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 SEPTEMBER 30, 2005
COMMISSION FILE NUMBER: 0-29302
TLC VISION CORPORATION
(Exact name of registrant as specified in its charter)
NEW BRUNSWICK, CANADA 980151150
(State or jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5280 SOLAR DRIVE, SUITE 300 L4W 5M8
MISSISSAUGA, ONTARIO (Zip Code)
(Address of principal executive offices)
Registrant's telephone, including area code: (905) 602-2020
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
X Yes No
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
X Yes No
----- -----
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
----- -----
As of November 7, 2005 there were 68,624,387 of the registrant's Common
Shares outstanding.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Statements of Operations for the three and
nine months ended September 30, 2005 and 2004
Consolidated Balance Sheets as of September 30, 2005 and
December 31, 2004
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2005 and 2004
Consolidated Statement of Stockholders' Equity for the nine
months ended September 30, 2005
Notes to Interim Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits
Signatures
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
TLC VISION CORPORATION
CONSOLIDATED STATEMENTS OF
OPERATIONS (UNAUDITED)
(In thousands except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
2005 2004 2005 2004
-------- ------- -------- --------
Revenues:
Refractive:
Centers ......................................... $34,968 $32,003 $116,743 $110,058
Access .......................................... 7,846 9,390 29,085 31,983
Other healthcare services .......................... 18,825 16,299 53,680 48,330
------- ------- -------- --------
Total revenues ........................................ 61,639 57,692 199,508 190,371
------- ------- -------- --------
Cost of revenues:
Refractive:
Centers ......................................... 26,147 23,201 80,597 76,841
Access .......................................... 6,319 6,910 20,929 22,217
Other healthcare services .......................... 11,652 9,972 33,010 29,684
------- ------- -------- --------
Total cost of revenues ................................ 44,118 40,083 134,536 128,742
------- ------- -------- --------
Gross profit ....................................... 17,521 17,609 64,972 61,629
------- ------- -------- --------
General and administrative ............................ 8,689 6,792 26,976 19,567
Marketing and sales ................................... 5,398 4,710 16,238 13,565
Research and development, clinical and regulatory ..... 1,140 525 3,794 1,249
Amortization of intangibles ........................... 1,047 1,016 3,090 3,085
Other expense (income) ................................ 32 (163) (1,001) (1,895)
Restructuring and severance ........................... -- -- -- 2,755
------- ------- -------- --------
16,306 12,880 49,097 38,326
------- ------- -------- --------
Operating income ...................................... 1,215 4,729 15,875 23,303
Interest income ....................................... 1,071 387 3,361 1,338
Interest expense ...................................... (435) (573) (1,316) (2,199)
Minority interests .................................... (609) (1,674) (2,400) (6,002)
Earnings from equity investments ...................... 487 555 1,826 1,567
------- ------- -------- --------
Income before income taxes ............................ 1,729 3,424 17,346 18,007
Income taxes .......................................... (30) (102) (530) (394)
------- ------- -------- --------
Net income ............................................ $ 1,699 $ 3,322 $ 16,816 $ 17,613
------- ------- -------- --------
Earnings per share - basic ............................ $ 0.02 $ 0.05 $ 0.24 $ 0.26
======= ======= ======== ========
Earnings per share - diluted .......................... $ 0.02 $ 0.05 $ 0.23 $ 0.25
======= ======= ======== ========
Weighted average number of common shares outstanding
- basic ............................................ 69,888 69,004 70,083 68,153
Weighted average number of common shares outstanding
- diluted .......................................... 71,524 71,353 71,877 70,832
See the accompanying notes to unaudited interim consolidated financial
statements.
3
TLC VISION CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------
ASSETS
Current assets
Cash and cash equivalents ................ $ 50,657 $ 33,435
Short-term investments ................... 50,635 111,015
Accounts receivable ...................... 19,012 17,443
Prepaids and other current assets ........ 18,272 13,821
--------- ---------
Total current assets .................. 138,576 175,714
Restricted cash ............................. 1,140 932
Investments and other assets ................ 12,497 10,482
Goodwill .................................... 89,039 53,774
Intangibles, net ............................ 22,703 18,140
Fixed assets, net ........................... 47,348 46,199
--------- ---------
Total assets ................................ $ 311,303 $ 305,241
========= =========
LIABILITIES
Current liabilities
Accounts payable ......................... $ 8,801 $ 8,716
Accrued liabilities ...................... 28,634 27,139
Current portion of long-term debt ........ 4,572 8,664
--------- ---------
Total current liabilities ................... 42,007 44,519
Other long-term liabilities ................. 2,640 2,722
Long-term debt, less current maturities ..... 12,020 9,991
Minority interests .......................... 39,252 37,222
--------- ---------
Total liabilities ........................... 95,919 94,454
STOCKHOLDERS' EQUITY
Capital stock ............................... 452,412 458,959
Option and warrant equity ................... 1,868 2,872
Treasury stock .............................. (4,668) --
Accumulated deficit ......................... (234,228) (251,044)
--------- ---------
Total stockholders' equity .................. 215,384 210,787
--------- ---------
Total liabilities and stockholders' equity .. $ 311,303 $ 305,241
========= =========
See the accompanying notes to unaudited interim consolidated financial
statements.
4
TLC VISION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) (In thousands)
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
2005 2004
-------- --------
OPERATING ACTIVITIES
Net income .................................................................. $ 16,816 $ 17,613
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization ............................................ 12,019 13,304
Write-offs (reimbursements) of investments in research and development
arrangements .......................................................... (300) 849
Minority interests ....................................................... 2,400 6,002
Earnings from equity investments ......................................... (1,826) (1,567)
Loss (gain) on disposals of fixed assets ................................. (204) 1,032
Gain on the sales of subsidiaries ........................................ (319) (1,143)
Non-cash compensation expense ............................................ 285 424
Adjustment to the fair value of investments and long-term receivables .... -- (1,206)
Other .................................................................... 135 --
Changes in operating assets and liabilities, net of acquisitions and
dispositions:
Accounts receivable ...................................................... (1,450) (1,876)
Prepaid expenses and other current assets ................................ (4,236) (1,234)
Accounts payable and accrued liabilities ................................. (4,194) (2,513)
-------- --------
Cash from operating activities .............................................. 19,126 29,685
-------- --------
INVESTING ACTIVITIES
Purchases of fixed assets ................................................... (6,664) (4,243)
Proceeds from sales of fixed assets ......................................... 1,250 900
Proceeds from divestitures of investments and subsidiaries, net ............. 3,430 729
Reimbursements from (investments in) research and development arrangements .. 300 (849)
Distributions and loan payments received from equity investments ............ 1,828 792
Acquisitions and equity investments ......................................... (42,119) (5,245)
Proceeds from sales of short-term investments ............................... 98,575 2,165
Purchases of short-term investments ......................................... (38,295) (31,230)
Other ....................................................................... 33 711
-------- --------
Cash from investing activities .............................................. 18,338 (36,270)
-------- --------
FINANCING ACTIVITIES
Restricted cash movement .................................................... (208) (12)
Principal payments of debt financing and capital leases ..................... (7,500) (12,137)
Distributions to minority interests ......................................... (6,024) (5,536)
Proceeds from debt financing ................................................ 1,489 --
Purchases of treasury stock ................................................. (10,031) --
Proceeds from issuance of common stock ...................................... 1,748 19,121
Proceeds from issuance of OccuLogix, Inc. common stock ...................... 284 --
-------- --------
Cash from financing activities .............................................. (20,242) 1,436
-------- --------
Net increase (decrease) in cash and cash equivalents during the period ...... 17,222 (5,149)
Cash and cash equivalents, beginning of period .............................. 33,435 21,580
-------- --------
Cash and cash equivalents, end of period .................................... $ 50,657 $ 16,431
======== ========
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 TREASURY STOCK AND
----------------- ------------------ WARRANT ACCUMULATED
SHARES AMOUNT 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 ................... 38 317 317
Exercises of stock options ......................... 642 2,750 (1,002) 1,748
Options expired or forfeited ....................... 2 (2) --
Value of shares issued upon meeting certain
earnings criteria ............................... 181 181
Escrow shares returned to the Company .............. (171) --
Changes in OccuLogix, Inc.'s stockholders' equity .. 234 234
Purchases of treasury stock ........................ (1,830) (14,699) (14,699)
Retirement of treasury stock ....................... (1,150) (10,031) 1,150 10,031 --
Net income and comprehensive
income .......................................... 16,816 16,816
------ -------- ------- -------- ------- --------- --------
Balance September 30, 2005 ......................... 69,445 $452,412 (680) $ (4,668) $ 1,868 $(234,228) $215,384
====== ======== ======= ======== ======= ========= ========
See the accompanying notes to unaudited interim consolidated
financial statements.
6
TLC VISION CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005 (Unaudited)
(Tabular amounts in thousands, except per share amounts)
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with the
instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. The
unaudited interim consolidated financial statements included herein should
be read in conjunction with the Annual Report on Form 10-K for the year
ended December 31, 2004 filed by TLC Vision Corporation (the "Company" or
"TLCVision") with the Securities and Exchange Commission. In the opinion of
management, all normal recurring adjustments and estimates considered
necessary for a fair presentation have been included. The results of
operations for the interim periods are not necessarily indicative of the
results that may be expected for the entire year ending December 31, 2005.
The consolidated financial statements as of December 31, 2004 and unaudited
interim consolidated financial statements for the three and nine months
ended September 30, 2005 and 2004 include the accounts and transactions of
the Company and its majority-owned subsidiaries that are not considered
variable interest entities (VIEs) and all VIEs for which the Company is the
primary beneficiary. All significant intercompany accounts and transactions
have been eliminated.
The unaudited interim consolidated financial statements for the three and
nine months ended September 30, 2004 include certain reclassifications to
conform with classifications for the three and nine months ended September
30, 2005 including (a) reclassifying $1.4 million and $3.9 million,
respectively, of certain labor costs from "General and administrative" to
"Marketing and sales" as these costs relate to the marketing and selling
efforts of the Company; and (b) reclassifying $1.0 million and $3.9
million, respectively, of surgeon fees from "Centers revenues" to "Centers
cost of revenues."
2. ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation under the provisions of
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock
Issued to Employees," and its related interpretations. Accordingly, the
Company records expense over the vesting period in an amount equal to the
intrinsic value of the award on the grant date. The Company recorded
variable stock option expense (reduction of expense) of $(228,000) and
$106,000 during the three and nine months ended September 30, 2004,
respectively, for options repriced in 2002. The following table illustrates
the pro forma net income and earnings per share as if the fair value-based
method as set forth under SFAS No. 123 "Accounting for Stock Based
Compensation," applied to all awards:
7
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2005 2004 2005 2004
------ ------ ------- -------
Net income as reported .................................... $1,699 $3,322 $16,816 $17,613
Add (deduct) stock-based employee compensation cost
included in net income ................................. -- (228) -- 106
Add (deduct) OccuLogix, Inc.'s stock-based employee
compensation cost included in net income, net of
minority interests ..................................... (6) -- -- --
Less stock-based employee compensation cost determined
under fair value based method for all awards ........... (725) (311) (2,275) (865)
Less OccuLogix, Inc.'s stock-based employee compensation
cost determined under fair value based method for all
awards, net of minority interests ...................... (562) -- (1,380) --
------ ------ ------- -------
Pro forma net income ...................................... $ 406 $2,783 $13,161 $16,854
====== ====== ======= =======
Pro forma earnings per share - basic ...................... $ 0.01 $ 0.04 $ 0.19 $ 0.25
====== ====== ======= =======
Pro forma earnings per share - diluted .................... $ 0.01 $ 0.04 $ 0.18 $ 0.24
====== ====== ======= =======
For purposes of pro forma disclosures, the estimated fair value of
stock-based compensation cost is amortized using the attribution method
under FASB Interpretation No. 28, "Accounting for Stock Appreciation Rights
and Other Variable Stock Option Award Plans."
3. ACQUISITIONS AND DISPOSITIONS
On July 11, 2005, the Company acquired substantially all the assets of
Kremer Laser Eye ("Kremer") for $29.6 million. In addition, the Company
assumed certain liabilities and incurred estimated transaction costs of
$1.1 million. Simultaneously with this transaction, the Company sold an 18%
interest in Kremer to a group of doctors associated with Kremer for $5.3
million. As a result, the Company has an 82% interest in Kremer. The
results of operations of Kremer have been included in the Company's
consolidated statements of operations since July 11, 2005.
Kremer operates three refractive centers and one ambulatory surgery center
all of which are located in the northeastern part of the United States. For
over 20 years, Kremer has been an integrated eye care company providing
refractive, cataract and glaucoma surgery services. The acquisition of
Kremer expands the Company's presence in both the refractive and ASC
businesses in one of the largest populated markets in the United States.
Under the purchase method of accounting, the initial purchase price is
allocated to Kremer's net tangible and intangible assets based upon their
estimated fair value as of the date of the acquisition. The purchase price
allocation is preliminary because the Company is in the process of
evaluating Kremer's contractual allowances.
The following table represents the Company's pro forma consolidated results
of operations as if the acquisition of Kremer had occurred at the beginning
of each period presented. Such results have been prepared by adjusting the
historical TLCVision results to include Kremer results of operations. The
pro forma results do not include any cost savings that may result from the
combination of TLCVision and Kremer operations. The pro forma results may
not necessarily reflect the consolidated operations that would have existed
had the acquisition been completed at the beginning of such periods nor are
they necessarily indicative of future results. Pro forma results for the
three months ended September 30, 2005 are not materially different from the
Company's reported results.
8
THREE MONTHS NINE MONTHS ENDED
ENDED SEPTEMBER 30,
SEPTEMBER 30, -------------------
2004 2005 2004
------------- -------- --------
Total revenues ................ $61,990 $210,017 $204,599
======= ======== ========
Net income .................... $ 3,864 $ 18,491 $ 19,833
======= ======== ========
Earnings per share - basic .... $ 0.06 $ 0.26 $ 0.29
======= ======== ========
Earnings per share - diluted .. $ 0.05 $ 0.26 $ 0.28
======= ======== ========
On July 1, 2005, the Company acquired a 100% interest in Millennium Laser
Eye ("Millennium") for $6.0 million in cash plus the assumption of certain
liabilities. Millennium provides refractive services in Washington, D.C.
On March 1, 2005, the Company sold its interest in Aspen Healthcare, Inc.
("Aspen") to National Surgical Centers, Inc. and recorded a gain of $0.3
million, which is included in other operating expenses (income).
The Company's strategy includes periodic acquisitions of or investments in
entities that operate in the refractive, cataract or eye care markets.
During the nine months ended September 30, 2005, the Company paid a total
of approximately $11 million to acquire or invest in several other
entities, none of which were individually greater than $5 million.
4. EARNINGS PER SHARE
The following table sets forth the computation of diluted earnings per
share:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2005 2004 2005 2004
-------- ------- ------- -------
Net income ..................................... $ 1,699 $ 3,322 $16,816 $17,613
======= ======= ======= =======
Weighted-average shares outstanding - basic .... 69,888 69,004 70,083 68,153
Dilutive effect of stock options and warrants .. 1,636 2,349 1,794 2,679
------- ------- ------- -------
Weighted-average shares outstanding - diluted .. 71,524 71,353 71,877 70,832
======= ======= ======= =======
Earnings per share - diluted ................... $ 0.02 $ 0.05 $ 0.23 $ 0.25
======= ======= ======= =======
5. SEGMENT INFORMATION
The Company has three reportable segments: refractive, mobile cataract and
age-related macular degeneration ("AMD"). The refractive segment provides
the majority of the Company's revenue and consists of providing corrective
laser surgery specifically related to refractive disorders, such as myopia
(nearsightedness), hyperopia (farsightedness) and astigmatism. This segment
is comprised of laser centers and the fixed and mobile access business. The
mobile cataract segment provides surgery specifically for the treatment of
cataracts. The AMD segment primarily includes the Company's majority
interest in OccuLogix, Inc. (formerly Vascular Sciences Corporation) and
consists of pursuing commercial applications of treatments of dry
age-related macular degeneration. Other includes an accumulation of other
healthcare business activities including the management of cataract and
secondary care centers that provide advanced levels of eye care, network
marketing and management to optometrists, and professional healthcare
facility management.
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.
9
The following tables set forth information by segments:
THREE MONTHS ENDED SEPTEMBER 30, 2005 MOBILE
(IN THOUSANDS) REFRACTIVE CATARACT AMD OTHER TOTAL
- -------------------------------------- ---------- -------- ------- ------- -------
Revenues ............................. $42,814 $8,241 $ 635 $ 9,949 $61,639
Expenses:
Operating ......................... 39,481 6,909 3,419 6,584 56,393
Depreciation and amortization ..... 3,007 641 30 353 4,031
------- ------- ------- ------- -------
42,488 7,550 3,449 6,937 60,424
------- ------- ------- ------- -------
Income (loss) from operations ........ 326 691 (2,814) 3,012 1,215
Interest income (expense) ............ 645 (32) 411 (388) 636
Minority interests ................... (377) -- 1,257 (1,489) (609)
Earnings from equity investments ..... 262 -- -- 225 487
Income taxes ......................... (1) -- (3) (26) (30)
------- ------- ------- ------- -------
Net income (loss) .................... $ 855 $ 659 $(1,149) $ 1,334 $ 1,699
======= ====== ======= ======= =======
THREE MONTHS ENDED SEPTEMBER 30, 2004 MOBILE
(IN THOUSANDS) REFRACTIVE CATARACT AMD OTHER TOTAL
- -------------------------------------- ---------- -------- ----- ------- -------
Revenues ............................. $41,393 $7,039 $ 218 $ 9,042 $57,692
Expenses:
Operating ......................... 36,460 5,642 962 5,613 48,677
Depreciation and amortization ..... 3,281 638 15 352 4,286
------- ------ ----- ------- -------
39,741 6,280 977 5,965 52,963
------- ------ ----- ------- -------
Income (loss) from operations ........ $ 1,652 $ 759 $(759) $ 3,077 $ 4,729
Interest income (expense) ............ 265 (69) -- (382) (186)
Minority interests ................... (442) -- -- (1,232) (1,674)
Earnings from equity investments ..... 499 -- -- 56 555
Income taxes ......................... (21) -- -- (81) (102)
------- ------ ----- ------- -------
Net income (loss) .................... $ 1,953 $ 690 $(759) $ 1,438 $ 3,322
======= ====== ===== ======= =======
NINE MONTHS ENDED SEPTEMBER 30, 2005 MOBILE
(IN THOUSANDS) REFRACTIVE CATARACT AMD OTHER TOTAL
- -------------------------------------- ---------- -------- ------- ------- --------
Revenues ............................. $145,828 $23,137 $ 1,635 $28,908 $199,508
Expenses:
Operating ......................... 122,723 18,974 11,292 18,625 171,614
Depreciation and amortization ..... 8,927 1,985 88 1,019 12,019
-------- ------- ------- ------- --------
131,650 20,959 11,380 19,644 183,633
-------- ------- ------- ------- --------
Income (loss) from operations ........ 14,178 2,178 (9,745) 9,264 15,875
Interest income (expense) ............ 2,148 (86) 1,187 (1,204) 2,045
Minority interests ................... (2,065) -- 4,167 (4,502) (2,400)
Earnings from equity investments ..... 1,110 -- -- 716 1,826
Income taxes ......................... (661) (1) (3) 135 (530)
-------- ------- ------- ------- --------
Net income (loss) .................... $ 14,710 $ 2,091 $(4,394) $ 4,409 $ 16,816
======== ======= ======= ======= ========
NINE MONTHS ENDED SEPTEMBER 30, 2004 MOBILE
(IN THOUSANDS) REFRACTIVE CATARACT AMD OTHER TOTAL
- -------------------------------------- ---------- -------- ------- ------- --------
Revenues ............................. $142,041 $20,019 $ 489 $27,822 $190,371
Expenses:
Operating ......................... 117,892 16,316 2,227 17,329 153,764
Depreciation and amortization ..... 10,327 1,984 53 940 13,304
-------- ------- ------- ------- --------
128,219 18,300 2,280 18,269 167,068
-------- ------- ------- ------- --------
Income (loss) from operations ........ 13,822 1,719 (1,791) 9,553 23,303
Interest income (expense) ............ 531 (88) -- (1,304) (861)
Minority interests ................... (1,813) -- -- (4,189) (6,002)
Earnings from equity investments ..... 1,389 -- -- 178 1,567
Income taxes ......................... (135) (1) -- (258) (394)
-------- ------- ------- ------- --------
Net income (loss) .................... $ 13,794 $ 1,630 $(1,791) $ 3,980 $ 17,613
======== ======= ======= ======= ========
10
6. SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash transactions:
NINE MONTHS
ENDED
SEPTEMBER 30,
----------------
2005 2004
------- ------
Capital lease obligations relating to equipment purchases ...... $ 2,519 $2,221
Inventory contributed to OccuLogix, Inc. ....................... 173 --
Value of shares issued upon meeting certain earnings criteria .. 181 389
Retirement of treasury stock ................................... 10,031 --
Accrual for treasury stock ..................................... 4,668 --
Option and warrant reduction ................................... 1,004 4,005
Value of shares issued as part of the employee share purchase
plan and 401(k) plan ........................................ 317 441
Cash paid for the following:
NINE MONTHS
ENDED
SEPTEMBER 30,
---------------
2005 2004
------ ------
Interest ...... $1,486 $1,887
Income taxes .. 681 572
7. SHARE REPURCHASES
During the three and nine months ended September 30, 2005, the Company
repurchased 1,829,800 common shares for $14.7 million. During the three and
nine months ended September 30, 2005, the Company retired 1,150,000 shares
valued at $10.0 million. The remaining 679,800 shares valued at $4.7
million were held in treasury stock as of September 30, 2005.
8. INVESTMENTS AND OTHER ASSETS
As of December 31, 2003, the Company maintained a $1.2 million reserve
against a $2.3 million long-term note receivable from a secondary care
service provider of which the Company owns approximately 25% of the
outstanding common shares. The Company had determined that the ability of
this secondary care service provider to repay this note was in doubt due to
the deteriorating financial condition of the investee. Through the first
six months of 2004, this secondary care provider continued to improve its
profitability and financial position and made all of its payments to the
Company when due. As a result, the Company reevaluated the collectibility
of the note as of June 30, 2004 and recorded an adjustment of $1.2 million
to reverse the remaining reserve, which is included in other operating
expense (income).
9. RESTRUCTURING AND SEVERANCE
During the nine months ended September 30, 2004, the Company recorded a
$2.6 million charge for severance payments to two officers under the terms
of employment contracts and a $0.2 million charge related to ongoing lease
payment obligations at previously closed centers. The severance payments
have been substantially paid as of September 30, 2005, while the lease
costs will be paid out over the remaining terms of the leases.
10. RECENTLY ISSUED ACCOUNTING STANDARDS
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
issued FASB Statement No. 123 (revised 2004), "Share-Based Payment"
("Statement 123(R)"), which is a revision of FASB Statement No. 123,
"Accounting for Stock-Based Compensation" ("Statement 123"). Statement
123(R) supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and amends FASB Statement No. 95, "Statement of Cash Flows."
Generally, the approach in Statement 123(R) is similar to the approach
described in Statement 123. However, Statement 123(R) requires all
share-based payments to employees, including grants of employee stock
11
options, to be recognized in the income statement based on their fair
values. Under Statement 123(R), pro forma disclosure is no longer
permitted.
On April 14, 2005, the Securities and Exchange Commission ("SEC") announced
that the effective date of Statement 123(R) will be suspended until January
1, 2006, for calendar year companies. Statement 123(R) permits companies to
adopt its requirements using either a "modified prospective" method, or a
"modified retrospective" method. Under the "modified prospective" method,
compensation cost is recognized in the financial statements beginning with
the effective date, based on the requirements of Statement 123(R) for all
share-based payments granted after that date, and based on the requirements
of Statement 123 for all unvested awards granted prior to the effective
date of Statement 123(R). Under the "modified retrospective" method, the
requirements are the same as under the "modified prospective" method, but
also permits entities to restate financial statements of previous periods
based on pro forma disclosures made in accordance with Statement 123.
The Company currently utilizes the Black-Scholes option pricing model to
measure the fair value of stock options granted to employees. While
Statement 123(R) permits entities to continue to use such a model, the
standard also permits the use of a "lattice" model. The Company has not yet
determined which model it will use to measure the fair value of employee
stock options upon the adoption of Statement 123(R).
The Company currently expects to adopt Statement 123(R) effective January
1, 2006, however, the Company has not yet determined which of the
aforementioned adoption methods it will use. In addition, the Company has
not yet determined the financial statement impact of adopting Statement
123(R) for 2006, which could be materially adverse.
11. SUBSEQUENT EVENTS
In October 2005, the Company purchased an additional 170,200 common shares
for $1.2 million completing its previously announced 2.0 million share
repurchase program.
On October 27, 2005, the Company agreed to acquire TruVision, Inc.
("TruVision") for $17.5 million paid in cash and company stock coupled with
a three-year earn out. TruVision is a managed care contractor to health
plan members and large corporations across 44 states. TruVision's services
enable insurance health plans and large corporations to offer LASIK vision
surgery to their members at a reduced price. TruVision represents over 85
million members across 37 contracted health plans. The Company anticipates
closing on the acquisition by mid-November.
12
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Quarterly Report on Form 10-Q (herein, together with all amendments,
exhibits and schedules hereto, referred to as the "Form 10-Q") contains certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which
statements can be identified by the use of forward looking terminology, such as
"may," "will," "expect," "anticipate," "estimate," "plans," "intends" or
"continue" or the negative thereof or other variations thereon or comparable
terminology. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including but not limited to those set forth elsewhere in this Form 10-Q in the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and in the Company's Annual Report on Form 10-K, as
amended, for the period ended December 31, 2004. Unless the context indicates or
requires otherwise, references in this Form 10-Q to the "Company" or "TLCVision"
shall mean TLC Vision Corporation and its subsidiaries. References to "$" or
"dollars" shall mean U.S. dollars unless otherwise indicated. References to "C$"
shall mean Canadian dollars. References to the "Commission" shall mean the U.S.
Securities and Exchange Commission.
OVERVIEW
TLC Vision Corporation is a diversified eye care services company dedicated
to improving lives through better vision by providing eye doctors with the tools
and technologies they need to deliver high quality patient care. The majority of
the Company's revenues comes from refractive surgery, which involves using an
excimer laser to treat common refractive vision disorders such as myopia
(nearsightedness), hyperopia (farsightedness) and astigmatism. The Company's
business models include arrangements ranging from owning and operating fixed
site centers to providing access to lasers through fixed site and mobile service
relationships. In addition to refractive surgery, the Company is diversified
into other eye care businesses. Through its Midwest Surgical Services, Inc.
("MSS") subsidiary, the Company furnishes hospitals and independent surgeons
with mobile or fixed site access to cataract surgery equipment and services.
Through its OR Partners and Michigan subsidiaries, TLCVision develops, manages
and has equity participation in single-specialty eye care ambulatory surgery
centers and multi-specialty ambulatory surgery centers. The Company owns a 51%
majority interest in Vision Source, an optometric franchise network for
independent optometrists. The Company is also a 51% majority owner of OccuLogix,
Inc., which focuses on the treatment of a specific eye disease known as dry
age-related macular degeneration, via rheopheresis, a process for filtering
blood. OccuLogix, Inc. is also a reporting company with the Commission, and its
stock is publicly traded.
The Company serves surgeons who performed over 212,000 procedures,
including refractive and cataract procedures at the Company's centers or using
the Company's equipment during the nine months ended September 30, 2005.
The Company continually assesses patient, optometric and ophthalmic
industry trends and developing strategies to improve laser vision correction
revenues and procedure volumes. Additionally, it is pursuing growth initiatives
and investment opportunities in the refractive market and within its other
healthcare services.
RECENT DEVELOPMENTS
On July 11, 2005, the Company acquired substantially all the assets of
Kremer Laser Eye ("Kremer") for $29.6 million. In addition, the Company assumed
certain liabilities and incurred estimated transaction costs of $1.1 million.
Simultaneously with this transaction, the Company sold an 18% interest in Kremer
to a group of doctors associated with Kremer for $5.3 million. As a result, the
Company has an 82% interest in Kremer. The results of operations of Kremer have
been included in the Company's consolidated statements of operations since July
11, 2005.
Kremer operates three refractive centers and one ambulatory surgery center
all of which are located in the northeastern part of the United States. For over
20 years, Kremer has been an integrated eye care company
13
providing refractive, cataract and glaucoma surgery services. The acquisition of
Kremer expands the Company's presence in both the refractive and ASC businesses
in one of the largest populated markets in the United States.
Under the purchase method of accounting, the initial purchase price is
allocated to Kremer's net tangible and intangible assets based upon their
estimated fair value as of the date of the acquisition. The purchase price
allocation is preliminary because the Company is in the process of evaluating
Kremer's contractual allowances.
The following table represents the Company's pro forma consolidated results
of operations as if the acquisition of Kremer had occurred at the beginning of
each period presented. Such results have been prepared by adjusting the
historical TLCVision results to include Kremer results of operations. The pro
forma results do not include any cost savings that may result from the
combination of TLCVision and Kremer operations. The pro forma results may not
necessarily reflect the consolidated operations that would have existed had the
acquisition been completed at the beginning of such periods nor are they
necessarily indicative of future results. Pro forma results for the three months
ended September 30, 2005 are not materially different from the Company's
reported results.
THREE MONTHS
ENDED NINE MONTHS ENDED SEPTEMBER 30,
SEPTEMBER 30, -------------------------------
2004 2005 2004
------------- -------- --------
Total revenues ................ $61,990 $210,017 $204,599
======= ======== ========
Net income .................... $ 3,864 $ 18,491 $ 19,833
======= ======== ========
Earnings per share - basic .... $ 0.06 $ 0.26 $ 0.29
======= ======== ========
Earnings per share - diluted .. $ 0.05 $ 0.26 $ 0.28
======= ======== ========
On July 1, 2005, the Company acquired a 100% interest in Millennium Laser
Eye ("Millennium") for $6.0 million in cash plus the assumption of certain
liabilities. Millennium provides refractive services in Washington, D.C.
On March 1, 2005, the Company sold its interest in Aspen Healthcare, Inc.
("Aspen") to National Surgical Centers, Inc. and recorded a gain of $0.3
million, which is included in other operating expenses (income).
The Company's strategy includes periodic acquisitions of or investments in
entities that operate in the refractive, cataract or eye care markets. During
the nine months ended September 30, 2005, the Company paid a total of
approximately $11 million to acquire or invest in several other entities, none
of which were individually greater than $5 million.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2004
Total revenues for the three months ended September 30, 2005 were $61.6
million, an increase of $3.9 million, or 7% over revenues of $57.7 million for
the three months ended September 30, 2004. This increase was due to a 3%
increase in refractive revenues and a 15% increase in other healthcare services
revenues. Approximately 69% of total revenues for the three months ended
September 30, 2005 were derived from refractive services compared to 72% during
the three months ended September 30, 2004.
Revenues from the refractive segment for the three months ended September
30, 2005 were $42.8 million, an increase of $1.4 million or 3% from revenues of
$41.4 million for the three months ended September 30, 2004. Refractive revenues
increased as a result of an increased mix of higher priced procedures, primarily
Custom LASIK, Wavelight and Intralase. Refractive revenues also increased as a
result of acquiring four new refractive centers during the three months ended
September 30, 2005. These increases were partially offset by a decrease in
refractive procedures. Refractive procedures for the three months ended
September 30, 2005 were approximately 42,500, a decrease of 3,200 or 7% from
refractive procedures of 45,700 for the three months ended September 30, 2004.
14
Procedures for Laser Eye Care of California ("LECC") were included in both
periods and accounted for 4,300 procedures for the three months ended September
30, 2005, a decrease of 400 procedures over the prior year period. The Company
owns a 30% interest in LECC.
Revenues from centers for the three months ended September 30, 2005 were
$35.0 million, an increase of $3.0 million, or 9% from revenues of $32.0 million
for the three months ended September 30, 2004. The increase in revenues from
centers was due to an increase in centers procedures and an increased mix of
higher priced procedures. For the three months ended September 30, 2005, centers
procedures were approximately 27,300, an increase of 100 over centers procedures
of 27,200 for the three months ended September 30, 2004. Included in this
increase were 1,900 procedures from centers opened or acquired since September
30, 2004.
Revenues from access services for the three months ended September 30, 2005
were $7.8 million, a decrease of $1.6 million or 16% from revenues of $9.4
million for the three months ended September 30, 2004. The decline in access
revenues was primarily due to 3,300 or 18% 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 September 30,
2005 was $32.5 million, an increase of $2.4 million, or 8% over the cost of
refractive revenues of $30.1 million for the three months ended September 30,
2004. This increase was primarily attributable to higher costs associated with
higher priced procedures and the operations of the newly acquired centers. Gross
margins for the refractive business as a whole decreased to 24% during the three
months ended September 30, 2005 from 27% in the prior year period.
The cost of revenues from centers for the three months ended September 30,
2005 was $26.1 million, an increase of $2.9 million, or 13% from the cost of
revenues of $23.2 million for the three months ended September 30, 2004. This
increase was primarily attributable to increased procedure volume, including
increases from the newly acquired centers, and higher costs associated with
higher priced procedures. Gross margins from centers decreased to 25% for the
three months ended September 30, 2005 from 27% in the prior year period.
The cost of revenues from access services for the three months ended
September 30, 2005 was $6.3 million, a decrease of $0.6 million or 9% from the
cost of revenues of $6.9 million during the three months ended September 30,
2004. This decrease was primarily due to a decrease in access procedures
partially offset by costs from higher priced procedures. Gross margins decreased
to 19% from 26% primarily due to a decrease in procedures and lower margins on
Custom LASIK procedures.
Revenues from other healthcare services for the three months ended
September 30, 2005, were $18.8 million, an increase of $2.5 million or 16% from
revenues of $16.3 million for the three months ended September 30, 2004.
Approximately 31% of total revenues for the three months ended September 30,
2005 were derived from other healthcare services compared to 28% for the three
months ended September 30, 2004. The increase in other healthcare services
revenue resulted from internal growth of existing businesses and contributions
from businesses acquired within the past year.
The cost of revenues from other healthcare services for the three months
ended September 30, 2005 was $11.7 million, an increase of $1.7 million or 17%
from cost of revenues of $10.0 million for the three months ended September 30,
2004. The increase in cost of revenues primarily related to incremental costs
incurred to generate the increased revenue of the other healthcare service
business. For the three months ended September 30, 2005, gross margins decreased
to 38% from 39% for the prior year period due to lower margins in the mobile
cataract business.
General and administrative expenses increased to $8.7 million for the three
months ended September 30, 2005 from $6.8 million for the three months ended
September 30, 2004. The $1.9 million or 28% increase included a $1.8 million
increase as a result of consolidating the operations of OccuLogix, Inc. in the
current year period. The remaining $0.1 million increase was primarily due to
$0.3 million of costs related to businesses acquired within the last year
partially offset by $0.2 million of lower spending from ongoing activities.
Marketing and sales expenses increased to $5.4 million for the three months
ended September 30, 2005 from $4.7 million for the three months ended September
30, 2004. The $0.7 million or 15% increase included a $0.1 million increase as a
result of consolidating the operations of OccuLogix, Inc. in the current year
period, $0.3
15
million of costs related to businesses acquired within the last year, and a $0.3
million increase in the refractive business.
Research and development, clinical and regulatory expenses increased to
$1.1 million for the three months ended September 30, 2005 from $0.5 million for
the three months ended September 30, 2004. Research and development, clinical
and regulatory expenses were incurred by OccuLogix, Inc. as it conducted
clinical trials related to its rheopheresis application to the U. S. Food and
Drug Administration ("FDA").
Interest income increased to $1.1 million for the three months ended
September 30, 2005 from $0.4 million for the three months ended September 30,
2004. This $0.7 million increase included a $0.4 million increase as a result of
consolidating the operations of OccuLogix, Inc. in the current year period. The
remaining $0.3 million increase was due to an increase in the Company's cash and
cash equivalents and short-term investments balances as well as higher rates of
return.
Interest expense decreased to $0.4 million for the three months ended
September 30, 2005 from $0.6 million for the three months ended September 30,
2004. This $0.2 million decrease was due to declining debt and lease
obligations.
Minority interest expense decreased to $0.6 million for the three months
ended September 30, 2005 from $1.7 million for the three months ended September
30, 2004. This $1.1 million decrease included a $1.3 million decrease as a
result of consolidating the operations of OccuLogix, Inc. in the current year
period offset by a $0.2 million increase from the Company's other business
segments.
Earnings from equity investments decreased to $0.5 million for the three
months ended September 30, 2005 from $0.6 million for the three months ended
September 30, 2004. This $0.1 million decrease is primarily due to a $0.2
million decrease in earnings from LECC partially offset by $0.1 million in
earnings from an ASC in which the Company acquired a minority ownership in
December 2004.
Net income for the three months ended September 30, 2005 decreased to $1.7
million or $0.02 per share from $3.3 million or $0.05 per share for the three
months ended September 30, 2004. This $1.6 million decrease included a $0.4
million decrease from the AMD segment. Excluding the impact of the AMD segment,
net income decreased to $2.8 million or $0.04 per share for the three months
ended September 30, 2005 from $4.1 million or $0.06 per share for the prior year
period.
NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 2004
Total revenues for the nine months ended September 30, 2005 were $199.5
million, an increase of $9.1 million, or 5% over revenues of $190.4 million for
the nine months ended September 30, 2004. This increase was due to a 3% increase
in refractive revenues and a 11% increase in other healthcare services revenues.
Approximately 73% of total revenues were derived from refractive services for
the nine months ended September 30, 2005 compared to 75% for the nine months
ended September 30, 2004.
Revenues from the refractive segment for the nine months ended September
30, 2005 were $145.8 million, an increase of $3.8 million or 3% from revenues of
$142.0 million for the nine months ended September 30, 2004. The increase in
refractive revenues was due to an increase in centers procedures, including
increases from newly acquired centers, and an increased mix of higher priced
procedures partially offset by a decrease in access procedures. Refractive
procedures for the nine months ended September 30, 2005 were approximately
151,100, a decrease of 3,100 from refractive procedures of 154,200 for the nine
months ended September 30, 2004. Procedures for LECC were included in both
periods and accounted for 13,700 procedures for the nine months ended September
30, 2005, an increase of 1,000 procedures over the prior year period. The
Company owns a 30% interest in LECC.
Revenues from centers for the nine months ended September 30, 2005 were
$116.7 million, an increase of $6.6 million, or 6% from revenues of $110.1
million for the nine months ended September 30, 2004. The increase in revenues
from centers was due to an increase in centers procedures, including increases
from newly acquired centers, and an increased mix of higher priced procedures.
For the nine months ended September 30, 2005, centers
16
procedures were approximately 93,300, an increase of 3,100 or 3% over centers
procedures of 90,200 for the nine months ended September 30, 2004. This increase
was due to 1,300 or 1% more procedures at centers open during both the nine
months ended September 30, 2005 and 2004, 2,400 procedures from centers opened
or acquired since September 30, 2004 offset by 600 fewer procedures from centers
closed subsequent to June 30, 2004.
Revenues from access services for the nine months ended September 30, 2005
were $29.1 million, a decrease of $2.9 million or 9% from revenues of $32.0
million for the nine months ended September 30, 2004. The decline in access
revenues was primarily due to 6,100 or 10% fewer procedures.
The cost of refractive revenues for the nine months ended September 30,
2005 was $101.5 million, an increase of $2.4 million, or 2% over the cost of
refractive revenues of $99.1 million for the nine months ended September 30,
2004. This increase was primarily attributable to higher costs associated with
higher priced procedures and the operations of newly acquired centers. Gross
margins for the refractive business as a whole remained consistent at 30% during
the nine months ended September 30, 2005 and 2004.
The cost of revenues from centers for the nine months ended September 30,
2005 was $80.6 million, an increase of $3.8 million, or 5% from the cost of
revenues of $76.8 million from the nine months ended September 30, 2004. This
increase was primarily attributable to increased procedure volume, including
increases from newly acquired centers, and higher costs associated with higher
priced procedures. Gross margins from centers increased to 31% from 30%
primarily due to an increase in procedures.
The cost of revenues from access services for the nine months ended
September 30, 2005 was $20.9 million, a decrease of $1.3 million or 6% from the
cost of revenues of $22.2 million during the nine months ended September 30,
2004. This decrease primarily resulted from lower procedure volume partially
offset by costs from higher priced procedures. Gross margins decreased to 28%
from 31% primarily due to a decrease in procedures.
Revenues from other healthcare services for the nine months ended September
30, 2005, were $53.7 million, an increase of $5.4 million or 11% from revenues
of $48.3 million for the nine months ended September 30, 2004. Approximately 27%
of total revenues for the nine months ended September 30, 2005 were derived from
other healthcare services compared to 25% for the nine months ended September
30, 2004. The increase in other healthcare services revenue resulted from
internal growth of existing businesses and contributions from businesses
acquired within the past year.
The cost of revenues from other healthcare services for the nine months
ended September 30, 2005 was $33.0 million, an increase of $3.3 million or 11%
from cost of revenues of $29.7 million for the nine months ended September 30,
2004. The increase in cost of revenues primarily related to incremental costs
incurred to generate the increased revenue of the other healthcare services
business. For the nine months ended September 30, 2005 and 2004, gross margins
remained consistent at 39%.
General and administrative expenses increased to $27.0 million for the nine
months ended September 30, 2005 from $19.6 million for the nine months ended
September 30, 2004. The $7.4 million or 38% increase included a $5.5 million
increase as a result of consolidating the operations of OccuLogix, Inc. in the
current year period. The remaining $1.9 million increase was primarily due to
additional staffing costs, professional fees, corporate taxes and costs related
to businesses acquired within the last year.
Marketing and sales expenses increased to $16.2 million for the nine months
ended September 30, 2005 from $13.6 million for the nine months ended September
30, 2004. The $2.6 million or 20% increase included a $0.4 million increase as a
result of consolidating the operations of OccuLogix, Inc. in the current year
period, $0.3 million of costs related to businesses acquired within the last
year and a $1.9 million increase in the refractive business.
Research and development, clinical and regulatory expenses increased to
$3.8 million for the nine months ended September 30, 2005 from $1.2 million for
the nine months ended September 30, 2004. Research and development, clinical and
regulatory expenses are incurred by OccuLogix, Inc. as it conducted clinical
trials related to its rheopheresis application to the U.S. FDA.
17
Other operating income of $1.0 million for the nine months ended September
30, 2005 primarily resulted from a $0.3 million gain on the sale of Aspen, a
$0.3 million reimbursement from a previous research and development investment
and $0.4 million of miscellaneous operating income. For the nine months ended
September 30, 2004, other operating income of $1.9 million resulted from a $1.1
million gain on the sale of a controlling interest in LECC, a $1.2 million
reversal of a reserve related to a long-term note receivable, a $0.4 million
reimbursement from a previous research and development investment and $0.2
million of miscellaneous operating income offset by $1.0 million of net losses
related to the sales and disposals of fixed assets.
During the nine months ended September 30, 2004, the Company recorded a
$2.6 million charge for severance payments to two officers under the terms of
employment contracts and a $0.2 million charge for ongoing lease payment
obligations at previously closed centers.
Interest income increased to $3.4 million for the nine months ended
September 30, 2005 from $1.3 million for the nine months ended September 30,
2004. This $2.1 million increase included a $1.2 million increase as a result of
consolidating the operations of OccuLogix, Inc. in the current year period. The
remaining $0.9 million increase was 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 $1.3 million for the nine months ended
September 30, 2005 from $2.2 million for the nine months ended September 30,
2004. This $0.9 million decrease was due to declining debt and lease
obligations.
Minority interest expense decreased to $2.4 million for the nine months
ended September 30, 2005 from $6.0 million for the nine months ended September
30, 2004. This $3.6 million decrease included a $4.2 million decrease as a
result of consolidating the operations of OccuLogix, Inc. in the current year
period offset by a $0.6 million increase from the Company's other business
segments.
Earnings from equity investments increased to $1.8 million for the nine
months ended September 30, 2005 from $1.6 million for the nine months ended
September 30, 2004. This $0.2 million increase was primarily due to $0.5 million
of earnings from an ASC in which the Company acquired a minority ownership in
December 2004 partially offset by a $0.2 million decrease in earnings from LECC.
Net income for the nine months ended September 30, 2005 decreased to $16.8
million or $0.23 per share from $17.6 million or $0.25 per share for the nine
months ended September 30, 2004. This $0.8 million decrease included a $2.6
million decrease from the AMD segment. Excluding the impact of the AMD segment,
net income increased to $21.2 million or $0.30 per share for the nine months
ended September 30, 2005 from $19.4 million or $0.27 per share for the prior
year period.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 2005, the Company continued to
focus its activities primarily on expanding its refractive centers and other
healthcare businesses through internal growth and acquisitions. Cash and cash
equivalents, short-term investments and restricted cash were $102.4 million at
September 30, 2005 compared to $145.4 million at December 31, 2004. Working
capital at September 30, 2005 was $96.6 million, a decrease of $34.6 million
from $131.2 million at December 31, 2004.
The Company's principal cash expenditures have included normal operating
expenses, debt repayment, distributions to minority partners, capital
expenditures, share repurchases, acquisitions and investments. OccuLogix, Inc.'s
principal cash expenditures have included expenditures to fund the development
of its infrastructure, to complete its clinical trials, to accumulate inventory
and to undertake other activities to commercialize its products.
During the nine months ended September 30, 2005, the Company invested $6.7
million in fixed assets and received vendor financing for $2.5 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
18
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
nine months ended September 30, 2005, the Company reserved an additional
liability of $0.5 million related to ongoing lease payment obligations at
previously closed centers and made cash payments of $2.5 million in respect of
these exit liabilities, resulting in a $0.8 million exit liability at September
30, 2005.
CASH FROM OPERATING ACTIVITIES
Net cash provided by operating activities was $19.1 million for the nine
months ended September 30, 2005. The cash flows provided by operating activities
during the nine months ended September 30, 2005 were primarily due to net income
of $16.8 million plus non-cash items including depreciation and amortization of
$12.0 million and minority interest expense of $2.4 million, offset by an
increase in net operating assets of $9.9 million, earnings from equity
investments of $1.8 million and a gain on the sale of a subsidiary of $0.3
million. The increase in net operating assets consisted of a $1.5 million
increase in accounts receivable due primarily to higher revenues, a $4.2 million
increase in prepaid expenses and other current assets and a $4.2 million
decrease in accounts payable and accrued liabilities. Excluding the impact of
the AMD segment, net cash provided by operating activities would have been $33.7
million for the nine months ended September 30, 2005.
CASH FROM INVESTING ACTIVITIES
Net cash provided by investing activities was $18.3 million for the nine
months ended September 30, 2005. The cash flows provided by investing activities
during the nine months ended September 30, 2005 primarily included net proceeds
from the sales of short-term investments of $60.3 million, proceeds from the
sale of a subsidiary of $3.4 million, distributions and loan payments received
from equity investments of $1.8 million, proceeds from the sales of fixed assets
of $1.3 million and a $0.3 million reimbursement from a previous research and
development investment. These cash flows were offset by capital expenditures of
$6.7 million and acquisitions and equity investments of $42.1 million. Excluding
the impact of the AMD segment, net cash provided by investing activities would
have been $8.2 million for the nine months ended September 30, 2005.
CASH FROM FINANCING ACTIVITIES
Net cash used in financing activities was $20.2 million for the nine months
ended September 30, 2005. Net cash used in financing activities during the nine
months ended September 30, 2005 primarily related to purchases of treasury stock
of $10.0 million, the repayment of certain notes payable and capitalized lease
obligations of $7.5 million and distributions to minority interests of $6.0
million, offset by proceeds from debt financing of $1.5 million and proceeds
from the exercise of stock options of $1.7 million. Excluding the impact of the
AMD segment, net cash used in investing activities would have been $20.5 million
for the nine months ended September 30, 2005.
SUBSEQUENT EVENTS
In October 2005, the Company purchased an additional 170,200 common shares
for $1.2 million completing its previously announced 2.0 million share
repurchase program.
On October 27, 2005, the Company agreed to acquire TruVision, Inc.
("TruVision") for $17.5 million paid in cash and company stock coupled with a
three-year earn out. TruVision is a managed care contractor to health plan
members and large corporations across 44 states. TruVision's services enable
insurance health plans and large corporations to offer LASIK vision surgery to
their members at a reduced price. TruVision represents over 85 million members
across 37 contracted health plans. The Company anticipates closing on the
acquisition by mid-November.
19
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,
2004.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) The following table provides information about purchases by the
Company during the quarter ended September 30, 2005 of equity
securities that are registered by the Company pursuant to Section 12
of the Exchange Act:
20
Issuer Purchases of TLCVision Common Stock
Total Number of
Total Number Shares Purchased as Maximum Number of Shares
of Shares Average Price Part of Publicly that May Yet Be Purchased
Period Purchased Paid per Share Announced Programs (1) Under the Programs (1)
------ ------------ -------------- ---------------------- -------------------------
07/01/2005 - 07/31/2005 -- $ -- -- 2,000,000
08/01/2005 - 08/31/2005 1,150,000 8.7226 1,150,000 850,000
09/01/2005 - 09/30/2005 679,800 6.8673 679,800 170,200
--------- ------- --------- ---------
Total 1,829,800 $8.0334 1,829,800 170,200
--------- ------- --------- ---------
(1) On December 20, 2004, the Company announced a stock repurchase program,
pursuant to which up to 2,000,000 shares of its common stock may be
repurchased. Since September 30, 2005, the Company has acquired 170,200
additional shares to complete its repurchase program.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
2.1 Asset Purchase Agreement By and Among TLC Vision (USA) Corporation,
Eyes of the Future, P.C., and Frederic B. Kremer, M.D., dated as of
July 11, 2005
2.2 Asset Purchase Agreement By and Among TLC Vision (USA) Corporation,
Frederic B. Kremer, M.D., P.C., and Frederic B. Kremer, M.D., dated as
of July 11, 2005
2.3 Agreement and Plan of Merger By and Among Truvision, Inc. and TLC
Wildcard Corp. and TLC Vision Corporation and TLC Vision (USA)
Corporation and Lindsay T. Atwood, dated as of October 27, 2005
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.
21
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
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TLC VISION CORPORATION
By: /s/ James C. Wachtman
------------------------------------
James C. Wachtman
Chief Executive Officer
November 7, 2005
By: /s/ Steven P. Rasche
------------------------------------
Steven P. Rasche
Chief Financial Officer
November 7, 2005
23
EXHIBIT INDEX
NO. DESCRIPTION
--- -----------
2.1 Asset Purchase Agreement By and Among TLC Vision (USA) Corporation, Eyes
of the Future, P.C., and Frederic B. Kremer, M.D., dated as of July 11,
2005
2.2 Asset Purchase Agreement By and Among TLC Vision (USA) Corporation,
Frederic B. Kremer, M.D., P.C., and Frederic B. Kremer, M.D., dated as of
July 11, 2005
2.3 Agreement and Plan of Merger By and Among Truvision, Inc. and TLC
Wildcard Corp. and TLC Vision Corporation and TLC Vision (USA)
Corporation and Lindsay T. Atwood dated as of October 27, 2005
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
24