-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Pcp5iQu9Jk0JrlXAjxTG7iQ60KA87bYvnbdReLWtIr94J9BDGc/U2eMqYbunX5eM MDGkYfQxSKbqPuLI5MBTVg== 0000950137-04-006454.txt : 20040809 0000950137-04-006454.hdr.sgml : 20040809 20040809163456 ACCESSION NUMBER: 0000950137-04-006454 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040809 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TLC VISION CORP CENTRAL INDEX KEY: 0001010610 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SPECIALTY OUTPATIENT FACILITIES, NEC [8093] IRS NUMBER: 980151150 STATE OF INCORPORATION: A6 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-29302 FILM NUMBER: 04961773 BUSINESS ADDRESS: STREET 1: 5600 EXPLORER DRIVE STREET 2: SUITE 301 CITY: MISSISSAUGA ONTARIO STATE: A6 ZIP: 00000 BUSINESS PHONE: 3144346900 MAIL ADDRESS: STREET 1: 540 MARYVILLE CENTRE DR STREET 2: - CITY: ST LOUIS STATE: MO ZIP: 63141 FORMER COMPANY: FORMER CONFORMED NAME: TLC LASER CENTER INC DATE OF NAME CHANGE: 19960314 10-Q 1 c87416e10vq.txt QUARTERLY REPORT 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 EX-31.1 2 c87416exv31w1.txt CEO'S CERTIFICATION EXHIBIT 31.1 CERTIFICATION I, Elias Vamvakas, certify that: 1. I have reviewed this quarterly report on Form 10-Q of TLC Vision Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (that registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 9, 2004 /s/ Elias Vamvakas --------------------------- Elias Vamvakas Chief Executive Officer 24 EX-31.2 3 c87416exv31w2.txt CFO'S CERTIFICATION EXHIBIT 31.2 CERTIFICATION I, B. Charles Bono III, certify that: 1. I have reviewed this quarterly report on Form 10-Q of TLC Vision Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (that registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 9, 2004 /s/ B. Charles Bono III --------------------------- B. Charles Bono III Chief Financial Officer 25 EX-32.1 4 c87416exv32w1.txt CEO'S CERTIFICATION EXHIBIT 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of TLC Vision Corporation (the "Company") on Form 10-Q for the period ended June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Elias Vamvakas, Chief Executive Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: August 9, 2004 /s/ Elias Vamvakas - ----------------------------- Elias Vamvakas Chief Executive Officer 26 EX-32.2 5 c87416exv32w2.txt CFO'S CERTIFICATION EXHIBIT 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of TLC Vision Corporation (the "Company") on Form 10-Q for the period ended June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, B. Charles Bono, Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: August 9, 2004 /s/ B. Charles Bono III - ------------------------------------ B. Charles Bono III Chief Financial Officer 27 EX-99 6 c87416exv99.txt RECONCILIATION EXHIBIT 99 RECONCILIATION BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES TLC Vision Corporation (the "Company") prepares its consolidated financial statements in accordance with United States (U.S.) Generally Accepted Accounting Principles ("GAAP"), which differ in certain respects from Canadian GAAP. This reconciliation between Canadian and U.S. GAAP should be read in conjunction with the consolidated interim financial statements as of June 30, 2004 and for the three and six months ended June 30, 2004 and 2003 and related management's discussion and analysis prepared in accordance with U.S. GAAP and filed with the Securities Exchange Commission and the Ontario Securities Commission. a) Reconciliation from U.S. GAAP to Canadian GAAP Following is a reconciliation of net income from U.S. GAAP to Canadian GAAP:
THREE MONTHS ENDED SIX MONTHS ENDED ------------------ ---------------- JUNE 30, JUNE 30 -------- ------- 2004 2003 2004 2003 ---- ---- ---- ---- Net income (loss) per U.S. GAAP ................................ $ 6,239 $(3,453) $14,291 $(2,383) Amortization of Practice Management Agreements (1) ............. (378) (378) (756) (756) Depreciation of fixed assets (2) ............................... (70) (70) (140) (140) Interest income on note receivable related to the sale-leaseback of building (3) ................................ 19 20 39 39 Variable accounting for stock options (4) ...................... 15 -- 334 -- Fair value accounting of stock options (4) ..................... (278) -- (554) -- ------- ------- ------- ------- Net income (loss) per Canadian GAAP ............................ $ 5,547 $(3,881) $13,214 $(3,240) ======= ======= ======= ======= Net income (loss) per share for Canadian GAAP - basic ........ $ 0.08 $ (0.06) $ 0.20 $ (0.05) ======= ======= ======= ======= Net income (loss) per share for Canadian GAAP - diluted ........ $ 0.08 $ (0.06) $ 0.19 $ (0.05) ======= ======= ======= =======
The most significant balance sheet differences between U.S. GAAP and Canadian GAAP are as follows:
JUNE 30, DECEMBER 31, 2004 2003 -------- ------------ Investments and Other Assets Balance per U.S. GAAP ..................................... $ 7,858 $ 3,102 Note receivable related to the sale-leaseback of building (2) .......................................... 976 976 -------- -------- Balance per Canadian GAAP ................................. $ 8,834 $ 4,078 ======== ======== Intangibles, Net Balance per U.S. GAAP ..................................... $ 20,327 $ 22,959 Difference in impairment write-off of intangibles (1) ..... 6,334 6,334 Amortization of Practice Management Agreements (1) ........ (3,150) (2,394) -------- -------- Balance per Canadian GAAP ................................. $ 23,511 $ 26,899 ======== ======== Fixed Assets, Net Balance per U.S. GAAP ..................................... $ 50,780 $ 56,891 Adjustment for the sale-leaseback of building (2) ......... (829) (829) Depreciation of fixed assets (2) .......................... (838) (698) -------- -------- Balance per Canadian GAAP ................................. $ 49,113 $ 55,364 ======== ========
28
JUNE 30, DECEMBER 31, 2004 2003 --------- ------------ Long-Term Debt, Less Current Maturities Balance per U.S. GAAP ................................................................ $ 12,341 $ 19,242 Adjustment for note payable related to the sale-leaseback of building (2) ......................................................................... 913 913 --------- --------- Balance per Canadian GAAP ............................................................ $ 13,254 $ 20,155 ========= ========= Contributed Surplus Balance per U.S. GAAP ................................................................ $ -- $ -- Adjustment for change in accounting policy related to the fair value accounting of stock options (4) ................................................ 13,607 -- Adjustment for fair value accounting of stock options (4) ............................ 554 -- --------- --------- Balance per Canadian GAAP ............................................................ $ 14,161 $ -- ========= ========= Option and Warrant Equity Balance per U.S. GAAP ................................................................ $ 4,877 $ 8,143 Adjustment to compensation expense for warrants and stock options (4) .......................................................................... (556) (222) --------- --------- Balance per Canadian GAAP ............................................................ $ 4,321 $ 7,921 ========= ========= Accumulated Deficit Balance per U.S. GAAP ................................................................ $(280,461) $(294,752) Adjustment to the value of intangible Practice Management Agreements (1) ....................................................................... 3,184 3,940 Adjustment for the sale-leaseback of building (2) .................................... (1,667) (1,527) Interest on note receivable related to the sale-leaseback of building (3) ......................................................................... 205 166 Adjustment to compensation expense for warrants and stock options (4) .................................................................................. 2 222 Adjustment for change in accounting policy related to the fair value of stock options (4) ........................................................... (13,607) -- --------- --------- Balance per Canadian GAAP ............................................................ $(292,344) $(291,951) ========= =========
(1) During the year ended May 31, 2002, the Company reviewed its Practice Management Agreements ("PMA's") for impairment based on budgets prepared for future periods. The refractive industry had experienced reduced procedure volumes over the prior two years as a result of increased competition, customer confusion and a weakening North American economy. This reduction in procedures had occurred at practices the Company had purchased, and as a result revenues were lower than anticipated when initial purchase prices and resulting intangible values were determined. For U.S. GAAP purposes, the Company accounts for its intangible assets subject to amortization in accordance with Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 requires the impairment analysis first consider undiscounted cash flows in determining if an impairment exists. If an impairment is evident, a second calculation using a discounted cash flow method is utilized to determine the actual amount of the impairment. For U.S. GAAP purposes, the Company recorded an impairment charge of $31.0 million for the year ended May 31, 2002 related to its PMA's. For Canadian GAAP purposes, the Company measured the initial impairment charge in accordance with the Canadian Institute of Chartered Accountant's ("CICA") Handbook Section 3060, "Capital Assets", the Canadian GAAP rules in existence during the year ended May 31, 2002 ("CICA 3060"). CICA 3060 required an impairment charge to be recognized when the expected future undiscounted cash flows do not exceed the carrying value of such assets. 29 As at May 31, 2002, this resulted in a $6.3 million difference in the write-down of the PMA's between U.S. and Canadian GAAP ($24.7 million). This difference in the initial measurement of the impairment further resulted in a difference to the amortization expense in subsequent periods, resulting in an additional $3.2 million of amortization expense for Canadian GAAP compared to U.S. GAAP. During 2003, the CICA issued CICA 3061, Property, Plant and Equipment which is consistent with U.S. GAAP, however retroactive adoption of this change was not required. (2) During the year ended May 31, 2002, the Company completed a sale-leaseback transaction. Total consideration received for the sale of the building and related land was $6.4 million, which was comprised of $5.4 million in cash and a $1.0 million 8.0% note receivable ("Note"). The Note has a seven-year term with the first of four annual payments of $63,000 starting on the third anniversary of the sale and a final payment of $0.7 million due on the seventh anniversary of the sale. For U.S. GAAP purposes, this transaction was accounted for in accordance with SFAS 98, "Accounting for Leases" ("SFAS 98"). SFAS 98 prohibits sale recognition on a sale-leaseback transaction when the sublease is considered to be minor and the only recourse to any future amounts owing from the other party is the leased asset. A sublease is considered to be minor when the present value of the sublease rent is less than 10% of the total fair market value. The Company accounted for the transaction as a financing transaction which requires sale proceeds to be recorded as a liability and for the Note to not be recognized. In addition, since the sale recognition is not accounted for, the carrying value of the asset is not adjusted for and the asset continues to be depreciated over the original depreciation period of 40 years. Lease payments, exclusive of an interest portion, decrease the liability while payments received on the Note increase the liability. For Canadian GAAP purposes, the sale-leaseback transaction was accounted for in accordance with Emerging Issues Committee No. 25, "Accounting for Sales with Leasebacks", which resulted in the Company recognizing a loss on the sale with a corresponding lease asset and lease obligation. The terms of the lease are considered capital in nature and accordingly the land and building are reflected as assets under capital lease with the discounted value of the lease payments recorded as an obligation under capital lease. The fair value of the assets under capital lease was less than its previous carrying value and accordingly a write down of approximately $0.8 million was reflected in the consolidated statement of operations for the year ended May 31, 2002. For U.S. GAAP purposes, depreciation expense reflects the higher net book value of the building depreciated over a 40-year expected life. For Canadian GAAP purposes, the building is depreciated over the 15-year life of the lease and the $1.0 million Note is included in investments and other assets. As of June 30, 2004, as a result of the difference in the initial accounting treatment of the sale-leaseback transaction and subsequent differences in depreciation expense recorded, the net book value of the building is $1.7 million higher for U.S. GAAP. Investments and other assets is $1.0 million higher and notes payable is $1.0 million higher (of which $0.9 million is classified as long-term) for Canadian GAAP. For the three and six months ended June 30, 2004 and 2003, depreciation expense is higher for U.S. GAAP by $70,000 and $140,000, respectively. (3) For the three months ended June 30, 2004 and 2003, the Company reported $20,000 and $19,000 of interest income respectively related to the Note on the sale-leaseback of the building as described above. For the six months ended June 30, 2004 and 2003, the Company reported $39,000 of interest income, respectively, related to the Note on the sale-leaseback of the building. The cumulative interest earned as at June 30, 2004 of $205,000 was classified as prepaids and other current assets for Canadian GAAP purposes. (4) For U.S. GAAP purposes, the Company has adopted the disclosure requirements of SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123") and as permitted under SFAS 123, applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25") and related interpretations in accounting for its stock option plans. SFAS 123 requires disclosure of pro forma amounts to reflect the impact if the Company had elected to adopt the optional recognition provisions of SFAS 123 for its stock option plans and employee stock purchase plans. 30 For Canadian GAAP purposes, the Company accounts for its stock options in accordance with the provisions of CICA Section 3870, Stock-Based Compensation and Other Stock-Based Payments, ("CICA 3870"). CICA 3870, issued in December 2001, established standards for the recognition, measurement and disclosure of stock-based compensation, and other stock-based payments. Under the provisions of CICA 3870, prior to January 1, 2004, companies could either measure the compensation cost of equity instruments issued under employee compensation plans using a fair value-based method or could recognize compensation cost using another method, such as the intrinsic value-based method. However, if another method was applied, pro forma disclosure of net income or loss and earnings or loss per share was required in the financial statements as if the fair value-based method had been applied. Effective January 1, 2004, CICA 3870 requires that all stock-based compensation be measured and expensed using a fair value-based methodology. Prior to January 1, 2004, the Company recognized employee stock-based compensation under the intrinsic value-based method and provided pro forma disclosure of net income or loss and earnings or loss per share as if the fair value-based method had been applied. Effective January 1, 2004, the Company adopted the fair value-based method for recognizing employee stock-based compensation on a retroactive basis to January 1, 1996, without restatement of prior periods. At January 1, 2004, the cumulative effect of the change in accounting policy on prior periods resulted in a charge to accumulated deficit of $13.6 million which represents the sum of the previously disclosed pro forma fair value adjustments with a corresponding increase to contributed surplus. For the three and six months ended June 30, 2004, the Company recorded stock-based compensation expense of $278,000, and $554,000, respectively, which is included in general and administrative expenses. No compensation expense for stock options granted to employees at fair market value was included in the determination of net income for the three and six months ended June 30, 2003. For the three and six months ended June 30, 2003, the following table presents the Company's pro forma net income and earnings per share as if the fair value-based method of CICA 3870 had been applied for all stock options granted:
THREE MONTHS SIX MONTHS ------------ ---------- ENDED ENDED ----- ----- JUNE 30, 2003 JUNE 30, 2003 ------------- ------------- Net Income per Canadian GAAP .................................... $(3,881) $(3,240) Total pro forma stock-based compensation expense determined under fair value-based method ........................ (259) (528) ------- ------- Pro forma net income ............................................ $(4,140) $(3,768) ======= ======= BASIC AND DILUTED EARNINGS PER SHARE As reported $ (0.06) $ (0.05) Pro forma $ (0.07) $ (0.06)
During the year ended May 31, 2002, the Company allowed the holders of outstanding TLC Vision Corporation stock options with an exercise price greater than $8.688 (C$13.69) to elect to reduce the exercise price of their options to $8.688 (C$13.69), in some cases by surrendering existing options for a greater number of shares than the number of shares issuable on exercise of each repriced option. For U.S. GAAP purposes, such modification which results in a change in the exercise price of the underlying stock options is subject to APB 25's variable method of accounting for stock options. Variable accounting requires that differences between the price of the Company's common shares at the end of each reporting period and the modified exercise price be charged to income as compensation expense over the remaining vesting period of the outstanding options. For the three and six month periods ended June 30, 2004, the Company recognized additional stock compensation expense of $15,000 and $334,000, respectively, related to the modified stock options. CICA 3870 does not require the application of variable method of accounting for stock options. 31 The fair value of the options granted was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
JUNE 30, JUNE 30, 2004 2003 ---- ---- Risk free interest rate 2.35% 2.35% Volatility 0.75 0.75 Weighted average expected life 2.5 2.5
The dividend rate for options issued in 2004 and 2003 was nil. The Company issued 12,000 and 30,500 stock options during the three and six months ended June 30, 2004, respectively. For the three and six month periods ended June 30, 2004, for Canadian GAAP purposes the Company recognized $278,000 and $554,000, respectively, in stock option compensation expense related to the amortization of the fair value of issued stock options. b) Management's Discussion and Analysis - Canadian Supplement Management's Discussion and Analysis - Canadian Supplement ("Canadian Supplement") in this document is based on consolidated financial statements of TLC Vision Corporation prepared in accordance with U.S. GAAP. The Canadian Supplement has been prepared by management to provide an analysis of the impact of material differences that differ from U.S. GAAP on net income and trending analysis of the consolidated statements of operations. THREE MONTHS ENDED JUNE 30, 2004, COMPARED TO THREE MONTHS ENDED JUNE 30, 2003 Net income for the three months ended June 30, 2004 was $5.5 million or $0.08 per share compared to a net loss of $3.9 million or $0.06 per share for the three months ended June 30, 2003. Amortization expenses decreased to $1.4 million for the three months ended June 30, 2004 from $2.1 million for the three months ended June 30, 2003. The decrease was largely due to the reduction in Practice Management Agreements resulting from the deconsolidation of Laser Eye Care of California. Net cash provided by operating activities was $8.5 million for the three months ended June 30, 2004. The cash flows provided by operating activities during the three months ended June 30, 2004 were primarily due to net income of $5.5 million plus non-cash items including depreciation and amortization of $4.9 million, minority interest expense of $2.5 million, offset by an increase in net operating assets of $3.5 million, an adjustment to the fair value of investments and long-term receivables of $1.2 million, and earnings from equity investments of $0.6 million . The increase in net operating assets primarily consisted of a $2.8 million decrease in accounts payable and accrued liabilties and a $0.9 million increase in prepaid expenses offset by a $0.2 million decrease in accounts receivable. Settlement of litigation or payment of accrued liabilities in future periods could reduce cash without affecting working capital. SIX MONTHS ENDED JUNE 30, 2004, COMPARED TO SIX MONTHS ENDED JUNE 30, 2003 Net income for the six months ended June 30, 2004 was $13.2 million or $0.19 per share compared to a net loss of $3.2 million or $0.05 per share for the six months ended June 30, 2003. Amortization expenses decreased to $2.8 million for the six months ended June 30, 2004 from $4.1 million for the six months ended June 30, 2003. The decrease was largely due to the reduction in Practice Management Agreements resulting from the deconsolidation of Laser Eye Care of California. 32 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 $13.2 million and research and development expenditures of $0.7 million, plus non-cash items including depreciation and amortization of $9.9 million, minority interest expense of $4.3 million, non-cash compensation expense of $0.8 million, and a loss on the disposal of fixed assets of $0.7 million. These increases were offset by an increase in net operating assets of $7.0 million, an adjustment to the fair value of investments and long-term receivables of $1.2 million, a gain on the divestiture of LECC of $1.1 million, and earnings from equity investments of $1.0 million . The increase in net operating assets primarily consisted of a $3.8 million increase in accounts receivable, a $1.7 million decrease in accounts payable and accrued liabilities and a $1.5 million increase in prepaid expenses. Settlement of litigation or payment of accrued liabilities in future periods could reduce cash without affecting working capital. c) For comparative purposes, the following tables illustrate previously filed financial statements in accordance with both Canadian GAAP and U.S. GAAP during the respective time periods in 2003. Differences between Canadian GAAP and U.S. GAAP are described above. 33 TLC VISION CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (In thousands of U.S. dollars except per share amounts)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, 2003 JUNE 30, 2003 ------------- ------------- CANADIAN GAAP U.S. GAAP CANADIAN GAAP U.S. GAAP ------------- --------- ------------- --------- Revenues: Refractive: Centers .............................. $ 26,237 $ 26,237 $ 57,160 $ 57,160 Access ............................... 9,647 9,647 20,576 20,576 Other healthcare services ................. 11,648 11,648 23,386 23,386 --------- --------- --------- --------- Total revenues .............................. 47,532 47,532 101,122 101,122 --------- --------- --------- --------- Cost of revenues: Refractive: Centers .............................. 20,636 20,636 43,179 43,179 Access ............................... 6,481 6,481 13,643 13,643 Other healthcare services ................. 7,950 7,950 15,430 15,430 --------- --------- --------- --------- Total cost of revenues ...................... 35,067 35,067 72,252 72,252 --------- --------- --------- --------- Gross margin .............................. 12,465 12,465 28,870 28,870 --------- --------- --------- --------- General and administrative .................. 8,383 8,313 16,472 16,332 Marketing ................................... 3,496 3,496 7,157 7,157 Amortization of intangibles ................. 2,056 1,678 4,106 3,350 Adjustment to the fair value of investments and long-term receivables...... (651) (651) (448) (448) Restructuring, severance and other charges .. 1,720 1,720 1,720 1,720 --------- --------- --------- --------- 15,004 14,556 29,007 28,111 --------- --------- --------- --------- Operating income (loss) ..................... (2,539) (2,091) (137) 759 Other income, net ........................... 198 198 566 566 Interest expense, net ....................... (373) (393) (722) (761) Minority interests .......................... (961) (961) (2,502) (2,502) --------- --------- --------- --------- Income (loss) before income taxes ........... (3,675) (3,247) (2,795) (1,938) Income tax expense .......................... (206) (206) (445) (445) --------- --------- --------- --------- Net income (loss) ........................... $ (3,881) $ (3,453) $ (3,240) $ (2,383) ========= ========= ========= ========= Earnings (loss) per share - basic and diluted ................................... $ (0 06) $ (0.05) $ (0.05) $ (0.04) ========= ========= ========= ========= Weighted average number of common shares outstanding - basic and diluted ................................... 63,457 63,457 63,435 63,435
34 TLC VISION CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands of U.S. dollars)
DECEMBER 31, 2003 ----------------- CANADIAN GAAP U.S. GAAP ------------- --------- ASSETS Current assets Cash and cash equivalents ........................... $ 29,580 $ 29,580 Short-term investments .............................. 748 748 Accounts receivable ................................. 15,617 15,617 Prepaids and other current assets ................... 11,812 11,646 --------- --------- Total current assets ............................... 57,757 57,591 Restricted cash ....................................... 1,376 1,376 Investments and other assets .......................... 4,078 3,102 Intangibles, net ...................................... 26,899 22,959 Goodwill, net ......................................... 48,829 48,829 Fixed assets, net ..................................... 55,364 56,891 --------- --------- Total assets .......................................... $ 194,303 $ 190,748 ========= ========= LIABILITIES Current liabilities Accounts payable .................................... $ 10,627 $ 10,627 Accrued liabilities ................................. 25,811 25,811 Current portion of long-term debt ................... 10,348 10,285 --------- --------- Total current liabilities ............................. 46,786 46,723 Other long-term liabilities ........................... 2,607 2,607 Long term-debt, less current maturities ............... 20,155 19,242 Minority interests .................................... 10,907 10,907 SHAREHOLDERS' EQUITY Capital stock ......................................... 397,878 397,878 Option and warrant equity ............................. 7,921 8,143 Accumulated deficit ................................... (291,951) (294,752) --------- --------- Total shareholders' equity ............................ 113,848 111,269 --------- --------- Total liabilities and shareholders' equity ............ $ 194,303 $ 190,748 ========= =========
35 TLC VISION CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands of U.S. dollars)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, 2003 JUNE 30, 2003 CANADIAN GAAP U.S. GAAP CANADIAN GAAP U.S. GAAP ------------- --------- ------------- --------- Net loss ....................................................... $ (3,881) $ (3,881) $ (3,240) $ (2,383) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization .................................. 5,941 5,941 11,943 11,047 Minority interests ............................................. 961 961 2,502 2,502 Adjustment to the fair value of investments and long-term receivables and impairment of fixed assets ....................................................... (605) (605) (402) (402) Loss (gain) on disposal of fixed assets ........................ (391) (391) (391) (391) Restructuring and other costs .................................. 527 527 527 527 Changes in operating assets and liabilities: Accounts receivable ............................................ (10) (10) (3,784) (3,784) Prepaid expenses and other current assets ...................... (1,462) (1,462) (1,199) (1,160) Accounts payable and accrued liabilities ....................... (705) (705) (5,055) (5,055) -------- -------- -------- -------- Cash provided by operating activities .......................... 375 375 901 901 -------- -------- -------- -------- INVESTING ACTIVITIES Purchase of fixed assets ....................................... (974) (974) (2,587) (2,587) Net proceeds from the sale of investments and subsidiaries ..... 548 548 221 221 Acquisitions and investments ................................... (532) (532) (2,622) (2,622) Purchase of short-term investments ............................. (86) (86) (324) (324) Proceeds from sale of fixed assets ............................. 77 77 548 548 Other .......................................................... 220 220 273 273 -------- -------- -------- -------- Cash used in investing activities .............................. (747) (747) (4,491) (4,491) -------- -------- -------- -------- FINANCING ACTIVITIES Restricted cash movement ....................................... (489) (489) (439) (439) Principal payments of debt financing and capital leases ....................................................... (1,198) (1,198) (3,979) (3,979) Distributions to minority interests ............................ (1,172) (1,172) (1,802) (1,802) Proceeds from debt financing ................................... 1,450 1,450 1,450 1,450 Proceeds from the issuance of common stock ..................... 899 899 905 905 -------- -------- -------- -------- Cash used in financing activities .............................. (510) (510) (3,865) (3,865) -------- -------- -------- -------- Net decrease in cash and cash equivalents during the period ....................................................... (882) (882) (7,455) (7,455) Cash and cash equivalents, beginning of period ................. 29,508 29,508 36,081 36,081 -------- -------- -------- -------- Cash and cash equivalents, end of period ....................... $ 28,626 $ 28,626 $ 28,626 $ 28,626 ======== ======== ======== ========
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