-----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, CmtCNJ1/oYA0kM9pJBooyBVaHf/XWthlLlCBfn+gqGTOYFmg5Ylc7t9fuqm90I8U g6U98Ux0QbGRqthKdy3idw== 0000950137-05-009876.txt : 20050809 0000950137-05-009876.hdr.sgml : 20050809 20050809131556 ACCESSION NUMBER: 0000950137-05-009876 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050809 DATE AS OF CHANGE: 20050809 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: 051008642 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 c97521e10vq.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005 COMMISSION FILE NUMBER: 0-29302 TLC VISION CORPORATION (Exact name of registrant as specified in its charter) NEW BRUNSWICK, CANADA 980151150 (State or jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 5280 SOLAR DRIVE, SUITE 300 L4W 5M8 MISSISSAUGA, ONTARIO (Zip Code) (Address of principal executive offices) Registrant's telephone, including area code: (905) 602-2020 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). [X] Yes [ ] No As of August 8, 2005 there were 70,479,721 of the registrant's Common Shares outstanding. INDEX PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements (unaudited) Consolidated Statements of Operations for the three and six months ended June 30, 2005 and 2004 Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004 Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2004 Consolidated Statement of Stockholders' Equity for the six months ended June 30, 2005 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. Unregistered Sales of Equity Securities and Use of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information 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 SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ----------------------- 2005 2004 2005 2004 --------- --------- --------- --------- Revenues: Refractive: Centers ........................................ $ 38,010 $ 36,374 $ 81,775 $ 75,212 Access ......................................... 9,828 10,544 21,239 22,593 Other healthcare services ........................... 18,982 17,743 34,855 32,031 --------- --------- --------- --------- Total revenues ........................................ 66,820 64,661 137,869 129,836 --------- --------- --------- --------- Cost of revenues: Refractive: Centers ........................................ 25,921 24,645 54,450 50,797 Access ......................................... 7,200 7,135 14,610 15,307 Other healthcare services ........................... 11,207 10,574 21,358 19,712 --------- --------- --------- --------- Total cost of revenues ................................ 44,328 42,354 90,418 85,816 --------- --------- --------- --------- Gross profit ........................................ 22,492 22,307 47,451 44,020 --------- --------- --------- --------- General and administrative ............................ 9,227 6,115 18,287 12,775 Marketing and sales ................................... 5,843 4,720 10,840 8,855 Research and development, clinical and regulatory .......................................... 1,310 350 2,654 724 Amortization of intangibles ........................... 1,032 1,057 2,043 2,069 Other ................................................. (363) (1,184) (1,033) (1,732) Restructuring, severance and other charges ............ - 2,755 - 2,755 --------- --------- --------- --------- 17,049 13,813 32,791 25,446 --------- --------- --------- --------- Operating income ...................................... 5,443 8,494 14,660 18,574 Interest income ....................................... 1,219 473 2,291 951 Interest expense ...................................... (424) (745) (882) (1,626) Minority interests .................................... (1,105) (2,454) (1,791) (4,328) Earnings from equity investments ...................... 680 613 1,339 1,012 --------- --------- --------- --------- Income before income taxes ............................ 5,813 6,381 15,617 14,583 Income tax expense .................................... (302) (142) (500) (292) --------- --------- --------- --------- Net income ............................................ $ 5,511 $ 6,239 $ 15,117 $ 14,291 --------- --------- --------- --------- Earnings per share - basic ............................ $ 0.08 $ 0.09 $ 0.22 $ 0.21 ========= ========= ========= ========= Earnings per share - diluted .......................... $ 0.08 $ 0.09 $ 0.21 $ 0.20 ========= ========= ========= ========= Weighted average number of common shares outstanding - basic ................................. 70,326 68,585 70,182 67,759 Weighted average number of common shares outstanding - diluted ............................... 72,071 71,249 72,057 70,341
See the accompanying notes to unaudited interim consolidated financial statements. 3 TLC VISION CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands)
(UNAUDITED) JUNE 30, DECEMBER 31, 2005 2004 ----------- ------------ ASSETS Current assets Cash and cash equivalents ........................... $ 63,939 $ 33,435 Short-term investments .............................. 77,660 111,015 Accounts receivable ................................. 19,136 17,443 Prepaids and other current assets ................... 16,865 13,821 ----------- ------------ Total current assets ............................... 177,600 175,714 Restricted cash ....................................... 907 932 Investments and other assets .......................... 12,197 10,482 Goodwill .............................................. 57,408 53,774 Intangibles, net ...................................... 17,758 18,140 Fixed assets, net ..................................... 46,184 46,199 ----------- ------------ Total assets .......................................... $ 312,054 $ 305,241 =========== ============ LIABILITIES Current liabilities Accounts payable .................................... $ 9,139 $ 8,716 Accrued liabilities ................................. 21,837 27,139 Current portion of long-term debt ................... 4,395 8,664 ----------- ------------ Total current liabilities ............................. 35,371 44,519 Other long-term liabilities ........................... 2,919 2,722 Long-term debt, less current maturities ............... 10,995 9,991 Minority interests .................................... 35,432 37,222 ----------- ------------ Total liabilities ..................................... 84,717 94,454 STOCKHOLDERS' EQUITY Capital stock ......................................... 461,184 458,959 Option and warrant equity ............................. 2,080 2,872 Accumulated deficit ................................... (235,927) (251,044) ----------- ------------ Total stockholders' equity ............................ 227,337 210,787 ----------- ------------ Total liabilities and stockholders' equity ............ $ 312,054 $ 305,241 =========== ============
See the accompanying notes to unaudited interim consolidated financial statements. 4 TLC VISION CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands)
SIX MONTHS ENDED JUNE 30, --------------------- 2005 2004 -------- -------- OPERATING ACTIVITIES Net income ....................................................................... $ 15,117 $ 14,291 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization .................................................. 7,988 9,018 Write-offs (reimbursements) of investments in research and development arrangements ................................................................. (300) 724 Minority interests ............................................................. 1,791 4,328 Earnings from equity investments ............................................... (1,339) (1,012) Loss (gain) on disposals of fixed assets ....................................... (96) 742 Gain on the sales of subsidiaries .............................................. (319) (1,143) Non-cash compensation expense .................................................. 206 575 Adjustment to the fair value of investments and long-term receivables .......... - (1,206) Other .......................................................................... 88 - Changes in operating assets and liabilities, net of acquisitions and dispositions: Accounts receivable ............................................................ (2,213) (3,772) Prepaid expenses and other current assets ...................................... (3,312) (1,469) Accounts payable and accrued liabilities ....................................... (4,854) (1,696) -------- -------- Cash from operating activities ................................................... 12,757 19,380 -------- -------- INVESTING ACTIVITIES Purchases of fixed assets ........................................................ (5,177) (3,761) Proceeds from sales of fixed assets .............................................. 724 467 Proceeds from divestitures of investments and subsidiaries, net .................. 3,430 (271) Reimbursements from (investments in) research and development arrangements ....... 300 (724) Distributions and loan payments received from equity investments ................. 1,387 680 Acquisitions and equity investments .............................................. (8,881) (4,570) Proceeds from sales of short-term investments .................................... 66,397 1,865 Purchases of short-term investments .............................................. (33,093) (19,415) Other ............................................................................ (7) 907 -------- -------- Cash from investing activities ................................................... 25,080 (24,822) -------- -------- FINANCING ACTIVITIES Restricted cash movement ......................................................... 25 24 Principal payments of debt financing and capital leases .......................... (6,131) (8,305) Distributions to minority interests .............................................. (3,744) (3,715) Proceeds from debt financing ..................................................... 1,321 - Proceeds from issuance of common stock ........................................... 1,089 18,260 Proceeds from issuance of OccuLogix, Inc. common stock ........................... 107 - -------- -------- Cash from financing activities ................................................... (7,333) 6,264 -------- -------- Net increase in cash and cash equivalents during the period ...................... 30,504 822 Cash and cash equivalents, beginning of period ................................... 33,435 21,580 -------- -------- Cash and cash equivalents, end of period ......................................... $ 63,939 $ 22,402 ======== ========
See the accompanying notes to unaudited interim consolidated financial statements. 5 TLC VISION CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED) (In thousands)
OPTION COMMON STOCK AND ----------------- WARRANT ACCUMULATED SHARES AMOUNT EQUITY DEFICIT TOTAL ------ --------- ------- ----------- ---------- Balance December 31, 2004................................ 70,086 $ 458,959 $ 2,872 $ (251,044) $ 210,787 Shares issued as part of the employee share purchase plan and 401(k) plan................... 27 231 231 Exercises of stock options.............................. 410 1,879 (790) 1,089 Options expired or forfeited............................ 2 (2) - Changes in OccuLogix, Inc.'s stockholders' equity.................................. 113 113 Net income and comprehensive income............................................... 15,117 15,117 ------ --------- ------- ----------- ---------- Balance June 30, 2005................................... 70,523 $ 461,184 $ 2,080 $ (235,927) $ 227,337 ====== ========= ======= =========== ==========
See the accompanying notes to unaudited interim consolidated financial statements. 6 TLC VISION CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS June 30, 2005 (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, 2004 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, 2005. The consolidated financial statements as of December 31, 2004 and unaudited interim consolidated financial statements for the three and six months ended June 30, 2005 and 2004 include the accounts and transactions of the Company and its majority-owned subsidiaries that are not considered variable interest entities (VIEs) and all VIEs for which the Company is the primary beneficiary. All significant intercompany accounts and transactions have been eliminated. The unaudited interim consolidated financial statements for the three and six months ended June 30, 2004 include certain reclassifications to conform with classifications for the three and six months ended June 30, 2005 including (a) reclassifying certain labor costs from "General and administrative" to "Marketing and sales" as these costs relate to the marketing and selling efforts of the Company; (b) reclassifying clinical trial expenses incurred by OccuLogix, Inc. from "General and administrative" to "Research and development, clinical and regulatory;" and (c) reclassifying gains and losses from the sales and dispositions of fixed assets as well as other miscellaneous income and expenses to "Other" operating expenses (income). 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 variable stock option expense of $15,000 and $334,000 during the three and six months ended June 30, 2004, respectively, for options repriced in 2002. The following table illustrates the pro forma net income and earnings 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: 7
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 2005 2004 2005 2004 -------- -------- -------- -------- Net income as reported ............................................... $ 5,511 $ 6,239 $ 15,117 $ 14,291 Add stock-based employee compensation cost included in net income ........................................................... - 15 - 334 Add OccuLogix, Inc.'s stock-based employee compensation cost included in net income, net of minority interests ............................................... 6 - 6 - Less stock-based employee compensation cost determined under fair value based method for all awards ..................... (770) (278) (1,550) (554) Less OccuLogix, Inc.'s stock-based employee compensation cost determined under fair value based method for all awards, net of minority interests ................................ (591) - (818) - -------- -------- -------- -------- Pro forma net income ................................................. $ 4,156 $ 5,976 $ 12,755 $ 14,071 ======== ======== ======== ======== Pro forma earnings per share - basic ................................. $ 0.06 $ 0.09 $ 0.18 $ 0.21 ======== ======== ======== ======== Pro forma earnings per share - diluted ............................... $ 0.06 $ 0.08 $ 0.18 $ 0.20 ======== ======== ======== ========
For purposes of pro forma disclosures, the estimated fair value of stock-based compensation cost is amortized using the attribution method under FASB Interpretation No. 28, "Accounting for Stock Appreciation Rights and Other Variable Stock Option Award Plans." 3. ACQUISITIONS AND DISPOSITIONS On March 1, 2005, the Company sold its interest in Aspen Healthcare, Inc. ("Aspen") to National Surgical Centers, Inc. and recorded a gain of $0.3 million, which is included in other operating expenses (income). The Company's strategy includes periodic acquisitions of or investments in entities that operate in the refractive, cataract or eye care markets. 4. EARNINGS PER SHARE The following table sets forth the computation of diluted earnings per share:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 2005 2004 2005 2004 --------- --------- --------- -------- Net income............................................... $ 5,511 $ 6,239 $ 15,117 $ 14,291 ========= ========= ========= ======== Weighted-average shares outstanding - basic.............. 70,326 68,585 70,182 67,759 Dilutive effect of stock options and warrants............ 1,745 2,664 1,875 2,582 --------- --------- --------- -------- Weighted-average shares outstanding - diluted............ 72,071 71,249 72,057 70,341 ========= ========= ========= ======== Earnings per share - diluted............................. $ 0.08 $ 0.09 $ 0.21 $ 0.20 ========= ========= ========= ========
5. SEGMENT INFORMATION The Company has three reportable segments: refractive, mobile cataract and age-related macular degeneration ("AMD"). The refractive segment provides the majority of the Company's revenue and consists of providing corrective laser surgery specifically related to refractive disorders, such as myopia (nearsightedness), hyperopia (farsightedness) and astigmatism. This segment is comprised of laser centers and the fixed and mobile access business. The mobile cataract segment provides surgery specifically for the treatment of cataracts. The AMD segment includes the Company's majority interest in OccuLogix, Inc. (formerly Vascular Sciences Corporation), OccuLogix, LP and RHEO Clinic, Inc. and consists of pursuing commercial applications of treatments of dry age-related macular degeneration. Other includes an accumulation of other healthcare business activities including the management of cataract and secondary care centers that provide advanced levels of eye care, network marketing and management to optometrists, and professional healthcare facility management. 8 The Company's reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different management and marketing strategies. The following tables set forth information by segments:
THREE MONTHS ENDED JUNE 30, 2005 MOBILE (IN THOUSANDS) REFRACTIVE CATARACT AMD OTHER TOTAL - ------------------------------------------------- ---------- -------- ------- --------- -------- Revenues......................................... $ 47,838 $ 8,158 $ 568 $ 10,256 $ 66,820 Expenses: Doctors' compensation.......................... 8,141 - 35 2 8,178 Operating...................................... 32,511 6,401 2,644 6,362 47,918 Research and development, clinical and regulatory................................... - - 1,310 - 1,310 Depreciation expense........................... 2,126 572 13 228 2,939 Amortization of intangibles.................... 788 136 - 108 1,032 ---------- -------- ------- --------- -------- 43,566 7,109 4,002 6,700 61,377 ---------- -------- ------- --------- -------- Income (loss) from operations.................... 4,272 1,049 (3,434) 3,556 5,443 Interest income (expense), net................... 804 (28) 421 (402) 795 Minority interests............................... (681) - 1,411 (1,835) (1,105) Earnings from equity investments.................................... 454 - - 226 680 Income taxes..................................... (280) - - (22) (302) ---------- -------- ------- --------- -------- Net income (loss)................................ $ 4,569 $ 1,021 $(1,602) $ 1,523 $ 5,511 ========== ======== ======= ========= ========
THREE MONTHS ENDED JUNE 30, 2004 MOBILE (IN THOUSANDS) REFRACTIVE CATARACT AMD OTHER TOTAL - ------------------------------------------------- ---------- -------- ------- --------- -------- Revenues......................................... $ 46,918 $ 6,988 $ 62 $ 10,693 $ 64,661 Expenses: Doctors' compensation.......................... 7,370 - 21 6 7,397 Operating...................................... 29,959 5,555 189 6,707 42,410 Research and development, clinical and regulatory................................... - - 350 - 350 Depreciation................................... 2,639 550 27 188 3,404 Amortization of intangibles.................... 842 104 - 111 1,057 Adjustment to the fair value of investments and long-term receivables.................... (1,206) - - - (1,206) Restructuring, severance and other charges..... 2,755 - - - 2,755 ---------- -------- ------- --------- -------- 42,359 6,209 587 7,012 56,167 ---------- -------- ------- --------- -------- Income from operations........................... 4,559 779 (525) 3,681 8,494 Interest income (expense), net................... 167 (28) - (411) (272) Minority interests............................... (624) - - (1,830) (2,454) Earnings from equity investments.................................... 491 - - 122 613 Income taxes..................................... (41) - - (101) (142) ---------- -------- ------- --------- -------- Net income....................................... $ 4,552 $ 751 $ (525) $ 1,461 $ 6,239 ========== ======== ======= ========= ========
9
SIX MONTHS ENDED JUNE 30, 2005 MOBILE (IN THOUSANDS) REFRACTIVE CATARACT AMD OTHER TOTAL - ------------------------------------------------- ---------- -------- ------- --------- --------- Revenues......................................... $ 103,014 $ 14,896 $ 1,000 $ 18,959 $137,869 Expenses: Doctors' compensation.......................... 17,833 - 81 2 17,916 Operating...................................... 65,108 12,065 5,138 12,340 94,651 Research and development, clinical and regulatory................................... - - 2,654 - 2,654 Depreciation................................... 4,330 1,106 59 450 5,945 Amortization of intangibles.................... 1,590 237 - 216 2,043 ---------- -------- ------- --------- -------- 88,861 13,408 7,932 13,008 123,209 ---------- -------- --------- --------- -------- Income (loss) from operations.................... 14,153 1,488 (6,932) 5,951 14,660 Interest income (expense), net................... 1,501 (55) 776 (813) 1,409 Minority interests............................... (1,687) - 2,910 (3,014) (1,791) Earnings from equity investments................. 849 - - 490 1,339 Income taxes..................................... (659) (1) - 160 (500) ---------- -------- ------- --------- -------- Net income (loss)................................ $ 14,157 $ 1,432 $(3,246) $ 2,774 $ 15,117 ========== ======== ======= ========= ========
SIX MONTHS ENDED JUNE 30, 2004 MOBILE (IN THOUSANDS) REFRACTIVE CATARACT AMD OTHER TOTAL - ------------------------------------------------- ---------- -------- ------- --------- -------- Revenues......................................... $ 97,813 $ 12,980 $ 271 $ 18,772 $129,836 Expenses: Doctors' compensation.......................... 15,058 - 39 6 15,103 Operating...................................... 61,726 10,642 502 11,998 84,868 Research and development, clinical and regulatory................................... - - 724 - 724 Depreciation................................... 5,406 1,137 38 368 6,949 Amortization of intangibles.................... 1,640 209 - 220 2,069 Adjustment to the fair value of investments and long-term receivables.................... (1,206) - - - (1,206) Restructuring, severance and other charges..... 2,755 - - - 2,755 ---------- -------- ------- --------- -------- 85,379 11,988 1,303 12,592 111,262 ---------- -------- ------- --------- -------- Income from operations........................... 12,434 992 (1,032) 6,180 18,574 Interest income (expense), net................... 9 (51) - (633) (675) Minority interests............................... (1,370) - - (2,958) (4,328) Earnings from equity investments.................................... 890 - - 122 1,012 Income taxes..................................... (114) (1) - (177) (292) ----------- -------- ------- --------- -------- Net income....................................... $ 11,849 $ 940 $(1,032) $ 2,534 $ 14,291 ========== ======== ======= ========= ========
6. SUPPLEMENTAL CASH FLOW INFORMATION Non-cash transactions:
SIX MONTHS ENDED JUNE 30, ------------------------- 2005 2004 -------- ------- Capital lease obligations relating to equipment purchases...................... $ 1,169 $ 959 Option and warrant reduction................ 792 3,600 Shares issued as part of the employee share purchase plan and 401(k) plan............ 231 357
Cash paid for the following:
SIX MONTHS ENDED JUNE 30, ------------------------- 2005 2004 -------- -------- Interest.................................... $ 1,051 $ 1,364 Income taxes................................ 415 181
10 7. INVESTMENTS AND OTHER ASSETS As of December 31, 2003, the Company maintained a $1.2 million reserve against a $2.3 million long-term note 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. Through the first six months of 2004, this secondary care provider continued to improve its profitability and financial position and made all of its payments to the Company when due. As a result, the Company reevaluated the collectibility of the note as of June 30, 2004 and recorded an adjustment to reverse the remaining reserve of $1.2 million, which is included in other operating expense (income). 8. RESTRUCTURING, SEVERANCE AND OTHER CHARGES During the three and six months ended June 30, 2004, the Company recorded a $2.6 million charge for severance payments to two officers under the terms of employment contracts and a $0.2 million charge related to ongoing lease payment obligations at previously closed centers. The severance payments have been substantially paid as of June 30, 2005, while the lease costs will be paid out over the remaining terms of the leases. 9. RECENTLY ISSUED ACCOUNTING STANDARD On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004), "Share-Based Payment" ("Statement 123(R)"), which is a revision of FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("Statement 123"). Statement 123(R) supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees," and amends FASB Statement No. 95, "Statement of Cash Flows." Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Under Statement 123(R), pro forma disclosure is no longer permitted. On April 14, 2005, the Securities and Exchange Commission (SEC) announced that the effective date of Statement 123(R) will be suspended until January 1, 2006, for calendar year companies. Statement 123(R) permits companies to adopt its requirements using either a "modified prospective" method, or a "modified retrospective" method. Under the "modified prospective" method, compensation cost is recognized in the financial statements beginning with the effective date, based on the requirements of Statement 123(R) for all share-based payments granted after that date, and based on the requirements of Statement 123 for all unvested awards granted prior to the effective date of Statement 123(R). Under the "modified retrospective" method, the requirements are the same as under the "modified prospective" method, but also permits entities to restate financial statements of previous periods based on pro forma disclosures made in accordance with Statement 123. The Company currently utilizes the Black-Scholes option pricing model to measure the fair value of stock options granted to employees. While Statement 123(R) permits entities to continue to use such a model, the standard also permits the use of a "lattice" model. The Company has not yet determined which model it will use to measure the fair value of employee stock options upon the adoption of Statement 123(R). The Company currently expects to adopt Statement 123(R) effective January 1, 2006, however, the Company has not yet determined which of the aforementioned adoption methods it will use. In addition, the Company has not yet determined the financial statement impact of adopting Statement 123(R) for 2006. 10. SUBSEQUENT EVENTS On July 11, 2005, the Company acquired an 82% interest in the assets of Kremer Laser Eye ("Kremer") for $24.3 million in cash plus the assumption of certain liabilities. Kremer includes three refractive centers and one ambulatory surgery center all of which are located in the northeastern part of the United States. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q (herein, together with all amendments, exhibits and schedules hereto, referred to as the "Form 10-Q") contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which statements can be identified by the use of forward looking terminology, such as "may," "will," "expect," "anticipate," "estimate," "plans," "intends" or "continue" or the negative thereof or other variations thereon or comparable terminology. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth elsewhere in this Form 10-Q in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in the Company's Annual Report on Form 10-K, as amended, for the period ended December 31, 2004. Unless the context indicates or requires otherwise, references in this Form 10-Q to the "Company" or "TLCVision" shall mean TLC Vision Corporation and its subsidiaries. References to "$" 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 is a diversified eye care services company dedicated to improving lives through better vision by providing eye doctors with the tools and technologies they need to deliver high quality patient care. The majority of the Company's revenues comes 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 operating 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 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, an optometric franchise network for independent optometrists. The Company is also a 51% majority owner of OccuLogix, Inc., which focuses on the treatment of a specific eye disease known as dry age-related macular degeneration, via rheopheresis, a process for filtering blood. OccuLogix, Inc. is also a registered filer with the Commission. The Company serves surgeons who performed over 147,000 procedures, including refractive and cataract procedures at the Company's centers or using the Company's equipment during the six months ended June 30, 2005. 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 the refractive market and within its other healthcare services. RECENT DEVELOPMENTS On March 1, 2005, the Company sold its interest in Aspen Healthcare, Inc. ("Aspen") to National Surgical Centers, Inc. and recorded a gain of $0.3 million, which is included in other operating expenses (income). The Company's strategy includes periodic acquisitions of or investments in entities that operate in the refractive, cataract or eye care markets. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2005 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2004 Total revenues for the three months ended June 30, 2005 were $66.8 million, an increase of $2.1 million, or 3% over revenues of $64.7 million for the three months ended June 30, 2004. This increase was due to a 2% increase in refractive 12 revenues and a 7% increase in other healthcare services revenues. Approximately 72% of total revenues for the three months ended June 30, 2005 were derived from refractive services compared to 73% during the three months ended June 30, 2004. Revenues from the refractive segment for the three months ended June 30, 2005 were $47.8 million, an increase of $0.9 million or 2% from revenues of $46.9 million for the three months ended June 30, 2004. Refractive revenues increased as a result of an increased mix of higher priced procedures, primarily Custom LASIK, Wavelight and Intralase. The increase in refractive revenues was partially offset by a decrease in refractive procedures. Refractive procedures for the three months ended June 30, 2005 were approximately 49,900, a decrease of 1,700 or 3% from refractive procedures of 51,600 for the three months ended June 30, 2004. Procedures for Laser Eye Care of California ("LECC") were included in both periods and account for 4,600 procedures for the three months ended June 30, 2005, an increase of 600 procedures over the prior year period. The Company owns a 30% interest in LECC. Revenues from centers for the three months ended June 30, 2005 were $38.0 million, an increase of $1.6 million, or 4% from revenues of $36.4 million for the three months ended June 30, 2004. The increase in revenues from centers was due to an increase in centers procedures and an increased mix of higher priced procedures. For the three months ended June 30, 2005, centers procedures were approximately 30,600, an increase of 300 or 1% over centers procedures of 30,300 for the three months ended June 30, 2004. Included in this increase were 200 or 1% more procedures at centers open during both the three months ended June 30, 2005 and 2004. Revenues from access services for the three months ended June 30, 2005 were $9.8 million, a decrease of $0.7 million or 7% from revenues of $10.5 million for the three months ended June 30, 2004. The decline in access revenues was primarily due to 2,000 or 9% fewer procedures partially offset by higher average pricing due to an increase in Custom LASIK procedures. The cost of refractive revenues for the three months ended June 30, 2005 was $33.1 million, an increase of $1.3 million, or 4% over the cost of refractive revenues of $31.8 million for the three months ended June 30, 2004. This increase was primarily attributable to higher costs associated with higher priced procedures. Primarily as a result of lower access procedure volumes, gross margins for the refractive business as a whole decreased to 31% during the three months ended June 30, 2005 from 32% in the prior year period. The cost of revenues from centers for the three months ended June 30, 2005 was $25.9 million, an increase of $1.3 million, or 5% from the cost of revenues of $24.6 million for the three months ended June 30, 2004. This increase was primarily attributable to increased procedure volume and higher costs associated with higher priced procedures. Gross margins from centers remained constant at 32% for the three months ended June 30, 2005 and 2004. The cost of revenues from access services for the three months ended June 30, 2005 was $7.2 million, an increase of $0.1 million or 1% from the cost of revenues of $7.1 million during the three months ended June 30, 2004. This increase was primarily attributable to higher average costs due to an increase in Custom LASIK procedures partially offset by a decrease in procedures. Gross margins decreased to 27% from 32% primarily due to a decrease in procedures and lower margins on Custom LASIK procedures. Revenues from other healthcare services for the three months ended June 30, 2005, were $19.0 million, an increase of $1.3 million or 7% from revenues of $17.7 million for the three months ended June 30, 2004. Approximately 28% of total revenues for the three months ended June 30, 2005 were derived from other healthcare services compared to 27% for the three months ended June 30, 2004. The increase in other healthcare services revenue resulted from internal growth of existing businesses and contributions from businesses acquired within the past year. The cost of revenues from other healthcare services for the three months ended June 30, 2005 was $11.2 million, an increase of $0.6 million or 6% from cost of revenues of $10.6 million for the three months ended June 30, 2004. The increase in cost of revenues primarily related to incremental costs incurred to generate the increased revenue of the other healthcare service business. For the three months ended June 30, 2005, gross margins increased to 41% from 40% for the prior year period due to volume growth and a higher percentage of total revenue generated from Vision Source, which has relatively higher gross margins. General and administrative expenses increased to $9.2 million for the three months ended June 30, 2005 from $6.1 million for the three months ended June 30, 2004. The $3.1 million or 51% increase included a $1.9 million increase from 13 the AMD segment as OccuLogix, Inc. incurs costs to prepare for the commercialization of the RHEO(TM) System in the United States. The remaining $1.2 million increase was primarily due to additional staffing costs, corporate taxes and other operating expenses. Marketing and sales expenses increased to $5.8 million for the three months ended June 30, 2005 from $4.7 million for the three months ended June 30, 2004. The $1.1 million or 24% increase included a $0.1 million increase from the AMD segment, and a $1.0 million increase in the refractive business. Research and development, clinical and regulatory expenses increased to $1.3 million for the three months ended June 30, 2005 from $0.4 million for the three months ended June 30, 2004. Research and development, clinical and regulatory expenses are incurred by OccuLogix, Inc. as it conducts clinical trials related to its rheopheresis application to the United States Food and Drug Administration ("FDA"). Other operating income of $0.4 million for the three months ended June 30, 2005 resulted from a $0.3 million reimbursement from a previous research and development investment and $0.1 million of miscellaneous operating income. As of June 30, 2004, the Company fully reversed a reserve by $1.2 million related to a long-term note receivable due to a consistent payment history and continually improving financial strength of the debtor. During the three months ended June 30, 2004, the Company recorded a $2.6 million charge for severance payments to two officers under the terms of employment contracts and a $0.2 million charge for ongoing lease payment obligations at previously closed centers. Interest income increased to $1.2 million for the three months ended June 30, 2005 from $0.5 million for the three months ended June 30, 2004. This $0.7 million increase is due to an increase in the Company's cash and cash equivalents and short-term investments balances as well as higher rates of return. Interest expense decreased to $0.4 million for the three months ended June 30, 2005 from $0.7 million for the three months ended June 30, 2004. This $0.3 million decrease is due to declining debt and lease obligations. Minority interest expense decreased to $1.1 million for the three months ended June 30, 2005 from $2.5 million for the three months ended June 30, 2004. This $1.4 million decrease was from the AMD segment. Earnings from equity investments increased to $0.7 million for the three months ended June 30, 2005 from $0.6 million for the three months ended June 30, 2004. This $0.1 million increase is primarily due to earnings from an ASC in which the Company acquired a minority ownership in December 2004. Net income for the three months ended June 30, 2005 decreased to $5.5 million or $0.08 per share from $6.2 million or $0.09 per share for the three months ended June 30, 2004. This $0.7 million decrease included a $1.1 million decrease from the AMD segment. Excluding the impact of the AMD segment, net income increased to $7.1 million or $0.10 per share for the three months ended June 30, 2005 from $6.8 million or $0.09 per share for the prior year period. SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2004 Total revenues for the six months ended June 30, 2005 were $137.9 million, an increase of $8.1 million, or 6% over revenues of $129.8 million for the six months ended June 30, 2004. This increase was due to a 5% increase in refractive revenues and a 9% increase in other healthcare services revenues. Approximately 75% of total revenues were derived from refractive services for the six months ended June 30, 2005 and 2004. Revenues from the refractive segment for the six months ended June 30, 2005 were $103.0 million, an increase of $5.2 million or 5% from revenues of $97.8 million for the six months ended June 30, 2004. The increase in refractive revenues was due to an increase in centers procedures and an increased mix of higher priced procedures partially offset by a decrease in access revenues. Refractive procedures for the six months ended June 30, 2005 were approximately 108,600, an increase of 100 over refractive procedures of 108,500 for the six months ended June 30, 2004. Procedures for LECC were included in both periods and account for 9,400 procedures for the six months ended June 30, 2005, an increase of 1,400 procedures over the prior year period. The Company owns a 30% interest in LECC. 14 Revenues from centers for the six months ended June 30, 2005 were $81.8 million, an increase of $6.6 million, or 9% from revenues of $75.2 million for the six months ended June 30, 2004. The increase in revenues from centers was due to an increase in centers procedures and an increased mix of higher priced procedures. For the six months ended June 30, 2005, centers procedures were approximately 66,000, an increase of 3,000 or 5% over centers procedures of 63,000 for the six months ended June 30, 2004. This increase was primarily due to 3,000 or 5% more procedures at centers open during both the six months ended June 30, 2005 and 2004. Revenues from access services for the six months ended June 30, 2005 were $21.2 million, a decrease of $1.4 million or 6% from revenues of $22.6 million for the six months ended June 30, 2004. The decline in access revenues was primarily due to 2,800 or 6% fewer procedures. The cost of refractive revenues for the six months ended June 30, 2005 was $69.1 million, an increase of $3.0 million, or 4% over the cost of refractive revenues of $66.1 million for the six months ended June 30, 2004. This increase was primarily attributable to increased procedure volume and higher costs associated with higher priced procedures. Primarily as a result of higher procedure volumes at centers, gross margins for the refractive business as a whole increased to 33% during the six months ended June 30, 2005 from 32% in the prior year period. The cost of revenues from centers for the six months ended June 30, 2005 was $54.5 million, an increase of $3.7 million, or 7% from the cost of revenues of $50.8 million from the six months ended June 30, 2004. This increase was primarily attributable to increased procedure volume and higher costs associated with higher priced procedures. Gross margins from centers increased to 33% for the six months ended June 30, 2005 from 32% during the prior year period as increased procedure volumes led to incremental variable margin gains at many of the Company's centers. The cost of revenues from access services for the six months ended June 30, 2005 was $14.6 million, a decrease of $0.7 million or 5% from the cost of revenues of $15.3 million during the six months ended June 30, 2004. This decrease primarily resulted from lower procedure volume. Gross margins decreased to 31% from 32% primarily due to a decrease in procedures. Revenues from other healthcare services for the six months ended June 30, 2005, were $34.9 million, an increase of $2.9 million or 9% from revenues of $32.0 million for the six months ended June 30, 2004. Approximately 25% of total revenues were derived from other healthcare services for the six months ended June 30, 2005 and 2004. The cost of revenues from other healthcare services for the six months ended June 30, 2005 was $21.4 million, an increase of $1.7 million or 8% from cost of revenues of $19.7 million for the six months ended June 30, 2004. The increase in cost of revenues primarily related to incremental costs incurred to generate the increased revenue of the other healthcare service business. For the six months ended June 30, 2005, gross margins increased to 39% from 38% for the prior year period due to volume growth and a higher percentage of total revenue generated from Vision Source, which has relatively higher gross margins. General and administrative expenses increased to $18.3 million for the six months ended June 30, 2005 from $12.8 million for the six months ended June 30, 2004. The $5.5 million or 43% increase included a $3.7 million increase from the AMD segment as OccuLogix, Inc. incurs costs to prepare for the commercialization of the RHEO(TM) System in the United States. The remaining $1.8 million increase was primarily due to additional staffing costs, professional fees, corporate taxes and costs related to businesses acquired within the last year. Marketing and sales expenses increased to $10.8 million for the six months ended June 30, 2005 from $8.9 million for the six months ended June 30, 2004. The $1.9 million or 22% increase included a $0.3 million increase from the AMD segment, and a $1.6 million increase in the refractive business. Research and development, clinical and regulatory expenses increased to $2.7 million for the six months ended June 30, 2005 from $0.7 million for the six months ended June 30, 2004. Research and development, clinical and regulatory expenses are incurred by OccuLogix, Inc. as it conducts clinical trials related to its rheopheresis application to the United States FDA. Other operating income of $1.0 million for the six months ended June 30, 2005 resulted from a $0.3 million gain on the sale of Aspen, a $0.3 million reimbursement from a previous research and development investment, $0.1 million of net gains from the sales and disposals of fixed assets and $0.3 million of miscellaneous operating income. For the six months ended 15 June 30, 2004, other operating income of $1.7 million resulted from a $1.1 million gain on the sale of a controlling interest in LECC, a $1.2 million reversal of a reserve related to a long-term note receivable and $0.1 million of miscellaneous operating income offset by $0.7 million of net losses related to the sales and disposals of fixed assets. During the six months ended June 30, 2004, the Company recorded a $2.6 million charge for severance payments to two officers under the terms of employment contracts and a $0.2 million charge for ongoing lease payment obligations at previously closed centers. Interest income increased to $2.3 million for the six months ended June 30, 2005 from $1.0 million for the six months ended June 30, 2004. This $1.3 million increase is due to an increase in the Company's cash and cash equivalents and short-term investments balances as well as higher rates of return. Interest expense decreased to $0.9 million for the six months ended June 30, 2005 from $1.6 million for the six months ended June 30, 2004. This $0.7 million decrease is due to declining debt and lease obligations. Minority interest expense decreased to $1.8 million for the six months ended June 30, 2005 from $4.3 million for the six months ended June 30, 2004. This $2.5 million decrease included a $2.9 million decrease from the AMD segment offset by a $0.4 million or 9% increase from the Company's other business segments. Earnings from equity investments increased to $1.3 million for the six months ended June 30, 2005 from $1.0 million for the six months ended June 30, 2004. This $0.3 million increase is primarily due to earnings from an ASC in which the Company acquired a minority ownership in December 2004. Net income for the six months ended June 30, 2005 increased to $15.1 million or $0.21 per share from $14.3 million or $0.20 per share for the six months ended June 30, 2004. This $0.8 million increase included a $2.2 million decrease from the AMD segment. Excluding the impact of the AMD segment, net income increased to $18.4 million or $0.25 per share for the six months ended June 30, 2005 from $15.3 million or $0.22 per share for the prior year period. LIQUIDITY AND CAPITAL RESOURCES During the six months ended June 30, 2005, the Company continued to focus its activities primarily on expanding its refractive centers and other healthcare businesses through internal growth and acquisitions. Cash and cash equivalents, short-term investments and restricted cash were $142.5 million at June 30, 2005 compared to $145.4 million at December 31, 2004. Working capital at June 30, 2005 was $142.2 million, an increase of $11.0 million from $131.2 million at December 31, 2004. The Company's principal cash requirements have included normal operating expenses, debt repayment, distributions to minority partners, capital expenditures, acquisitions and investments. During the six months ended June 30, 2005, the Company invested $5.2 million in fixed assets and received vendor financing for $1.2 million of fixed assets. As new technologies emerge in the refractive market, the Company may need to upgrade its equipment, including excimer lasers and flap-making technology. 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, 2004 the Company reported $2.8 million of exit liabilities primarily related to severance costs for two former officers under the terms of employment contracts and ongoing lease obligations at closed centers. During the six months ended June 30, 2005, the Company made cash payments of $2.1 million in respect of these exit liabilities, resulting in a $0.7 million exit liability at June 30, 2005. 16 CASH FROM OPERATING ACTIVITIES Net cash provided by operating activities was $12.8 million for the six months ended June 30, 2005. The cash flows provided by operating activities during the six months ended June 30, 2005 were primarily due to net income of $15.1 million plus non-cash items including depreciation and amortization of $8.0 million and minority interest expense of $1.8 million, offset by an increase in net operating assets of $10.4 million, earnings from equity investments of $1.3 million and a gain on the sale of a subsidiary of $0.3 million. The increase in net operating assets consisted of a $2.2 million increase in accounts receivable due primarily to higher revenues during the seasonably strong first and second quarters, a $3.3 million increase in prepaid expenses and other current assets and a $4.9 million decrease in accounts payable and accrued liabilities. Excluding the impact of the AMD segment, net cash provided by operating activities would have been $23.3 million for the six months ended June 30, 2005. CASH FROM INVESTING ACTIVITIES Net cash provided by investing activities was $25.1 million for the six months ended June 30, 2005. The cash flows provided by investing activities during the six months ended June 30, 2005 primarily included net proceeds from the sales of short-term investments of $33.3 million, proceeds from the sale of a subsidiary of $3.4 million, distributions and loan payments received from equity investments of $1.4 million, proceeds from the sales of fixed assets of $0.7 million and a $0.3 million reimbursement from a previous research and development investment. These cash flows were offset by capital expenditures of $5.2 million and acquisitions and equity investments of $8.9 million. Excluding the impact of the AMD segment, net cash provided by investing activities would have been $20.5 million for the six months ended June 30, 2005. CASH FROM FINANCING ACTIVITIES Net cash used in financing activities was $7.3 million for the six months ended June 30, 2005. Net cash used in financing activities during the six months ended June 30, 2005 primarily related to the repayment of certain notes payable and capitalized lease obligations of $6.1 million and distributions to minority interests of $3.7 million, offset by proceeds from debt financing of $1.3 million, proceeds from the exercise of stock options of $1.1 million and proceeds from the issuance of OccuLogix, Inc. common stock of $0.1 million. Excluding the impact of the AMD segment, net cash used in investing activities would have been $7.4 million for the six months ended June 30, 2005. SUBSEQUENT EVENTS On July 11, 2005, the Company acquired an 82% interest in the assets of Kremer Laser Eye ("Kremer") for $24.3 million in cash plus the assumption of certain liabilities. Kremer includes three refractive centers and one ambulatory surgery center all of which are located in the northeastern part of the United States. 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. 17 As of the end of the period covered by the report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective, in all material respects, to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required. There have been no significant changes in the Company's internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect the Company's internal control over financial reporting. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There have been no material changes in legal proceedings from that reported in the Company's Annual Report on Form 10-K for the year ended December 31, 2004. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's annual meeting of shareholders was held on June 23, 2005. At the annual meeting, shareholders of the Company voted on the following proposals: (a) to elect seven directors for the ensuing year; (b) to appoint Ernst & Young LLP as auditors of the Company for the ensuing year and to authorize the directors to fix the remuneration to be paid to the auditors; (c) to confirm an amendment to the Company's by-laws; and (d) to approve the Company's Shareholder Rights Plan. Each of the proposals, including the election of directors, was approved at the annual meeting. With respect to the election of directors, the following votes were cast:
Votes in Favor Votes Withheld -------------- -------------- Elias Vamvakas 36,985,318 939,813 Thomas N. Davidson 36,985,318 939,813 Richard L. Lindstrom, M.D. 36,985,318 939,813 Warren S. Rustand 36,985,318 939,813 James C. Wachtman 36,985,318 939,813 Toby S. Wilt 36,985,318 939,813 Michael D. DePaolis, O.D. 36,985,318 939,813
With respect to the appointment of Ernst & Young LLP as auditors of the Company for the ensuing year and to authorize the directors to fix the remuneration to be paid to the auditors, the following votes were cast:
Votes in Favor Votes Withheld - -------------- -------------- 37,754,610 67,875
With respect to the confirmation of an amendment to the Company's by-laws, the following votes were cast:
Votes in Favor Votes Against Votes Withheld - -------------- ------------- -------------- 37,155,909 725,529 43,693
18 With respect to the approval of the Company's Shareholder Rights Plan, the following votes were cast:
Votes in Favor Votes Against Votes Withheld - -------------- ------------- -------------- 15,915,476 1,259,601 608,275
ITEM 5. OTHER INFORMATION 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 19 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 August 8, 2005 By: /s/ Steven P. Rasche ------------------------------ Steven P. Rasche Chief Financial Officer August 8, 2005 20 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
21 EX-31.1 2 c97521exv31w1.txt CERTIFICATION 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 (the registrant); 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements or external purposes in accordance with generally accepted accounting principles; (c) 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 (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (that registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 8, 2005 /s/ James C. Wachtman ----------------------- James C. Wachtman Chief Executive Officer 22 EX-31.2 3 c97521exv31w2.txt CERTIFICATION 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 (the registrant); 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements or external purposes in accordance with generally accepted accounting principles; (c) 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 (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (that registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 8, 2005 /s/ Steven P. Rasche ------------------------ Steven P. Rasche Chief Financial Officer 23 EX-32.1 4 c97521exv32w1.txt CERTIFICATION EXHIBIT 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of TLC Vision Corporation (the "Company") on Form 10-Q for the period ended June 30, 2005 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: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: August 8, 2005 /s/ James C. Wachtman - ------------------------ James C. Wachtman Chief Executive Officer * A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to TLC Vision Corporation and will be retained by TLC Vision Corporation and furnished to the Securities and Exchange Commission or its staff upon request. 24 EX-32.2 5 c97521exv32w2.txt CERTIFICATION EXHIBIT 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of TLC Vision Corporation (the "Company") on Form 10-Q for the period ended June 30, 2005 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: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: August 8, 2005 /s/ Steven P. Rasche - ------------------------------------ Steven P. Rasche Chief Financial Officer * A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to TLC Vision Corporation and will be retained by TLC Vision Corporation and furnished to the Securities and Exchange Commission or its staff upon request. 25 EX-99 6 c97521exv99.txt RECONCILIATION EXHIBIT 99 RECONCILIATION BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES TLC Vision Corporation (the "Company") prepares its consolidated financial statements in accordance with United States (U.S.) Generally Accepted Accounting Principles ("GAAP"), which differ in certain respects from Canadian GAAP. This reconciliation between Canadian and U.S. GAAP should be read in conjunction with the consolidated interim financial statements as of June 30, 2005 and for the three and six months ended June 30, 2005 and 2004 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 JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 2005 2004 2005 2004 --------- --------- --------- --------- Net income per U.S. GAAP.................................... $ 5,511 $ 6,239 $ 15,117 $ 14,291 Amortization of Practice Management Agreements (1).......... (378) (378) (756) (756) Depreciation of fixed assets (2)............................ (70) (70) (140) (140) Interest income on note receivable related to the sale-leaseback of building (3)........................... 19 19 39 39 Variable accounting for stock options (4)................... 6 15 6 334 Fair value accounting for stock options (4)................. (1,361) (278) (2,368) (554) --------- --------- --------- --------- Net income per Canadian GAAP................................ $ 3,727 $ 5,547 $ 11,898 $ 13,214 ========= ========= ========= ========= Earnings per share for Canadian GAAP - basic................ $ 0.05 $ 0.08 $ 0.17 $ 0.20 ========= ========= ========= ========= Earnings per share for Canadian GAAP - diluted.............. $ 0.05 $ 0.08 $ 0.17 $ 0.19 ========= ========= ========= =========
The most significant balance sheet differences between U.S. GAAP and Canadian GAAP are as follows:
JUNE 30, DECEMBER 31, 2005 2004 -------- ------------ Investments and Other Assets Balance per U.S. GAAP ............................................. $ 12,197 $ 10,482 Note receivable related to the sale-leaseback of building (2) ..... 913 913 -------- ------------ Balance per Canadian GAAP ......................................... $ 13,110 $ 11,395 ======== ============ Intangibles, Net Balance per U.S. GAAP ............................................. $ 17,758 $ 18,140 Difference in impairment write-off of intangibles (1) ............. 6,334 6,334 Amortization of Practice Management Agreements (1) ................ (4,662) (3,906) -------- ------------ Balance per Canadian GAAP ......................................... $ 19,430 $ 20,568 ======== ============ Fixed Assets, Net Balance per U.S. GAAP ............................................. $ 46,184 $ 46,199 Adjustment for the sale-leaseback of building (2) ................. (829) (829) Depreciation of fixed assets (2) .................................. (1,118) (978) -------- ------------ Balance per Canadian GAAP ......................................... $ 44,237 $ 44,392 ======== ============
26
JUNE 30, DECEMBER 31, 2005 2004 --------- ------------ Long-Term Debt, Less Current Maturities Balance per U.S. GAAP ................................................. $ 10,995 $ 9,991 Adjustment for note payable related to the sale-leaseback of building (2) .................................................... 850 850 Cumulative interest payments received on note receivable related to the sale-leaseback of building (3) ...................... (231) (224) --------- ------------ Balance per Canadian GAAP ............................................. $ 11,614 $ 10,617 ========= ============ 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 13,607 Adjustment for fair value accounting of stock options (4) ............. 3,613 1,245 --------- ------------ Balance per Canadian GAAP ............................................. $ 17,220 $ 14,852 ========= ============ Option and Warrant Equity Balance per U.S. GAAP ................................................. $ 2,080 $ 2,872 Adjustment to compensation expense for warrants and stock options (4) ........................................................ (336) (330) --------- ------------ Balance per Canadian GAAP ............................................. $ 1,744 $ 2,542 ========= ============ Accumulated Deficit Balance per U.S. GAAP ................................................. $(235,927) $ (251,044) Adjustment to the value of intangible Practice Management Agreements (1) ..................................................... 1,672 2,428 Adjustment for the sale-leaseback of building (2) ..................... (1,947) (1,807) Interest on note receivable related to the sale-leaseback of building (3) .................................................... 283 244 Adjustment to compensation expense for warrants and stock options (4) ........................................................ (3,277) (915) Adjustment for change in accounting policy related to the fair value of stock options (4) .................................... (13,607) (13,607) --------- ------------ Balance per Canadian GAAP ............................................. $(252,803) $ (264,701) ========= ============
(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 exceeds the carrying value of such assets. 27 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 $4.7 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 sales-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 Note ($0.9 million as of June 30, 2005) is included in investments and other assets. As of June 30, 2005, 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 $1.9 million higher for U.S. GAAP. Investments and other assets is $0.9 million higher and notes payable is $0.7 million higher (of which $0.6 million is classified as long-term) for Canadian GAAP. For the three and six months ended June 30, 2005 and 2004, depreciation expense is higher for Canadian GAAP by $70,000 and $140,000, respectively. (3) For each of the three months ended June 30, 2005 and 2004, the Company reported $19,000 of interest income related to the Note on the sale-leaseback of the building as described above. For each of the six months ended June 30, 2005 and 2004, the Company reported $39,000 of interest income related to the Note on the sale-leaseback of the building as described above. As of June 30, 2005, $52,000 of interest income was not yet received, and the associated interest receivable was included in prepaids and other current assets for Canadian GAAP purposes. In the above U.S. GAAP to Canadian GAAP reconciliation, cumulative interest payments received of $231,000 are recorded as reductions to long-term debt in order to adjust the U.S. GAAP treatment of the payments, which increases the debt upon their receipt. (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 28 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. 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 months ended June 30, 2005 and 2004, the Company recorded stock-based compensation expenses of $1,361,000 (of which $591,000 relates to OccuLogix, Inc. stock options) and $278,000, respectively. For the six months ended June 30, 2005 and 2004, the Company recorded stock-based compensation expenses of $2,368,000 (of which $818,000 relates to OccuLogix, Inc. stock options) and $554,000, respectively, which are included in general and administrative expenses. The fair value of the options granted by the Company was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
JUNE 30, JUNE 30, 2005 2004 -------- --------- Risk free interest rate 3.21% 2.35% Volatility factors 0.75 0.75 Weighted average expected option life 2.5 2.5 Dividend rate 0% 0%
The Company granted 45,000 and 30,500 stock options during the six months ended June 30, 2005 and 2004, respectively. OccuLogix, Inc. granted 1.5 million options during the six months ended June 30, 2005. The fair value of the options granted by OccuLogix, Inc. during the six months ended June 30, 2005 was estimated at the date of grant using the Black-Scholes option pricing model. During the year ended May 31, 2002, the Company allowed the holders of outstanding TLC Vision Corporation stock options with an exercise price greater than $8.688 (C$13.69) to elect to reduce the exercise price of their options to $8.688 (C$13.69), in some cases by surrendering existing options for a greater number of shares than the number of shares issuable on exercise of each repriced option. For U.S. GAAP purposes, such modification which results in a change in the exercise price of the underlying stock options is subject to APB 25's variable method of accounting for stock options. Variable accounting requires that differences between the price of the Company's common shares at the end of each reporting period and the modified exercise price be charged to income as compensation expense over the remaining vesting period of the outstanding options. For the three and six months ended June 30, 2004, the Company recognized additional stock compensation expense of $15,000 and $334,000, respectively, related to the modified stock options. 29 During the six months ended June 30, 2005, OccuLogix, Inc. granted options that have vesting periods contingent upon the date at which OccuLogix, Inc. receives FDA approval for its RHEO(TM) System. These options are subject to APB 25's variable method of accounting for stock options. During the six months ended June 30, 2005, OccuLogix, Inc. recorded $12,000 of variable compensation expense related to these options (of which the Company recognized $6,000 after minority interests). 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 and cash flows. THREE MONTHS ENDED JUNE 30, 2005, COMPARED TO THREE MONTHS ENDED JUNE 30, 2004 Net income for the three months ended June 30, 2005 was $3.7 million or $0.05 per share compared to income of $5.5 million or $0.08 per share for the three months ended June 30, 2004. Amortization expenses were $1.4 million for each of the three months ended June 30, 2005 and 2004. Net cash provided by operating activities was $7.0 million for the three months ended June 30, 2005. The cash flows provided by operating activities during the three months ended June 30, 2005 were primarily due to net income of $3.7 million plus non-cash items including depreciation and amortization of $4.4 million, compensation expense of $1.5 million and minority interest expense of $1.1 million, offset by an increase in net operating assets of $2.9 million and earnings from equity investments of $0.7 million. The increase in net operating assets consisted of a $1.0 million increase in prepaid expenses and a $3.2 million decrease in accounts payable and accrued liabilities offset by a $1.3 million decrease in accounts receivable. SIX MONTHS ENDED JUNE 30, 2005, COMPARED TO SIX MONTHS ENDED JUNE 30, 2004 Net income for the six months ended June 30, 2005 was $11.9 million or $0.17 per share compared to income of $13.2 million or $0.19 per share for the six months ended June 30, 2004. Amortization expenses were $2.8 million for each of the six months ended June 30, 2005 and 2004. Net cash provided by operating activities was $12.8 million for the six months ended June 30, 2005. The cash flows provided by operating activities during the six months ended June 30, 2005 were primarily due to net income of $11.9 million plus non-cash items including depreciation and amortization of $8.9 million, minority interest expense of $1.8 million and compensation expense of $2.6 million. These increases were offset by an increase in net operating assets of $10.4 million, a gain on the sale of Aspen of $0.3 million, a $0.3 million reimbursement from a previous research and development investment and earnings from equity investments of $1.3 million. The increase in net operating assets primarily consisted of a $2.2 million increase in accounts receivable, a $4.9 million decrease in accounts payable and accrued liabilities and a $3.3 million increase in prepaid expenses. 30 -----END PRIVACY-ENHANCED MESSAGE-----