 9,647 22,593 20,576 20,576
Other healthcare services 17,743 11,648 11,648 32,031 23,386 23,386
--------- --------- --------- --------- --------- ---------
Total Revenues 64,661 47,532 51,507 129,836 101,122 109,980
Cost of revenue:
Refractive:
Centers 24,645 20,636 24,583 50,797 43,179 51,968
Access 7,135 6,481 6,481 15,307 13,643 13,643
Other healthcare services 10,574 7,950 7,950 19,712 15,430 15,430
--------- --------- --------- --------- --------- ---------
Total cost of revenues 42,354 35,067 39,014 85,816 72,252 81,041
--------- --------- --------- --------- --------- ---------
Gross margin $ 22,307 $ 12,465 $ 12,493 $ 44,020 $ 28,870 $ 28,939
========= ========= ========= ========= ========= =========
General and administrative $ 7,400 $ 8,313 $ 8,341 $ 15,301 $ 16,332 $ 16,401
========= ========= ========= ========= ========= =========
Net income (loss) $ 6,239 $ (3,453) $ (3,453) $ 14,291 $ (2,383) $ (2,383)
========= ========= ========= ========= ========= =========
Basic earnings (loss)
per share $ 0.09 $ (0.05) $ (0.05) $ 0.21 $ (0.04) $ (0.04)
========= ========= ========= ========= ========= =========
Diluted earnings (loss)
per share $ 0.09 $ (0.05) $ (0.05) $ 0.20 $ (0.04) $ (0.04)
========= ========= ========= ========= ========= =========
As a result of the elimination of the distinction between owned and managed
centers upon the adoption of FIN 46, their revenue and costs are no longer
identified separately on the Company's consolidated statement of
operations.
Although the Company's investment in Vascular Sciences is considered to be
a variable interest in a VIE, the Company does not consolidate Vascular
Sciences as it is not the primary beneficiary.
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
compensation expense of $155,000 and $575,000 during the three and six
months ended June 30, 2004, respectively, including $15,000 and $334,000,
respectively, of variable stock option expense for options repriced in 2002.
The following table illustrates the pro forma net income and net income 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:
8
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2004 2003 2004 2003
---- ---- ---- ----
Net income (loss) as reported .................. $ 6,239 $ (3,453) $ 14,291 $ (2,383)
Add back stock-based employee ..................
compensation cost included in reported
net income (loss) ............................ 15 -- 334 --
Less stock-based employee compensation
cost determined under fair value based
method for all awards ........................ (278) (259) (554) (528)
-------- -------- -------- --------
Pro forma net income (loss) .................... $ 5,976 $ (3,712) $ 14,071 $ (2,911)
======== ======== -------- --------
Pro forma earnings (loss) per share - basic .... $ 0.09 $ (0.06) $ 0.21 $ (0.05)
======== ======== ======== ========
Pro forma earnings (loss) per share - diluted .. $ 0.08 $ (0.06) $ 0.20 $ (0.05)
======== ======== ======== ========
3. ACQUISITIONS AND DISPOSITIONS
On January 1, 2004, the Company settled a lawsuit brought by Thomas S.
Tooma, M.D. and TST Acquisitions, LLC ("TST") in October 2002. Under the
terms of the settlement, the Company sold approximately 24% of Laser Eye
Care of California ("LECC") and 30% of its California access business to TST
for $2.3 million. The Company continues to hold a 30% ownership in LECC and
a 70% ownership in the California access business. The Company recorded a
$1.1 million gain on the sale of these business interests which is included
in "other income (expense), net" in the accompanying statements of
operations. Effective January 1, 2004, the Company deconsolidated LECC and
began reporting its interest in LECC under the equity method of accounting
because it no longer owns a controlling interest in the entity.
On March 1, 2004, OR Partners, Inc., a subsidiary of TLCVision, entered into
a purchase agreement to acquire 70% of an ambulatory surgery center ("ASC")
in Texas, which provides access to surgical and diagnostic equipment to
perform cataract surgery in hospitals and ambulatory surgery centers. The
Company paid $3.8 million in cash, substantially all of which was goodwill.
The results of operations have been included in the consolidated statements
of operations of the Company since the acquisition date.
4. SEGMENT INFORMATION
The Company has two reportable segments: refractive and cataract. The
refractive segment provides the primary source of revenues for 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 services. The cataract segment provides surgery
specifically for the treatment of cataracts. Other segments consist of
healthcare businesses that provide network marketing and purchasing
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.
Doctors 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 laser centers. Where the Company manages laser centers due to
certain state law 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 2003, the costs associated with arranging for these
professional services were reported as a cost of the professional
corporation and not of the Company. In 2004, the costs associated with
arranging for these professional services were reported as a cost of the
Company due to the adoption of FIN 46.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different management and marketing strategies. The
Company's business units were acquired or developed as a unit, and
management at the time of acquisition was retained.
The following tables set forth information by segments:
9
THREE MONTHS ENDED JUNE 30, 2004
(IN THOUSANDS) REFRACTIVE CATARACT OTHER TOTAL
-------------- ---------- -------- ----- -----
Revenues .............................................. $ 46,926 $ 6,988 $10,747 $ 64,661
Expenses:
Doctor compensation ................................. 7,370 -- 27 7,397
Operating ........................................... 29,937 5,555 6,896 42,388
Research and development ............................ -- -- 350 350
Depreciation ........................................ 2,639 550 215 3,404
Amortization of intangibles ......................... 842 104 111 1,057
Adjustment to the fair value of investments
and long-term receivables ......................... (1,206) -- -- (1,206)
Restructuring, severance and other charges .......... 2,755 -- -- 2,755
-------- -------- -------- --------
42,337 6,209 7,599 56,145
-------- -------- -------- --------
Income from operations ................................ 4,589 779 3,148 8,516
Other income and interest expense, net ................ 145 (28) (411) (294)
Minority interests .................................... (624) -- (1,830) (2,454)
Earnings from equity investments....................... 491 -- 122 613
Income taxes .......................................... (41) -- (101) (142)
-------- -------- -------- --------
Net income ............................................ $ 4,560 $ 751 $ 928 $ 6,239
======== ======== ======== ========
THREE MONTHS ENDED JUNE 30, 2003
(IN THOUSANDS) 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 3,617 40,429
Depreciation ........................................ 3,024 579 212 3,815
Amortization of intangibles ......................... 1,359 108 211 1,678
Adjustment to the fair value of investments and long-
term receivables .................................. (651) -- -- (651)
Restructuring, severance and other charges .......... 1,720 -- -- 1,720
-------- -------- -------- --------
39,573 5,960 4,090 49,623
-------- -------- -------- --------
Income (loss) from operations ......................... (3,689) 236 1,362 (2,091)
Other income and interest expense, net ................ 5 39 (239) (195)
Minority interests .................................... (261) -- (700) (961)
Income taxes .......................................... 33 18 (257) (206)
-------- -------- -------- --------
Net income (loss) ..................................... $ (3,912) $ 293 $ 166 $ (3,453)
======== ======== ======== ========
SIX MONTHS ENDED JUNE 30, 2004
(IN THOUSANDS) REFRACTIVE CATARACT OTHER TOTAL
-------------- ---------- -------- -------- --------
Revenues .............................................. $ 97,813 $ 12,980 $ 19,043 $129,836
Expenses:
Doctor compensation ................................. 15,058 -- 45 15,103
Operating ........................................... 62,252 10,642 12,500 85,394
Research and development ............................ -- -- 724 724
Depreciation ........................................ 5,406 1,137 406 6,949
Amortization of intangibles ......................... 1,640 209 220 2,069
Adjustment to the fair value of investments
and long-term receivables ......................... (1,206) -- -- (1,206)
Restructuring, severance and other charges .......... 2,755 -- -- 2,755
-------- -------- -------- --------
85,905 11,988 13,895 111,788
-------- -------- -------- --------
Income from operations ................................ 11,908 992 5,148 18,048
Other income and interest expense, net ................ 535 (51) (633) (149)
Minority interests .................................... (1,370) -- (2,958) (4,328)
Earnings from equity investments....................... 890 -- 122 1,012
Income taxes .......................................... (114) (1) (177) (292)
-------- -------- -------- --------
Net income ............................................ $ 11,849 $ 940 $ 1,502 $ 14,291
======== ======== ======== ========
10
SIX MONTHS ENDED JUNE 30, 2003
(IN THOUSANDS) 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 8,207 82,375
Depreciation ........................................ 6,119 1,140 438 7,697
Amortization of intangibles ......................... 2,935 204 211 3,350
Adjustment to the fair value of investments
and long-term receivables ........................ (448) -- -- (448)
Restructuring, severance and other charges........... 1,720 -- -- 1,720
-------- -------- -------- --------
80,197 11,224 8,942 100,363
-------- -------- -------- --------
Income (loss) from operations ......................... (2,461) 348 2,872 759
Other income and interest expense, net ................ 252 (1) (446) (195)
Minority interests .................................... (1,154) -- (1,348) (2,502)
Income taxes .......................................... (49) 18 (414) (445)
-------- -------- -------- --------
Net income (loss) ..................................... $ (3,412) $ 365 $ 664 $ (2,383)
======== ======== ======== ========
5. SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash transactions:
SIX MONTHS ENDED JUNE 30,
-------------------------
2004 2003
---- ----
Capital assets financed and leased..... $ 959 $ 5,592
Common stock issued for acquisition.... -- 96
Cash paid for the following:
SIX MONTHS ENDED JUNE 30,
-------------------------
2004 2003
---- ----
Interest............................... $1,364 $ 1,633
Income taxes........................... 181 160
6. INVESTMENTS AND OTHER ASSETS
As of December 31, 2002, the Company maintained a $1.9 million reserve
against a $2.3 million long-term receivable from a secondary care service
provider of which the Company owns approximately 25% of the outstanding
common shares. The Company had determined that the ability of this secondary
care service provider to repay this note was in doubt due to the
deteriorating financial condition of the investee. During the first six
months of 2003, the secondary care provider was profitable, improved its
financial strength and consistently made all payments to the Company when
due. As a result, the Company reevaluated the collectibility of this note
receivable as of June 30, 2003 and recorded an adjustment to the fair value
of investments and long-term receivables of $0.7 million to reverse a
portion of the reserve.
During the last six months of 2003 and the first six months of 2004, this
secondary care provider continued to improve its profitability and financial
position and made all of its payments to the Company when due. As a result,
the Company reevaluated the collectibility of the note again as of June 30,
2004 and recorded an adjustment to the fair value of investments and
long-term receivables to reverse the remaining reserve of $1.2 million.
7. RESTRUCTURING, SEVERANCE AND OTHER CHARGES
During the three and six months ended June 30, 2004, the Company recorded a
$2.5 million charge for severance payments to two officers under the terms
of employment contracts and a $0.3 million charge related to ongoing lease
payment obligations at previously closed centers. The severance payments
will be paid out within the next six to nine months, while the lease costs
will be paid out over the remaining term of the lease.
11
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Quarterly Report on Form 10-Q (herein, together with all amendments,
exhibits and schedules hereto, referred to as the "Form 10-Q") contains certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which
statements can be identified by the use of forward looking terminology, such as
"may," "will," "expect," "anticipate," "estimate," "plans," "intends" or
"continue" or the negative thereof or other variations thereon or comparable
terminology. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including but not limited to those set forth elsewhere in this Form 10-Q in the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and in the Company's Annual Report on Form 10-K for
the period ended December 31, 2003. Unless the context indicates or requires
otherwise, references in this Form 10-Q to the "Company" or "TLCVision" shall
mean TLC Vision Corporation and its subsidiaries. References to "$" or "dollars"
shall mean U.S. dollars unless otherwise indicated. References to "C$" shall
mean Canadian dollars. References to the "Commission" shall mean the U.S.
Securities and Exchange Commission.
OVERVIEW
TLC Vision Corporation (formerly TLC Laser Eye Centers Inc.) and its
subsidiaries ("TLCVision" or the "Company") is a diversified healthcare service
company focused on working with eye doctors to help them provide high quality
patient care in the eye care segment. The majority of the Company's revenues
come from 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 models include
arrangements ranging from owning and managing fixed site centers to providing
access to lasers through fixed site and mobile service relationships. In
addition to refractive surgery, the Company is diversified into other eye care
businesses. Through its Midwest Surgical Services, Inc. ("MSS") subsidiary, the
Company furnishes hospitals and independent surgeons with mobile or fixed site
access to cataract surgery equipment and services. Through its OR Partners,
Aspen Healthcare and Michigan subsidiaries, TLCVision develops, manages and has
equity participation in single-specialty eye care ambulatory surgery centers and
multi-specialty ambulatory surgery centers. The Company also owns a 51% majority
interest in Vision Source, which provides franchise opportunities to independent
optometrists. In 2002, the Company formed a joint venture with Vascular Sciences
Corporation ("VSC") to create OccuLogix, L.P., a partnership focused on the
treatment of a specific eye disease known as dry age-related macular
degeneration, via rheopheresis, a process for filtering blood.
The Company serves surgeons who performed over 137,000 procedures including
cataract procedures at the Company's centers or using the Company's laser and
cataract access programs during the six-month period ended June 30, 2004.
The Company continually assesses 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 initiatives
focusing on future development opportunities for the Company in other healthcare
services.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2003
As a result of adopting FIN 46, the Company began consolidating the
physician practices that are managed but not owned by the Company on January 1,
2004. The consolidation resulted in the Company recording an additional $4.5
million in center revenue, $4.4 million in center cost of revenue and $0.1
million in general and administrative expenses during the second quarter of 2004
as the revenue earned and expenses paid (primarily doctors compensation) by the
physician practices are now included in the Company's results. The consolidation
had no impact on net income for the quarter.
Prior to the adoption, doctors compensation and related revenue were not
reflected in the Company's statement of operations for the managed centers, but
were reflected in the Company's statement of operations for the owned centers.
The Company previously presented the revenues and cost of revenues of managed
centers and owned centers separately in the
12
statements of operations due to different profit margins. Beginning with the
first quarter of 2004, the Company presents all centers, managed and owned,
together because both types of centers now include doctors compensation and the
related revenue.
The increase in center revenue attributed to the adoption of FIN 46 is
partially offset by the deconsolidation of LECC in connection with the sale of a
portion of the Company's interest in LECC. The results of operations for the
three months ended June 30, 2003, included $3.5 million in center revenues
related to LECC whereas the results of operations for the three months ended
June 30, 2004 include no center revenue for LECC because LECC is accounted for
using the equity method of accounting beginning January 1, 2004.
Total revenues for the three months ended June 30, 2004 were $64.7 million,
an increase of $17.2 million, or 36% over revenues of $47.5 million for the
three months ended June 30, 2003. Approximately 73% of total revenues for the
three months ended June 30, 2004 were derived from refractive services compared
to 75% during the three months ended June 30, 2003, reflecting the Company's
success in diversifying into other healthcare businesses.
Revenues from the refractive segment for the three months ended June 30,
2004 were $46.9 million, an increase of $11.0 million or 31% from $35.9 million
for the three months ended June 30, 2003. This increase was primarily due to a
16% increase in procedure volume and higher average pricing associated with the
introduction of Custom LASIK in June 2003.
Revenues from centers for the three months ended June 30, 2004 were $36.4
million, an increase of $10.2 million, or 39% from the revenues of $26.2 million
for the three months ended June 30, 2003. Higher procedure volumes at centers,
higher pricing due to Custom LASIK and additional revenue as a result of
adopting FIN 46 were partially offset by lost revenue from several unprofitable
centers that were closed subsequent to June 30, 2003. Management believes center
revenues will continue to outpace prior year revenue throughout 2004.
Revenues from access services for the three months ended June 30, 2004 were
$10.5 million, an increase of $0.9 million or 9% from revenues of $9.6 million
for the three months ended June 30, 2003. The growth in the access business
resulted from increased procedure volume.
Approximately 51,600 refractive procedures were performed in the three
months ended June 30, 2004, compared to approximately 44,600 procedures for the
three months ended June 30, 2003. This 7,000 or 16% increase in procedures was
primarily due to 5,900 or 24% more procedures at centers open during both the
three months ended June 30, 2004 and 2003 and 1,700 or 9% more procedures for
the access business offset by the absence of 600 procedures at centers that were
closed within the past year. Procedures for LECC are included in both periods
and account for 4,000 procedures for the three months ended June 30, 2004, an
increase of 900 procedures over the prior year period.
The cost of refractive revenues for the three months ended June 30, 2004 was
$31.8 million, an increase of $4.7 million, or 17% over the cost of refractive
revenues of $27.1 million for the three months ended June 30, 2003. This
increase was primarily attributable to increased procedure volume and higher
costs associated with Custom LASIK. Primarily as a result of higher procedure
volumes at centers, gross margins for the refractive business as a whole
increased to 32% during the three months ended June 30, 2004 from 24% in the
prior year period.
The cost of revenues from centers for the three months ended June 30, 2004
was $24.6 million, an increase of $4.0 million, or 19% from the cost of revenues
of $20.6 million from the three months ended June 30, 2003. This increase
primarily resulted from $2.1 million of higher costs related to increased
procedure volume and $4.4 million of costs resulting from the Company's adoption
of FIN 46 effective January 1, 2004 (as compared to none in the prior year
period). These increases were offset by $2.5 million in cost of revenues for
LECC during the three months ended June 30, 2003 (as compared to none during the
three months ended June 30, 2004) since LECC is now reported in the Company's
Consolidated Statement of Operations using the equity method.
Gross margins from centers increased to 32% for the three months ended June
30, 2004 from 21% during the prior year period as increased procedure volumes
led to strong incremental variable margin gains at many of the Company's
centers. This margin percentage increase was diluted by the consolidation of the
physician practices managed by the Company due to the adoption of FIN 46. For
comparison purposes, had the Company consolidated the physician practices during
2003, the gross margin percentage would have been 19% for the quarter ended June
30, 2003.
13
The cost of revenues from access services for the three months ended June
30, 2004 was $7.1 million, an increase of $0.6 million or 10% from the cost of
revenues of $6.5 million during the three months ended June 30, 2003. This
increase primarily resulted from higher procedure volume. Gross margins
decreased to 32% from 33% due to pricing pressure from competitors and higher
costs associated with Custom LASIK.
Revenues from other healthcare services for the three months ended June 30,
2004, were $17.7 million, an increase of $6.1 million or 52% from revenues of
$11.6 million for the three months ended June 30, 2003. Approximately 27% of
total revenues for the three months ended June 30, 2004 were derived from other
healthcare services compared to 25% during the three months ended June 30, 2003.
The increase in other healthcare services revenue resulted from internal growth
of existing business and contributions from businesses acquired within the past
year, and was reflective 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, 2004 was $10.6 million, an increase of $2.6 million or 33% from
cost of revenues of $8.0 million for the three months ended June 30, 2003. The
increase in cost of revenues primarily related to incremental costs incurred to
generate the increased revenue of the other healthcare service business. Gross
margins increased to 40% from 32% due to volume growth and a higher percentage
of revenue generated from OR Partners and Vision Source, which provide services
with higher gross margin percentages than other businesses within the other
healthcare services category.
General and administrative expenses decreased to $7.4 million for the three
months ended June 30, 2004 from $8.3 million for the three months ended June 30,
2003. The $0.9 million or 11% decrease reflected the Company's success in
controlling overhead costs despite a 36% increase in revenue. Accordingly,
general and administrative expenses as a percentage of revenue decreased to 11%
from 17% compared to the prior year quarter.
Marketing expenses of $3.4 million decreased by $0.1 million or 2% for the
three months ended June 30, 2004 from $3.5 million for the three months ended
June 30, 2003. Marketing expenses as a percentage of revenue decreased to 5%
from 7% in the prior year period, reflecting the Company's success in increasing
revenue while controlling marketing expenses.
Research and development expenses were $0.4 million for the three months
ended June 30, 2004, relating to investments made to fund research and
development efforts by VSC to achieve Food and Drug Administration ("FDA")
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 VSC.
Amortization expenses decreased to $1.1 million for the three months ended
June 30, 2004 from $1.7 million for the three months ended June 30, 2003. This
decrease was largely due to the reduction in intangible assets (Practice
Management Agreements) resulting from the deconsolidation of LECC.
As of June 30, 2004, the Company fully reversed a reserve by $1.2 million
related to a long-term note receivable due to a consistent payment history and
continually improving financial strength of the debtor. The Company had
initially reduced the reserve in the prior year period by $0.7 million due to a
similar valuation analysis.
The Company recorded a $2.5 million charge for severance payments to two
officers under the terms of employment contracts and a $0.3 million charge for
ongoing lease payment obligations at previously closed centers during the three
months ended June 30, 2004. The Company recorded a $1.7 million charge during
the three months ended June 30, 2003 primarily relating to the closing of four
unprofitable centers.
Interest expense, net of $0.3 million for the three months ended June 30,
2004 reflected interest expense from debt and lease obligations, partially
offset by interest income from the Company's cash position. In the prior year
period, average debt levels were higher resulting in net interest expense of
$0.4 million.
Minority interest expense was $2.5 million for the three months ended June
30, 2004, an increase of $1.5 million from $1.0 million for the three months
ended June 30, 2003. This increase results from higher profits at certain of the
Company's subsidiaries in which partners hold minority interests.
Earnings from equity investments of $0.6 million for the three months ended
June 30, 2004 resulted primarily from $0.2
14
million of earnings related to the Company's minority ownership investment in
LECC and $0.3 million of earnings related to the Company's minority ownership
investment in a secondary care service provider.
Income tax expense was $0.1 million for the three months ended June 30, 2004
and 2003. The $0.1 million tax expense primarily 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 current year federal income tax expense
attributable to the Company and subsidiaries included in the consolidated
federal return was offset by the reversal of valuation allowances as the Company
anticipates utilizing net operating loss carryforwards.
Net income for the three months ended June 30, 2004 was $6.2 million or
$0.09 per share compared to loss of $3.5 million or $0.05 per share for the
three months ended June 30, 2003.
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2003
As a result of adopting FIN 46, the Company began consolidating the
physician practices that are managed but not owned by the Company on January 1,
2004. The consolidation resulted in the Company recording an additional $9.0
million in center revenue, $8.9 million in center cost of revenue and $0.1
million in general and administrative expenses during the six months ended June
30, 2004, as the revenue earned and expenses paid (primarily doctors
compensation) by the physician practices are now included in the Company's
results. The consolidation had no impact on net income for the six months ended
June 30, 2004.
Prior to the adoption, doctors compensation and related revenue were not
reflected in the Company's statement of operations for the managed centers, but
were reflected in the Company's statement of operations for the owned centers.
The Company previously presented the revenues and cost of revenues of managed
centers and owned centers separately in the statements of operation due to
different profit margins. Beginning with the first quarter of 2004, the Company
presents all centers, managed and owned, together because both types of centers
now include doctors compensation and the related revenue.
The increase in revenue attributed to the adoption of FIN 46 is partially
offset by the deconsolidation of LECC in connection with the sale of a portion
of the Company's interest in LECC. The results of operations for the six months
ended June 30, 2003, included $7.0 million in center revenues related to LECC
whereas the results of operations for the six months ended June 30, 2004 include
no center revenue for LECC because LECC is accounted for using the equity method
of accounting beginning January 1, 2004.
Total revenues for the six months ended June 30, 2004 were $129.8 million,
an increase of $28.7 million, or 28% over revenues of $101.1 million for the six
months ended June 30, 2003. Approximately 75% of total revenues for the six
months ended June 30, 2004 were derived from refractive services compared to 77%
during the six months ended June 30, 2003, reflecting the Company's success in
diversifying into other healthcare businesses.
Revenues from the refractive segment for the six months ended June 30, 2004
were $97.8 million, an increase of $20.1 million or 26% from $77.7 million for
the six months ended June 30, 2003. This increase was primarily due to a 11%
increase in procedure volume and higher average pricing associated with the
introduction of Custom LASIK in June 2003.
Revenues from centers for the six months ended June 30, 2004 were $75.2
million, an increase of $18.0 million, or 32% from the revenues of $57.2 million
for the six months ended June 30, 2003. Higher procedure volumes at centers,
higher pricing due to Custom LASIK and additional revenue as a result of
adopting FIN 46 were partially offset by lost revenue from several unprofitable
centers that were closed subsequent to December 31, 2002. Management believes
center revenues will continue to outpace prior year revenue throughout 2004.
Revenues from access services for the six months ended June 30, 2004 were
$22.6 million, an increase of $2.0 million or 10% from revenues of $20.6 million
for the six months ended June 30, 2003. The growth in the access business
resulted from increased procedure volume.
Approximately 108,500 refractive procedures were performed in the six months
ended June 30, 2004, compared to approximately 98,000 procedures for the six
months ended June 30, 2003. This 10,500 or 11% increase in procedures was
15
primarily due to 10,300 or 20% more procedures at centers open during both the
six months ended June 30, 2004 and 2003 and 2,700 or 6% more procedures for the
access business offset by the absence of 2,500 procedures at centers that were
closed within the past year. Procedures for LECC are included in both periods
and account for 8,000 procedures for the six months ended June 30, 2004, an
increase of 1,600 procedures over the prior year period.
The cost of refractive revenues for the six months ended June 30, 2004 was
$66.1 million, an increase of $9.3 million, or 16% over the cost of refractive
revenues of $56.8 million for the six months ended June 30, 2003. This increase
was primarily attributable to increased procedure volume and higher costs
associated with Custom LASIK. Primarily as a result of higher procedure volumes
at centers, gross margins for the refractive business as a whole increased to
32% during the six months ended June 30, 2004 from 27% in the prior year period.
The cost of revenues from centers for the six months ended June 30, 2004 was
$50.8 million, an increase of $7.6 million, or 18% from the cost of revenues of
$43.2 million from the six months ended June 30, 2003. This increase primarily
resulted from $3.6 million of higher costs related to increased procedure volume
and $8.9 million of costs resulting from the Company's adoption of FIN 46
effective January 1, 2004 (as compared to none in the prior year period). These
increases are offset by $4.9 million in cost of revenues for LECC during the six
months ended June 30, 2003 (as compared to none during the six months ended June
30, 2004) since LECC is now reported in the Company's Consolidated Statement of
Operations using the equity method.
Gross margins from centers increased to 32% for the six months ended June
30, 2004 from 24% during the prior year period as increased procedure volumes
led to strong incremental variable margin gains at many of the Company's
centers. This margin percentage increase was diluted by the consolidation of the
physician practices managed by the Company due to the adoption of FIN 46. For
comparison purposes, had the Company consolidated the physician practices during
2003, the gross margin percentage would have been 21% for the six months ended
June 30, 2003.
The cost of revenues from access services for the six months ended June 30,
2004 was $15.3 million, an increase of $1.7 million or 12% from the cost of
revenues of $13.6 million during the six months ended June 30, 2003. This
increase primarily resulted from higher procedure volume. Gross margins
decreased to 32% from 34% due to pricing pressure from competitors and higher
costs associated with Custom LASIK.
Revenues from other healthcare services for the six months ended June 30,
2004, were $32.0 million, an increase of $8.6 million or 37% from revenues of
$23.4 million for the six months ended June 30, 2003. Approximately 25% of total
revenues for the six months ended June 30, 2004 were derived from other
healthcare services compared to 23% during the six months ended June 30, 2003.
The increase in other healthcare services revenue resulted from internal growth
of existing business and contributions from businesses acquired within the past
year, and was reflective 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, 2004 was $19.7 million, an increase of $4.3 million or 28% from cost of
revenues of $15.4 million for the six months ended June 30, 2003. The increase
in cost of revenues primarily related to incremental costs incurred to generate
the increased revenue of the other healthcare service business. Gross margins
increased to 38% from 34% due to volume growth and a higher percentage of
revenue generated from OR Partners and Vision Source, which provide services
with higher gross margin percentages than other businesses within the other
healthcare services category.
General and administrative expenses decreased to $15.3 million for the six
months ended June 30, 2004 from $16.3 million for the six months ended June 30,
2003. The $1.0 million or 6% decrease reflected the Company's success in
controlling overhead costs despite a 28% increase in revenue. Accordingly,
general and administrative expenses as a percentage of revenue decreased to 12%
from 16% compared to the prior year period.
Marketing expenses of $6.3 million decreased by $0.9 million or 12% for the
six months ended June 30, 2004 from $7.2 million for the six months ended June
30, 2003. Marketing expenses as a percentage of revenue decreased to 5% from 7%
in the prior year period, reflecting the Company's success in increasing revenue
while controlling marketing expenses.
Research and development expenses were $0.7 million for the six months ended
June 30, 2004, relating to investments made to fund research and development
efforts by VSC 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 FDA approval, the
16
Company accounted for this investment as a research and development arrangement
whereby investments were expensed as amounts are expended by VSC.
Amortization expenses decreased to $2.1 million for the six months ended
June 30, 2004 from $3.4 million for the six months ended June 30, 2003. This
decrease was largely due to the reduction in intangible assets (Practice
Management Agreements) resulting from the deconsolidation of LECC.
As of June 30, 2004, the Company fully reversed a reserve by $1.2 million
related to a long-term receivable due to a consistent payment history and
continually improving financial strength of the debtor. In the prior year
period, the Company had initially reduced the reserve by $0.7 million due to a
similar valuation analysis and wrote down the value of an unrelated investment
by $0.2 million due to an other than temporary decline in its value.
During the six months ended June 30, 2004, the Company recorded a $2.5
million charge for severance payments to two officers under the terms of
employment contracts and a $0.3 million charge for ongoing lease payment
obligations at previously closed centers. The Company had recorded $1.7 million
of restructuring charges during the six months ended June 30, 2003 primarily
relating to the closing of four unprofitable centers.
Other income and expense of $0.5 million for the six months ended June 30,
2004 primarily resulted from a $1.1 million gain on the sale of a controlling
interest in LECC offset by a $0.8 million loss related to the disposal of fixed
assets. During the six months ended June 30, 2003, the Company recorded $0.6
million in other revenue.
Interest expense, net of $0.7 million for the six months ended June 30, 2004
reflected interest expense from debt and lease obligations, partially offset by
interest income from the Company's cash position. In the prior year period,
average debt levels were higher resulting in net interest expense of $0.8
million.
Minority interest expense was $4.3 million for the six months ended June 30,
2004, an increase of $1.8 million from $2.5 million for the six months ended
June 30, 2003. This increase results from higher profits at certain of the
Company's subsidiaries in which partners hold minority interests.
Earnings from equity investments of $1.0 million for the six months ended
June 30, 2004 resulted primarily from $0.6 million of earnings related to the
Company's minority ownership investment in LECC and $0.3 million of earnings
related to the Company's minority ownership investment in a secondary care
service provider.
Income tax expense was $0.3 million for the six months ended June 30, 2004
and 2003. The $0.3 million tax expense primarily 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 current year federal income tax expense
attributable to the Company and subsidiaries included in the consolidated
federal return was offset by the reversal of valuation allowances as the Company
anticipates utilizing net operating loss carryforwards.
Net income for the six months ended June 30, 2004 was $14.3 million or $0.20
per share compared to loss of $2.4 million or $0.04 per share for the six months
ended June 30, 2003.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 2004, the Company continued to focus
its activities primarily on increasing procedure volumes at its centers,
reducing operating costs, and expanding its other healthcare businesses through
internal growth and acquisitions. Cash and cash equivalents, short-term
investments and restricted cash were $49.6 million at June 30, 2004 compared to
$31.7 million at December 31, 2003. Working capital at June 30, 2004 was $35.3
million, an increase of $24.4 million from $10.9 million at December 31, 2003.
The Company's principal cash requirements have included normal operating
expenses, debt repayment, distributions to minority partners, capital
expenditures, acquisitions and investments. 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.
17
During the six months ended June 30, 2004, the Company invested $3.8 million
in fixed assets and received vendor lease financing for $1.0 million of fixed
assets.
The Company does not expect to purchase additional excimer lasers during the
next 12 to 18 months, however, existing lasers and flap-making technology 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, 2003, the Company had $2.1 million of exit liabilities
primarily related to the restructuring of operations in connection with the
LaserVision merger, including several centers that have been closed. During the
six months ended June 30, 2004, the Company reserved an additional liability of
$0.3 million related to ongoing lease payment obligations at previously closed
centers and made cash payments of $1.0 million toward previous liability
obligations.
As previously announced, the Company believes that a separation and possible
initial public offering ("IPO") of VSC's patented Rheopheresis blood filtration
process business ("RHEO") would maximize its potential and result in the highest
value for the Company and its shareholders. As a result, the Company and the
other major shareholders of VSC have in principle agreed to a plan to proceed
with a re-organization that would combine VSC and OccuLogix LP (a limited
partnership 50% owned by TLCVision), into a new stand-alone company focused on
development of the RHEO procedure and the sales and distribution of RHEO filters
and OctoNova pumps. The Company will continue to explore a potential IPO during
the remainder of 2004.
CASH PROVIDED BY OPERATING ACTIVITIES
Net cash provided by operating activities was $19.4 million for the six
months ended June 30, 2004. The cash flows provided by operating activities
during the six months ended June 30, 2004 were primarily due to net income of
$14.3 million plus non-cash items including depreciation and amortization of
$9.0 million, minority interest expense of $4.3 million and a loss on the
disposal of fixed assets of $0.7 million, offset by an increase in net operating
assets of $6.9 million, a gain on the sale of a subsidiary of $1.1 million, and
a reversal of a long-term receivable reserve of $1.2 million. The increase in
net operating assets consisted of a $3.8 million increase in accounts receivable
due primarily to higher revenues, a $1.5 million increase in prepaid expenses,
and a $1.7 million decrease in accounts payable and accrued liabilities.
Settlement of litigation or payment of accrued liabilities in future periods
could reduce cash without affecting working capital.
CASH USED IN INVESTING ACTIVITIES
Net cash used in investing activities was $7.3 million for the six months
ended June 30, 2004. Cash used in investing activities during the six-month
period ended June 30, 2004 included $4.6 million for business acquisitions, $3.8
million for the capital expenditures, $0.7 million for investments in research
and development with Vascular Sciences, and $0.3 million in net cash associated
with the sale of a portion of the Company's interest in LECC. These cash
outflows are offset by a $0.9 million decrease in other assets, $0.7 million in
cash distributions received from equity investees, and $0.5 million of proceeds
from the sale of fixed assets. The $0.3 million decrease in cash related to the
sale of the Company's controlling interest in the LECC consists of $2.3 million
in proceeds from the sale offset by a net of $2.6 million in cash that is no
longer included in the consolidated balance sheet because the LECC business is
now accounted for using the equity method of accounting since the Company no
longer holds a controlling interest in the entity.
CASH PROVIDED BY FINANCING ACTIVITIES
Net cash provided by financing activities was $6.3 million for the six
months ended June 30, 2004. Net cash provided by financing activities during the
six months ended June 30, 2004 was primarily related to proceeds from the
exercise of stock options of $18.3 million offset by the repayment of certain
notes payable and capitalized lease obligations of $8.3 million and distribution
to minority interests of $3.7 million.
18
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
There have been no material changes in legal proceedings from that reported
in the Company's Annual Report on Form 10-K for the year ended December 31,
2003.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of shareholders was held on June 14, 2004. At
the annual meeting, shareholders of the Company voted on the following
proposals: (a) to elect seven directors for the ensuing year; (b) 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; (c)
to approve the 2004 Employee Share Purchase Plan; (d) to approve amendments to
the 1997 Share Purchase Plan for Canadian Employees; and (e) to approve an
increase in the number of common shares reserved for the Amended and Restated
Share Option Plan by 2,000,000 common shares. Each of the proposals, including
the election of directors, was approved at the annual meeting.
19
With respect to the election of directors, the following votes were cast:
Votes in Favor Votes Withheld
- -------------- --------------
54,637,190 204,775
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 Withheld
- -------------- --------------
53,385,434 107,971
With respect to the approval of the 2004 Employee Share Purchase Plan, the
following votes were cast:
Votes in Favor Votes Against
- -------------- -------------
32,247,690 3,459,330
With respect to the approval of the amendments to the 1997 Share Purchase
Plan for Canadian Employees, the following votes were cast:
Votes in Favor Votes Against
- -------------- -------------
31,705,915 3,324,575
With respect to the approval of an increase in the number of common shares
reserved for the Amended and Restated Share Option Plan by 2,000,000 common
shares, the following votes were cast:
Votes in Favor Votes Against
- -------------- -------------
20,099,781 15,564,922
20
ITEM 6. EXHIBITS AND REPORTS ON FORM 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
99 Reconciliation between Canadian and United States Generally
Accepted Accounting Principles
b. Reports on Form 8-K:
On July 14, 2004, the Company filed a Current Report on Form 8-K
announcing the retirement of the Company's Chief Financial Officer and
its Succession Plan.
On May 10, 2004, the Company filed a Current Report on Form 8-K
pertaining to an update with respect to its patented Rheopheresis (R)
blood filtration process business.
21
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 9, 2004
By: /s/ B. Charles Bono III
-------------------------
B. Charles Bono III
Chief Financial Officer
August 9, 2004
22
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
99 Reconciliation between Canadian and United States Generally Accepted Accounting Principles
23