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, 2006
COMMISSION FILE NUMBER: 0-29302
TLC VISION CORPORATION
(Exact name of registrant as specified in its charter)
NEW BRUNSWICK, CANADA 980151150
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5280 SOLAR DRIVE, SUITE 300
MISSISSAUGA, ONTARIO L4W 5M8
(Address of principal executive offices) (Zip Code)
Registrant's telephone, including area code: (905) 602-2020
Indicate by check mark whether the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
[ ] Yes [X] No
Indicate by check mark whether the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
[ ] Yes [X] No
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12-b(2) of the Exchange Act.
[ ] Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12-b(2) of the Exchange Act).
[ ] Yes [X] No
As of May 8, 2006 there were 68,880,000 of the registrant's Common Shares
outstanding.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Statements of Operations for the three months
ended March 31, 2006 and 2005
Consolidated Balance Sheets as of March 31, 2006 and
December 31, 2005
Consolidated Statements of Cash Flows for the three months
ended March 31, 2006 and 2005
Consolidated Statement of Changes in Stockholders' Equity
for the three months ended March 31, 2006
Notes to Interim Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits
Signatures
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
TLC VISION CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED) (In thousands except per share amounts)
THREE MONTHS ENDED
MARCH 31,
----------------------
2006 2005
-------- -----------
AS RESTATED
Revenues:
Refractive:
Centers ................................................. $47,939 $43,765
Access .................................................. 10,988 11,411
Other healthcare services .................................. 18,654 15,873
------- -------
Total revenues ................................................ 77,581 71,049
------- -------
Cost of revenues:
Refractive:
Centers.................................................. 31,888 28,529
Access .................................................. 7,515 7,410
Other healthcare services .................................. 12,986 10,151
------- -------
Total cost of revenues ........................................ 52,389 46,090
------- -------
Gross profit ............................................... 25,192 24,959
------- -------
General and administrative .................................... 10,827 8,925
Marketing and sales 6,971 4,997
Research and development, clinical and regulatory ............. 1,475 1,344
Amortization of intangibles ................................... 864 1,011
Other expenses (income), net .................................. 492 (535)
------- -------
20,629 15,742
------- -------
Operating income .............................................. 4,563 9,217
Interest income ............................................... 1,013 1,072
Interest expense .............................................. (538) (458)
Minority interests ............................................ 186 (686)
Earnings from equity investments .............................. 923 659
------- -------
Income before income taxes .................................... 6,147 9,804
Income tax expense ............................................ (3,435) (3,077)
------- -------
Net income .................................................... $ 2,712 $ 6,727
======= =======
Earnings per share - basic .................................... $ 0.04 $ 0.10
======= =======
Earnings per share - diluted .................................. $ 0.04 $ 0.09
======= =======
Weighted average number of common shares outstanding - basic .. 68,756 70,036
Weighted average number of common shares outstanding -
diluted .................................................... 69,550 72,045
See the accompanying notes to unaudited interim consolidated financial
statements.
3
TLC VISION CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2006 2005
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents ............................. $ 45,735 $ 31,729
Short-term investments ................................ 29,912 38,213
Accounts receivable, net .............................. 21,541 20,583
Prepaid expenses, inventory and other ................. 16,816 17,123
--------- ---------
Total current assets ............................... 114,004 107,648
Restricted cash .......................................... 1,010 975
Investments and other assets ............................. 20,110 19,838
Goodwill ................................................. 100,021 99,402
Other intangible assets, net ............................. 23,307 24,021
Fixed assets, net ........................................ 49,775 49,159
--------- ---------
Total assets ............................................. $ 308,227 $ 301,043
========= =========
LIABILITIES
Current liabilities:
Accounts payable ...................................... $ 10,423 $ 11,031
Accrued liabilities ................................... 29,171 24,453
Current maturities of long-term debt .................. 6,099 5,268
--------- ---------
Total current liabilities........................... 45,693 40,752
Other long-term liabilities .............................. 3,198 3,427
Long term-debt, less current maturities .................. 12,115 12,665
Minority interests ....................................... 33,619 35,794
--------- ---------
Total liabilities ........................................ 94,625 92,638
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, no par value; unlimited number authorized .. 453,213 450,703
Option and warrant equity ................................ 1,836 1,861
Accumulated deficit ...................................... (241,447) (244,159)
--------- ---------
Total stockholders' equity ............................... 213,602 208,405
--------- ---------
Total liabilities and stockholders' equity ............... $ 308,227 $ 301,043
========= =========
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,
----------------------
2006 2005
-------- -----------
AS RESTATED
OPERATING ACTIVITIES
Net income ................................................................... $ 2,712 $ 6,727
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization ............................................. 3,792 4,017
Deferred taxes ............................................................ 2,131 2,506
Excess tax benefits from stock-based compensation expense ................. (1,710) --
Minority interests ........................................................ (186) 686
Earnings from equity investments .......................................... (923) (659)
Loss (gain) on sales and disposals of fixed assets ........................ 61 (96)
Reimbursements from investments in research and development arrangements .. (300) --
Write-down of OccuLogix, Inc. inventory ................................... 1,625 --
Gain on sale of subsidiary ................................................ -- (319)
Non-cash compensation expense ............................................. 612 69
Other ..................................................................... 26 --
Changes in operating assets and liabilities, net of acquisitions and
dispositions:
Accounts receivable .................................................... (1,089) (3,540)
Prepaid expenses, inventory and other current assets ................... (1,175) (2,308)
Accounts payable and accrued liabilities ............................... 3,383 (1,278)
------- --------
Cash from operating activities ............................................... 8,959 5,805
------- --------
INVESTING ACTIVITIES
Purchases of fixed assets .................................................... (2,349) (2,727)
Proceeds from sales of fixed assets .......................................... 26 454
Proceeds from divestitures of investments and subsidiaries, net .............. -- 3,430
Distributions and loan payments received from equity investments ............. 1,333 556
Reimbursements from investments in research and development arrangements ..... 300 --
Acquisitions and equity investments .......................................... (1,474) (443)
Proceeds from sales of short-term investments ................................ 9,925 38,750
Purchases of short-term investments .......................................... (1,650) (14,246)
Other ........................................................................ (57) (125)
------- --------
Cash from investing activities ............................................... 6,054 25,649
------- --------
FINANCING ACTIVITIES
Restricted cash movement ..................................................... (35) 23
Principal payments of debt financing and capital leases ...................... (1,071) (4,219)
Proceeds from debt financing ................................................. 83 1,117
Excess tax benefits from stock-based compensation expense .................... 1,710 --
Distributions to minority interests .......................................... (2,184) (1,977)
Proceeds from issuances of common stock ...................................... 257 1,077
Proceeds from issuances of OccuLogix, Inc. stock ............................. 233 217
------- --------
Cash from financing activities ............................................... (1,007) (3,762)
------- --------
Net increase in cash and cash equivalents during the period .................. 14,006 27,692
Cash and cash equivalents, beginning of period ............................... 31,729 33,435
------- --------
Cash and cash equivalents, end of period ..................................... $45,735 $ 61,127
======= ========
See the accompanying notes to unaudited interim consolidated financial
statements.
5
TLC VISION CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED) (In thousands)
OPTION
COMMON STOCK AND
----------------- WARRANT ACCUMULATED
SHARES AMOUNT EQUITY DEFICIT TOTAL
------ -------- ------- ----------- --------
Balance December 31, 2005.................. 68,691 $450,703 $1,861 $(244,159) $208,405
Shares issued as part of the employee
share purchase plan and 401(k) plan..... 38 217 217
Exercise of stock options.................. 82 166 (24) 142
Options expired or forfeited............... 1 (1) --
Stock-based compensation................... 285 285
Reversal of deferred tax asset valuation
allowance for excess stock-based
compensation tax deductions............. 1,710 1,710
Changes in OccuLogix, Inc.'s
stockholders' equity.................... 131 131
Net income and comprehensive income........ 2,712 2,712
------ -------- ------ --------- --------
Balance March 31, 2006..................... 68,811 $453,213 $1,836 $(241,447) $213,602
====== ======== ====== ========= ========
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, 2006 (Unaudited)
(Tabular amounts in thousands, except per share amounts)
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with the
instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. The
unaudited interim consolidated financial statements included herein should
be read in conjunction with the Annual Report on Form 10-K for the year
ended December 31, 2005 filed by TLC Vision Corporation (the "Company" or
"TLCVision") with the Securities and Exchange Commission. In the opinion of
management, all normal recurring adjustments and estimates considered
necessary for a fair presentation have been included. The results of
operations for the interim periods are not necessarily indicative of the
results that may be expected for the entire year ending December 31, 2006.
The consolidated financial statements as of December 31, 2005 and unaudited
interim consolidated financial statements for the three months ended March
31, 2006 and 2005 include the accounts and transactions of the Company and
its majority-owned subsidiaries that are not considered variable interest
entities (VIEs) and all VIEs for which the Company is the primary
beneficiary. All significant intercompany accounts and transactions have
been eliminated.
The unaudited interim consolidated financial statements for the three-month
period ended March 31, 2005 include certain reclassifications to conform
with classifications for the three-month period ended March 31, 2006.
2. ACCOUNTING CHANGES
Depreciation Method
On January 1, 2006, the Company changed its depreciation policy for the
following asset classifications: furniture, fixtures and equipment; laser
equipment; medical equipment; and vehicles and other. The Company has
changed to the straight-line depreciation method from the 25% declining
balance method for these assets. The change will be reflected prospectively
in the Company's financial statements both for new assets acquired after
January 1, 2006 and for assets previously held from that date forward.
Management's decision to change was based on its judgment that
straight-line depreciation provides a better method of reflecting the
pattern of consumption of the assets being depreciated over their estimated
useful lives given their characteristics and usage patterns. The Company
has determined that the design and durability of these assets diminishes
ratably over time, and it is therefore preferable to recognize the related
cost uniformly over their estimated useful lives on a straight line basis.
Based on the Company's fixed asset balance as of January 1, 2006 and
anticipated current year capital expenditures, the anticipated effect of
the change for fiscal year 2006 will be an increase to net income of
approximately $1.6 million or $0.02 per diluted share. During the three
months ended March 31, 2006, the change in depreciation method increased
net income by approximately $0.1 million or less than $0.01 per diluted
share.
Stock-based Compensation
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
issued Statement No. 123 (revised 2004), "Share-Based Payment," ("Statement
123(R)") effective January 1, 2006, which is a revision of FASB Statement
No. 123, "Accounting for Stock-Based Compensation" ("Statement 123").
Generally, the approach in Statement 123(R) is similar to the approach
described in Statement 123. However, Statement 123(R) requires all
share-based payments to employees, including grants of employee stock
options, to be recognized in the income statement based on their fair
values. Under Statement 123(R), pro forma disclosure is no longer
permitted.
7
Prior to January 1, 2006, the Company accounted for stock-based
compensation utilizing the intrinsic value method in accordance with the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and its related interpretations. Accordingly, no
compensation expense was recognized for fixed option plans because the
exercise prices of employee stock options equaled or exceeded the market
prices of the underlying stock on the dates of grant. However, stock-based
compensation has been included in pro forma disclosures in the financial
statement footnotes in prior periods.
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of Statement 123(R) using the modified prospective method of
application, which requires the Company to recognize compensation expense
on a prospective basis. Therefore, prior period financial statements have
not been restated to recognize compensation expense under the provisions of
Statement 123(R). Under this method, in addition to reflecting compensation
expense for new stock-based awards, expense is also recognized to reflect
the remaining service period of awards that had been included in pro forma
disclosures in prior periods. Statement 123(R) also requires that excess
tax benefits related to stock option exercises be reflected as financing
cash inflows instead of operating cash inflows.
Total stock-based compensation in the quarter ended March 31, 2006 was
$612,000. Total stock-based compensation includes $285,000 ($176,000 after
tax or less than $0.01 basic and diluted earnings per share) for TLCVision
stock options and its Employee Share Purchase Plan, and $141,000 for the
value of stock issued in connection with the Company's 401(k) matching
program. Total stock-based compensation also includes $186,000 ($95,000
after minority interests) of stock-based compensation expense recorded by
OccuLogix, Inc. in connection with its adoption of Statement 123(R).
As of March 31, 2006, the total unrecognized compensation expense related
to TLCVision non-vested employee awards was approximately $2.4 million. The
unrecognized compensation expense will be recognized over the remaining
vesting period, which expires December 31, 2009 for certain options.
The following table illustrates the effect on net income and earnings per
share as if Statement 123(R) had been applied to all outstanding awards for
the three months ended March 31, 2005:
THREE MONTHS
ENDED MARCH 31,
2005
---------------
Net income as reported ...................................................... $6,727
Add stock-based employee compensation cost included in net income ........... --
Less stock-based employee compensation cost determined under fair value
based method for all awards, net of related tax effects .................. (483)
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 ........................................................ $6,017
======
Pro forma earnings per share - basic ........................................ $ 0.09
======
Pro forma earnings per share - diluted ...................................... $ 0.08
======
For awards granted prior to the adoption of Statement 123(R), the Company
uses the attribution method under FASB Interpretation No. 28, "Accounting
for Stock Appreciation Rights and Other Variable Stock Option Award Plans,"
to amortize stock-based compensation cost. For awards granted subsequent to
the adoption of Statement 123(R), the Company uses the straight-line method
to amortize stock-based compensation cost.
The fair value of stock options granted to employees is estimated on the
date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions: risk-free interest rate of 4.4% and
3.2% for 2006 and 2005, respectively; expected dividend yield of 0%;
expected life of 3 years and 2.5 years for 2006 and 2005, respectively; and
expected volatility of 57% and 75% for 2006 and 2005, respectively.
3. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
In conjunction with the issuance of the Company's consolidated financial
statements for the year ended December 31, 2005, the Company restated its
results for the first three quarters of 2005 to correct its accounting
8
for income taxes. Accordingly, the consolidated financial statements for
the three months ended March 31, 2005, included herein, have been restated.
During the three months ended March 31, 2005, the Company reversed a
portion of its deferred tax asset valuation allowance as a reduction to
income tax expense. Due to limitations on the availability of certain
portions of the Company's net operating loss carryforwards, the Company has
determined that the deferred tax asset valuation allowance reversals in the
three months ended March 31, 2005 should have been recorded primarily to
goodwill and equity. The adjustment to income tax expense was $2.9 million
for the three months ended March 31, 2005 and is primarily a non-cash item.
The restatement had the effect of reducing each of basic and diluted
earnings per share by $0.04 for the three months ended March 31, 2005.
4. ACQUISITIONS AND DISPOSITIONS
On March 1, 2005, the Company sold its interest in Aspen Healthcare, Inc.
to National Surgical Centers, Inc. and recorded a gain of $0.3 million,
which is included in other operating expenses (income).
The Company's strategy includes periodic acquisitions of or investments in
entities that operate in the refractive, cataract or eye care markets.
During the three months ended March 31, 2006, the Company paid over $1
million to acquire or invest in several entities, none of which were
individually material.
5. OTHER EXPENSES (INCOME), NET
Other expenses (income), net includes the following operating items:
THREE MONTHS ENDED MARCH 31,
----------------------------
2006 2005
----- -----
Loss (gain) on sales and disposals of fixed assets ..... $ 61 $ (96)
Center closing costs ................................... 8 135
Gain on sale of subsidiary ............................. -- (319)
Reimbursements from previous research and development
arrangements ........................................ (300) --
OccuLogix, Inc. severance accruals ..................... 820 --
Miscellaneous income ................................... (97) (255)
----- -----
$ 492 $(535)
===== =====
6. EARNINGS PER SHARE
The following table sets forth the computation of diluted earnings per
share:
THREE MONTHS ENDED MARCH 31,
----------------------------
2006 2005
------- -------
Net income ..................................... $ 2,712 $ 6,727
Weighted-average shares outstanding - basic .... 68,756 70,036
Dilutive effect of stock options and warrants .. 794 2,009
------- -------
Weighted-average shares outstanding - diluted .. 69,550 72,045
Earnings per share - diluted ................... $ 0.04 $ 0.09
======= =======
7. SEGMENT INFORMATION
The Company has four reportable segments: refractive, mobile cataract,
optometric franchising and age-related macular degeneration ("AMD"). The
refractive segment provides the majority of the Company's revenue and is in
the business of providing corrective laser surgery specifically related to
refractive disorders, such as myopia (nearsightedness), hyperopia
(farsightedness) and astigmatism. This segment is comprised of laser
centers and the fixed and mobile access business. The mobile cataract
segment provides surgery specifically for the treatment of cataracts. The
optometric franchising segment provides marketing, practice development and
purchasing power to independently-owned and operated optometric practices
in the United States. The AMD
9
segment primarily includes the Company's majority interest in OccuLogix
(see Note 9). The AMD segment is pursuing commercial applications for
treatments of dry age-related macular degeneration. Other includes an
accumulation of other healthcare business activities including the
management of cataract and secondary care centers that provide advanced
levels of eye care. None of the businesses in the other segment meet the
quantitative criteria to be disclosed separately as a reportable segment.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different management and marketing strategies. The
Company's reportable segments are as follows:
THREE MONTHS ENDED MARCH 31, 2006 MOBILE OPTOMETRIC
(IN THOUSANDS) REFRACTIVE CATARACT FRANCHISING AMD OTHER TOTAL
--------------------------------- ---------- -------- ----------- ------- ------ --------
Revenues ............................. $58,927 $7,942 $4,159 $ -- $6,553 $ 77,581
Expenses: ............................
Operating ......................... 49,190 6,912 2,553 5,877 4,694 69,226
Depreciation and amortization ..... 2,720 631 14 34 393 3,792
------- ------ ------ ------- ------ ------
51,910 7,543 2,567 5,911 5,087 73,018
------- ------ ------ ------- ------ ------
Income (loss) from operations ........ 7,017 399 1,592 (5,911) 1,466 4,563
Interest income (expense) ............ 615 (28) (95) 366 (383) 475
Minority interests ................... (999) -- (734) 2,715 (796) 186
Earnings from equity investments ..... 416 -- -- -- 507 923
------- ------ ------ ------- ------ ------
Income (loss) before income
taxes ............................. 7,049 371 763 (2,830) 794 6,147
Income taxes ......................... (3,435)
--------
Net income ........................... $ 2,712
========
THREE MONTHS ENDED MARCH 31, 2005 MOBILE OPTOMETRIC
(IN THOUSANDS) REFRACTIVE CATARACT FRANCHISING AMD OTHER TOTAL
--------------------------------- ---------- -------- ----------- ------- ------ -------
Revenues.............................. $55,176 $6,738 $3,536 $ 431 $5,168 $71,049
Expenses:
Operating ......................... 42,289 5,664 2,210 3,881 3,771 57,815
Depreciation and amortization ..... 3,006 635 10 46 320 4,017
------ ------ ------ ------- ------ -------
45,295 6,299 2,220 3,927 4,091 61,832
------ ------ ------ ------- ------ -------
Income (loss) from operations ........ 9,881 439 1,316 (3,496) 1,077 9,217
Interest income (expense) ............ 697 (27) (122) 355 (289) 614
Minority interests ................... (1,006) -- (585) 1,499 (594) (686)
Earnings from equity investments ..... 395 -- -- -- 264 659
------ ------ ------ ------- ------ -------
Income (loss) before income
taxes .............................. 9,967 412 609 (1,642) 458 9,804
Income taxes ......................... (3,077)
-------
Net income ........................... $ 6,727
=======
8. SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash transactions:
THREE MONTHS ENDED MARCH 31,
----------------------------
2006 2005
------ ----
Capital lease obligations relating to equipment
purchases ..................................... $1,435 $152
Inventory contributed to OccuLogix, Inc. ......... 25 --
Option and warrant reduction ..................... 25 777
Cash paid for the following:
THREE MONTHS ENDED MARCH 31,
----------------------------
2006 2005
---- ----
Interest ...... $538 $627
Income taxes .. 688 249
10
9. SUBSEQUENT EVENT
On April 11, 2006, the Company sold 800,000 shares of OccuLogix, Inc.
common stock. After the sale of stock, the Company owns approximately 49%
of OccuLogix, Inc. Effective April 11, 2006, the Company will deconsolidate
OccuLogix, Inc. and begin accounting for its investment under the equity
method.
11
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Quarterly Report on Form 10-Q (herein, together with all amendments,
exhibits and schedules hereto, referred to as the "Form 10-Q") contains certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which
statements can be identified by the use of forward looking terminology, such as
"may," "will," "expect," "anticipate," "estimate," "plans," "intends" or
"continue" or the negative thereof or other variations thereon or comparable
terminology. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including but not limited to those set forth elsewhere in this Form 10-Q in the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and in the Company's Annual Report on Form 10-K for
the period ended December 31, 2005. Unless the context indicates or requires
otherwise, references in this Form 10-Q to the "Company" or "TLCVision" shall
mean TLC Vision Corporation and its subsidiaries. References to "$" or "dollars"
shall mean U.S. dollars unless otherwise indicated. References to "C$" shall
mean Canadian dollars. References to the "Commission" shall mean the U.S.
Securities and Exchange Commission.
OVERVIEW
TLC Vision Corporation and its subsidiaries comprise a diversified
healthcare services company focused on working with eye doctors to help them
provide high quality patient care primarily in the eye care segment. The
majority of the Company's revenues come from refractive surgery, which involves
using an excimer laser to treat common refractive vision disorders such as
myopia (nearsightedness), hyperopia (farsightedness) and astigmatism. The
Company's business models include arrangements ranging from owning and operating
fixed site centers to providing access to lasers through fixed site and mobile
service relationships. In addition to refractive surgery, the Company is
diversified into other eye care businesses. Through its MSS, Inc. subsidiary,
the Company furnishes hospitals and independent surgeons with mobile or fixed
site access to cataract surgery equipment and services. Through its OR Partners
and Michigan subsidiaries, TLCVision develops, manages and has equity
participation in single-specialty eye care ambulatory surgery centers and
multi-specialty ambulatory surgery centers. The Company also owns a 51% majority
interest in Vision Source, which provides franchise opportunities to independent
optometrists. Until April 11, 2006, the Company was 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 (see Note 9).
The Company serves surgeons who performed over 73,000 procedures, including
refractive and cataract procedures, at the Company's centers or using the
Company's equipment during the three months ended March 31, 2006.
The Company continually assesses patient, optometric and ophthalmic
industry trends and developing strategies to improve laser vision correction
revenues and procedure volumes. Additionally, it is pursuing growth initiatives
and investment opportunities in the refractive market and within its other
healthcare services.
RECENT DEVELOPMENTS
The Company's strategy includes periodic acquisitions of or investments in
entities that operate in the refractive, cataract or eye care markets. During
the three months ended March 31, 2006, the Company paid over $1 million to
acquire or invest in several entities, none of which were individually material.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2005
Total revenues for the three months ended March 31, 2006 were $77.6
million, an increase of $6.6 million, or
12
9% over revenues of $71.0 million for the three months ended March 31, 2005.
This increase was due to a 7% increase in refractive revenues and a 18% increase
in other healthcare services revenues.
Revenues from the refractive segment for the three months ended March 31,
2006 were $58.9 million, an increase of $3.7 million or 7% from revenues of
$55.2 million for the three months ended March 31, 2005. Refractive revenues
increased as a result of an increased mix of higher priced procedures, primarily
Custom LASIK and Intralase. Refractive revenues also increased due to a higher
number of centers resulting from acquisitions and de novo centers opened during
the past year. These increases were partially offset by a decrease in refractive
procedures. Refractive procedures for the three months ended March 31, 2006 were
approximately 56,100, a decrease of 2,600 or 4% from refractive procedures of
58,700 for the three months ended March 31, 2005. Procedures for Laser Eye Care
of California ("LECC") were included in both periods and account for 5,000
procedures for the three months ended March 31, 2006, an increase of 200
procedures over the prior year period. The Company owns a 30% interest in LECC.
Revenues from centers for the three months ended March 31, 2006 were $47.9
million, an increase of $4.1 million, or 10% from revenues of $43.8 million for
the three months ended March 31, 2005. The increase in revenues from centers was
due to an increased mix of higher priced procedures and a higher number of
centers resulting from acquisitions and de novo centers opened during the past
year. These increases were partially offset by a decrease in centers procedures.
For the three months ended March 31, 2006, centers procedures were approximately
35,100, a decrease of 300 or 1% from centers procedures of 35,400 for the three
months ended March 31, 2005.
Revenues from access services for the three months ended March 31, 2006
were $11.0 million, a decrease of $0.4 million or 4% from revenues of $11.4
million for the three months ended March 31, 2005. The decline in access
revenues was primarily due to 2,400 or 10% fewer procedures, partially offset by
higher average pricing due to an increase in Custom LASIK procedures.
Revenues from other healthcare services for the three months ended March
31, 2006, were $18.7 million, an increase of $2.8 million or 18% from revenues
of $15.9 million for the three months ended March 31, 2005. Approximately 24% of
total revenues for the three months ended March 31, 2006 were derived from other
healthcare services compared to 22% for the three months ended March 31, 2005.
The increase in other healthcare services revenues resulted from internal growth
of existing businesses and contributions from businesses acquired within the
past year.
The cost of refractive revenues for the three months ended March 31, 2006
was $39.4 million, an increase of $3.5 million, or 10% over the cost of
refractive revenues of $35.9 million for the three months ended March 31, 2005.
This increase was primarily attributable to higher costs associated with higher
priced procedures and the operations of new centers acquired or opened in the
past year partially offset by a decrease in refractive procedures. Gross margins
for the refractive business as a whole decreased to 33% during the three months
ended March 31, 2006 from 35% in the prior year period.
The cost of revenues from centers for the three months ended March 31, 2006
was $31.9 million, an increase of $3.4 million, or 12% from the cost of revenues
of $28.5 million for the three months ended March 31, 2005. This increase was
primarily attributable to higher costs associated with higher priced procedures
and the operations of new centers acquired or opened in the past year partially
offset by a decrease in centers procedures. Gross margins for centers decreased
to 33% during the three months ended March 31, 2006 from 35% in the prior year
period.
The cost of revenues from access services for the three months ended March
31, 2006 was $7.5 million, an increase of $0.1 million or 1% from the cost of
revenues of $7.4 million during the three months ended March 31, 2005. This
increase was primarily attributable to higher costs associated with higher
priced procedures partially offset by a decrease in access procedures. Gross
margins decreased to 32% during the three months ended March 31, 2006 from 35%
in the prior year period.
The cost of revenues from other healthcare services for the three months
ended March 31, 2006 was $13.0 million, an increase of $2.8 million or 28% from
cost of revenues of $10.2 million for the three months ended March 31, 2005. The
increase in cost of revenues primarily related to a $1.1 million increase from
the AMD segment,
13
which included a $1.6 million write-down of OccuLogix, Inc. inventory. The
remaining increase is due to incremental costs incurred to generate the
increased revenues of the other healthcare services business. For the three
months ended March 31, 2006, gross margins decreased to 30% from 36% for the
prior year period. Excluding the $1.6 million write-down of OccuLogix, Inc.
inventory, gross margins increased to 39% primarily due to growth in the
Company's optometric franchising segment, which has high gross margins within
the Company's other healthcare services businesses.
General and administrative expenses increased to $10.8 million for the
three months ended March 31, 2006 from $8.9 million for the three months ended
March 31, 2005. The $1.9 million or 21% increase included a $0.1 million
decrease from the AMD segment as OccuLogix, Inc. continues to research the data
of its clinical trials related to its rheopheresis application to the United
States Food and Drug Administration ("FDA"). The remaining $2.0 million increase
was primarily due to costs related to businesses acquired or opened within the
past year and stock-based compensation attributable to the adoption of Statement
123(R).
Marketing expenses increased to $7.0 million for the three months ended
March 31, 2006 from $5.0 million for the three months ended March 31, 2005. The
$2.0 million or 40% increase was primarily due to costs related to businesses
acquired or opened within the past year including marketing costs related to the
Company's LASIK Select centers.
Research and development, clinical and regulatory expenses increased to
$1.5 million for the three months ended March 31, 2006 from $1.3 million for the
three months ended March 31, 2005. Research and development, clinical and
regulatory expenses were incurred by OccuLogix, Inc. as it conducted clinical
trials related to its rheopheresis application to the FDA.
For the three months ended March 31, 2006, other operating expenses, net of
$0.5 million primarily included $0.8 million of severance accruals at OccuLogix,
Inc., partially offset by a $0.3 million reimbursement received under a previous
research and development arrangement. For the three months ended March 31, 2005,
other operating income, net of $0.5 million primarily included a $0.3 million
gain on the sale of a subsidiary and $0.3 million of miscellaneous income.
Interest income decreased to $1.0 million for the three months ended March
31, 2006 from $1.1 million for the three months ended March 31, 2005. This $0.1
million decrease is primarily due to a decrease in the Company's cash and cash
equivalents and short-term investments balances partially offset by higher rates
of return.
Interest expense was $0.5 million for the three months ended March 31, 2006
and 2005.
Minority interests decreased to $0.2 million of income for the three months
ended March 31, 2006 from $0.7 million of expense for the three months ended
March 31, 2005. This $0.9 million decrease included a $1.2 million decrease from
the AMD segment. This decrease was partially offset by a $0.3 million increase
from the Company's other business segments.
Earnings from equity investments increased to $0.9 million for the three
months ended March 31, 2006 from $0.7 million for the three months ended March
31, 2005. This $0.2 million increase was primarily due to an increase in
earnings of $0.1 million from LECC and $0.1 million of earnings from an ASC in
which the Company acquired a minority ownership in the fourth quarter of 2005.
Income tax expense increased to $3.4 million for the three months ended
March 31, 2006 from $3.1 million for the three months ended March 31, 2005. This
$0.3 million increase was primarily due to the nature of the valuation allowance
released on the reversal of temporary differences and the net operating loss
carryforwards that were utilized for each respective three-month period. For the
three months ended March 31, 2005, the Company utilized certain net operating
loss carryforwards that reduced income tax expense and the effective tax rate.
For the three months ended March 31, 2006, the Company utilized certain net
operating loss carryforwards and deducted certain temporary differences that
reduced goodwill and increased equity but did not reduce income tax expense.
Therefore, the Company's effective tax rate was higher for the three months
ended March 31, 2006 than the prior year period.
Net income for the three months ended March 31, 2006 decreased to $2.7
million or $0.04 per diluted share from
14
$6.7 million or $0.09 per diluted share for the three months ended March 31,
2005. This $4.0 million decrease included a $1.2 million decrease from the AMD
segment. Excluding the impact of the AMD segment, net income decreased to $5.5
million or $0.08 per diluted share for the three months ended March 31, 2006
from $8.4 million or $0.12 per diluted share for the prior year period.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 2006, the Company continued to
focus its activities primarily on expanding its refractive centers and other
healthcare businesses through internal growth and acquisitions. Cash and cash
equivalents, short-term investments and restricted cash were $76.7 million at
March 31, 2006 compared to $70.9 million at December 31, 2005. Working capital
at March 31, 2006 was $68.3 million, an increase of $1.4 million from $66.9
million at December 31, 2005.
The Company's principal cash requirements have included normal operating
expenses, debt repayment, distributions to minority partners, capital
expenditures, acquisitions and investments.
During the three months ended March 31, 2006, the Company invested $2.3
million in fixed assets and received vendor lease financing for $1.4 million.
As new technologies emerge in the refractive market, the Company may need
to upgrade its equipment, including excimer lasers and flap-making technology.
The Company has access to vendor financing at fixed interest rates or on a per
procedure fee basis and expects to continue to have access to these financing
options for at least the next 12 months.
The Company estimates that existing cash balances and short-term
investments, together with funds expected to be generated from operations and
credit facilities, will be sufficient to fund the Company's anticipated level of
operations and expansion plans for at least the next 12 to 18 months.
CASH FROM OPERATING ACTIVITIES
Net cash provided by operating activities was $9.0 million for the three
months ended March 31, 2006. The cash flows provided by operating activities
during the three months ended March 31, 2006 were primarily due to net income of
$2.7 million and a decrease in net operating assets of $1.1 million plus
non-cash items including depreciation and amortization of $3.8 million, deferred
taxes of $2.1 million, write-down of OccuLogix, Inc. inventory of $1.6 million
and stock-based compensation of $0.6 million. These cash flows were partially
offset by excess tax benefits from stock-based compensation expense of $1.7
million, earnings from equity investments of $0.9 million and minority interest
income of $0.2 million. The decrease in net operating assets consisted of a $3.4
million increase in accounts payable and accrued liabilities partially offset by
a $1.1 million increase in accounts receivable due primarily to higher revenues
during the seasonably strong first quarter, and a $1.2 million increase in
prepaid expenses and other current assets. Excluding the impact of the AMD
segment, net cash provided by operating activities would have been $13.8 million
for the three months ended March 31, 2006.
CASH FROM INVESTING ACTIVITIES
Net cash provided by investing activities was $6.1 million for the three
months ended March 31, 2006. The cash flows provided by investing activities
during the three months ended March 31, 2006 primarily included net proceeds
from the sales and purchases of short-term investments of $8.3 million,
distributions and loan payments received from equity investments of $1.3 million
and a reimbursement of a previous research and development arrangement of $0.3
million. These cash flows were partially offset by capital expenditures of $2.3
million and acquisitions and investments of $1.5 million. Excluding the impact
of the AMD segment, cash used in investing activities would have been $3.8
million for the three months ended March 31, 2006.
CASH FROM FINANCING ACTIVITIES
Net cash used in financing activities was $1.0 million for the three months
ended March 31, 2006. Net cash used in financing activities during the three
months ended March 31, 2006 was primarily related to the repayment of
15
certain notes payable and capitalized lease obligations of $1.1 million and
distributions to minority interests of $2.2 million, partially offset by excess
tax benefits from stock-based compensation expense of $1.7 million, proceeds
from issuances of common stock of $0.3 million and proceeds from issuances of
OccuLogix, Inc. common stock of $0.2 million. Excluding the impact of the AMD
segment, net cash used in investing activities would have been $1.2 million for
the three months ended March 31, 2006.
SUBSEQUENT EVENT
On April 11, 2006, the Company sold 800,000 shares of OccuLogix, Inc.
common stock. After the sale of stock, the Company owns approximately 49% of
OccuLogix, Inc. Effective April 11, 2006, the Company will deconsolidate
OccuLogix, Inc. and begin accounting for its investment under the equity method.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the ordinary course of business, the Company is exposed to interest rate
risks and foreign currency risks, which the Company does not currently consider
to be material. These exposures primarily relate to having short-term
investments earning short-term interest rates and having fixed rate debt. The
Company views its investment in foreign subsidiaries as a long-term commitment
and does not hedge any translation exposure.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's reports
under the Securities Exchange Act of 1934, as amended (the "Exchange Act") is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms, and that such
information is accumulated and communicated to the Company's management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
As of the end of the period covered by the report, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
of the Exchange Act). Based on that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures were effective, in all material respects, to ensure that
information required to be disclosed in the reports the Company files and
submits under the Exchange Act is recorded, processed, summarized and reported
as and when required.
There have been no significant changes in the Company's internal controls
over financial reporting that have materially affected, or are reasonably likely
to materially affect the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material changes in legal proceedings from that reported
in the Company's Annual Report on Form 10-K for the year ended December 31,
2005.
ITEM 1A. RISK FACTORS
Not applicable.
16
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.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
18 Letter from Ernst & Young LLP regarding change in accounting principle
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
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TLC VISION CORPORATION
By: /s/ James C. Wachtman
------------------------------------
James C. Wachtman
Chief Executive Officer
May 9, 2006
By: /s/ Steven P. Rasche
------------------------------------
Steven P. Rasche
Chief Financial Officer
May 9, 2006
18
EXHIBIT INDEX
NO. DESCRIPTION
- --- -----------
18 Letter from Ernst & Young LLP regarding change in accounting principle
31.1 CEO's Certification required by Rule 13a-14(a) of the Securities Exchange
Act of 1934, as amended.
31.2 CFO's Certification required by Rule 13a-14(a) of the Securities Exchange
Act of 1934, as amended.
32.1 CEO's Certification of periodic financial report pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, U.S.C. Section 1350.
32.2 CFO's Certification of periodic financial report pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, U.S.C. Section 1350
19