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 MARCH 31, 2005
COMMISSION FILE NUMBER: 0-29302
TLC VISION CORPORATION
(Exact name of registrant as specified in its charter)
NEW BRUNSWICK, CANADA 980151150
(State or jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5280 SOLAR DRIVE, SUITE 300 L4W 5M8
MISSISSAUGA, ONTARIO (Zip Code)
(Address of principal executive offices)
Registrant's telephone, including area code: (905) 602-2020
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [X] Yes [ ] No
As of May 6, 2005 there were 70,485,916 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, 2005 and 2004
Consolidated Balance Sheets as of March 31, 2005 and December 31,
2004
Consolidated Statements of Cash Flows for the three months ended
March 31, 2005 and 2004
Consolidated Statement of Changes in Stockholders' Equity for the
three months ended March 31, 2005
Notes to Interim Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Matters
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 MARCH 31,
-----------------------------
2005 2004
--------- ---------
Revenues:
Refractive:
Centers.............................................. $ 43,291 $ 38,838
Access............................................... 11,880 12,049
Other healthcare services................................. 15,878 14,288
--------- ---------
Total revenues.............................................. 71,049 65,175
--------- ---------
Cost of revenues:
Refractive:
Centers.............................................. 28,099 26,152
Access............................................... 7,837 8,172
Other healthcare services................................. 10,154 9,138
--------- ---------
Total cost of revenues...................................... 46,090 43,462
--------- ---------
Gross profit.............................................. 24,959 21,713
--------- ---------
General and administrative.................................. 11,451 7,353
Marketing................................................... 3,535 2,894
Research and development.................................... -- 374
Amortization of intangibles................................. 1,011 1,012
--------- ---------
15,997 11,633
--------- ---------
Operating income............................................ 8,962 10,080
Other income, net........................................... 255 --
Interest income............................................. 1,072 478
Interest expense............................................ (458) (881)
Minority interests.......................................... (686) (1,874)
Earnings from equity investments............................ 659 399
--------- ---------
Income before income taxes.................................. 9,804 8,202
Income tax expense.......................................... (198) (150)
--------- ---------
Net income.................................................. $ 9,606 $ 8,052
========= =========
Earnings per share - basic.................................. $ 0.14 $ 0.12
========= =========
Earnings per share - diluted................................ $ 0.13 $ 0.12
========= =========
Weighted average number of common shares outstanding -
basic..................................................... 70,036 66,932
Weighted average number of common shares outstanding -
diluted................................................... 72,045 69,433
See the accompanying notes to unaudited interim consolidated financial
statements.
3
TLC VISION CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2005 2004
----------- ------------
ASSETS
Current assets
Cash and cash equivalents................................ $ 61,127 $ 33,435
Short-term investments................................... 81,128 111,015
Accounts receivable...................................... 20,463 17,443
Prepaids and other current assets........................ 16,068 13,821
---------- -----------
Total current assets.................................... 178,786 175,714
Restricted cash............................................ 909 932
Investments and other assets............................... 16,012 10,482
Goodwill................................................... 52,751 53,774
Intangibles, net........................................... 17,129 18,140
Fixed assets, net.......................................... 45,623 46,199
---------- -----------
Total assets............................................... $ 311,210 $ 305,241
========== ===========
LIABILITIES
Current liabilities
Accounts payable......................................... $ 11,054 $ 8,716
Accrued liabilities...................................... 23,509 27,139
Current portion of long-term debt........................ 6,327 8,664
---------- -----------
Total current liabilities.................................. 40,890 44,519
Other long-term liabilities................................ 3,166 2,722
Long term-debt, less current maturities.................... 9,654 9,991
Minority interests......................................... 35,919 37,222
---------- -----------
Total liabilities.......................................... 89,629 94,454
---------- -----------
SHAREHOLDERS' EQUITY
Capital stock.............................................. 460,924 458,959
Option and warrant equity.................................. 2,095 2,872
Accumulated deficit........................................ (241,438) (251,044)
---------- -----------
Total shareholders' equity................................. 221,581 210,787
---------- -----------
Total liabilities and shareholders' equity................. $ 311,210 $ 305,241
========== ===========
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,
-------------------
2005 2004
-------- --------
OPERATING ACTIVITIES
Net income.......................................................................................... $ 9,606 $ 8,052
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization..................................................................... 4,017 4,557
Write-off of investment in research and development arrangement................................... -- 374
Minority interests................................................................................ 686 1,874
Earnings from equity investments.................................................................. (659) (399)
Loss (gain) on disposals of fixed assets.......................................................... (96) 730
Gain on sales of subsidiaries..................................................................... (319) (1,278)
Non-cash compensation expense..................................................................... 69 420
Changes in operating assets and liabilities, net of acquisitions and dispositions
Accounts receivable............................................................................. (3,540) (3,984)
Prepaid expenses and other current assets....................................................... (2,308) (552)
Accounts payable and accrued liabilities........................................................ (1,651) 1,067
-------- --------
Cash from operating activities...................................................................... 5,805 10,861
-------- --------
INVESTING ACTIVITIES
Purchases of fixed assets........................................................................... (2,727) (1,570)
Proceeds from sales of fixed assets................................................................. 454 147
Proceeds from divestitures of investments and subsidiaries, net..................................... 3,430 (271)
Distributions and loan payments received from equity investments.................................... 556 --
Investment in research and development arrangements................................................. -- (374)
Acquisitions and equity investments................................................................. (443) (4,210)
Proceeds from sale of short-term investments........................................................ 38,750 --
Purchases of short-term investments................................................................. (8,863) (7,125)
Purchases of long-term investments.................................................................. (5,383) --
Other............................................................................................... (125) 544
-------- --------
Cash from investing activities...................................................................... 25,649 (12,859)
-------- --------
FINANCING ACTIVITIES
Restricted cash movement............................................................................ 23 7
Principal payments of debt financing and capital leases............................................. (4,219) (4,566)
Proceeds from debt financing........................................................................ 1,117 --
Distributions to minority interests................................................................. (1,977) (1,355)
Proceeds from issuance of common stock.............................................................. 1,077 8,287
Proceeds from issuance of OccuLogix, Inc. common stock.............................................. 217 --
-------- --------
Cash from financing activities...................................................................... (3,762) 2,373
-------- --------
Net increase in cash and cash equivalents during the period......................................... 27,692 375
Cash and cash equivalents, beginning of period...................................................... 33,435 21,580
-------- --------
Cash and cash equivalents, end of period............................................................ $ 61,127 $ 21,955
======== ========
See the accompanying notes to unaudited interim consolidated financial
statements.
5
TLC VISION CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED) (In thousands)
OPTION
COMMON STOCK AND
---------------- WARRANT ACCUMULATED
SHARES AMOUNT EQUITY DEFICIT TOTAL
------ -------- ------- ----------- ---------
Balance December 31, 2004............. 70,086 $458,959 $ 2,872 $ (251,044) $ 210,787
Shares issued as part of the
employee share purchase plan and
401(k) plan.......................... 13 101 101
Exercise of stock options............. 363 1,751 (775) 976
Options expired or forfeited.......... 2 (2) --
Changes in OccuLogix, Inc.'s
stockholders' equity................. 111 111
Net income and comprehensive income 9,606 9,606
------ -------- ------- ----------- ---------
Balance March 31, 2005................ 70,462 $460,924 $ 2,095 $ (241,438) $ 221,581
====== ======== ======= =========== =========
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, 2005 (Unaudited)
(Tabular amounts in thousands, except per share amounts)
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in
the United States for interim financial information and with the instructions
to Form 10-Q. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. The unaudited interim consolidated
financial statements included herein should be read in conjunction with the
Annual Report on Form 10-K for the year ended December 31, 2004 filed by TLC
Vision Corporation (the "Company" or "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, 2005. The consolidated financial statements as of
December 31, 2004 and unaudited interim consolidated financial statements for
the three months ended March 31, 2005 and 2004 include the accounts and
transactions of the Company and its majority-owned subsidiaries that are not
considered variable interest entities (VIEs) and all VIEs for which the
Company is the primary beneficiary. All significant intercompany accounts and
transactions have been eliminated.
The unaudited interim consolidated financial statements for the three-month
period ended March 31, 2004 include certain reclassifications to conform with
classifications for the three-month period ended March 31, 2005.
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 $69,000 and $420,000 during the three months ended
March 31, 2005 and 2004, respectively, including $0 and $319,000 of variable
stock option expense, respectively, 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:
THREE MONTHS ENDED MARCH 31,
------------------------------
2005 2004
------- -------
Net income as reported...................................... $ 9,606 $ 8,052
Add stock-based employee compensation cost included in net
income.................................................. -- 319
Less stock-based employee compensation cost determined
under fair value based method for all awards............ (780) (276)
Less OccuLogix, Inc.'s stock-based employee compensation
cost determined under fair value based method for all
awards, net of minority interests....................... (227) --
------- -------
Pro forma net income........................................ $ 8,599 $ 8,095
======= =======
Pro forma earnings per share - basic........................ $ 0.12 $ 0.12
======= =======
Pro forma earnings per share - diluted...................... $ 0.12 $ 0.12
======= =======
For purposes of pro forma disclosures, the estimated fair value of stock-based
compensation cost is amortized using the attribution method under FASB
Interpretation No. 28, "Accounting for Stock Appreciation Rights and Other
Variable Stock Option Award Plans."
7
3. ACQUISITIONS AND DISPOSITIONS
On March 1, 2005, the Company sold its interest in Aspen Healthcare, Inc.
("Aspen") to National Surgical Centers, Inc. and recorded a gain of $0.3
million, which is included in general and administrative expenses.
4. EARNINGS PER SHARE
The following table sets forth the computation of diluted earnings per share:
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
-------- --------
Net income............................................... $ 9,606 $ 8,052
Weighted-average shares outstanding - basic.............. 70,036 66,932
Dilutive effect of stock options and warrants............ 2,009 2,501
-------- --------
Weighted-average shares outstanding - diluted............ 72,045 69,433
Earnings per share - diluted............................. $ 0.13 $ 0.12
======== ========
5. SEGMENT INFORMATION
The Company has three reportable segments: refractive, mobile cataract and
age-related macular degeneration ("AMD"). The refractive segment provides the
majority of the Company's revenue and 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 AMD segment includes OccuLogix, Inc. (formerly
Vascular Sciences Corporation), OccuLogix, LP and RHEO Clinic, Inc. and is
pursuing commercial applications of treatments of dry age-related macular
degeneration. Other includes an accumulation of other healthcare business
activities including the management of cataract and secondary care centers
that provide advanced levels of eye care, network marketing and management to
optometrists, and professional healthcare facility management. None of these
activities meet the quantitative criteria to be disclosed separately as a
reportable segment.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different management and marketing strategies. The
Company's business units were acquired or developed as a unit, and management
at the time of acquisition was retained.
The following tables set forth information by segments:
THREE MONTHS ENDED MARCH 31, 2005 MOBILE
(IN THOUSANDS) REFRACTIVE CATARACT AMD OTHER TOTAL
- ------------------------------------------------- ---------- -------- --------- --------- ----------
Revenues......................................... $ 55,171 $ 6,738 $ 431 $ 8,709 $ 71,049
Expenses:
Doctors' compensation.......................... 9,692 -- 46 -- 9,738
Operating...................................... 32,847 5,664 3,835 5,986 48,332
Depreciation expense........................... 2,204 534 46 222 3,006
Amortization of intangibles.................... 802 101 -- 108 1,011
---------- -------- --------- --------- ----------
45,545 6,299 3,927 6,316 62,087
---------- -------- --------- --------- ----------
Income (loss) from operations.................... 9,626 439 (3,496) 2,393 8,962
Other income and interest expense, net........... 952 (27) 355 (411) 869
Minority interests............................... (1,006) -- 1,499 (1,179) (686)
Earnings from equity investments................. 395 -- -- 264 659
Income taxes..................................... (379) (1) -- 182 (198)
---------- -------- --------- --------- ----------
Net income (loss)................................ $ 9,588 $ 411 $ (1,642) $ 1,249 $ 9,606
========== ======== ========= ========= ==========
8
THREE MONTHS ENDED MARCH 31, 2004 MOBILE
(IN THOUSANDS) REFRACTIVE CATARACT AMD OTHER TOTAL
- ----------------------------------------------------------------- ---------- -------- --------- --------- ----------
Revenues......................................................... $ 50,887 $ 5,992 $ 209 $ 8,087 $ 65,175
Expenses:
Doctors' compensation.......................................... 7,688 -- 18 -- 7,706
Operating...................................................... 32,315 5,087 313 5,291 43,006
Research and development....................................... -- -- 374 -- 374
Depreciation expense........................................... 2,767 587 11 180 3,545
Amortization of intangibles.................................... 798 105 -- 109 1,012
--------- -------- --------- --------- ----------
43,568 5,779 716 5,580 55,643
--------- -------- --------- --------- ----------
Income (loss) from operations.................................... 7,319 213 (507) 2,507 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 (loss)................................................ $ 7,289 $ 189 $ (507) $ 1,081 $ 8,052
========= ======== ========= ========= ==========
6. SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash transactions:
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
------ --------
Debt and capital lease obligations
relating to equipment purchases..... $ 152 $ 601
Option and warrant reduction........... 777 3,415
Cash paid for the following:
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
------ -------
Interest............................... $ 627 $ 813
Income taxes........................... 249 71
7. RECENTLY ISSUED ACCOUNTING STANDARD
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123 (revised 2004), "Share-Based Payment" ("Statement
123(R)"), which is a revision of FASB Statement No. 123, "Accounting for
Stock-Based Compensation." Statement 123(R) supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and amends FASB Statement No. 95,
"Statement of Cash Flows." Generally, the approach in Statement 123(R) is
similar to the approach described in Statement 123. However, Statement 123(R)
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on their fair
values. Under Statement 123(R), pro forma disclosure is no longer permitted.
The effective date of Statement 123(R) is the first reporting period beginning
after June 15, 2005, which is third quarter 2005 for the Company, although early
adoption is allowed. However, on April 14, 2005, the Securities and Exchange
Commission (SEC) announced that the effective date of Statement 123(R) will be
suspended until January 1, 2006, for calendar year companies. Statement 123(R)
permits companies to adopt its requirements using either a "modified
prospective" method, or a "modified retrospective" method. Under the "modified
prospective" method, compensation cost is recognized in the financial statements
beginning with the effective date, based on the requirements of Statement 123(R)
for all share-based payments granted after that date, and based on the
requirements of Statement 123 for all unvested awards granted prior to the
effective date of Statement 123(R). Under the "modified retrospective" method,
the requirements are the same as under the "modified prospective" method, but
also permits entities to restate financial statements of previous periods based
on pro forma disclosures made in accordance with Statement 123.
9
The Company currently utilizes the Black-Scholes option pricing model to measure
the fair value of stock options granted to employees. While Statement 123(R)
permits entities to continue to use such a model, the standard also permits the
use of a "lattice" model. The Company has not yet determined which model it will
use to measure the fair value of employee stock options upon the adoption of
Statement 123(R).
The Company currently expects to adopt Statement 123(R) effective January 1,
2006, based on the new effective date announced by the SEC; however, the Company
has not yet determined which of the aforementioned adoption methods it will use.
In addition, the Company has not yet determined the financial statement impact
of adopting Statement 123(R) for periods beyond 2005.
8. SUBSEQUENT EVENTS
On April 1, 2005, Midwest Surgical Services, Inc., a wholly owned subsidiary of
the Company, acquired Vision Surgical Services, Inc. ("VSS"). VSS leases
surgical instruments and mobile equipment to perform cataract surgery.
On May 4, 2005, the Company acquired the refractive assets of Southeastern Eye
Center, which provides refractive surgery in Greensboro, North Carolina.
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, 2004. 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 and its subsidiaries is a diversified eye care
services company dedicated to improving lives through better vision by providing
eye doctors with the tools and technologies they need to deliver high quality
patient care. The majority of the Company's revenues 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 Midwest
Surgical Services, Inc. ("MSS") subsidiary, the Company furnishes hospitals and
independent surgeons with mobile or fixed site access to cataract surgery
equipment and services. Through its OR Partners and Michigan subsidiaries,
TLCVision develops, manages and has equity participation in single-specialty eye
care ambulatory surgery centers and multi-specialty ambulatory surgery centers.
The Company also owns a 51% majority interest in Vision Source, an optometric
franchise network for independent optometrists. The Company is also a 51%
majority owner of OccuLogix, Inc., 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 75,000 procedures including
refractive and cataract procedures at the Company's centers or using the
Company's equipment during the three-month period ended March 31, 2005.
The Company continually assesses patient, optometric and ophthalmic
industry trends and developing strategies to improve laser vision correction
revenues and procedure volumes. Additionally, it is pursuing growth initiatives
and investment opportunities in other healthcare services.
RECENT DEVELOPMENTS
On March 1, 2005, the Company sold its interest in Aspen to National
Surgical Centers, Inc. and recorded a gain of $0.3 million, which is included in
general and administrative expenses.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2004
Total revenues for the three months ended March 31, 2005 were $71.0
million, an increase of $5.8 million, or 9% over revenues of $65.2 million for
the three months ended March 31, 2004. This increase was due to an 8%
11
increase in refractive revenues and an 11% increase in other healthcare services
revenues. Approximately 78% of total revenues were derived from refractive
services for the three months ended March 31, 2005 and 2004.
Revenues from the refractive segment for the three months ended March 31,
2005 were $55.2 million, an increase of $4.3 million or 8% from revenues of
$50.9 million for the three months ended March 31, 2004. The increase in
refractive revenues was partially due to an increase in refractive procedures.
Refractive procedures for the three months ended March 31, 2005 were
approximately 58,700, an increase of 1,800 or 3% over refractive procedures of
56,900 for the three months ended March 31, 2004. Procedures for Laser Eye Care
of California ("LECC") were included in both periods and account for 4,800
procedures for the three months ended March 31, 2005, an increase of 800
procedures over the prior year period. The Company owns a 30% interest in LECC.
Refractive revenues also increased as a result of an increase mix of higher
priced procedures, primarily Custom LASIK.
Revenues from centers for the three months ended March 31, 2005 were $43.3
million, an increase of $4.5 million, or 11% from revenues of $38.8 million for
the three months ended March 31, 2004. The increase in centers revenues was
partially due to 2,800 or 9% more procedures at centers open during both the
three months ended March 31, 2005 and 2004 offset by the absence of 200
procedures at centers that were closed within the past year. Centers revenues
also increased as a result of an increase mix of higher priced procedures,
primarily Custom LASIK.
Revenues from access services for the three months ended March 31, 2005
were $11.9 million, a decrease of $0.1 million or 1% from revenues of $12.0
million for the three months ended March 31, 2004. The decline in access
revenues was primarily due to 800 or 3% fewer procedures partially offset by
higher average pricing due to an increase in Custom LASIK procedures.
The cost of refractive revenues for the three months ended March 31, 2005
was $35.9 million, an increase of $1.6 million, or 5% over the cost of
refractive revenues of $34.3 million for the three months ended March 31, 2004.
This increase was primarily attributable to increased procedure volume and
higher costs associated with higher priced procedures, primarily Custom LASIK
procedures. Primarily as a result of higher procedure volumes at centers, gross
margins for the refractive business as a whole increased to 35% during the three
months ended March 31, 2005 from 33% in the prior year period.
The cost of revenues from centers for the three months ended March 31,
2005 was $28.1 million, an increase of $1.9 million, or 7% from the cost of
revenues of $26.2 million from the three months ended March 31, 2004. This
increase was primarily attributable to increased procedure volume and higher
costs associated with higher priced procedures, primarily Custom LASIK
procedures. Gross margins from centers increased to 35% for the three months
ended March 31, 2005 from 33% during the prior year period as increased
procedure volumes led to strong incremental variable margin earnings at many of
the Company's centers.
The cost of revenues from access services for the three months ended March
31, 2005 was $7.8 million, a decrease of $0.4 million or 4% from the cost of
revenues of $8.2 million during the three months ended March 31, 2004. This
decrease primarily resulted from lower procedure volume. Gross margins increased
to 34% from 32% primarily due to more of the total access procedures coming from
the Company's transportable business, which has higher margins than the
Company's fixed access business.
Revenues from other healthcare services for the three months ended March
31, 2005, were $15.9 million, an increase of $1.6 million or 11% from revenues
of $14.3 million for the three months ended March 31, 2004. Approximately 22% of
total revenues were derived from other healthcare services for the three months
ended March 31, 2005 and 2004.
The cost of revenues from other healthcare services for the three months
ended March 31, 2005 was $10.2 million, an increase of $1.1 million or 11% from
cost of revenues of $9.1 million for the three months ended March 31, 2004. 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, 2005 and 2004.
12
General and administrative expenses increased to $11.5 million for the
three months ended March 31, 2005 from $7.4 million for the three months ended
March 31, 2004. The $4.1 million or 56% increase included a $3.1 million
increase from the AMD segment as OccuLogix, Inc. conducts clinical trials
related to its rheopheresis application to the United States Food and Drug
Administration ("FDA") and incurs the cost to prepare for the commercialization
of the RHEO(TM) System in the United States. The remaining $1.0 million increase
was primarily due to additional staffing costs, professional fees and other
operating expenses.
Marketing expenses increased to $3.5 million for the three months ended
March 31, 2005 from $2.9 million for the three months ended March 31, 2004. The
$0.6 million or 22% increase included a $0.2 million increase from the AMD
segment, and a $0.4 million increase to improve procedure growth in the
refractive centers business.
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 OccuLogix, Inc. (formerly Vascular Sciences Corporation)
to achieve FDA approval for medical treatments related to dry age-related
macular degeneration. In connection with the reorganization and initial public
offering of OccuLogix, Inc. in December 2004, the Company was not required to
make any additional research and development investments in OccuLogix, Inc. As
such, the Company did not incur any research and development expenses during the
three months ended March 31, 2005.
Amortization of intangibles was $1.0 million for the three months ended
March 31, 2005 and 2004.
Interest income increased to $1.1 million for the three months ended March
31, 2005 from $0.5 million for the three months ended March 31, 2004. This $0.6
million increase is due to an increase in the Company's cash and cash
equivalents and short-term investments balances as well as higher rates of
return.
Interest expense decreased to $0.5 million for the three months ended
March 31, 2005 from $0.9 million for the three months ended March 31, 2004. This
$0.4 million decrease is due to declining debt and lease obligations.
Minority interest expense decreased to $0.7 million for the three months
ended March 31, 2005 from $1.9 million for the three months ended March 31,
2004. This $1.2 million decrease included a $1.5 million decrease from the AMD
segment. Excluding the impact of the AMD segment, minority interest expense
increased $0.3 million or 17% due to higher profits reported by the Company's
subsidiaries in which the Company has a shared interest with minority partners.
Earnings from equity investments increased to $0.7 million for the three
months ended March 31, 2005 from $0.4 million for the three months ended March
31, 2004. This $0.3 million increase is primarily due to earnings from an ASC in
which the Company acquired a minority ownership in December 2004.
Income tax expense was $0.2 million for the three-month periods ended
March 31, 2005 and 2004. For the three months ended March 31, 2005, the $0.2
million tax expense primarily consisted of Canadian and U.S. federal taxes.
Net income for the three months ended March 31, 2005 increased to $9.6
million or $0.13 per share from $8.1 million or $0.12 per share for the three
months ended March 31, 2004. This $1.5 million increase included a $1.1 million
decrease from the AMD segment. Excluding the impact of the AMD segment, net
income increased to $11.2 million or $0.16 per share for the three months ended
March 31, 2005 from $8.6 million or $0.12 per share for the prior year period.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 2005, the Company continued to
focus its activities primarily on increasing procedure volumes at its centers
and expanding its other healthcare businesses through internal growth and
acquisitions. Cash and cash equivalents, short-term investments and restricted
cash were $143.2 million at March 31, 2005 compared to $145.4 million at
December 31, 2004. Working capital at March 31, 2005 was $137.9 million, an
increase of $6.7 million from $131.2 million at December 31, 2004.
The Company's principal cash requirements have included normal operating
expenses, debt repayment, distributions to minority partners, capital
expenditures, acquisitions and investments.
13
During the three months ended March 31, 2005, the Company invested $2.7
million in fixed assets and received vendor lease financing for $0.2 million of
fixed assets.
As new technologies emerge in the refractive market, the Company may need
to upgrade its equipment, including excimer lasers and flap-making technology.
The Company has access to vendor financing at fixed interest rates or on a per
procedure fee basis and expects to continue to have access to these financing
options for at least the next 12 months.
The Company estimates that existing cash balances and short-term
investments, together with funds expected to be generated from operations and
credit facilities, will be sufficient to fund the Company's anticipated level of
operations and expansion plans for at least the next 12 to 18 months.
At December 31, 2004 the Company reported $2.8 million of exit liabilities
primarily related to severance costs for two former officers under the terms of
employment contracts and ongoing lease obligations at closed centers. During the
three months ended March 31, 2005, the Company made cash payments of $1.6
million in respect of these exit liabilities, resulting in a $1.2 million exit
liability at March 31, 2005.
CASH FROM OPERATING ACTIVITIES
Net cash provided by operating activities was $5.8 million for the three
months ended March 31, 2005. The cash flows provided by operating activities
during the three months ended March 31, 2005 were primarily due to net income of
$9.6 million plus non-cash items including depreciation and amortization of $4.0
million and minority interest expense of $0.7, offset by an increase in net
operating assets of $7.5 million, earnings from equity investments of $0.7
million and a gain on the sale of a subsidiary of $0.3 million. The increase in
net operating assets consisted of a $3.5 million increase in accounts receivable
due primarily to higher revenues during the seasonably strong first quarter, a
$2.3 million increase in prepaid expenses and other current assets and a $1.7
million decrease in accounts payable and accrued liabilities. Excluding the
impact of the AMD segment, net cash provided by operating activities would have
been $11.8 million for the three months ended March 31, 2005.
CASH FROM INVESTING ACTIVITIES
Net cash provided by investing activities was $25.6 million for the three
months ended March 31, 2005. The cash flows provided by investing activities
during the three-month period ended March 31, 2005 primarily included net
proceeds from the sale of short-term investments of $29.9 million, proceeds from
the sale of a subsidiary of $3.4 million and distributions and loan payments
received from equity investments of $0.6 million, offset by capital expenditures
of $2.7 million and purchases of long-term investments of $5.4 million.
Excluding the impact of the AMD segment, net cash provided by investing
activities would have been $30.9 million for the three months ended March 31,
2005.
CASH FROM FINANCING ACTIVITIES
Net cash used in financing activities was $3.8 million for the three
months ended March 31, 2005. Net cash used in financing activities during the
three months ended March 31, 2005 was primarily related to the repayment of
certain notes payable and capitalized lease obligations of $4.2 million and
distributions to minority interests of $2.0 million, offset by proceeds from
debt financing of $1.1 million, proceeds from the exercise of stock options of
$1.1 million and proceeds from the issuance 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 $4.0 million for the three months ended
March 31, 2005.
SUBSEQUENT EVENTS
On April 1, 2005, Midwest Surgical Services, Inc., a wholly owned
subsidiary of the Company, acquired Vision Surgical Services, Inc. ("VSS"). VSS
leases surgical instruments and mobile equipment to perform cataract surgery.
14
On May 4, 2005, the Company acquired the refractive assets of Southeastern
Eye Center, which provides refractive surgery in Greensboro, North Carolina.
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 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, 2004.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
15
ITEM 5. OTHER MATTERS
Not applicable.
ITEM 6. EXHIBITS
31.1 CEO's Certification required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended
31.2 CFO's Certification required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended
32.1 CEO's Certification of periodic financial report pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, U.S.C. Section 1350.
32.2 CFO's Certification of periodic financial report pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, U.S.C. Section 1350
99 Reconciliation between Canadian and United States Generally Accepted
Accounting Principles
16
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
May 9, 2005
By: /s/ Steven P. Rasche
-----------------------
Steven P. Rasche
Chief Financial Officer
May 9, 2005
17
EXHIBIT INDEX
NO. DESCRIPTION
--- -----------
31.1 CEO's Certification required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended.
31.2 CFO's Certification required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended.
32.1 CEO's Certification of periodic financial report pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, U.S.C. Section 1350.
32.2 CFO's Certification of periodic financial report pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, U.S.C. Section 1350
99 Reconciliation between Canadian and United States Generally Accepted
Accounting Principles
18