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 MARCH 31, 2004
COMMISSION FILE NUMBER: 0-29302
TLC VISION CORPORATION
(Exact name of registrant as specified in its charter)
NEW BRUNSWICK, CANADA 980151150
(State or jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5280 SOLAR DRIVE, SUITE 300 L4W 5M8
MISSISSAUGA, ONTARIO (Zip Code)
(Address of principal executive offices)
Registrant's telephone, including area code: (905) 602-2020
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [X] Yes [ ] No
As of May 7, 2004 there were 68,704,502 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 months
ended March 31, 2004 and 2003
Consolidated Balance Sheets as of March 31, 2004 and December
31, 2003
Consolidated Statements of Cash Flows for the three months ended
March 31, 2004 and 2003
Consolidated Statement of Changes in Stockholders' Equity for the
three months ended March 31, 2004
Notes to Interim Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities, Use of Proceeds and Issuer
Purchases and Equity Securities
Item 4. Submission of Matter to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on 8-K
Signatures
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
TLC VISION CORPORATION
CONSOLIDATED STATEMENTS OF
OPERATIONS (UNAUDITED)
(In thousands except per share amounts)
THREE MONTHS ENDED MARCH 31,
------------------------------
2004 2003
------------ ------------
Revenues:
Refractive:
Centers ............................................. $ 38,838 $ 30,923
Access .............................................. 12,049 10,929
Other healthcare services ................................ 14,288 11,738
------------ ------------
Total revenues ............................................. 65,175 53,590
------------ ------------
Cost of revenues:
Refractive:
Centers ............................................. 26,152 22,543
Access .............................................. 8,172 7,162
Other healthcare services ................................ 9,138 7,480
------------ ------------
Total cost of revenues ..................................... 43,462 37,185
------------ ------------
Gross margin ............................................. 21,713 16,405
------------ ------------
General and administrative ................................. 7,901 8,019
Marketing .................................................. 2,894 3,661
Research and development ................................... 374 --
Amortization of intangibles ................................ 1,012 1,672
Write down in the fair value of investments ................ -- 203
------------ ------------
12,181 13,555
------------ ------------
Operating income ........................................... 9,532 2,850
Other income, net .......................................... 548 368
Interest expense, net ...................................... (403) (368)
Minority interests ......................................... (1,874) (1,541)
Earnings from equity investments ........................... 399 --
------------ ------------
Income before income taxes ................................. 8,202 1,309
Income tax expense ......................................... (150) (239)
------------ ------------
Net income ................................................. $ 8,052 $ 1,070
============ ============
Earnings per share - basic ................................. $ 0.12 $ 0.02
============ ============
Earnings per share - diluted ............................... $ 0.12 $ 0.02
============ ============
Weighted average number of common shares outstanding -
basic .................................................... 66,932 64,060
Weighted average number of common shares outstanding -
diluted .................................................. 69,433 64,060
See the accompanying notes to unaudited interim consolidated financial
statements.
3
TLC VISION CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2004 2003
------------- -------------
ASSETS
Current assets
Cash and cash equivalents .............. $ 37,080 $ 29,580
Short-term investments ................. 313 748
Accounts receivable .................... 17,959 15,617
Prepaids and other current assets ...... 12,159 11,646
------------- -------------
Total current assets .................. 67,511 57,591
Restricted cash .......................... 1,369 1,376
Investments and other assets ............. 7,518 3,102
Intangibles, net ......................... 20,548 22,959
Goodwill, net ............................ 52,728 48,829
Fixed assets ............................. 52,189 56,891
------------- -------------
Total assets ............................. $ 201,863 $ 190,748
============= =============
LIABILITIES
Current liabilities
Accounts payable ....................... $ 9,385 $ 10,627
Accrued liabilities .................... 26,512 25,811
Current portion of long-term debt ...... 12,305 10,285
------------- -------------
Total current liabilities ................ 48,202 46,723
Other long-term liabilities .............. 2,554 2,607
Long term-debt, less current maturities .. 13,475 19,242
Minority interests ....................... 9,705 10,907
SHAREHOLDERS' EQUITY
Capital stock ............................ 409,580 397,878
Option and warrant equity ................ 5,047 8,143
Accumulated deficit ...................... (286,700) (294,752)
------------- -------------
Total shareholders' equity ............... 127,927 111,269
------------- -------------
Total liabilities and shareholders'
equity ................................. $ 201,863 $ 190,748
============= =============
See the accompanying notes to unaudited interim consolidated financial
statements.
4
TLC VISION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) (In thousands)
THREE MONTHS
ENDED MARCH 31,
------------------------------
2004 2003
------------ ------------
OPERATING ACTIVITIES
Net income ............................................................ $ 8,052 $ 1,070
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ....................................... 4,557 5,554
Write-off of investment in research and development arrangement ..... 374 --
Minority interests .................................................. 1,874 1,541
Undistributed earnings from equity investments ...................... (399) --
Loss on disposal of fixed assets .................................... 730 --
Gain on the sale of subsidiary ...................................... (1,278) --
Compensation expense ................................................ 420 --
Adjustment to the fair value of investments and long-term receivables
and impairment of fixed assets .................................... -- 203
CHANGES IN OPERATING ASSETS AND LIABILITIES
Accounts receivable ................................................. (3,984) (3,774)
Prepaid expenses and other current assets ........................... (552) 282
Accounts payable and accrued liabilities ............................ 1,067 (4,350)
------------ ------------
Cash provided by operating activities ................................. 10,861 526
------------ ------------
INVESTING ACTIVITIES
Purchase of fixed assets .............................................. (1,570) (1,613)
Proceeds from sale of fixed assets .................................... 147 --
Net proceeds from the sale of investments and subsidiaries ............ (271) 144
Investment in research and development arrangements ................... (374) --
Acquisitions and investments .......................................... (4,210) (2,090)
Proceeds from sale of short-term investments .......................... -- (238)
Other ................................................................. 544 53
------------ ------------
Cash used in investing activities ..................................... (5,734) (3,744)
------------ ------------
FINANCING ACTIVITIES
Restricted cash movement .............................................. 7 50
Principal payments of debt financing and capital leases ............... (4,566) (2,781)
Distributions to minority interests ................................... (1,355) (630)
Proceeds from the issuance of common stock ............................ 8,287 6
------------ ------------
Cash provided by (used in) financing activities ...................... 2,373 (3,355)
------------ ------------
Net increase (decrease) in cash and cash equivalents during the period 7,500 (6,573)
Cash and cash equivalents, beginning of period ........................ 29,580 36,081
------------ ------------
Cash and cash equivalents, end of period .............................. $ 37,080 $ 29,508
============ ============
See the accompanying notes to unaudited interim consolidated financial
statements.
5
TLC VISION CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED) (In thousands)
OPTION
AND
COMMON STOCK WARRANT ACCUMULATED
SHARES AMOUNT EQUITY DEFICIT TOTAL
---------- ---------- ---------- ----------- ----------
Balance December 31, 2003 .............. 65,756 $ 397,878 $ 8,143 $ (294,752) $ 111,269
Shares issued as part of the
employee share purchase plan ......... 4 39 39
Exercise of stock options ............. 2,044 8,248 8,248
Options expired or exercised .......... 3,415 (3,415) --
Variable stock option expense ......... 319 319
Net income and comprehensive
income ............................. 8,052 8,052
---------- ---------- ---------- ----------- ----------
Balance March 31, 2004 ................ 67,804 $ 409,580 $ 5,047 $ (286,700) $ 127,927
========== ========== ========== =========== ==========
See the accompanying notes to unaudited interim consolidated financial
statements.
6
TLC VISION CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004 (Unaudited)
(Tabular amounts in thousands, except per share amounts)
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with the
instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. The
unaudited interim consolidated financial statements included herein should
be read in conjunction with the Annual Report on Form 10-K for the year
ended December 31, 2003 filed by TLC Vision Corporation (the "Company" or
"TLC Vision") with the Securities and Exchange Commission. In the opinion
of management, all normal recurring adjustments and estimates considered
necessary for a fair presentation have been included. The results of
operations for the interim periods are not necessarily indicative of the
results that may be expected for the entire year ending December 31, 2004.
The unaudited interim consolidated financial statements as of December 31,
2003 and for the three months ended March 31, 2003 include the accounts
and transactions of the Company and its majority-owned subsidiaries. The
unaudited interim consolidated financial statements as of and for the
three months ended March 31, 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-month period ended March 31, 2003 include certain reclassifications
to conform with classifications for the three-month period ended March 31,
2004.
Earnings per share was computed using the weighted average number of
common shares outstanding during each period. The diluted weighted average
shares outstanding calculation for the three months ended March 31, 2004
includes 2.5 million shares for the dilutive effect of outstanding stock
options using the treasury stock method and the average stock price during
the quarter.
In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51" (FIN 46). In December 2003, the FASB
modified FIN 46 to make certain technical corrections and address certain
implementation issues that had arisen. FIN 46 provides a new framework for
identifying variable interest entities (VIEs) and determining when a
company should include the assets, liabilities, noncontrolling interests
and results of activities of a VIE in its consolidated financial
statements.
In general, a VIE is any legal structure used to conduct activities or
hold assets that either (1) has an insufficient amount of equity to carry
out its principal activities without additional subordinated financial
support, (2) has a group of equity owners that are unable to make
significant decisions about its activities, or (3) has a group of equity
owners that do not have the obligation to absorb losses or the right to
receive returns generated by its operations.
FIN 46 requires a VIE to be consolidated if a party with an ownership,
contractual or other financial interest in the VIE (a variable interest
holder) is obligated to absorb a majority of the risk of loss from the
VIE's activities, is entitled to receive a majority of the VIE's residual
returns (if no party absorbs a majority of the VIE's losses), or both. A
variable interest holder that consolidates the VIE is called the primary
beneficiary. Upon consolidation, the primary beneficiary generally must
initially record all of the VIE's assets, liabilities and noncontrolling
interests at fair value and subsequently account for the VIE as if it were
consolidated based on majority voting interest.
7
FIN 46 was effective immediately for VIEs created after January 31, 2003.
The provisions of FIN 46, as revised, were adopted as of January 1, 2004,
for the Company's interests in all VIEs.
Prior to the adoption of FIN 46, the Company did not consolidate the
physician practices that were managed but not owned by the Company. These
managed physician practices were determined to be variable interest
entities for which the Company is the primary beneficiary. As a result,
the physician practices have been consolidated as of January 1, 2004. The
adoption of FIN 46 resulted in an increase of total assets and total
liabilities of $354,000 and an increase in revenues and cost of revenues
for the managed refractive centers, but did not have any material impact
on gross margin, operating income or net income. Prior periods were not
restated. The following pro forma amounts reflect the effect of FIN 46
assuming it is applied retroactively:
THREE MONTHS ENDED MARCH 31,
2004 2003
-------------------------------------------------
Pro forma Pro forma
---------- ----------
Revenues:
Refractive:
Centers $ 38,838 $ 38,838 $ 30,923 $ 35,806
Access 12,049 12,049 10,929 10,929
Other healthcare services 14,288 14,288 11,738 11,738
---------- ---------- ---------- ----------
Total Revenues 65,175 65,175 53,590 58,473
Cost of revenue:
Refractive:
Centers 26,152 26,152 22,543 27,385
Access 8,172 8,172 7,162 7,162
Other healthcare services 9,138 9,138 7,480 7,480
---------- ---------- ---------- ----------
Total cost of revenues 43,462 43,462 37,185 42,027
---------- ---------- ---------- ----------
Gross margin $ 21,713 $ 21,713 $ 16,405 $ 16,446
========== ========== ========== ==========
General and administrative $ 7,901 $ 7,901 $ 8,019 $ 8,051
========== ========== ========== ==========
Net income $ 8,052 $ 8,052 $ 1,070 $ 1,070
========== ========== ========== ==========
Basis and diluted earnings per share $ 0.12 $ 0.12 $ 0.02 $ 0.02
========== ========== ========== ==========
As a result of the elimination of the distinction between owned and
managed centers upon the adoption of FIN 46, owned centers and managed
centers are no longer identified separately on the Company's consolidated
statement of operations and instead are now classified as "centers."
The Company's investment in Vascular Sciences is considered to be a
variable interest in a VIE, however the Company is not the primary
beneficiary and therefore did not consolidate Vascular Sciences.
2. ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation under the provisions of
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock
Issued to Employees," and its related interpretations. Accordingly, the
Company records expense over the vesting period in an amount equal to the
intrinsic value of the award on the grant date. The Company recorded
compensation expense of $420,000 during the quarter ended March 31, 2004,
including $319,000 of variable stock option expense for options repriced
in 2002. The following table illustrates the pro forma net income and net
income per share as if the fair value-based method as set forth under SFAS
No. 123 "Accounting for Stock Based Compensation," applied to all awards:
8
THREE MONTHS ENDED MARCH 31,
---------------------------------
2004 2003
--------------- ---------------
Net income as reported ......................... $ 8,052 $ 1,070
Adjustments for SFAS No. 123 ................... 43 (269)
--------------- ---------------
Pro forma net income ........................... $ 8,095 $ 801
=============== ===============
Pro forma earnings per share - basic and diluted $ .12 $ .01
=============== ===============
3. ACQUISITIONS AND DISPOSITIONS
On January 1, 2004, the Company settled a lawsuit brought by Thomas S.
Tooma, M.D. and TST Acquisitions, LLC ("TST") in October 2002. Under the
terms of the settlement, the Company sold approximately 24% of Laser Eye
Care of California ("LECC") and 30% of its California access business to
TST for $2.3 million. The Company continues to hold 30% ownership in LECC
and a 70% ownership in the California access business. The Company
recorded a $1.3 million gain on the sale of these business interests which
is included in other income, net in the accompanying statements of
operations. The Company deconsolidated LECC and began reporting its
interest in LECC under the equity method of accounting because it no
longer owns a controlling interest in the entity.
On March 1, 2004, OR Partners, Inc., a subsidiary of TLC Vision, entered
into a purchase agreement to acquire 70% of an ASC in Texas, which
provides access to surgical and diagnostic equipment to perform cataract
surgery in hospitals and ambulatory surgery centers. The Company paid $3.8
million in cash substantially all of which was goodwill. The results of
operations have been included in the consolidated statements of operations
of the Company since the acquisition date.
4. EQUIPMENT FINANCING
During the quarter ended March 31, 2004, the Company entered into a
three-year note payable with a supplier for equipment to upgrade its laser
technology. Payments for the three-year period will total $0.5 million,
paid either on a flat monthly payment basis or based on the number of
procedure cards acquired from the supplier during the month with any
remaining balance due at the end of the financing period.
5. SEGMENT INFORMATION
The Company has two reportable segments: refractive and cataract. The
refractive segment provides the primary source of revenues for the Company
and is in the business of providing corrective laser surgery specifically
related to refractive disorders, such as myopia (nearsightedness),
hyperopia (farsightedness) and astigmatism. This segment is comprised of
Company-owned laser centers, Company-managed laser centers and the access
and mobile refractive business services. The cataract segment provides
surgery specifically for the treatment of cataracts. The other segment
consists of healthcare businesses that provide network marketing and
management to optometrists, manage cataract and eye care centers and
develop and manage professional healthcare facilities. None of these
activities meet the quantitative criteria to be disclosed separately as a
reportable segment.
Doctors compensation as presented in the segment information of the
financial statements represents the cost to the Company of engaging
ophthalmic professionals to perform laser vision correction services at
the Company's owned laser centers. Where the Company manages laser centers
due to certain state requirements, it is the responsibility of the
professional corporations or physicians to whom the Company furnishes
management services to provide the required professional services and
engage ophthalmic professionals. In 2003, the costs associated with
arranging for these professional services were reported as a cost of the
professional corporation and not of the Company. In 2004, the costs
associated with arranging for these professional services were reported as
a cost of the Company.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different management and marketing strategies. The
Company's business units were acquired or developed as a unit, and
management at the time of acquisition was retained.
The following tables set forth information by segments:
9
THREE MONTHS ENDED MARCH 31, 2004
(IN THOUSANDS) REFRACTIVE CATARACT OTHER TOTAL
- --------------------------------------------- ------------ ------------ ------------ ------------
Revenues .................................... $ 50,887 $ 5,992 $ 8,296 $ 65,175
Expenses:
Doctor compensation ....................... 7,688 -- 18 7,706
Operating ................................. 32,315 5,087 5,604 43,006
Research and development .................. -- -- 374 374
Depreciation expense ...................... 2,767 587 191 3,545
Amortization of intangibles ............... 798 105 109 1,012
------------ ------------ ------------ ------------
43,568 5,779 6,296 55,643
------------ ------------ ------------ ------------
Income from operations ...................... 7,319 213 2,000 9,532
Other income and interest expense, net ...... 390 (23) (222) 145
Minority interests .......................... (746) -- (1,128) (1,874)
Earnings from equity investments ............ 399 -- -- 399
Income taxes ................................ (73) (1) (76) (150)
------------ ------------ ------------ ------------
Net income .................................. $ 7,289 $ 189 $ 574 $ 8,052
============ ============ ============ ============
THREE MONTHS ENDED MARCH 31, 2003
(IN THOUSANDS) REFRACTIVE CATARACT OTHER TOTAL
- -------------------------------------------------- ---------- ---------- ---------- ----------
Revenues ......................................... $ 41,852 $ 5,376 $ 6,362 $ 53,590
Expenses:
Doctor compensation ............................ 3,001 -- 36 3,037
Operating ...................................... 32,749 4,607 4,590 41,946
Depreciation expense ........................... 3,095 561 226 3,882
Amortization of intangibles .................... 1,576 96 -- 1,672
Write down in the fair value of investments .... 203 -- -- 203
---------- ---------- ---------- ----------
40,624 5,264 4,852 50,740
---------- ---------- ---------- ----------
Income from operations ........................... 1,228 112 1,510 2,850
Other income and interest expense, net ........... 248 (40) (208) --
Minority interests, net .......................... (893) -- (648) (1,541)
Income taxes ..................................... (82) -- (157) (239)
---------- ---------- ---------- ----------
Net income ....................................... $ 501 $ 72 $ 497 $ 1,070
========== ========== ========== ==========
6. SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash transactions:
THREE MONTHS ENDED MARCH 31,
----------------------------------
2004 2003
------------ ------------
Capital assets financed and leased .......... $ 601 $ 3,639
Options expired or exercised ................ 3,415 515
Common stock issued for acquisition ......... -- 96
Cash paid for the following:
THREE MONTHS ENDED MARCH 31,
----------------------------------
2004 2003
------------ ------------
Interest .......................................... $ 813 $ 1,016
Income taxes ...................................... 71 109
7. SUBSEQUENT EVENTS
In April 2004, the Company received $7.7 million in proceeds from the
exercise of 900,000 non-qualified stock options.
10
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Quarterly Report on Form 10-Q (herein, together with all amendments,
exhibits and schedules hereto, referred to as the "Form 10-Q") contains certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which
statements can be identified by the use of forward looking terminology, such as
"may," "will," "expect," "anticipate," "estimate," "plans," "intends" or
"continue" or the negative thereof or other variations thereon or comparable
terminology. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including but not limited to those set forth elsewhere in this Form 10-Q in the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and in the Company's Annual Report on Form 10-K for
the period ended December 31, 2003. Unless the context indicates or requires
otherwise, references in this Form 10-Q to the "Company" or "TLC Vision" shall
mean TLC Vision Corporation and its subsidiaries. References to "$" or "dollars"
shall mean U.S. dollars unless otherwise indicated. References to "C$" shall
mean Canadian dollars. References to the "Commission" shall mean the U.S.
Securities and Exchange Commission.
OVERVIEW
TLC Vision Corporation (formerly TLC Laser Eye Centers Inc.) and its
subsidiaries ("TLC Vision" or the "Company") is a diversified healthcare service
company focused on working with eye doctors to help them provide high quality
patient care in the eye care segment. The majority of the Company's revenues
come from refractive surgery, which involves using an excimer laser to treat
common refractive vision disorders such as myopia (nearsightedness), hyperopia
(farsightedness) and astigmatism. The Company's business models include
arrangements ranging from owning and managing fixed site centers to providing
access to lasers through fixed site and mobile service relationships. In
addition to refractive surgery, the Company is diversified into other eye care
businesses. Through its Midwest Surgical Services, Inc. ("MSS") subsidiary, the
Company furnishes hospitals and independent surgeons with mobile or fixed site
access to cataract surgery equipment and services. Through its OR Partners,
Aspen Healthcare and Michigan subsidiaries, TLC Vision develops, manages and has
equity participation in single-specialty eye care ambulatory surgery centers and
multi-specialty ambulatory surgery centers. The Company also owns a 51% majority
interest in Vision Source, which provides franchise opportunities to independent
optometrists. In 2002, the Company formed a joint venture with Vascular Sciences
Corporation to create OccuLogix, L.P., a partnership focused on the treatment of
a specific eye disease known as dry age-related macular degeneration, via
rheopheresis, a process for filtering blood.
In accordance with an Agreement and Plan of Merger with LaserVision, the
Company completed a business combination with LaserVision on May 15, 2002, which
resulted in LaserVision becoming a wholly owned subsidiary of TLC Vision.
LaserVision is a leading access service provider of excimer lasers,
microkeratomes and other equipment and value and support services to eye
surgeons. The Company believes that the combined companies provide a broader
array of services to eye care professionals to ensure these individuals may
provide superior quality of care and achieve outstanding clinical results. The
Company believes this will be the long-term determinant of success in the eye
surgery services industry.
The Company serves surgeons who performed over 70,000 procedures including
cataract procedures at the Company's centers or using the Company's laser access
during the three-month period ended March 31, 2004.
The Company continually assesses patient, optometric and ophthalmic
industry trends and developing strategies to improve laser vision correction
revenues and procedure volumes. The Company's cost reduction initiatives
continue to target the effective use of funds and the Company is also pursuing
growth initiative's focusing on future development opportunities for the Company
in other healthcare services.
11
RECENT DEVELOPMENTS
On January 1, 2004, the Company settled a lawsuit brought by Thomas S.
Tooma, M.D. and TST Acquisitions, LLC ("TST") in October 2002. Under the terms
of the settlement, the Company sold approximately 24% of Laser Eye Care of
California ("LECC") and 30% of its California access business to TST for $2.3
million. The Company continues to hold 30% ownership in LECC and a 70% ownership
in the California access business. The Company recorded a $1.3 million gain on
the sale of these business interests and began recording LECC under the equity
method of accounting because it no longer owns a controlling interest in the
entity.
On March 1, 2004, OR Partners, Inc., a subsidiary of TLC Vision, entered
into a purchase agreement to acquire 70% of an ASC in Texas, which provides
access to surgical and diagnostic equipment to perform cataract surgery in
hospitals and ambulatory surgery centers. The Company paid $3.8 million in cash
substantially all of which was goodwill. The results of operations have been
included in the consolidated statements of operations of the Company since the
acquisition date.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2003
As a result of adopting FIN 46, the Company began consolidating the
physician practices that are managed but not owned by the Company on January 1,
2004. The consolidation resulted in the Company recording an additional $4.5
million in refractive revenue and cost of revenue in the first quarter of 2004
as the revenue earned and expenses paid (primarily doctors compensation) by the
physician practices are now included in the Company's results. The consolidation
had no impact on net income for the quarter.
Prior to the adoption, doctors compensation and related revenue were not
reflected in the Company's statement of operations for the managed centers, but
were reflected in the Company's statement of operations for the owned centers.
The Company previously presented the revenues and cost of revenues of managed
centers and owned centers separately in the statements of operation, because
this difference resulted in different margins for managed centers than for owned
centers. However, for management purposes, the Company never distinguished
between owned and managed centers. Beginning with this quarter, the Company will
present all centers, managed and owned, together, because both types of centers
include doctors compensation and the related revenue.
The increase in revenue attributed to the adoption of FIN 46 is partially
offset by the deconsolidation of LECC in connection with the sale of a portion
of the Company's interest in LECC. The results of operations for the three
months ended March 31, 2003, included $3.5 million in refractive revenues
related to LECC whereas the results of operations for the three months ended
March 31, 2004 include no refractive revenue for LECC, because beginning January
1, 2004, LECC is accounted for on the equity method of accounting.
Total revenues for the three months ended March 31, 2004 were $65.2
million, an increase of $11.6 million, or 22% over revenues of $53.6 million for
the three months ended March 31, 2003. Approximately 78% of total revenues for
the three months ended March 31, 2004 were derived from refractive services
compared to 78% during the three months ended March 31, 2003. Although the
Company has continued to execute its strategy to diversify into other healthcare
businesses, strong demand for refractive laser procedures kept pace with the 22%
growth in other healthcare service revenues during the quarter.
Revenues from the refractive segment for the three months ended March 31,
2004 were $50.9 million, an increase of $9.0 million or 24% from $41.9 million
for the three months ended March 31, 2003. This increase was primarily due to a
6% increase in procedure volume and higher average pricing associated with the
introduction of Custom LASIK in June 2003.
Revenues from centers for the three months ended March 31, 2004 were $38.8
million, an increase of $7.9 million, or 26% from the revenues of $30.9 million
for the three months ended March 31, 2003. Higher procedure volumes at centers
and higher pricing due to Custom LASIK were partially offset by lost revenue
from several
12
unprofitable centers that were closed subsequent to March 31, 2003. Management
believes center revenues will continue to outpace prior year revenue throughout
2004.
Revenues from access services for the three months ended March 31, 2004
were $12.0 million, an increase of $1.1 million or 10% from revenues of $10.9
million for the three months ended March 31, 2003. The growth in the access
business resulted from increased procedure volume and reversed a trend of
declining procedures and revenue experienced throughout 2003.
Approximately 56,900 refractive procedures were performed in the three
months ended March 30, 2004, compared to approximately 53,500 procedures for the
three months ended March 31, 2003. This 3,400 or 6% increase in procedures was
primarily due to 4,400 or 16% more procedures at centers open during both the
three months ended March 31, 2004 and 2003 and 900 or 4% more procedures for the
access business offset by the absence of 1,900 procedures at centers that were
closed within the past year. Procedures for LECC are included in both periods
and account for 4,000 procedures for the three months ended March 31, 2004, an
increase of 800 procedures over the prior year period.
The cost of refractive revenues for the three months ended March 31, 2004
was $34.3 million, an increase of $4.6 million, or 15% over the cost of
refractive revenues of $29.7 million for the three months ended March 31, 2003.
This increase was primarily attributable to increased procedure volume and
higher costs associated with Custom LASIK. Primarily as a result of higher
procedure volumes at centers, gross margins for the refractive business as a
whole increased to 33% during the three months ended March 31, 2004 from 29% in
the prior year period.
The cost of revenues from centers for the three months ended March 31,
2004 was $26.2 million, an increase of $3.7 million, or 16% from the cost of
revenues of $22.5 million from the three months ended March 31, 2003. This
increase primarily resulted from $2.0 million of higher costs related to
increased procedure volume and $4.0 million of compensation paid to surgeons
resulting from the Company's adoption of FIN 46 effective January 1, 2004 (as
compared to none in the prior year period). These increases are offset by $2.4
million in cost of revenues for LECC during the three months ended March 31,
2003 (as compared to none during the three months ended March 31, 2004) since
LECC is no longer included in the Company's Consolidated Statement of
Operations.
Gross margins from centers increased to 33% for the three months ended
March 31, 2004 from 27% during the prior year period as increased procedure
volumes led to strong incremental variable margin earnings at many of the
Company's centers. This margin percentage increase was diluted by the
consolidation of the physician practices managed by the Company due to the
adoption of FIN 46. For comparison purposes, had the Company not consolidated
the physician practices, the gross margin percentage would have been 37% for the
quarter ended March 31, 2004.
The cost of revenues from access services for the three months ended March
31, 2004 was $8.2 million, an increase of $1.0 million or 14% from the cost of
revenues of $7.2 million during the three months ended March 31, 2003. This
increase primarily resulted from higher procedure volume. Gross margins
decreased to 32% from 34% due to pricing pressure from competitors and higher
costs associated with Custom LASIK.
Revenues from other healthcare services for the three months ended March
31, 2004, were $14.3 million, an increase of $2.6 million or 22% from revenues
of $11.7 million for the three months ended March 31, 2003. Approximately 22% of
total revenues for the three months ended March 31, 2004 were derived from other
healthcare services compared to 22% during the three months ended March 31,
2003. The increase in other healthcare services revenue resulted from internal
growth of existing business and contributions from businesses acquired within
the past year and was reflective of the Company's stated diversification
strategy to increase non-refractive eye care services.
The cost of revenues from other healthcare services for the three months
ended March 31, 2004 was $9.1 million, an increase of $1.6 million or 21% from
cost of revenues of $7.5 million for the three months ended March 31, 2003. The
increase in cost of revenues primarily related to incremental costs incurred to
generate the increased revenue of the other healthcare service business. Gross
margins for other healthcare services remained constant at 36% during the three
months ended March 31, 2004 and 2003.
13
General and administrative expenses decreased to $7.9 million for the
three months ended March 31, 2004 from $8.0 million for the three months ended
March 31, 2003. The $0.1 million or 1% decrease reflected the Company's success
in controlling overhead costs despite a 22% increase in revenue. Accordingly,
general and administrative expenses as percentage of revenue decreased to 12%
from 15% compared to the prior year quarter.
Marketing expenses of $2.9 million decreased by $0.8 million or 22% for
the three months ended March 31, 2004 from $3.7 million for the three months
ended March 31, 2003. The Company monitors marketing spending closely and
adjusts expenditures as necessary based upon procedure volume. Marketing
expenses as a percentage of revenue decreased to 4% from 7% in the prior year
period, reflecting the Company's success in increasing revenue while controlling
marketing expenses.
Research and development expenses were $0.4 million for the three months
ended March 31, 2004, relating to investments made to fund research and
development efforts by Vascular Sciences to achieve Food and Drug Administration
approval for medical treatments related to dry age-related macular degeneration.
Since the technology is in the development stage and has not received FDA
approval, the Company accounted for this investment as a research and
development arrangement whereby investments were expensed as amounts are
expended by Vascular Sciences.
Amortization expenses decreased to $1.0 million for the three months ended
March 31, 2004 from $1.7 million for the three months ended March 31, 2003. This
decrease was largely due to the reduction in intangible assets (Practice
Management Agreements) resulting from the deconsolidation of LECC.
Other income and expense of $0.5 million for the three months ended March
31, 2004 primarily resulted from a $1.3 million gain on the sale of a
controlling interest in LECC offset by a $0.7 million loss related to the
disposal of fixed assets. During the three months ended March 31, 2003, the
Company recorded $0.4 million in other revenue.
Interest expense, net of $0.4 million for the three months ended March 31,
2004 and 2003 reflected interest expense from debt and lease obligations,
partially offset by interest income from the Company's cash position.
Minority interest expense was $1.9 million for the three months ended
March 31, 2004, an increase of $0.4 million from $1.5 million for the three
months ended March 31, 2003. This increase results from higher profits at
certain of the Company's subsidiaries in which partners hold minority interests.
Earnings from equity investments of $0.4 million for the three months
ended March 31, 2004 resulted primarily from $0.3 million of earnings related to
the Company's minority ownership investment in LECC, which is now accounted for
under the equity method.
Income tax expense was $0.2 million for the three-month periods ended
March 31, 2004 and 2003. The $0.2 million tax expense primarily consisted of
federal and state taxes for certain of the Company's subsidiaries where a
consolidated federal and state tax return cannot be filed.
Net income for the three months ended March 31, 2004 was $8.1 million or
$0.12 per share compared to income of $1.1 million or $0.02 per share for the
three months ended March 31, 2003.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 2004, the Company continued to
focus its activities primarily on increasing procedure volumes at its centers,
reducing operating costs, and expanding its other healthcare businesses through
internal growth and acquisitions. Cash and cash equivalents, short-term
investments and restricted cash were $38.8 million at March 31, 2004 compared to
$31.7 million at December 31, 2003. Working capital at March 31, 2004 was $19.3
million, an increase of $8.4 million from $10.9 million at December 31, 2003.
The Company's principal cash requirements have included normal operating
expenses, debt repayment, distributions to minority partners, capital
expenditures, acquisitions and investments. Normal operating expenses
14
include doctor compensation, procedure royalty fees, procedure and medical
supply expenses, travel and entertainment, professional fees, insurance, rent,
equipment maintenance, wages, utilities and marketing.
During the three months ended March 31, 2004, the Company invested $1.6
million in fixed assets and received vendor lease financing for $0.6 million of
fixed assets.
The Company does not expect to purchase additional excimer lasers during
the next 12 to 18 months, however, existing lasers and flap-making technology
may need to be upgraded. The Company has access to vendor financing at fixed
interest rates or on a per procedure fee basis and expects to continue to have
access to these financing options for at least the next 12 months.
The Company estimates that existing cash balances and short-term
investments, together with funds expected to be generated from operations and
credit facilities, will be sufficient to fund the Company's anticipated level of
operations and expansion plans for at least the next 12 to 18 months.
At December 31, 2003 the Company had $2.1 million of exit liabilities
primarily related to the restructuring of operations in connection with the
LaserVision merger, including several centers that have been closed. During the
three months ended March 31, 2004, the Company made cash payments of $0.4
million in respect of these exit liabilities.
CASH PROVIDED BY OPERATING ACTIVITIES
Net cash provided by operating activities was $10.9 million for the three
months ended March 31, 2004. The cash flows provided by operating activities
during the three months ended March 31, 2004 were primarily due to net income of
$8.1 million plus non-cash items including depreciation and amortization of $4.6
million, minority interest expense of $1.9 million and a loss on the disposal of
fixed assets of $0.8 million, offset by an increase in net operating assets of
$3.5 million and a gain on the sale of a subsidiary of $1.3 million. The
increase in net operating assets consisted of a $4.0 million increase in
accounts receivable due primarily to higher revenues and a $0.6 million increase
in prepaid expenses offset by a $1.1 million increase in accounts payable and
accrued liabilities. Settlement of litigation or payment of accrued liabilities
in future periods could reduce cash without affecting working capital.
CASH USED FOR INVESTING ACTIVITIES
Net cash used for investing activities was $5.7 million for the three
months ended March 31, 2003. Cash used in investing activities during the
three-month period ended March 31, 2003 included $4.2 million for business
acquisitions, $1.6 million for the capital expenditures, $0.4 million for
investments in the research and development with Vascular Sciences, and $0.3
million in net cash associated with the sale of a portion of the Company's
interest in LECC, offset by a $0.5 million decrease in other assets. The $0.3
million decrease in cash related to the sale of the Company's controlling
interest in the LECC consists of $2.3 million in proceeds from the sale offset
by a net of $2.6 million in cash that is no longer included in the consolidated
balance sheet because the LECC business is now accounted for using the equity
method of accounting since the Company no longer holds a controlling interest in
the entity.
CASH USED FOR FINANCING ACTIVITIES
Net cash provided by financing activities was $2.4 million for the three
months ended March 31, 2004. Net cash provided by financing activities during
the three months ended March 31, 2004 was primarily related to proceeds from the
exercise of stock options of $8.3 million offset by the repayment of certain
notes payable and capitalized lease obligations of $4.6 million and distribution
to minority interests of $1.4 million.
SUBSEQUENT EVENTS
In April 2004, the Company received $7.7 million in proceeds from the
exercise of 900,000 non-qualified stock options.
15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the ordinary course of business, the Company is exposed to interest rate
risks and foreign currency risks, which the Company does not currently consider
to be material. These exposures primarily relate to having short-term
investments earning short-term interest rates and to having fixed rate debt. The
Company views its investment in foreign subsidiaries as a long-term commitment,
and does not hedge any translation exposure.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's reports
under the Securities Exchange Act of 1934, as amended (the "Exchange Act") is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms, and that such
information is accumulated and communicated to the Company's management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
As of the end of the period covered by the report, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
of the Exchange Act). Based on that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective, in all material respects, to ensure that
information required to be disclosed in the reports the Company files and
submits under the Exchange Act is recorded, processed, summarized and reported
as and when required.
There have been no significant changes in the Company's internal controls
over financial reporting that have materially affected, or are reasonably likely
to materially affect the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material changes in legal proceedings from that
reported in the Company's Annual Report on Form 10-K for the year ended December
31, 2003.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
Not applicable.
16
ITEM 6. EXHIBITS AND REPORTS ON 8-K
a. Exhibits:
31.1 CEO's Certification required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended
31.2 CFO's Certification required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended
32.1 CEO's Certification of periodic financial report pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, U.S.C. Section 1350.
32.2 CFO's Certification of periodic financial report pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, U.S.C. Section 1350
b. Reports on 8-K:
On March 4, 2004 the Company filed a Current Report on Form 8-K announcing
the Company's financial results for the quarter and year ended December 31,
2003.
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TLC VISION CORPORATION
By: /s/ Elias Vamvakas
------------------------------------------
Elias Vamvakas
Chairman and Chief Executive Officer
May 10, 2004
By: /s/ B. Charles Bono III
------------------------------------------
B. Charles Bono III
Chief Financial Officer
May 10, 2004
18
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
19