-----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, Hm1yKaafoTKmJ3tcFD/F4tEihpNhxxifZGfTgZjsYhjcxq+y52fSfEDm22yrhPkm CBIkAnvD0itOfKRhPqw4GA== 0000950137-04-009634.txt : 20041109 0000950137-04-009634.hdr.sgml : 20041109 20041109095043 ACCESSION NUMBER: 0000950137-04-009634 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041109 DATE AS OF CHANGE: 20041109 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: 041127642 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 c89510e10vq.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 SEPTEMBER 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 November 5, 2004 there were 69,654,095 of the registrant's Common Shares outstanding. INDEX PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements (unaudited) Consolidated Statements of Operations for the three and nine months ended September 30, 2004 and 2003 Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003 Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003 Consolidated Statement of Stockholders' Equity for the nine months ended September 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 Signatures
2 PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS TLC VISION CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (In thousands except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------- ------------- 2004 2003 2004 2003 ---- ---- ---- ---- Revenues Refractive Centers ....................................... $ 30,955 $ 24,932 $ 106,167 $ 82,092 Access ........................................ 9,390 8,861 31,983 29,437 Other healthcare services .......................... 16,299 12,221 48,330 35,607 --------- --------- --------- --------- Total revenues ....................................... 56,644 46,014 186,480 147,136 --------- --------- --------- --------- Cost of revenues Refractive Centers ....................................... 22,153 20,239 72,950 63,418 Access ........................................ 6,910 6,558 22,217 20,201 Other healthcare services .......................... 9,972 7,752 29,684 23,182 --------- --------- --------- --------- Total cost of revenues ............................... 39,035 34,549 124,851 106,801 --------- --------- --------- --------- Gross margin ......................................... 17,609 11,465 61,629 40,335 --------- --------- --------- --------- General and administrative ........................... 8,152 8,023 23,453 24,355 Marketing ............................................ 3,350 3,118 9,679 10,275 Research and development ............................. 125 975 849 975 Amortization of intangibles .......................... 1,016 1,665 3,085 5,015 Adjustment to the fair value of investments and long-term receivables .............................. -- 231 (1,206) (217) Restructuring, severance and other charges ........... -- -- 2,755 1,720 --------- --------- --------- --------- 12,643 14,012 38,615 42,123 --------- --------- --------- --------- Operating income (loss) .............................. 4,966 (2,547) 23,014 (1,788) Other income (expense), net .......................... (237) 74 289 640 Interest expense, net ................................ (186) (325) (861) (1,086) Minority interests ................................... (1,674) (1,110) (6,002) (3,612) Earnings from equity investments ..................... 555 -- 1,567 -- --------- --------- --------- --------- Income (loss) before income taxes .................... 3,424 (3,908) 18,007 (5,846) Income tax expense ................................... (102) (182) (394) (627) --------- --------- --------- --------- Net income (loss) .................................... $ 3,322 $ (4,090) $ 17,613 $ (6,473) ========= ========= ========= ========= Earnings (loss) per share - basic .................... $ 0.05 $ (0.06) $ 0.26 $ (0.10) ========= ========= ========= ========= Earnings (loss) per share - diluted .................. $ 0.05 $ (0.06) $ 0.25 $ (0.10) ========= ========= ========= ========= Weighted average number of common shares outstanding - basic .............................................. 69,004 64,743 68,153 63,888 Weighted average number of common shares outstanding - diluted ............................................ 71,353 64,743 70,832 63,888
See the accompanying notes to unaudited interim consolidated financial statements. 3 TLC VISION CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands)
(UNAUDITED) SEPTEMBER 30, DECEMBER 31, 2004 2003 ---- ---- ASSETS Current assets Cash and cash equivalents .............. $ 53,496 $ 29,580 Short-term investments ................. 313 748 Accounts receivable .................... 17,386 15,617 Prepaids and other current assets ...... 12,573 11,646 --------- --------- Total current assets .................. 83,768 57,591 Restricted cash .......................... 1,388 1,376 Investments and other assets ............. 6,237 3,102 Intangibles, net ......................... 19,050 22,959 Goodwill, net ............................ 53,764 48,829 Fixed assets, net ........................ 48,435 56,891 --------- --------- Total assets ............................. $ 212,642 $ 190,748 ========= ========= LIABILITIES Current liabilities Accounts payable ....................... $ 7,378 $ 10,627 Accrued liabilities .................... 25,018 25,811 Current portion of long-term debt ...... 9,328 10,285 --------- --------- Total current liabilities ................ 41,724 46,723 Other long-term liabilities .............. 2,294 2,607 Long-term debt, less current maturities .. 10,501 19,242 Minority interests ....................... 9,625 10,907 SHAREHOLDERS' EQUITY Capital stock ............................ 421,393 397,878 Option and warrant equity ................ 4,244 8,143 Accumulated deficit ...................... (277,139) (294,752) --------- --------- Total shareholders' equity ............... 148,498 111,269 --------- --------- Total liabilities and shareholders' equity ................................... $ 212,642 $ 190,748 ========= =========
See the accompanying notes to unaudited interim consolidated financial statements. 4 TLC VISION CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)(In thousands)
NINE MONTHS ENDED SEPTEMBER 30, ------------------- 2004 2003 ---- ---- OPERATING ACTIVITIES Net income (loss) ..................................................... $ 17,613 $ (6,473) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization ....................................... 13,304 16,807 Write-off of investment in research and development arrangement ..... 849 975 Minority interests .................................................. 6,002 3,612 Earnings from equity investments .................................... (1,567) -- Loss (gain) on disposal of fixed assets ............................. 1,032 (538) Gain on the sale of interest in subsidiary .......................... (1,143) -- Non-cash compensation expense ....................................... 424 -- Adjustment to the fair value of investments and long-term receivables and impairment of fixed assets .................................... (1,206) (171) Non-cash restructuring and other costs .............................. -- 527 Changes in operating assets and liabilities: Accounts receivable .............................................. (1,876) (4,348) Prepaid expenses and other current assets ........................ (1,234) (307) Accounts payable and accrued liabilities ......................... (2,513) (7,766) -------- ---------- Cash provided by operating activities ................................. 29,685 2,318 -------- ---------- INVESTING ACTIVITIES Purchases of fixed assets ............................................. (4,243) (3,724) Proceeds from sale of fixed assets .................................... 900 548 Proceeds from divestitures of investments and subsidiaries, net of cash ........................................................... 729 221 Investment in research and development arrangements ................... (849) (975) Distributions received from equity investments ........................ 792 -- Acquisitions and investments, net of cash acquired .................... (5,245) (7,457) Sale of short-term investments ........................................ -- 788 Other ................................................................. 711 305 -------- ---------- Cash used in investing activities ..................................... (7,205) (10,294) -------- ---------- FINANCING ACTIVITIES Restricted cash movement .............................................. (12) (585) Principal payments of debt financing and capital leases ............... (12,137) (5,565) Proceeds from debt financing .......................................... -- 1,450 Distributions to minority interests ................................... (5,536) (3,593) Proceeds from the issuance of common stock ............................ 19,121 5,516 -------- ---------- Cash provided by (used in) financing activities ....................... 1,436 (2,777) -------- ---------- Net increase (decrease) in cash and cash equivalents during the period ..................................................... 23,916 (10,753) Cash and cash equivalents, beginning of period ........................ 29,580 36,081 -------- ---------- Cash and cash equivalents, end of period .............................. $ 53,496 $ 25,328 ======== ==========
See the accompanying notes to unaudited interim consolidated financial statements. 5 TLC VISION CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)(In thousands)
OPTION AND COMMON STOCK WARRANT ACCUMULATED SHARES AMOUNT EQUITY DEFICIT TOTAL ------ ------ ------ ------- ----- Balance December 31, 2003 ............ 65,756 $ 397,878 $ 8,143 $(294,752) $ 111,269 Shares issued in connection with the employee share purchase plan and 401(k) plan .................... 121 441 441 Exercise of stock options ........... 3,355 18,680 18,680 Options expired or exercised ........ 4,005 (4,005) -- Variable stock option expense ....... 106 106 Value of shares issued upon meeting certain earnings criteria .......... 389 389 Net income .......................... 17,613 17,613 --------- --------- --------- --------- --------- Balance September 30, 2004 .......... 69,232 $ 421,393 $ 4,244 $(277,139) $ 148,498 ========= ========= ========= ========= =========
See the accompanying notes to unaudited interim consolidated financial statements. 6 TLC VISION CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS September 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 nine months ended September 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 nine months ended September 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 nine-month period ended September 30, 2003 include certain reclassifications to conform with classifications for the three- and nine-month period ended September 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 nine months ended September 30, 2004 includes 2.3 million shares and 2.7 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 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 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 $104,000 as of September 30, 2004, and an increase in revenues and cost of revenues for the managed 7 refractive centers, however the adoption had 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 NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------------------- ----------------------------------- 2004 2003 2004 2003 --------- ---------------------- --------- ---------------------- Actual Actual Pro forma Actual Actual Pro forma --------- ---------------------- --------- ---------------------- Revenues: Refractive: Centers $ 30,955 $ 24,932 $ 28,635 $ 106,167 $ 82,092 $ 94,653 Access 9,390 8,861 8,861 31,983 29,437 29,437 Other healthcare services 16,299 12,221 12,221 48,330 35,607 35,607 --------- --------- --------- --------- --------- --------- Total Revenues 56,644 46,014 49,717 186,480 147,136 159,697 Cost of Revenue: Refractive: Centers 22,153 20,239 23,942 72,950 63,418 75,911 Access 6,910 6,558 6,558 22,217 20,201 20,201 Other healthcare services 9,972 7,752 7,752 29,684 23,182 23,182 --------- --------- --------- --------- --------- --------- Total cost of revenues 39,035 34,549 38,252 124,851 106,801 119,294 --------- --------- --------- --------- --------- --------- Gross margin $ 17,609 $ 11,465 $ 11,465 $ 61,629 $ 40,335 $ 40,403 ========= ========= ========= ========= ========= ========= General and administrative $ 8,152 $ 8,023 $ 8,023 $ 23,453 $ 24,355 $ 24,423 ========= ========= ========= ========= ========= ========= Net income (loss) $ 3,322 $ (4,090) $ (4,090) $ 17,613 $ (6,473) $ (6,473) ========= ========= ========= ========= ========= ========= Basic earnings (loss) per share $ 0.05 $ (0.06) $ (0.06) $ 0.26 $ (0.10) $ (0.10) ========= ========= ========= ========= ========= ========= Diluted earnings (loss) per share $ 0.05 $ (0.06) $ (0.06) $ 0.25 $ (0.10) $ (0.10) ========= ========= ========= ========= ========= =========
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. 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 (reduction of expense) of $(151,000) and $424,000 during the three and nine months ended September 30, 2004, respectively, including $(228,000) and $106,000, respectively, of variable stock option expense for options repriced in 2002. The following table illustrates the pro forma net income (loss) and net income (loss) per share as if the fair value-based method as set forth under SFAS No. 123 "Accounting for Stock Based Compensation," applied to all awards: 8
THREE MONTHS ENDED NINE MONTHS ENDED -------------------- ------------------- SEPTEMBER 30, SEPTEMBER 30, -------------------- ------------------- 2004 2003 2004 2003 ---- ---- ---- ---- Net income (loss) as reported .................................. $ 3,322 $ (4,090) $ 17,613 $ (6,473) Add (deduct) stock-based employee compensation cost (reduction of cost) included in reported net income (loss) .............. (228) -- 106 -- Less stock-based employee compensation cost determined under fair value based method for all awards ...................... (311) (227) (865) (755) -------- -------- -------- -------- Pro forma net income (loss) .................................... $ 2,783 $ (4,317) $ 16,854 $ (7,228) ======== ======== -------- -------- Pro forma earnings (loss) per share - basic .................... $ 0.04 $ (0.07) $ 0.25 $ (0.11) ======== ======== ======== ======== Pro forma earnings (loss) per share - diluted .................. $ 0.04 $ (0.07) $ 0.24 $ (0.11) ======== ======== ======== ========
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.("OR Partners"), 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. On August 1, 2004, OR Partners purchased an additional 5% ownership interest in its ASC in Mississippi for $0.7 million of which substantially all was allocated to goodwill. 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 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. 9 The Company's reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different management and marketing strategies. The Company's business units were acquired or developed as a unit, and management at the time of acquisition was retained. The following tables set forth information by segments:
THREE MONTHS ENDED SEPTEMBER 30, 2004 (IN THOUSANDS) REFRACTIVE CATARACT OTHER TOTAL ------------------------------------ ---------- -------- ----- ----- Revenues .............................................................. $ 40,345 $ 7,039 $ 9,260 $ 56,644 Expenses: Doctor compensation ................................................. 6,301 -- 45 6,346 Operating ........................................................... 28,842 5,674 6,405 40,921 Research and development ............................................ -- -- 125 125 Depreciation ........................................................ 2,516 533 221 3,270 Amortization of intangibles ......................................... 765 105 146 1,016 -------- -------- -------- -------- 38,424 6,312 6,942 51,678 -------- -------- -------- -------- Income from operations ................................................ 1,921 727 2,318 4,966 Other income and interest expense, net ................................ (4) (37) (382) (423) Minority interests .................................................... (442) -- (1,232) (1,674) Earnings from equity investments ...................................... 499 -- 56 555 Income taxes .......................................................... (21) -- (81) (102) -------- -------- -------- -------- Net income ............................................................ $ 1,953 $ 690 $ 679 $ 3,322 ======== ======== ======== ========
THREE MONTHS ENDED SEPTEMBER 30, 2003 (IN THOUSANDS) REFRACTIVE CATARACT OTHER TOTAL ------------------------------------ ---------- -------- ----- ----- Revenues .............................................................. $ 33,793 $ 6,531 $ 5,690 $ 46,014 Expenses: Doctor compensation ................................................. 2,424 -- 31 2,455 Operating ........................................................... 29,890 5,272 3,978 39,140 Research and development ............................................ -- -- 975 975 Depreciation ........................................................ 3,518 620 (43) 4,095 Amortization of intangibles ......................................... 1,461 95 109 1,665 Adjustment to the fair value of investments and long-term receivables ......................................................... 231 -- -- 231 -------- -------- -------- -------- 37,524 5,987 5,050 48,561 -------- -------- -------- -------- Income (loss) from operations ......................................... (3,731) 544 640 (2,547) Other income and interest expense, net ................................ 5 (39) (217) (251) Minority interests .................................................... (422) -- (688) (1,110) Income taxes .......................................................... (85) -- (97) (182) -------- -------- -------- -------- Net income (loss) ..................................................... $ (4,233) $ 505 $ (362) $ (4,090) ======== ======== ======== ========
10
NINE MONTHS ENDED SEPTEMBER 30, 2004 (IN THOUSANDS) REFRACTIVE CATARACT OTHER TOTAL ------------------------------------- ---------- --------- --------- --------- Revenues ................................................................. $ 138,150 $ 20,019 $ 28,311 $ 186,480 Expenses: Doctor compensation .................................................... 21,359 -- 90 21,449 Operating .............................................................. 91,093 16,316 18,906 126,315 Research and development ............................................... -- -- 849 849 Depreciation ........................................................... 7,922 1,670 627 10,219 Amortization of intangibles ............................................ 2,405 314 366 3,085 Adjustment to the fair value of investments and long-term receivables .. (1,206) -- -- (1,206) Restructuring, severance and other charges ............................. 2,755 -- -- 2,755 --------- --------- --------- --------- 124,328 18,300 20,838 163,466 --------- --------- --------- --------- Income from operations ................................................... 13,822 1,719 7,473 23,014 Other income and interest expense, net ................................... 531 (88) (1,015) (572) Minority interests ....................................................... (1,813) -- (4,189) (6002) Earnings from equity investments ......................................... 1,389 -- 178 1,567 Income taxes.............................................................. (135) (1) (258) (394) --------- --------- --------- --------- Net income ............................................................... $ 13,794 $ 1,630 $ 2,189 $ 17,613 ========= ========= ========= =========
NINE MONTHS ENDED SEPTEMBER 30, 2003 (IN THOUSANDS) REFRACTIVE CATARACT OTHER TOTAL ------------------------------------- ---------- --------- --------- --------- Revenues ................................................................. $ 111,529 $ 18,103 $ 17,504 $ 147,136 Expenses: Doctor compensation .................................................... 8,007 -- 117 8,124 Operating .............................................................. 94,178 15,152 12,185 121,515 Research and development ............................................... -- -- 975 975 Depreciation ........................................................... 9,637 1,760 395 11,792 Amortization of intangibles ............................................ 4,396 299 320 5,015 Adjustment to the fair value of investments and long-term receivables ........................................... (217) -- -- (217) Restructuring, severance and other charges ............................. 1,720 -- -- 1,720 --------- --------- --------- --------- 117,721 17,211 13,992 148,924 --------- --------- --------- --------- Income (loss) from operations ............................................ (6,192) 892 3,512 (1,788) Other income and interest expense, net ................................... 257 (40) (663) (446) Minority interests ....................................................... (1,576) -- (2,036) (3,612) Income taxes ............................................................. (134) 18 (511) (627) --------- --------- --------- --------- Net income (loss) ........................................................ $ (7,645) $ 870 $ 302 $ (6,473) ========= ========= ========= =========
5. SUPPLEMENTAL CASH FLOW INFORMATION Non-cash transactions:
NINE MONTHS ENDED SEPTEMBER 30, ----------------- 2004 2003 ---- ---- Capital assets financed and leased .......................... $2,221 $7,450 Value of shares issued upon meeting certain earnings criteria ....... 389 -- Common stock issued for acquisition ..................... -- 96
11 Cash paid for the following:
NINE MONTHS ENDED SEPTEMBER 30, ----------------- 2004 2003 ---- ---- Interest............................... $ 1,887 $ 2,168 Income taxes........................... 572 115
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. Throughout 2003 and 2004, this secondary care provider has improved 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 nine months ended September 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 are expected to be paid out within the next twelve months, while the lease costs will be paid out over the remaining term of the lease. 8. SUBSEQUENT EVENTS Since September 30, 2004, the Company has received $3.6 million in proceeds from the exercise of 0.4 million non-qualified stock options. In fiscal 2002, the Company advanced $1.0 million to Tracey Technologies, LLC ("Tracey") to support the development of laser scanning technology. This advance was used by Tracey to further develop the technology, and the Company recorded the advance as research and development expense. In October 2004, Tracey repaid $0.4 million of the advance and agreed to repay the remaining $0.6 million over the next twelve months in exchange for the Company's release of its claims on certain potential royalties should Tracey obtain FDA approval for its technology. The Company recorded the $0.4 million collection as a reduction to research and development expense for the three months ended September 30, 2004 and will record the remaining $0.6 million when collection becomes probable. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q (herein, together with all amendments, exhibits and schedules hereto, referred to as the "Form 10-Q") contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which statements can be identified by the use of forward looking terminology, such as "may," "will," "expect," "anticipate," "estimate," "plans," "intends" or "continue" or the negative thereof or other variations thereon or comparable terminology. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth elsewhere in this Form 10-Q in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in the Company's Annual Report on Form 10-K for the period ended December 31, 2003. Unless the context indicates or requires otherwise, references in this Form 10-Q to the "Company" or "TLCVision" shall mean TLC Vision Corporation and its subsidiaries. References to "$" 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 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 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. In July 2004, Vascular Sciences Corporation changed its name to OccuLogix, Inc. ("OccuLogix"). OccuLogix has filed a registration statement for a proposed initial public offering of its common stock. The Company serves surgeons who performed over 198,000 procedures including cataract procedures at the Company's centers or using the Company's laser and cataract access programs during the nine-month period ended September 30, 2004. The Company continually assesses patient, optometric and ophthalmic industry trends and developing strategies to improve laser vision correction revenues and procedure volumes. Additionally, it is pursuing growth initiatives and investment opportunities in other healthcare services. RECENT DEVELOPMENTS On August 1, 2004, OR Partners purchased an additional 5% ownership interest in its ASC in Mississippi for $0.7 million of which substantially all was allocated to goodwill. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 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 $3.6 million in center revenue and $3.6 million in center cost of revenue during the third 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 13 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 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 September 30, 2003, included $4.0 million in center revenues related to LECC whereas the results of operations for the three months ended September 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 September 30, 2004 were $56.6 million, an increase of $10.6 million, or 23% over revenues of $46.0 million for the three months ended September 30, 2003. Approximately 71% of total revenues for the three months ended September 30, 2004 were derived from refractive services compared to 73% during the three months ended September 30, 2003, reflecting the Company's success in diversifying into other healthcare businesses. Revenues from the refractive segment for the three months ended September 30, 2004 were $40.3 million, an increase of $6.5 million or 19% from $33.8 million for the three months ended September 30, 2003. This increase was primarily due to a 16% increase in procedure volume, a higher mix of procedures performed at the Company's centers, and higher average pricing. Revenues from centers for the three months ended September 30, 2004 were $31.0 million, an increase of $6.1 million, or 24% from revenues of $24.9 million for the three months ended September 30, 2003. This increase was primarily due to higher procedure volumes at centers, higher pricing due to Custom LASIK and additional revenue as a result of adopting FIN 46 offset by lost revenue from deconsolidating LECC. Management believes center revenues will continue to outpace prior year revenue for the remainder of 2004. Revenues from access services for the three months ended September 30, 2004 were $9.4 million, an increase of $0.5 million or 6% from revenues of $8.9 million for the three months ended September 30, 2003. The growth in the access business resulted from increased procedure volume. Approximately 45,700 refractive procedures were performed in the three months ended September 30, 2004, compared to approximately 39,400 procedures for the three months ended September 30, 2003. This 6,300 or 16% increase in procedures was primarily due to 4,700 or 21% increase in procedures at centers and 1,600 or 9% increase in procedures for the access business. Procedures for LECC are included in both periods, and account for 4,700 procedures for the three months ended September 30, 2004, an increase of 1,400 procedures over the prior year period. The cost of refractive revenues for the three months ended September 30, 2004 was $29.1 million, an increase of $2.3 million, or 8% over the cost of refractive revenues of $26.8 million for the three months ended September 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 28% during the three months ended September 30, 2004 from 21% in the prior year period. The cost of revenues from centers for the three months ended September 30, 2004 was $22.2 million, an increase of $2.0 million, or 9% from the cost of revenues of $20.2 million from the three months ended September 30, 2003. This increase primarily resulted from $1.3 million of additional costs related to increased procedure volume and higher costs associated with Custom LASIK, and $3.6 million of costs resulting from the Company's adoption of FIN 46 effective January 1, 2004. These increases were offset by $2.9 million in cost of revenues for LECC during the three months ended September 30, 2003 (as compared to none during the three months ended September 30, 2004). Gross margins from centers increased to 28% for the three months ended September 30, 2004 from 19% during the prior year period as higher procedure volumes led to strong incremental variable margin gains. This margin percentage increase 14 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 16% for the quarter ended September 30, 2003. The cost of revenues from access services for the three months ended September 30, 2004 was $6.9 million, an increase of $0.3 million or 5% from the cost of revenues of $6.6 million during the three months ended September 30, 2003. This increase primarily resulted from higher procedure volume. Gross margins from access services remained consistent at 26% for the three months ended September 30, 2004 and 2003. Revenues from other healthcare services for the three months ended September 30, 2004, were $16.3 million, an increase of $4.1 million or 33% from revenues of $12.2 million for the three months ended September 30, 2003. Approximately 29% of total revenues for the three months ended September 30, 2004 were derived from other healthcare services compared to 27% during the three months ended September 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. The cost of revenues from other healthcare services for the three months ended September 30, 2004 was $10.0 million, an increase of $2.2 million or 29% from cost of revenues of $7.8 million for the three months ended September 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 39% from 37% due principally to volume growth and a higher percentage of revenue generated from its ambulatory surgery centers and franchisees, which have higher gross margin percentages than other businesses within the other healthcare services category. General and administrative expenses increased to $8.2 million for the three months ended September 30, 2004 from $8.0 million for the three months ended September 30, 2003. The $0.2 million or 2% increase reflected the Company's success in controlling overhead costs as the Company grows. Accordingly, general and administrative expenses as a percentage of revenue decreased to 14% from 17% compared to the prior year quarter. Marketing expenses of $3.4 million increased by $0.3 million or 7% for the three months ended September 30, 2004 from $3.1 million for the three months ended September 30, 2003. Marketing expenses as a percentage of revenue decreased to 6% from 7% in the prior year period, reflecting the Company's success in increasing revenue while controlling marketing expenses. Research and development expenses decreased to $0.1 million for the three months ended September 30, 2004 from $1.0 million for the three months ended September 30, 2003. For the three months ended September 30, 2004 and 2003, the Company incurred research and development expenses of $0.5 million and $1.0 million, respectively, relating to investments made to fund research and development efforts by OccuLogix 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 OccuLogix. For the three months ended September 30, 2004, the $0.5 million research and development expense related to OccuLogix was offset by a $0.4 million reimbursement from Tracey of research and development investments that were previously expensed. Amortization expenses decreased to $1.0 million for the three months ended September 30, 2004 from $1.7 million for the three months ended September 30, 2003. This decrease was largely due to the reduction in intangible assets (Practice Management Agreements) resulting from the deconsolidation of LECC. Interest expense, net decreased to $0.2 million for the three months ended September 30, 2004 from $0.3 million for the three months ended September 30, 2003. This decrease is a result of less interest expense due to declining debt and lease obligations and more interest income related to rising cash balances. Minority interest expense was $1.7 million for the three months ended September 30, 2004, an increase of $0.6 million from $1.1 million for the three months ended September 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 September 30, 2004 resulted primarily from $0.5 million of earnings related to the Company's minority ownership investment in LECC. 15 Income tax expense decreased to $0.1 million for the three months ended September 30, 2004 from $0.2 million for the three months ended September 30, 2003. The $0.1 million tax expense primarily consisted of state taxes for certain states where the Company expects to pay income taxes. The current year federal income tax expense attributable to the Company and subsidiaries was offset by the partial reversal of valuation allowances as the Company anticipates utilizing a portion of net operating loss carryforwards in 2004. Net income for the three months ended September 30, 2004 was $3.3 million or $0.05 per share compared to loss of $4.1 million or $0.06 per share for the three months ended September 30, 2003. NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 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 $12.6 million in center revenue, $12.5 million in center cost of revenue and $0.1 million in general and administrative expenses during the nine months ended September 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 nine months ended September 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 nine months ended September 30, 2003, included $11.0 million in center revenues related to LECC whereas the results of operations for the nine months ended September 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 nine months ended September 30, 2004 were $186.5 million, an increase of $39.4 million, or 27% over revenues of $147.1 million for the nine months ended September 30, 2003. Approximately 74% of total revenues for the nine months ended September 30, 2004 were derived from refractive services compared to 76% during the nine months ended September 30, 2003, reflecting the Company's success in diversifying into other healthcare businesses. Revenues from the refractive segment for the nine months ended September 30, 2004 were $138.2 million, an increase of $26.7 million or 24% from $111.5 million for the nine months ended September 30, 2003. This increase was primarily due to a 12% increase in procedure volume, a higher mix of procedures performed at the Company's centers, and higher average pricing associated with the introduction of Custom LASIK in June 2003. Revenues from centers for the nine months ended September 30, 2004 were $106.2 million, an increase of $24.1 million, or 29% from revenues of $82.1 million for the nine months ended September 30, 2003. This increase was primarily due to higher procedure volumes at centers, higher pricing due to Custom LASIK, and additional revenue as a result of adopting FIN 46 offset by lost revenue from several unprofitable centers prior to their closure in 2003 and lost revenue from deconsolidating LECC. Management believes center revenues will continue to outpace prior year revenue for the remainder of 2004. Revenues from access services for the nine months ended September 30, 2004 were $32.0 million, an increase of $2.6 million or 9% from revenues of $29.4 million for the nine months ended September 30, 2003. The growth in the access business resulted from increased procedure volume. Approximately 154,200 refractive procedures were performed in the nine months ended September 30, 2004, compared to approximately 137,400 procedures for the nine months ended September 30, 2003. This 16,800 or 12% increase in procedures was primarily due to 15,100 or 20% more procedures at centers open during both the nine months ended 16 September 30, 2004 and 2003 and 4,300 or 7% more procedures for the access business offset by the absence of 2,600 procedures at centers that were closed within the past year. Procedures for LECC are included in both periods and account for 12,700 procedures for the nine months ended September 30, 2004, an increase of 3,000 procedures over the prior year period. The cost of refractive revenues for the nine months ended September 30, 2004 was $95.2 million, an increase of $11.6 million, or 14% over the cost of refractive revenues of $83.6 million for the nine months ended September 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 31% during the nine months ended September 30, 2004 from 25% in the prior year period. The cost of revenues from centers for the nine months ended September 30, 2004 was $73.0 million, an increase of $9.6 million, or 15% from the cost of revenues of $63.4 million from the nine months ended September 30, 2003. This increase primarily resulted from $4.9 million of additional costs related to increased procedure volume and higher costs associated with Custom LASIK, and $12.5 million of costs resulting from the Company's adoption of FIN 46 effective January 1, 2004. These increases are offset by $7.8 million in cost of revenues for LECC during the nine months ended September 30, 2003 (as compared to none during the nine months ended September 30, 2004). Gross margins from centers increased to 31% for the nine months ended September 30, 2004 from 23% during the prior year period as higher procedure volumes led to strong incremental variable margin gains. 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 20% for the nine months ended September 30, 2003. The cost of revenues from access services for the nine months ended September 30, 2004 was $22.2 million, an increase of $2.0 million or 10% from the cost of revenues of $20.2 million during the nine months ended September 30, 2003. This increase primarily resulted from higher procedure volume. Gross margins from access services remained consistent at 31% for the nine months ended September 30, 2004 and 2003. Revenues from other healthcare services for the nine months ended September 30, 2004, were $48.3 million, an increase of $12.7 million or 36% from revenues of $35.6 million for the nine months ended September 30, 2003. Approximately 26% of total revenues for the nine months ended September 30, 2004 were derived from other healthcare services compared to 24% during the nine months ended September 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. The cost of revenues from other healthcare services for the nine months ended September 30, 2004 was $29.7 million, an increase of $6.5 million or 28% from cost of revenues of $23.2 million for the nine months ended September 30, 2003. The increase in cost of revenues primarily related to incremental costs incurred to generate the higher revenue of the other healthcare service business. Gross margins increased to 39% from 35% due principally to volume growth and a higher percentage of revenue generated from its ambulatory surgery centers and franchisees, which have higher gross margin percentages than other businesses within the other healthcare services category. General and administrative expenses decreased to $23.5 million for the nine months ended September 30, 2004 from $24.4 million for the nine months ended September 30, 2003. The $0.9 million or 4% decrease reflected the Company's success in controlling overhead costs as the Company grows. Accordingly, general and administrative expenses as a percentage of revenue decreased to 13% from 17% compared to the prior year period. Marketing expenses of $9.7 million decreased by $0.6 million or 6% for the nine months ended September 30, 2004 from $10.3 million for the nine months ended September 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 decreased to $0.8 million for the nine months ended September 30, 2004 from $1.0 million for the nine months ended September 30, 2003. For the nine months ended September 30, 2004 and 2003, the Company incurred research and development expenses of $1.2 million and $1.0 million, respectively, relating to investments made to fund research and development efforts by OccuLogix to achieve FDA approval for medical treatments related to dry 17 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 OccuLogix. For the nine months ended September 30, 2004, the $1.2 million research and development expense related to OccuLogix was offset by a $0.4 million reimbursement from Tracey of research and development investments that were previously expensed. Amortization expenses decreased to $3.1 million for the nine months ended September 30, 2004 from $5.0 million for the nine months ended September 30, 2003. This decrease was largely due to the reduction in intangible assets (Practice Management Agreements) resulting from the deconsolidation of LECC. During the nine months ended September 30, 2004, the Company fully reversed a reserve of $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 unrelated investments by $0.5 million due to other than temporary declines in value. During the nine months ended September 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 nine months ended September 30, 2003 primarily relating to the closing of four unprofitable centers. Other income, net of $0.3 million for the nine months ended September 30, 2004 primarily resulted from a $1.1 million gain on the sale of a controlling interest in LECC offset by a $1.0 million loss related to the disposal of fixed assets. During the nine months ended September 30, 2003, the Company recorded $0.6 million in other income, net. Interest expense, net decreased to $0.9 million for the nine months ended September 30, 2004 from $1.1 million for the nine months ended September 30, 2003. This decrease is a result of less interest expense due to declining debt and lease obligations and more interest income related to rising cash balances. Minority interest expense was $6.0 million for the nine months ended September 30, 2004, an increase of $2.4 million from $3.6 million for the nine months ended September 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 $1.6 million for the nine months ended September 30, 2004 resulted primarily from $1.0 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 decreased to $0.4 million for the nine months ended September 30, 2004 from $0.6 million for the three months ended September 30, 2003. The $0.4 million tax expense primarily consisted of state taxes for certain states where the Company expects to pay income taxes. The current year federal income tax expense attributable to the Company and subsidiaries was offset by the partial reversal of valuation allowances as the Company anticipates utilizing a portion of net operating loss carryforwards in 2004. Net income for the nine months ended September 30, 2004 was $17.6 million or $0.25 per share compared to loss of $6.5 million or $0.10 per share for the nine months ended September 30, 2003. LIQUIDITY AND CAPITAL RESOURCES During the nine months ended September 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 $55.2 million at September 30, 2004 compared to $31.7 million at December 31, 2003. Working capital at September 30, 2004 was $42.0 million, an increase of $31.1 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, 18 insurance, rent, equipment maintenance, wages, utilities and marketing. During the nine months ended September 30, 2004, the Company purchased $4.2 million in fixed assets and obtained vendor lease financing for an additional $2.2 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 nine months ended September 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 $1.3 million toward previous liability obligations. On August 13, 2004, OccuLogix filed a registration statement with the U.S. Securities and Exchange Commission for the initial public offering of OccuLogix common stock. The Company believes that such an offering, if successful, is the best way to maximize the potential of OccuLogix' patented Rheopheresis ("RHEO") blood filtration process business, as well as provide the highest value for the Company and its shareholders. Pursuant to the successful completion of this offering, the Company has agreed, in principle, to a plan to proceed with a re-organization that would combine OccuLogix 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. It is anticipated that the Company and certain other major shareholders of OccuLogix would sell a portion of their respective shares of OccuLogix in the initial public offering. If the reorganization and offering are consummated, the Company anticipates that it would record a gain on the sale of the portion of its OccuLogix shares sold in the offering. If the Company has financial control of OccuLogix after the reorganization and offering, the Company will be required to include the financial statements of OccuLogix in its consolidated financial statements. As a result, OccuLogix's revenues, expenses and operating profit or loss would be included in the revenues, expenses and operating profit or loss reported by the Company and the profit or loss allocable to minority shareholders would be reported below the operating income line by the Company in its consolidated statement of operations. The registration statement for the proposed public offering by OccuLogix has not yet been declared effective and there can be no assurance that OccuLogix will complete the proposed public offering. CASH PROVIDED BY OPERATING ACTIVITIES Net cash provided by operating activities was $29.7 million for the nine months ended September 30, 2004. The cash flows provided by operating activities during the nine months ended September 30, 2004 were primarily due to net income of $17.6 million plus non-cash items including depreciation and amortization of $13.3 million, minority interest expense of $6.0 million, write-off of investments in research and development of $0.8 million, and a loss on the disposal of fixed assets of $1.0 million. These cash flows are offset by an increase in net operating assets of $5.6 million, a gain on the sale of an interest in a subsidiary of $1.1 million, earnings from equity investees of $1.6 million, and a reversal of a long-term receivable reserve of $1.2 million. The increase in net operating assets consisted of a $1.9 million increase in accounts receivable due primarily to higher revenues, a $1.2 million increase in prepaid expenses, and a $2.5 million decrease in accounts payable and accrued liabilities. CASH USED IN INVESTING ACTIVITIES Net cash used in investing activities was $7.2 million for the nine months ended September 30, 2004. Cash used in investing activities during the nine-month period ended September 30, 2004 included $5.2 million for business acquisitions, $4.2 million for the capital expenditures, and $0.8 million for investments in research and development. These cash outflows are offset by $0.7 million in net cash associated with the sale of a portion of the Company's interest in LECC, a $0.7 million decrease in other assets, $0.8 million in cash distributions received from equity investees, and $0.9 million of proceeds from the sale of fixed assets. The $0.7 million increase 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 $1.6 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 $1.4 million for the nine months ended September 30, 2004. Net cash 19 provided by financing activities during the nine months ended September 30, 2004 was primarily related to proceeds from the exercise of stock options and shares issued in connection with the employee share purchase plan of $19.1 million offset by the repayment of certain notes payable and capitalized lease obligations of $12.1 million and distribution to minority interests of $5.5 million. SUBSEQUENT EVENTS Since September 30, 2004, the Company has received $3.6 million in proceeds from the exercise of 0.4 million non-qualified stock options. In fiscal 2002, the Company advanced $1.0 million to Tracey Technologies, LLC ("Tracey") to support the development of laser scanning technology. This advance was used by Tracey to further develop the technology, and the Company recorded the advance as research and development expense. In October 2004, Tracey repaid $0.4 million of the advance and agreed to repay the remaining $0.6 million over the next twelve months in exchange for the Company's release of its claims on certain potential royalties should Tracey obtain FDA approval for its technology. The Company recorded the $0.4 million collection as a reduction to research and development expense for the three months ended September 30, 2004 and will record the remaining $0.6 million when collection becomes probable. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the ordinary course of business, the Company is exposed to interest rate risks and foreign currency risks, which the Company does not currently consider to be material. These exposures primarily relate to having short-term investments earning short-term interest rates and to having fixed rate debt. The Company views its investment in foreign subsidiaries as a long-term commitment, and does not hedge any translation exposure. ITEM 4. CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's reports under the Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As of the end of the period covered by the report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective, in all material respects, to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required. There have been no significant changes in the Company's internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect the Company's internal control over financial reporting. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In January 2004, the Company was served with a lawsuit filed in the Province of Ontario, Canada, by Omar Hakim, MD. The suit alleges damages for breach of contract, negligent misrepresentation and detrimental reliance and seeks damages of $7 million. The Company and Dr. Hakim are currently in negotiations to settle all claims. Any potential settlement is not expected to have a material impact on the Company's financial statements. 20 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 Not applicable. ITEM 6. 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 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/ James C. Wachtman ------------------------------------- James C. Wachtman Chief Executive Officer November 9, 2004 By: /s/ Steven P. Rasche ------------------------------------- Steven P. Rasche Chief Financial Officer November 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 c89510exv31w1.txt CERTIFICATION OF CEO EXHIBIT 31.1 CERTIFICATION I, James C. Wachtman, 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: November 9, 2004 /s/ James C. Wachtman -------------------------------------- James C. Wachtman Chief Executive Officer 24 EX-31.2 3 c89510exv31w2.txt CERTIFICATION OF CFO EXHIBIT 31.2 CERTIFICATION I, Steven P. Rasche 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: November 9, 2004 /s/ Steven P. Rasche ----------------------------------- Steven P. Rasche Chief Financial Officer 25 EX-32.1 4 c89510exv32w1.txt CERTIFICATION OF CEO 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 September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James C. Wachtman, Chief Executive Officer, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 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: November 9, 2004 /s/ James C. Wachtman - ----------------------------- James C. Wachtman Chief Executive Officer 26 EX-32.2 5 c89510exv32w2.txt CERTIFICATION OF CFO 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 September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Steven P. Rasche, Chief Financial Officer, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 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: November 9, 2004 /s/ Steven P. Rasche - ------------------------------------ Steven P. Rasche Chief Financial Officer 27 EX-99 6 c89510exv99.txt RECONCILIATION BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES 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 September 30, 2004 and for the three and nine months ended September 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 NINE MONTHS ENDED ------------------ ----------------- SEPTEMBER 30, SEPTEMBER 30 ------------- ------------ 2004 2003 2004 2003 ---- ---- ---- ---- Net income (loss) per U.S. GAAP ................................................. $ 3,322 $ (4,090) $ 17,613 $ (6,473) Amortization of Practice Management Agreements (1) .............................. (378) (378) (1,134) (1,134) Depreciation of fixed assets (2) ................................................ (70) (70) (210) (210) Interest income on note receivable related to the sale-leaseback of building (3) ................................................................. 20 20 59 59 Variable accounting for stock options (4) ....................................... (228) -- 106 -- Fair value accounting of stock options (4) ...................................... (311) -- (865) -- --------- --------- --------- --------- Net income (loss) per Canadian GAAP ............................................. $ 2,355 $ (4,518) $ 15,569 $ (7,758) ========= ========= ========= ========= Net income (loss) per share for Canadian GAAP - basic ........................... $ 0.03 $ (0.07) $ 0.23 $ (0.12) ========= ========= ========= ========= Net income (loss) per share for Canadian GAAP - diluted ......................... $ 0.03 $ (0.07) $ 0.22 $ (0.12) ========= ========= ========= =========
The most significant balance sheet differences between U.S. GAAP and Canadian GAAP are as follows:
SEPTEMBER 30, DECEMBER 31, 2004 2003 ---- ---- Investments and Other Assets Balance per U.S. GAAP ....................................... $ 6,237 $ 3,102 Note receivable related to the sale-leaseback of building (2) ............................................. 976 976 -------- -------- Balance per Canadian GAAP ................................... $ 7,213 $ 4,078 ======== ======== Intangibles, Net Balance per U.S. GAAP ....................................... $ 19,050 $ 22,959 Difference in impairment write-off of intangibles (1) ....... 6,334 6,334 Amortization of Practice Management Agreements (1) .......... (3,528) (2,394) -------- -------- Balance per Canadian GAAP ................................... $ 21,856 $ 26,899 ======== ======== Fixed Assets, Net Balance per U.S. GAAP ....................................... $ 48,435 $ 56,891 Adjustment for the sale-leaseback of building (2) ........... (829) (829) Depreciation of fixed assets (2) ............................ (908) (698) -------- -------- Balance per Canadian GAAP ................................... $ 46,698 $ 55,364 ======== ========
28
SEPTEMBER 30, DECEMBER 31, 2004 2003 -------------- ------------ Long-Term Debt, Less Current Maturities Balance per U.S. GAAP ........................................... $ 10,501 $ 19,242 Adjustment for note payable related to the sale-leaseback of building (2) .................................................... 913 913 --------- --------- Balance per Canadian GAAP ....................................... $ 11,414 $ 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) ....... 865 -- --------- --------- Balance per Canadian GAAP ....................................... $ 14,472 $ -- ========= ========= Option and Warrant Equity Balance per U.S. GAAP ........................................... $ 4,244 $ 8,143 Adjustment to compensation expense for warrants and stock options (4) ..................................................... (328) (222) --------- --------- Balance per Canadian GAAP ....................................... $ 3,916 $ 7,921 ========= ========= Accumulated Deficit Balance per U.S. GAAP ........................................... $(277,139) $(294,752) Adjustment to the value of intangible Practice Management Agreements (1) .................................................. 2,806 3,940 Adjustment for the sale-leaseback of building (2) ............... (1,737) (1,527) Interest on note receivable related to the sale-leaseback of building (3) .................................................... 225 166 Adjustment to compensation expense for warrants and stock options (4) ............................................................. (537) 222 Adjustment for change in accounting policy related to the fair value of stock options (4) ...................................... (13,607) -- --------- --------- Balance per Canadian GAAP ....................................... $(289,989) $(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 $3.5 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 September 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 nine months ended September 30, 2004 and 2003, depreciation expense is higher for U.S. GAAP by $70,000 and $210,000, respectively. (3) For each of the three months ended September 30, 2004 and 2003, the Company reported $20,000 of interest income related to the Note on the sale-leaseback of the building as described above. For each of the nine months ended September 30, 2004 and 2003, the Company reported $59,000 of interest income related to the Note on the sale-leaseback of the building. The cumulative interest earned as at September 30, 2004 of $225,000 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 nine months ended September 30, 2004, the Company recorded stock-based compensation expense of $311,000, and $865,000, respectively, which is included in general and administrative expenses. The fair value of the options granted in 2004 was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: risk free interest rate of 2.54%; dividend rate of 0%; volatility factor of 0.75; and expected life of 2.5 years. The Company issued 66,500 and 97,000 stock options during the three and nine months ended September 30, 2004, respectively. 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 nine months ended September 30, 2003. For the three and nine months ended September 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 NINE MONTHS ------------ ----------- ENDED ENDED ----- ----- SEPTEMBER 30, SEPTEMBER 30, ------------- ------------- 2003 2003 ---- ---- Net loss per Canadian GAAP ..................... $(4,518) $(7,758) Total pro forma stock-based compensation expense determined under fair value-based method ....... (227) (755) ------- ------- Pro forma net loss ............................. $(4,745) $(8,513) ======= ======= BASIC AND DILUTED EARNINGS (LOSS) PER SHARE As reported .................................... $ (0.07) $ (0.12) Pro forma ...................................... $ (0.07) $ (0.13)
The fair value of the options granted in 2003 was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: risk free interest rate of 2.35%; dividend rate of 0%; volatility factor of 0.75; and expected life of 2.5 years. 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 31 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 nine month periods ended September 30, 2004, the Company recognized additional stock compensation expense (reduction of expense) of $(228,000) and $106,000, respectively, related to the modified stock options. CICA 3870 does not require the application of variable method of accounting for 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 SEPTEMBER 30, 2004, COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2003 Net income for the three months ended September 30, 2004 was $2.4 million or $0.03 per share compared to a net loss of $4.5 million or $0.07 per share for the three months ended September 30, 2003. Amortization expenses decreased to $1.4 million for the three months ended September 30, 2004 from $2.0 million for the three months ended September 30, 2003. The decrease was largely due to the reduction in Practice Management Agreements resulting from the deconsolidation of LECC. Net cash provided by operating activities was $10.3 million for the three months ended September 30, 2004. The cash flows provided by operating activities during the three months ended September 30, 2004 were primarily due to net income of $2.4 million plus non-cash items including depreciation and amortization of $4.7 million, minority interest expense of $1.7 million, and a decrease in net operating assets of $1.3 million. The decrease in net operating assets primarily consisted of a $1.9 million decrease in accounts receivable and a $0.2 million decrease in prepaid expenses offset by a $0.8 million decrease in accounts payable and accrued liabilities. NINE MONTHS ENDED SEPTEMBER 30, 2004, COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2003 Net income for the nine months ended September 30, 2004 was $15.6 million or $0.22 per share compared to a net loss of $7.8 million or $0.12 per share for the nine months ended September 30, 2003. Amortization expenses decreased to $4.2 million for the nine months ended September 30, 2004 from $6.1 million for the nine months ended September 30, 2003. The decrease was largely due to the reduction in Practice Management Agreements resulting from the deconsolidation of LECC. Net cash provided by operating activities was $29.7 million for the nine months ended September 30, 2004. The cash flows provided by operating activities during the nine months ended September 30, 2004 were primarily due to net income of $15.6 million plus non-cash items including depreciation and amortization of $14.6 million, minority interest expense of $6.0 million, write-off of investments in research and development of $0.8 million, compensation expense of $1.2 million, and a loss on the disposal of fixed assets of $1.0 million. These cash flows were offset by an increase in net operating assets of $5.7 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 $1.6 million. The increase in net operating assets primarily consisted of a $1.9 million increase in accounts receivable, a $2.5 million decrease in accounts payable and accrued liabilities and a $1.3 million increase in prepaid expenses. 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. 32 TLC VISION CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (In thousands of U.S. dollars except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 2003 SEPTEMBER 30, 2003 ------------------ ------------------ CANADIAN GAAP U.S. GAAP CANADIAN GAAP U.S. GAAP ------------- --------- ------------- --------- Revenues: Refractive: Centers ................................ $ 24,932 $ 24,932 $ 82,092 $ 82,092 Access ................................. 8,861 8,861 29,437 29,437 Other healthcare services ................... 12,221 12,221 35,607 35,607 --------- --------- --------- --------- Total revenues ................................ 46,014 46,014 147,136 147,136 --------- --------- --------- --------- Cost of revenues: Refractive: Centers ................................ 20,239 20,239 63,418 63,418 Access ................................. 6,558 6,558 20,201 20,201 Other healthcare services ................... 7,752 7,752 23,182 23,182 --------- --------- --------- --------- Total cost of revenues ........................ 34,549 34,549 106,801 106,801 --------- --------- --------- --------- Gross margin ................................ 11,465 11,465 40,335 40,335 --------- --------- --------- --------- General and administrative .................... 8,093 8,023 24,565 24,355 Marketing ..................................... 3,118 3,118 10,275 10,275 Research and development ...................... 975 975 975 975 Amortization of intangibles ................... 2,043 1,665 6,149 5,015 Adjustment to the fair value of investments and long-term receivables ....................... 231 231 (217) (217) Restructuring, severance and other charges .... -- -- 1,720 1,720 --------- --------- --------- --------- 14,460 14,012 43,467 42,123 --------- --------- --------- --------- Operating income (loss) ....................... (2,995) (2,547) (3,132) (1,788) Other income, net ............................. 74 74 640 640 Interest expense, net ......................... (305) (325) (1,027) (1,086) Minority interests ............................ (1,110) (1,110) (3,612) (3,612) --------- --------- --------- --------- Income (loss) before income taxes ............. (4,336) (3,908) (7,131) (5,846) Income tax expense ............................ (182) (182) (627) (627) --------- --------- --------- --------- Net income (loss) ............................. $ (4,518) $ (4,090) $ (7,758) $ (6,473) ========= --------- ========= ========= Earnings (loss) per share - basic and diluted ....................................... $ (0.07) $ (0.06) $ (0.12) $ (0.10) ========= ========= ========= ========= Weighted average number of common shares outstanding - basic and diluted ............. 64,743 64,743 63,888 63,888
33 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 ========= =========
34 TLC VISION CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands of U.S. dollars)
THREE MONTHS ENDED NINE MONTHS ENDED ------------------ ------------------ SEPTEMBER 30, 2003 SEPTEMBER 30, 2003 ------------------ ------------------ CANADIAN GAAP U.S. GAAP CANADIAN GAAP U.S. GAAP ------------- --------- ------------- --------- Net loss ............................................... $ (4,518) $ (4,090) $ (7,758) $ (6,473) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization ....................... 6,208 5,760 18,151 16,807 Write-off of investment in research and development arrangement ........................................ 975 975 975 975 Minority interests .................................. 1,110 1,110 3,612 3,612 Loss (gain) on disposal of fixed assets ............. (147) (147) (538) (538) Adjustment to the fair value of investments and long-term receivables and impairment of fixed assets ............................................. 231 231 (171) (171) Non-cash restructuring and other costs .............. -- -- 527 527 Changes in operating assets and liabilities: Accounts receivable ............................... (564) (564) (4,348) (4,348) Prepaid expenses and other current assets ......... 833 853 (366) (307) Accounts payable and accrued liabilities .......... (2,711) (2,711) (7,766) (7,766) -------- -------- -------- -------- Cash provided by operating activities .................. 1,417 1,417 2,318 2,318 -------- -------- -------- -------- INVESTING ACTIVITIES Purchases of fixed assets .............................. (1,137) (1,137) (3,724) (3,724) Proceeds from sale of fixed assets ..................... -- -- 548 548 Proceeds from divestitures of investments and subsidiaries, net of cash ............................. -- -- 221 221 Investment in research and development arrangements .... (975) (975) (975) (975) Acquisitions and investments, net of cash acquired ..... (4,835) (4,835) (7,457) (7,457) Sale of short-term investments ......................... 1,112 1,112 788 788 Other .................................................. 32 32 305 305 -------- -------- -------- -------- Cash used in investing activities ...................... (5,803) (5,803) (10,294) (10,294) -------- -------- -------- -------- FINANCING ACTIVITIES Restricted cash movement ............................... (146) (146) (585) (585) Principal payments of debt financing and capital leases (1,586) (1,586) (5,565) (5,565) Proceeds from debt financing ........................... -- -- 1,450 1,450 Distributions to minority interests .................... (1,791) (1,791) (3,593) (3,593) Proceeds from the issuance of common stock ............. 4,611 4,611 5,516 5,516 -------- -------- -------- -------- Cash provided by (used in) financing activities ........ 1,088 1,088 (2,777) (2,777) -------- -------- -------- -------- Net decrease in cash and cash equivalents during the period ................................................ (3,298) (3,298) (10,753) (10,753) Cash and cash equivalents, beginning of period ......... 28,626 28,626 36,081 36,081 -------- -------- -------- -------- Cash and cash equivalents, end of period ............... $ 25,328 $ 25,328 $ 25,328 $ 25,328 ======== ======== ======== ========
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