-----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, FEUFBMGI+yn2tyt+1wZyDmyBBFxe56IjpWyrLJDD7SW5mrJZsAuGlt+sfnxx/bhJ aqZcZN0NCaaGUx7tNbg8xQ== 0000950137-06-008922.txt : 20060809 0000950137-06-008922.hdr.sgml : 20060809 20060809161004 ACCESSION NUMBER: 0000950137-06-008922 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20060630 FILED AS OF DATE: 20060809 DATE AS OF CHANGE: 20060809 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: 061017701 BUSINESS ADDRESS: STREET 1: 5280 SOLAR DRIVE STREET 2: SUITE 100 CITY: MISSISSAUGA ONTARIO STATE: A6 ZIP: 00000 BUSINESS PHONE: 636-534-2300 MAIL ADDRESS: STREET 1: 16305 SWINGLEY RIDGE ROAD STREET 2: SUITE 300 CITY: CHESTERFIELD STATE: MO ZIP: 63017 FORMER COMPANY: FORMER CONFORMED NAME: TLC LASER CENTER INC DATE OF NAME CHANGE: 19960314 10-Q 1 c07607e10vq.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, 2006 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 incorporation or organization) Identification No.)
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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12-b(2) of the Exchange Act. [ ] Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b(2) of the Exchange Act). [ ] Yes [X] No As of August 8, 2006 there were 68,959,000 of the registrant's Common Shares outstanding. INDEX PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements (unaudited) Consolidated Statements of Operations for the three and six months ended June 30, 2006 and 2005 Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005 Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005 Consolidated Statement of Changes in Stockholders' Equity for the six months ended June 30, 2006 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 1A. Risk Factors 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, --------------------- ---------------------- 2006 2005 2006 2005 ------- ----------- -------- ----------- AS RESTATED AS RESTATED Revenues: Refractive: Centers ...................................... $43,598 $ 38,010 $ 91,537 $ 81,775 Access ....................................... 9,771 9,828 20,759 21,239 Other healthcare services ....................... 22,846 18,982 41,500 34,855 ------- -------- -------- -------- Total revenues .................................. 76,215 66,820 153,796 137,869 ------- -------- -------- -------- Cost of revenues: Refractive: Centers ...................................... 29,908 25,921 61,796 54,450 Access ....................................... 7,160 7,200 14,675 14,610 Other healthcare services ....................... 13,946 11,207 26,932 21,358 ------- -------- -------- -------- Total cost of revenues ............................. 51,014 44,328 103,403 90,418 ------- -------- -------- -------- Gross profit .................................... 25,201 22,492 50,393 47,451 ------- -------- -------- -------- General and administrative ......................... 7,085 9,227 17,912 18,287 Marketing and sales ................................ 6,704 5,843 13,675 10,840 Research and development, clinical and regulatory .. -- 1,310 1,475 2,654 Amortization of intangibles ........................ 874 1,032 1,738 2,043 Other expenses (income), net ....................... (169) (363) 323 (1,033) ------- -------- -------- -------- 14,494 17,049 35,123 32,791 ------- -------- -------- -------- Operating income ................................... 10,707 5,443 15,270 14,660 Gain on sale of OccuLogix, Inc. stock .............. 1,450 -- 1,450 -- Interest income .................................... 222 979 1,235 2,051 Interest expense ................................... (141) (184) (679) (642) Minority interests ................................. (2,938) (1,105) (2,752) (1,791) Earnings (losses) from equity investments .......... (899) 680 24 1,339 ------- -------- -------- -------- Income before income taxes ......................... 8,401 5,813 14,548 15,617 Income tax (expense) benefit ....................... 2,466 (2,178) (969) (5,255) ------- -------- -------- -------- Net income ......................................... $10,867 $ 3,635 $ 13,579 $ 10,362 ------- -------- -------- -------- Earnings per share - basic ......................... $ 0.16 $ 0.05 $ 0.20 $ 0.15 ======= ======== ======== ======== Earnings per share - diluted ....................... $ 0.16 $ 0.05 $ 0.19 $ 0.14 ======= ======== ======== ======== Weighted average number of common shares outstanding - basic ............................. 68,881 70,326 68,819 70,182 Weighted average number of common shares outstanding - diluted ........................... 69,830 72,071 69,832 72,057
See the accompanying notes to unaudited interim consolidated financial statements. 3 TLC VISION CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands)
(UNAUDITED) JUNE 30, DECEMBER 31, 2006 2005 ----------- ------------ ASSETS Current assets: Cash and cash equivalents ............................. $ 35,879 $ 31,729 Short-term investments ................................ 9,825 38,213 Accounts receivable, net .............................. 19,811 20,583 Prepaid expenses, inventory and other ................. 12,053 17,123 --------- --------- Total current assets ............................... 77,568 107,648 Restricted cash .......................................... 1,010 975 Investments and other assets ............................. 39,990 19,838 Goodwill ................................................. 96,440 99,402 Other intangible assets, net ............................. 22,249 24,021 Fixed assets, net ........................................ 53,117 49,159 --------- --------- Total assets ............................................. $ 290,374 $ 301,043 ========= ========= LIABILITIES Current liabilities: Accounts payable ...................................... $ 9,675 $ 11,031 Accrued liabilities ................................... 21,715 24,453 Current maturities of long-term debt .................. 6,595 5,268 --------- --------- Total current liabilities .......................... 37,985 40,752 Other long-term liabilities .............................. 3,132 3,427 Long term-debt, less current maturities .................. 14,236 12,665 Minority interests ....................................... 14,696 35,794 --------- --------- Total liabilities ........................................ 70,049 92,638 --------- --------- STOCKHOLDERS' EQUITY Common stock, no par value; unlimited number authorized .. 449,091 450,703 Option and warrant equity ................................ 1,814 1,861 Accumulated deficit ...................................... (230,580) (244,159) --------- --------- Total stockholders' equity ............................... 220,325 208,405 --------- --------- Total liabilities and stockholders' equity ............... $ 290,374 $ 301,043 ========= =========
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, ---------------------- 2006 2005 -------- ----------- AS RESTATED OPERATING ACTIVITIES Net income ................................................... $ 13,579 $ 10,362 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization ............................. 7,676 7,988 Deferred taxes ............................................ 2,019 4,126 Minority interests ........................................ 2,752 1,791 Earnings from equity investments .......................... (24) (1,339) Loss (gain) on sales and disposals of fixed assets ........ 1 (96) Reimbursements from investments in research and development arrangements ............................... (300) (300) Write-down of OccuLogix, Inc. inventory ................... 1,625 -- Gain on sale of OccuLogix, Inc. stock ..................... (1,450) -- Gain on sale of subsidiary ................................ -- (319) Non-cash compensation expense ............................. 925 206 Other ..................................................... 26 88 Changes in operating assets and liabilities, net of acquisitions and dispositions: Accounts receivable .................................... 136 (2,213) Prepaid expenses, inventory and other current assets ... (1,081) (3,312) Accounts payable and accrued liabilities ............... (3,103) (4,225) -------- -------- Cash from operating activities ............................... 22,781 12,757 -------- -------- INVESTING ACTIVITIES Purchases of fixed assets .................................... (6,349) (5,177) Proceeds from sales of fixed assets .......................... 516 724 Proceeds from divestitures of investments and subsidiaries, net ......................................... -- 3,430 Proceeds from sale of OccuLogix, Inc. stock, net ............. 2,226 -- OccuLogix, Inc. cash balance at time of deconsolidation ...... (14,814) -- Distributions and loan payments received from equity investments ........................................ 1,854 1,387 Reimbursements from investments in research and development arrangements .................................. 300 300 Acquisitions and equity investments .......................... (3,171) (8,881) Proceeds from sales of short-term investments ................ 9,925 66,397 Purchases of short-term investments .......................... (3,275) (33,093) Other ........................................................ (47) (7) -------- -------- Cash from investing activities ............................... (12,835) 25,080 -------- -------- FINANCING ACTIVITIES Restricted cash movement ..................................... (35) 25 Principal payments of debt financing and capital leases ...... (1,968) (6,131) Proceeds from debt financing ................................. 283 1,321 Distributions to minority interests .......................... (4,754) (3,744) Proceeds from issuances of common stock ...................... 445 1,089 Proceeds from issuances of OccuLogix, Inc. stock ............. 233 107 -------- -------- Cash from financing activities ............................... (5,796) (7,333) -------- -------- Net increase in cash and cash equivalents during the period .. 4,150 30,504 Cash and cash equivalents, beginning of period ............... 31,729 33,435 -------- -------- Cash and cash equivalents, end of period ..................... $ 35,879 $ 63,939 ======== ========
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, 2005 .............................. 68,691 $450,703 $1,861 $(244,159) $208,405 Shares issued as part of the employee share purchase plan and 401(k) plan ................................ 80 474 474 Exercise of stock options .............................. 135 257 (46) 211 Options expired or forfeited ........................... 1 (1) -- Stock-based compensation ............................... 463 463 Adjustment of utilized net operating loss carryforwards (see Note 7).......................................... (3,116) (3,116) Changes in subsidiaries' stockholders' equity .......... 309 309 Net income and comprehensive income .................... 13,579 13,579 ------ -------- ------ --------- -------- Balance June 30, 2006 .................................. 68,906 $449,091 $1,814 $(230,580) $220,325 ====== ======== ====== ========= ========
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, 2006 (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, 2005 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, 2006. The consolidated financial statements as of December 31, 2005 and unaudited interim consolidated financial statements for the three and six months ended June 30, 2006 and 2005 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. Effective April 1, 2006, the Company deconsolidated OccuLogix, Inc. and began accounting for its investment in OccuLogix, Inc. under the equity method (See Note 4). The unaudited interim consolidated financial statements for the three and six months ended June 30, 2005 include certain reclassifications to conform with classifications for the three and six months ended June 30, 2006. 2. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS In conjunction with the issuance of the Company's consolidated financial statements for the year ended December 31, 2005, the Company restated its results for the first three quarters of 2005 to correct its accounting for income taxes. Accordingly, the consolidated financial statements for the three and six months ended June 30, 2005, included herein, have been restated. During the three and six months ended June 30, 2005, the Company reversed a portion of its deferred tax asset valuation allowance as a reduction to income tax expense. Due to estimated limitations on the availability of certain portions of the Company's net operating loss carryforwards as of December 31, 2005, the Company has determined that the deferred tax asset valuation allowance reversals in the three and six months ended June 30, 2005 should have been recorded primarily to goodwill and equity. The adjustments to income tax expense were $1.9 million and $4.8 million for the three and six months ended June 30, 2005, respectively, and are primarily non-cash items. The restatement had the effect of reducing each of basic and diluted earnings per share by $0.03 and $0.07 for the three and six months ended June 30, 2005, respectively. 3. ACCOUNTING CHANGES Depreciation Method On January 1, 2006, the Company changed its depreciation policy for the following asset classifications: furniture, fixtures and equipment; laser equipment; medical equipment; and vehicles and other. The Company has changed to the straight-line depreciation method from the 25% declining balance method for these assets. The change will be reflected prospectively in the Company's financial statements both for new assets acquired after January 1, 2006 and for assets previously held from that date forward. Management's decision to change was based on its judgment that straight-line depreciation provides a better method of reflecting the pattern of consumption of the assets being depreciated over their estimated useful lives given their characteristics and usage patterns. The Company has determined that the design and durability of these assets diminishes ratably over time, and it is therefore preferable to recognize the related cost uniformly over their estimated useful lives on a straight line basis. During the three and six months ended June 30, 2006, the change in depreciation method increased net income by approximately $0.3 million (or $0.00 per diluted share) and $0.4 million (or $0.01 per diluted share), respectively. Stock-based Compensation On December 16, 2004, the Financial Accounting Standards Board ("FASB") issued Statement No. 123 (revised 2004), "Share-Based Payment," ("Statement 123(R)") effective January 1, 2006, which is a revision of FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("Statement 123"). 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. Prior to January 1, 2006, the Company accounted for stock-based compensation utilizing the intrinsic value method in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for 7 Stock Issued to Employees" and its related interpretations. Accordingly, no compensation expense was recognized for fixed option plans because the exercise prices of employee stock options equaled or exceeded the market prices of the underlying stock on the dates of grant. However, stock-based compensation has been included in pro forma disclosures in the financial statement footnotes in prior periods. Effective January 1, 2006, the Company adopted the fair value recognition provisions of Statement 123(R) using the modified prospective method of application, which requires the Company to recognize compensation expense on a prospective basis. Therefore, prior period financial statements have not been restated to recognize compensation expense under the provisions of Statement 123(R). Under this method, in addition to reflecting compensation expense for new stock-based awards, expense is also recognized to reflect the remaining service period of awards that had been included in pro forma disclosures in prior periods. Statement 123(R) also requires that excess tax benefits related to stock option exercises be reflected as financing cash inflows instead of operating cash inflows. Total stock-based compensation for the three months ended June 30, 2006 was $313,000. Total stock-based compensation includes $178,000 ($159,000 after tax or less than $0.01 basic and diluted earnings per share) for TLCVision stock options and its Employee Share Purchase Plan, and $135,000 ($120,000 after tax or less than $0.01 basic and diluted earnings per share) for the value of stock issued in connection with the Company's 401(k) matching program. Total stock-based compensation for the six months ended June 30, 2006 was $925,000. Total stock-based compensation includes $463,000 ($413,000 after tax or $0.01 basic and diluted earnings per share) for TLCVision stock options and its Employee Share Purchase Plan, and $276,000 ($246,000 after tax or less than $0.01 basic and diluted earnings per share) for the value of stock issued in connection with the Company's 401(k) matching program. Total stock-based compensation also includes $186,000 ($95,000 after minority interests) of stock-based compensation expense recorded by OccuLogix, Inc. in connection with its adoption of Statement 123(R) for the three months ended March 31, 2006. As of June 30, 2006, the total unrecognized compensation expense related to TLCVision non-vested employee awards was approximately $2.2 million. The unrecognized compensation expense will be recognized over the remaining vesting period, which expires March 31, 2010 for certain options. The following table illustrates the effect on net income and earnings per share as if Statement 123(R) had been applied to all outstanding awards for the three and six months ended June 30, 2005:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, 2005 JUNE 30, 2005 ------------------ ---------------- Net income as reported ...................... $3,635 $10,362 Add stock-based employee compensation cost included in net income ................... -- -- 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, net of related tax effects .................................. (477) (960) 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 ........................ $2,573 $ 8,590 ====== ======= Pro forma earnings per share - basic ........ $ 0.04 $ 0.12 ====== ======= Pro forma earnings per share - diluted ...... $ 0.04 $ 0.12 ====== =======
For awards granted prior to the adoption of Statement 123(R), the Company uses the attribution method under FASB Interpretation No. 28, "Accounting for Stock Appreciation Rights and Other Variable Stock Option Award Plans," to amortize stock-based compensation cost. For awards granted subsequent to the adoption of Statement 123(R), the Company uses the straight-line method to amortize stock-based compensation cost. The fair value of stock options granted to employees is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rate of 4.4% and 3.2% for 2006 and 2005, respectively; expected dividend yield of 0%; expected life of 3 years and 2.5 years for 2006 and 2005, respectively; and expected volatility of 57% and 75% for 2006 and 2005, respectively. 8 4. ACQUISITIONS AND DISPOSITIONS On April 11, 2006, the Company sold 800,000 shares of OccuLogix, Inc. common stock and recorded a gain of $1.4 million. After the sale of stock, the Company owns approximately 49% of OccuLogix, Inc. Due to the insignificance of the results of operations of OccuLogix, Inc. from April 1, 2006 through April 11, 2006, the Company deconsolidated OccuLogix, Inc. effective April 1, 2006 and has accounted for its investment in OccuLogix, Inc. under the equity method since that date (see Note 5). On March 1, 2005, the Company sold its interest in Aspen Healthcare, Inc. 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. During the six months ended June 30, 2006, the Company paid over $3 million to acquire or invest in several entities, none of which were individually material. 5. INVESTMENTS AND OTHER ASSETS Included in investments and other assets as of June 30, 2006 is the Company's equity investment in OccuLogix, Inc., which totaled $18.3 million. During the three months ended June 30, 2006, OccuLogix, Inc. reported the following: Net sales ..... $ 83 ======== Gross profit .. $ 78 ======== Net loss ...... $(69,996) ========
For the three months ended June 30, 2006, the net loss for OccuLogix, Inc. includes a $65.9 million charge for impairment of goodwill. Because the Company accounted for its original investment in OccuLogix, Inc. at historical cost, the Company must eliminate certain items, including the $65.9 million impairment of goodwill, when it recognizes equity earnings (losses) from OccuLogix, Inc. For the three and six months ended June 30, 2006, the Company recognized $1.9 million of equity losses from OccuLogix, Inc. 9 6. OTHER EXPENSES (INCOME), NET Other expenses (income), net includes the following operating items:
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, -------------- --------------- 2006 2005 2006 2005 ----- ----- ----- ------- Loss (gain) on sales and disposals of fixed assets .................................... $ (45) $ -- $ 17 $ (96) Center closing costs ......................... (40) -- (32) -- Gain on sale of subsidiary ................... -- -- -- (319) Reimbursements from previous research and development arrangements .................. -- (300) (300) (300) OccuLogix, Inc. severance accruals ........... -- -- 820 -- Miscellaneous income ......................... (84) (63) (182) (318) ----- ----- ----- ------- $(169) $(363) $ 323 $(1,033) ===== ===== ===== =======
7. INCOME TAXES During the second quarter of 2006, the Company completed a comprehensive IRC Section 382 study to determine the specific limitations related to certain net operating loss carryforwards. The results of that study indicate that the availability of the Company's net operating loss carryforwards each year are greater than its original estimate. Based on the results of this study, the Company has recorded a cumulative catch-up adjustment for its change in estimate to properly reflect income taxes as of June 30, 2006. For the three and six months ended June 30, 2006, the impact of the change in estimate is a $3.4 million decrease to income tax expense (or a $0.05 increase per diluted share). In addition, as of June 30, 2006 the adjustment for the change in estimate decreases goodwill, common stock and income taxes payable by $3.9 million, $4.8 million and $2.5 million, respectively. As of June 30, 2006, the Company's net operating loss carryforwards for financial reporting purposes total $187.2 million. Due to the uncertainty of the Company's ability to utilize its net operating loss carryforwards beyond 2006, the Company maintained a valuation allowance as of June 30, 2006 against its net operating loss carryforwards. 8. EARNINGS PER SHARE The following table sets forth the computation of diluted earnings per share:
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ----------------- ----------------- 2006 2005 2006 2005 ------- ------- ------- ------- Net income ..................................... $10,867 $ 3,635 $13,579 $10,362 ======= ======= ======= ======= Weighted-average shares outstanding - basic .... 68,881 70,326 68,819 70,182 Dilutive effect of stock options and warrants .. 949 1,745 1,013 1,875 ------- ------- ------- ------- Weighted-average shares outstanding - diluted .. 69,830 72,071 69,832 72,057 ------- ------- ------- ------- Earnings per share - diluted ................... $ 0.16 $ 0.05 $ 0.19 $ 0.14 ======= ======= ======= =======
9. SEGMENT INFORMATION The Company has four reportable segments: refractive, mobile cataract, optometric franchising and age-related macular degeneration ("AMD"). The refractive segment provides the majority of the Company's revenue and is in the business of providing corrective laser surgery specifically related to refractive disorders, such as myopia (nearsightedness), hyperopia (farsightedness) and astigmatism. This segment is comprised of laser centers and the fixed and mobile access business. The mobile cataract segment provides surgery specifically for the treatment of cataracts. The optometric franchising segment provides marketing, practice development and purchasing power to independently-owned and operated optometric practices in the United States. The AMD segment includes the Company's interest in OccuLogix, Inc. The AMD segment is pursuing commercial applications for 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. None of the businesses in the other segment meet the quantitative criteria to be disclosed separately as a reportable segment. 10 The Company's reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different management and marketing strategies. The Company's reportable segments are as follows:
THREE MONTHS ENDED JUNE 30, 2006 MOBILE OPTOMETRIC (IN THOUSANDS) REFRACTIVE CATARACT FRANCHISING AMD OTHER TOTAL -------------------------------- ---------- -------- ----------- ------- ------ ------- Revenues ................................... $53,369 $9,068 $ 6,661 $ -- $7,117 $76,215 Expenses: Operating ............................... 45,942 7,235 3,627 -- 4,820 61,624 Depreciation and amortization ........... 2,859 660 14 -- 351 3,884 ------- ------ ------- ------- ------ ------- 48,801 7,895 3,641 -- 5,171 65,508 ------- ------ ------- ------- ------ ------- Income from operations ..................... 4,568 1,173 3,020 -- 1,946 10,707 Gain on sale of OccuLogix, Inc. stock ...... -- -- -- 1,450 -- 1,450 Interest income (expense) .................. 554 (30) (87) -- (356) 81 Minority interests ......................... (736) -- (1,437) -- (765) (2,938) Earnings (losses) from equity investments .. 414 -- -- (1,850) 537 (899) ------- ------ ------- ------- ------ ------- Income (loss) before income taxes .......... 4,800 1,143 1,496 (400) 1,362 8,401 Income tax benefit ......................... 2,466 ------- Net income ................................. $10,867 =======
THREE MONTHS ENDED JUNE 30, 2005 MOBILE OPTOMETRIC (IN THOUSANDS) REFRACTIVE CATARACT FRANCHISING AMD OTHER TOTAL -------------------------------- ---------- -------- ----------- ------- ------- ------- Revenues ................................... $47,838 $8,158 $5,617 $ 568 $ 4,639 $66,820 Expenses: .................................. Operating ............................... 40,652 6,401 3,593 3,989 2,771 57,406 Depreciation and amortization ........... 2,914 708 10 13 326 3,971 ------- ------ ------ ------- ------- ------- 43,566 7,109 3,603 4,002 3,097 61,377 ------- ------ ------ ------- ------- ------- Income (loss) from operations .............. 4,272 1,049 2,014 (3,434) 1,542 5,443 Interest income (expense) .................. 804 (28) (110) 421 (292) 795 Minority interests ......................... (681) -- (933) 1,411 (902) (1,105) Earnings from equity investments ........... 454 -- -- -- 226 680 ------- ------ ------ ------- ------- ------- Income (loss) before income taxes .......... 4,849 1,021 971 (1,602) 574 5,813 Income taxes ............................... (2,178) ------- Net income ................................. $ 3,635 =======
SIX MONTHS ENDED JUNE 30, 2006 MOBILE OPTOMETRIC (IN THOUSANDS) REFRACTIVE CATARACT FRANCHISING AMD OTHER TOTAL -------------------------------- ---------- -------- ----------- ------- -------- -------- Revenues ................................... $112,296 $17,010 $10,820 $ -- $ 13,670 $153,796 Expenses: .................................. Operating ............................... 95,132 14,147 6,180 5,877 9,514 130,850 Depreciation and amortization ........... 5,579 1,291 28 34 744 7,676 -------- ------- ------- ------- -------- -------- 100,711 15,438 6,208 5,911 10,258 138,526 -------- ------- ------- ------- -------- -------- Income (loss) from operations .............. 11,585 1,572 4,612 (5,911) 3,412 15,270 Gain on sale of OccuLogix, Inc. stock ...... -- -- -- 1,450 -- 1,450 Interest income (expense) .................. 1,169 (58) (182) 366 (739) 556 Minority interests ......................... (1,735) -- (2,171) 2,715 (1,561) (2,752) Earnings (losses) from equity investments .. 830 -- -- (1,850) 1,044 24 -------- ------- ------- ------- -------- -------- Income (loss) before income taxes .......... 11,849 1,514 2,259 (3,230) 2,156 14,548 Income taxes ............................... (969) -------- Net income ................................. $ 13,579 ========
11
SIX MONTHS ENDED JUNE 30, 2005 MOBILE OPTOMETRIC (IN THOUSANDS) REFRACTIVE CATARACT FRANCHISING AMD OTHER TOTAL -------------------------------- ---------- -------- ----------- ------- -------- -------- Revenues ................................... $103,014 $14,896 $ 9,153 $ 1,000 $ 9,806 $137,869 Expenses: .................................. Operating ............................... 82,941 12,065 5,803 7,873 6,539 115,221 Depreciation and amortization ........... 5,920 1,343 20 59 646 7,988 -------- ------- ------- ------- -------- -------- 88,861 13,408 5,823 7,932 7,185 123,209 -------- ------- ------- ------- -------- -------- Income (loss) from operations .............. 14,153 1,488 3,330 (6,932) 2,621 14,660 Interest income (expense) .................. 1,501 (55) (232) 776 (581) 1,409 Minority interests ......................... (1,687) -- (1,518) 2,910 (1,496) (1,791) Earnings from equity investments ........... 849 -- -- -- 490 1,339 -------- ------- ------- ------- -------- -------- Income (loss) before income taxes .......... 14,816 1,433 1,580 (3,246) 1,034 15,617 Income taxes ............................... (5,255) -------- Net income ................................. $ 10,362 ========
10. SUPPLEMENTAL CASH FLOW INFORMATION Non-cash transactions:
SIX MONTHS ENDED JUNE 30, ------------------------- 2006 2005 ------ ------ Capital lease obligations relating to equipment purchases .................... $4,467 $1,169 Inventory contributed to OccuLogix, Inc. .. 25 -- Option and warrant reduction .............. 47 792
Cash paid for the following:
SIX MONTHS ENDED JUNE 30, ------------------------- 2006 2005 ---- ------ Interest .................................. $678 $1,051 Income taxes .............................. 860 415
12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q (herein, together with all amendments, exhibits and schedules hereto, referred to as the "Form 10-Q") contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which statements can be identified by the use of forward looking terminology, such as "may," "will," "expect," "anticipate," "estimate," "plans," "intends" or "continue" or the negative thereof or other variations thereon or comparable terminology. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth elsewhere in this Form 10-Q in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in the Company's Annual Report on Form 10-K for the period ended December 31, 2005. Unless the context indicates or requires otherwise, references in this Form 10-Q to the "Company" or "TLCVision" shall mean TLC Vision Corporation and its subsidiaries. References to "$" or "dollars" shall mean U.S. dollars unless otherwise indicated. References to "C$" shall mean Canadian dollars. References to the "Commission" shall mean the U.S. Securities and Exchange Commission. OVERVIEW TLC Vision Corporation and its subsidiaries comprise a diversified healthcare services company focused on working with eye doctors to help them provide high quality patient care primarily in the eye care segment. The majority of the Company's revenues come from refractive surgery, which involves using an excimer laser to treat common refractive vision disorders such as myopia (nearsightedness), hyperopia (farsightedness) and astigmatism. The Company's business models include arrangements ranging from owning and 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 MSS, Inc. 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, which provides franchise opportunities to independent optometrists. The Company owns approximately 49% of OccuLogix, Inc., a public company focused on the treatment of a specific eye disease known as dry age-related macular degeneration, via rheopheresis, a process for filtering blood. The Company serves surgeons who performed over 142,000 procedures, including refractive and cataract procedures, at the Company's centers or using the Company's equipment during the six months ended June 30, 2006. 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 April 11, 2006, the Company sold 800,000 shares of OccuLogix, Inc. common stock and recorded a gain of $1.4 million. After the sale of stock, the Company owns approximately 49% of OccuLogix, Inc. Due to the insignificance of the results of operations of OccuLogix, Inc. from April 1, 2006 through April 11, 2006, the Company deconsolidated OccuLogix, Inc. effective April 1, 2006 and has accounted for its investment in OccuLogix, Inc. under the equity method since that date. The Company's strategy includes periodic acquisitions of or investments in entities that operate in the refractive, cataract or eye care markets. During the six months ended June 30, 2006, the Company paid over $3 million to acquire or invest in several entities, none of which were individually material. 13 RESULTS OF OPERATIONS The following table sets forth certain center and procedure operating data for the periods presented:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 2006 2005 2006 2005 ------ ------ ------ ------ OPERATING DATA (unaudited) Number of majority owned eye care centers at end of period ................................... 76 66 76 66 Number of LECC (minority owned) eye care centers at end of period ............................ 8 8 8 8 ------ ------ ------ ------ Number of TLCVision branded eye care centers at end of period ............................... 84 74 84 74 Number of laser vision correction procedures: Majority owned centers ...................... 27,200 26,000 57,200 56,600 LECC (minority owned) centers ............... 4,700 4,600 9,800 9,400 ------ ------ ------ ------ Total TLCVision branded center procedures ... 31,900 30,600 67,000 66,000 Total access procedures ..................... 17,600 19,300 38,600 42,700
THREE MONTHS ENDED JUNE 30, 2006 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2005 Total revenues for the three months ended June 30, 2006 were $76.2 million, an increase of $9.4 million, or 14% over revenues of $66.8 million for the three months ended June 30, 2005. This increase was due to a 12% increase in refractive revenues and a 20% increase in other healthcare services revenues. Revenues from the refractive segment for the three months ended June 30, 2006 were $53.4 million, an increase of $5.6 million or 12% from revenues of $47.8 million for the three months ended June 30, 2005. Refractive revenues increased as a result of an increased mix of higher priced procedures, primarily Custom LASIK and Intralase, and an increase in center procedures, offset in part by a decrease in access procedures. Revenues from centers for the three months ended June 30, 2006 were $43.6 million, an increase of $5.6 million, or 15% from revenues of $38.0 million for the three months ended June 30, 2005. The increase in revenues from centers was due to an increased mix of higher priced procedures, which accounted for approximately $3.8 million of the revenue increase, and an increase in center procedures, which accounted for approximately $1.8 million of the revenue increase. For the three months ended June 30, 2006, majority-owned center procedures were approximately 27,200, an increase of 1,200 or 4% from procedures of 26,000 for the three months ended June 30, 2005. Revenues from access services for the three months ended June 30, 2006 and 2005 were $9.8 million. For the three months ended June 30, 2006, access procedures declined by 1,700 or 9% and accounted for a decrease in revenues of approximately $0.9 million. This decrease in access revenues was offset by higher average pricing, which accounted for an increase in access revenues of approximately $0.9 million. Revenues from other healthcare services for the three months ended June 30, 2006, were $22.8 million, an increase of $3.8 million or 20% from revenues of $19.0 million for the three months ended June 30, 2005. Approximately 30% of total revenues for the three months ended June 30, 2006 were derived from other healthcare services compared to 28% for the three months ended June 30, 2005. The increase in other healthcare services revenues resulted from a $0.9 million increase from the mobile cataract segment, a $1.0 million increase from the optometric franchising segment and a $2.5 million increase from the other non-refractive businesses. These increases were partially offset by a $0.6 million decrease from the AMD segment. The cost of refractive revenues for the three months ended June 30, 2006 was $37.1 million, an increase of $4.0 million, or 12% over the cost of refractive revenues of $33.1 million for the three months ended June 30, 2005. This increase was primarily attributable to higher costs per procedure partially offset by a decrease in total refractive procedures. Gross margins for the refractive business as a whole remained consistent at 31% during the three months ended June 30, 2006 and 2005. 14 The cost of revenues from centers for the three months ended June 30, 2006 was $29.9 million, an increase of $4.0 million, or 15% from the cost of revenues of $25.9 million for the three months ended June 30, 2005. This increase was primarily attributable to higher costs per procedure, which accounted for approximately $2.8 million of the increase, and an increase in center procedures, which accounted for approximately $1.2 million of the increase. Gross margins for centers decreased to 31% during the three months ended June 30, 2006 from 32% in the prior year period. The cost of revenues from access services for the three months ended June 30, 2006 and 2005 was $7.2 million. Higher costs per procedure accounted for an increase in cost of revenues of approximately $0.7 million. This increase was offset by a decrease in access procedures, which accounted for a decrease in cost of revenues of approximately $0.7 million. Gross margins remained consistent at 27% during the three months ended June 30, 2006 and 2005. The cost of revenues from other healthcare services for the three months ended June 30, 2006 was $13.9 million, an increase of $2.7 million or 24% from cost of revenues of $11.2 million for the three months ended June 30, 2005. The increase in cost of revenues was due to a $0.8 million increase from the mobile cataract segment and a $2.6 million increase from the other non-refractive businesses. These increases were partially offset by a $0.2 million decrease from the optometric franchising segment and a $0.5 million decrease from the AMD segment. For the three months ended June 30, 2006, gross margins decreased to 39% from 41% for the prior year period due primarily from lower margins at certain ambulatory surgery centers in which the Company owns a majority interest. General and administrative expenses decreased to $7.1 million for the three months ended June 30, 2006 from $9.2 million for the three months ended June 30, 2005. The $2.1 million or 23% decrease was primarily due to a $2.0 million decrease from the AMD segment, which was a result of the deconsolidation of OccuLogix, Inc. Marketing expenses increased to $6.7 million for the three months ended June 30, 2006 from $5.8 million for the three months ended June 30, 2005. The $0.9 million or 15% increase was primarily due to $1.6 million of costs related to businesses acquired or opened within the past year including marketing costs related to the Company's LASIK Select centers. These costs were partially offset by a decrease related to the deconsolidation of OccuLogix, Inc. and a decrease in refractive marketing expenses. Research and development, clinical and regulatory expenses were $1.3 million for the three months ended June 30, 2005. Research and development, clinical and regulatory expenses were incurred by OccuLogix, Inc. as it conducted clinical trials related to its rheopheresis application to the FDA. Due to the deconsolidation of OccuLogix, Inc., the Company did not recognize any research and development, clinical and regulatory expenses during the three months ended June 30, 2006. During the three months ended June 30, 2006, the Company recorded a $1.4 million gain on the sale of 0.8 million shares of OccuLogix's common stock. There was no such sale of OccuLogix's common stock during the three months ended June 30, 2005. Interest income decreased to $0.2 million for the three months ended June 30, 2006 from $1.0 million for the three months ended June 30, 2005. This $0.8 million decrease was primarily due to a $0.4 million decrease from the AMD segment due to the deconsolidation of OccuLogix, Inc. The remaining decrease was primarily due to a decrease in the Company's cash and cash equivalents and short-term investments balances. Minority interest expense increased to $2.9 million for the three months ended June 30, 2006 from $1.1 million for the three months ended June 30, 2005. This $1.8 million increase included a $1.4 million increase from the AMD segment due to the deconsolidation of OccuLogix, Inc. The remaining increase was due to increases from the Company's other business segments. Earnings from equity investments decreased to $0.9 million of losses for the three months ended June 30, 2006 from $0.7 million of earnings for the three months ended June 30, 2005. This $1.6 million decrease included a $1.8 million decrease from the AMD segment due to the Company accounting for its investment in OccuLogix, Inc. under the equity method beginning in the second quarter of 2006. This decrease was partially offset by an increase in earnings from the Company's other equity investments including two ASCs in which the Company acquired a 15 minority ownership in the fourth quarter of 2005. For the three months ended June 30, 2006, the Company recognized an income tax benefit of $2.5 million. This benefit includes a $3.4 million benefit related to a change in estimate based on the results of a comprehensive IRC Section 382 study that was completed during the second quarter of 2006. Partially offsetting this $3.4 million benefit is $0.9 million of income tax expense. Approximately $0.8 million of this expense related to the utilization of certain net operating loss carryforwards that reduce goodwill. For the three months ended June 30, 2005, the Company recognized income tax expense of $2.2 million. Approximately $1.0 million and $0.7 million of this expense related to the utilization of certain net operating loss carryforwards that reduce equity and goodwill, respectively. Net income for the three months ended June 30, 2006 increased to $10.9 million or $0.16 per diluted share from $3.6 million or $0.05 per diluted share for the three months ended June 30, 2005. This $7.3 million increase included a $1.2 million increase from the AMD segment primarily due to the gain on sale of OccuLogix, Inc. stock during the three months ended June 30, 2006. Excluding the impact of the AMD segment, net income increased to $11.3 million or $0.16 per diluted share for the three months ended June 30, 2006 from $5.2 million or $0.07 per diluted share for the prior year period. SIX MONTHS ENDED JUNE 30, 2006 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2005 Total revenues for the six months ended June 30, 2006 were $153.8 million, an increase of $15.9 million, or 12% over revenues of $137.9 million for the six months ended June 30, 2005. This increase was due to a 9% increase in refractive revenues and a 19% increase in other healthcare services revenues. Revenues from the refractive segment for the six months ended June 30, 2006 were $112.3 million, an increase of $9.3 million or 9% from revenues of $103.0 million for the six months ended June 30, 2005. Refractive revenues increased as a result of an increased mix of higher priced procedures, primarily Custom LASIK and Intralase, and an increase in center procedures, offset in part by a decrease in access procedures. Revenues from centers for the six months ended June 30, 2006 were $91.5 million, an increase of $9.7 million or 12% from revenues of $81.8 million for the six months ended June 30, 2005. The increase in revenues from centers was due to an increased mix of higher priced procedures, which accounted for approximately $8.8 million of the revenue increase, and an increase in center procedures, which accounted for approximately $0.9 million of the revenue increase. For the six months ended June 30, 2006, majority-owned center procedures were approximately 57,200, an increase of 600 or 1% from procedures of 56,600 for the six months ended June 30, 2005. Revenues from access services for the six months ended June 30, 2006 were $20.8, a decrease of $0.4 million or 2% from revenues of $21.2 million for the six months ended June 30, 2005. The decrease in access revenues was due to a decrease in access procedures, which accounted for approximately $2.1 million of the revenue decrease, partially offset by higher average pricing, which accounted for an increase in access revenues of approximately $1.7 million. For the six months ended June 30, 2006, access procedures were approximately 38,600, an decrease of 4,100 or 10% from access procedures of 42,700 for the six months ended June 30, 2005. Revenues from other healthcare services for the six months ended June 30, 2006, were $41.5 million, an increase of $6.6 million or 19% from revenues of $34.9 million for the six months ended June 30, 2005. Approximately 27% of total revenues for the six months ended June 30, 2006 were derived from other healthcare services compared to 25% for the six months ended June 30, 2005. The increase in other healthcare services revenues resulted from a $2.1 million increase from the mobile cataract segment, a $1.7 million increase from the optometric franchising segment and a $3.8 million increase from the other non-refractive businesses. These increases were partially offset by a $1.0 million decrease from the AMD segment. The cost of refractive revenues for the six months ended June 30, 2006 was $76.5 million, an increase of $7.4 million, or 11% over the cost of refractive revenues of $69.1 million for the six months ended June 30, 2005. This increase was primarily attributable to higher costs per procedure partially offset by a decrease in total refractive 16 procedures. Gross margins for the refractive business as a whole decreased to 32% during the six months ended June 30, 2006 from 33% in the prior year period. The cost of revenues from centers for the six months ended June 30, 2006 was $61.8 million, an increase of $7.3 million or 13% from the cost of revenues of $54.5 million for the six months ended June 30, 2005. This increase was primarily attributable to higher costs per procedure, which accounted for approximately $6.7 million of the increase, and an increase in center procedures, which accounted for approximately $0.6 million of the increase. Gross margins for centers decreased to 32% during the six months ended June 30, 2006 from 33% in the prior year period. The cost of revenues from access services for the six months ended June 30, 2006 was $14.7 million, an increase of $0.1 million from the cost of revenues of $14.6 million for the six months ended June 30, 2005. This increase was primarily attributable to higher costs per procedure, which accounted for approximately $1.6 million of the increase, partially offset by a decrease in access procedures, which accounted for a decrease in cost of revenues of approximately $1.5 million. Gross margins decreased to 29% during the six months ended June 30, 2006 from 31% in the prior year period. The cost of revenues from other healthcare services for the six months ended June 30, 2006 was $26.9 million, an increase of $5.5 million or 26% from cost of revenues of $21.4 million for the six months ended June 30, 2005. The increase in cost of revenues includes a $0.6 million increase from the AMD segment's cost of revenues, which included a $1.6 million write-down of OccuLogix, Inc. inventory. The remaining increase in cost of revenues was due to a $1.6 million increase from the mobile cataract segment, a $0.2 million increase from the optometric franchising segment and a $3.1 million increase from the other non-refractive businesses. For the six months ended June 30, 2006, gross margins decreased to 35% from 39% for the prior year period. Excluding the $1.6 million write-down of OccuLogix, Inc. inventory, gross margins remained consistent at 39%. General and administrative expenses decreased to $17.9 million for the six months ended June 30, 2006 from $18.3 million for the six months ended June 30, 2005. The $0.4 million or 2% decrease included a $2.1 million decrease from the AMD segment due to the deconsolidation of OccuLogix, Inc. in the second quarter of 2006. This decrease was partially offset by a $1.1 million increase from businesses acquired or opened within the past year and $0.5 million of stock-based compensation, excluding the AMD segment, attributable to the adoption of Statement 123(R). Marketing expenses increased to $13.7 million for the six months ended June 30, 2006 from $10.8 million for the six months ended June 30, 2005. The $2.9 million or 26% increase was primarily due to costs related to businesses acquired or opened within the past year including marketing costs related to the Company's LASIK Select centers. Research and development, clinical and regulatory expenses decreased to $1.5 million for the six months ended June 30, 2006 from $2.7 million for the six months ended June 30, 2005. Research and development, clinical and regulatory expenses were incurred by OccuLogix, Inc. as it conducted clinical trials related to its rheopheresis application to the FDA. The decrease was due to the deconsolidation of OccuLogix, Inc. in the second quarter of 2006. For the six months ended June 30, 2006, other operating expenses, net of $0.3 million primarily included $0.8 million of severance accruals at OccuLogix, Inc., partially offset by a $0.3 million reimbursement received under a previous research and development arrangement and $0.2 million of miscellaneous income. For the six months ended June 30, 2005, other operating income, net of $1.0 million primarily included a $0.3 million gain on the sale of a subsidiary, a $0.3 million reimbursement received under a previous research and development arrangement and $0.3 million of miscellaneous income. During the six months ended June 30, 2006, the Company recorded a $1.4 million gain on the sale of 0.8 million shares of OccuLogix's common stock. There was no such sale of OccuLogix's common stock during the six months ended June 30, 2005. Interest income decreased to $1.2 million for the six months ended June 30, 2006 from $2.1 million for the six 17 months ended June 30, 2005. This $0.9 million decrease was primarily due to a $0.4 million decrease from the AMD segment due to the deconsolidation of OccuLogix, Inc. in the second quarter of 2006 The remaining decrease was primarily due to a decrease in the Company's cash and cash equivalents and short-term investments balances. Minority interest expense increased to $2.8 million for the six months ended June 30, 2006 from $1.8 million for the six months ended June 30, 2005. This $1.0 million increase included a $0.2 million increase from the AMD segment due to the deconsolidation of OccuLogix, Inc. in the second quarter of 2006. The remaining increase of $0.8 million was due to higher income from the Company's other business segments. Earnings from equity investments decreased to $24,000 for the six months ended June 30, 2006 from $1.3 million for the six months ended June 30, 2005. This decrease included a $1.8 million decrease from the AMD segment due to the Company accounting for its investment in OccuLogix, Inc. under the equity method beginning in the second quarter of 2006. This decrease was partially offset by an increase in earnings from the Company's other equity investments including two ASCs in which the Company acquired a minority ownership in the fourth quarter of 2005. For the six months ended June 30, 2006, the Company recognized income tax expense of $1.0 million. This expense includes a $3.4 million benefit related to a change in estimate based on the results of a comprehensive IRC Section 382 study that was completed during the second quarter of 2006. For the six months ended June 30, 2005, the Company recognized income tax expense of $5.3 million. Approximately $2.5 million and $1.7 million of this expense related to the utilization of certain net operating loss carryforwards that reduce equity and goodwill, respectively. Net income for the six months ended June 30, 2006 increased to $13.6 million or $0.19 per diluted share from $10.4 million or $0.14 per diluted share for the six months ended June 30, 2005. Excluding the impact of the AMD segment, net income increased to $16.8 million or $0.24 per diluted share for the six months ended June 30, 2006 from $13.6 million or $0.19 per diluted share for the prior year period. LIQUIDITY AND CAPITAL RESOURCES During the six months ended June 30, 2006, 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 and short-term investments were $45.7 million at June 30, 2006 compared to $69.9 million at December 31, 2005. This decrease is primarily due to the deconsolidation of OccuLogix, Inc. in the second quarter of 2006. Working capital at June 30, 2006 was $39.6 million, a decrease of $27.3 million from $66.9 million at December 31, 2005. This decrease is also primarily due to the deconsolidation of OccuLogix, Inc. 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, 2006, the Company invested $6.3 million in fixed assets and received vendor lease financing for $4.5 million. 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. CASH FROM OPERATING ACTIVITIES Net cash provided by operating activities was $22.8 million for the six months ended June 30, 2006. The cash flows provided by operating activities during the six months ended June 30, 2006 were primarily due to net income 18 of $13.6 million plus non-cash items including depreciation and amortization of $7.7 million, deferred taxes of $2.0 million, minority interests of $2.8 million, write-down of OccuLogix, Inc. inventory of $1.6 million and stock-based compensation of $0.9 million. These cash flows were partially offset by a gain on sale of OccuLogix, Inc. stock of $1.5 million and an increase in net operating assets of $4.0 million. The increase in net operating assets consisted of a $1.1 million increase in prepaid expenses and other current assets and a $3.1 million decrease in accounts payable and accrued liabilities partially offset by a $0.1 million decrease in accounts receivable. The increase in prepaid expenses and other current assets is primarily due to increases in prepaid insurance balances since December 31, 2005. The decrease in accounts payable and accrued liabilities is primarily due to a decrease in income taxes payable resulting from the cumulative catch-up adjustment recorded to properly reflect income taxes as of June 30, 2006 (see Note 7). Excluding the impact of the AMD segment, net cash provided by operating activities for the six months ended June 30, 2006 would have been $27.6 million, an increase of $4.3 million over the prior year period. CASH FROM INVESTING ACTIVITIES Net cash used in investing activities was $12.8 million for the six months ended June 30, 2006. The cash used in investing activities primarily included the cash balance of OccuLogix, Inc. that was deconsolidated in connection with the Company's sale of OccuLogix, Inc. stock in the second quarter of 2006. The cash used in investing activities also included capital expenditures of $6.3 million and acquisitions and investments of $3.2 million. These cash outflows were partially offset by net proceeds from the sales and purchases of short-term investments of $6.7 million, distributions and loan payments received from equity investments of $1.9 million, proceeds from the sales of fixed asset of $0.5 million and a reimbursement of a previous research and development arrangement of $0.3 million. Excluding the impact of the AMD segment, cash used in investing activities would have been $10.1 million for the six months ended June 30, 2006. CASH FROM FINANCING ACTIVITIES Net cash used in financing activities was $5.8 million for the six months ended June 30, 2006. Net cash used in financing activities during the six months ended June 30, 2006 was primarily related to the repayment of certain notes payable and capitalized lease obligations of $2.0 million and distributions to minority interests of $4.8 million, partially offset by proceeds from issuances of common stock of $0.4 million, proceeds from debt financing of $0.3 million and proceeds from issuances of OccuLogix, Inc. common stock of $0.2 million. Excluding the impact of the AMD segment, net cash used in investing activities would have been $3.8 million for the six months ended June 30, 2006. 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 having fixed rate debt. The Company views its investment in foreign subsidiaries as a long-term commitment and does not hedge any translation exposure. ITEM 4. CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's reports under the Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As of the end of the period covered by the report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and 19 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 were 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, 2005. ITEM 1A. RISK FACTORS Not applicable. 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 22, 2006. 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; and (c) to approve certain amendments to the Company's Amended and Restated Share Option Plan. Each of the proposals, including the election of directors, was approved at the annual meeting. With respect to the election of directors, all of the following directors were elected by a show of hands: Elias Vamvakas Thomas N. Davidson Richard L. Lindstrom, M.D. Warren S. Rustand James C. Wachtman Toby S. Wilt Michael D. DePaolis, O.D. With respect to the resolution regarding 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 resolution passed by a show of hands. With respect to the approval of certain amendments to the Company's Amended and Restated Share Option Plan, 20 the following votes were cast:
Votes in Favor Votes Against - -------------- ------------- 23,578,847 13,607,523
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
21 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TLC VISION CORPORATION By: /s/ James C. Wachtman ------------------------------------ James C. Wachtman Chief Executive Officer August 9, 2006 By: /s/ Steven P. Rasche ------------------------------------ Steven P. Rasche Chief Financial Officer August 9, 2006 22 EXHIBIT INDEX
NO. DESCRIPTION - --- ----------- 31.1 CEO's Certification required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. 31.2 CFO's Certification required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. 32.1 CEO's Certification of periodic financial report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, U.S.C. Section 1350. 32.2 CFO's Certification of periodic financial report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, U.S.C. Section 1350
23 EX-31.1 2 c07607exv31w1.txt CEO'S 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 9, 2006 /s/ James C. Wachtman ---------------------------------------- James C. Wachtman Chief Executive Officer EX-31.2 3 c07607exv31w2.txt CFO'S 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 9, 2006 /s/ Steven P. Rasche ---------------------------------------- Steven P. Rasche Chief Financial Officer EX-32.1 4 c07607exv32w1.txt SECTION 1350 CFO'S CERTIFICATION EXHIBIT 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of TLC Vision Corporation (the "Company") on Form 10-Q for the period ended June 30, 2006 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 9, 2006 /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. EX-32.2 5 c07607exv32w2.txt SECTION 1350 CFO'S CERTIFICATION EXHIBIT 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of TLC Vision Corporation (the "Company") on Form 10-Q for the period ended June 30, 2006 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 9, 2006 /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. -----END PRIVACY-ENHANCED MESSAGE-----