UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006
COMMISSION FILE NUMBER: 0-29302
TLC VISION CORPORATION
(Exact name of registrant as specified in its charter)
NEW BRUNSWICK, CANADA 980151150
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5280 SOLAR DRIVE, SUITE 300 L4W 5M8
MISSISSAUGA, ONTARIO (Zip Code)
(Address of principal executive offices)
Registrant's telephone, including area code: (905) 602-2020
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12-b(2) of the Exchange Act.
[ ] Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12-b(2) of the Exchange Act). [ ] Yes [X] No
As of August 8, 2006 there were 68,959,000 of the registrant's Common
Shares outstanding.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Statements of Operations for the three
and six months ended June 30, 2006 and 2005
Consolidated Balance Sheets as of June 30, 2006
and December 31, 2005
Consolidated Statements of Cash Flows for the six
months ended June 30, 2006 and 2005
Consolidated Statement of Changes in Stockholders'
Equity for the six months ended June 30, 2006
Notes to Interim Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits
Signatures
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
TLC VISION CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED) (In thousands except per share amounts)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ----------------------
2006 2005 2006 2005
------- ----------- -------- -----------
AS RESTATED AS RESTATED
Revenues:
Refractive:
Centers ...................................... $43,598 $ 38,010 $ 91,537 $ 81,775
Access ....................................... 9,771 9,828 20,759 21,239
Other healthcare services ....................... 22,846 18,982 41,500 34,855
------- -------- -------- --------
Total revenues .................................. 76,215 66,820 153,796 137,869
------- -------- -------- --------
Cost of revenues:
Refractive:
Centers ...................................... 29,908 25,921 61,796 54,450
Access ....................................... 7,160 7,200 14,675 14,610
Other healthcare services ....................... 13,946 11,207 26,932 21,358
------- -------- -------- --------
Total cost of revenues ............................. 51,014 44,328 103,403 90,418
------- -------- -------- --------
Gross profit .................................... 25,201 22,492 50,393 47,451
------- -------- -------- --------
General and administrative ......................... 7,085 9,227 17,912 18,287
Marketing and sales ................................ 6,704 5,843 13,675 10,840
Research and development, clinical and regulatory .. -- 1,310 1,475 2,654
Amortization of intangibles ........................ 874 1,032 1,738 2,043
Other expenses (income), net ....................... (169) (363) 323 (1,033)
------- -------- -------- --------
14,494 17,049 35,123 32,791
------- -------- -------- --------
Operating income ................................... 10,707 5,443 15,270 14,660
Gain on sale of OccuLogix, Inc. stock .............. 1,450 -- 1,450 --
Interest income .................................... 222 979 1,235 2,051
Interest expense ................................... (141) (184) (679) (642)
Minority interests ................................. (2,938) (1,105) (2,752) (1,791)
Earnings (losses) from equity investments .......... (899) 680 24 1,339
------- -------- -------- --------
Income before income taxes ......................... 8,401 5,813 14,548 15,617
Income tax (expense) benefit ....................... 2,466 (2,178) (969) (5,255)
------- -------- -------- --------
Net income ......................................... $10,867 $ 3,635 $ 13,579 $ 10,362
------- -------- -------- --------
Earnings per share - basic ......................... $ 0.16 $ 0.05 $ 0.20 $ 0.15
======= ======== ======== ========
Earnings per share - diluted ....................... $ 0.16 $ 0.05 $ 0.19 $ 0.14
======= ======== ======== ========
Weighted average number of common shares
outstanding - basic ............................. 68,881 70,326 68,819 70,182
Weighted average number of common shares
outstanding - diluted ........................... 69,830 72,071 69,832 72,057
See the accompanying notes to unaudited interim consolidated financial
statements.
3
TLC VISION CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2006 2005
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents ............................. $ 35,879 $ 31,729
Short-term investments ................................ 9,825 38,213
Accounts receivable, net .............................. 19,811 20,583
Prepaid expenses, inventory and other ................. 12,053 17,123
--------- ---------
Total current assets ............................... 77,568 107,648
Restricted cash .......................................... 1,010 975
Investments and other assets ............................. 39,990 19,838
Goodwill ................................................. 96,440 99,402
Other intangible assets, net ............................. 22,249 24,021
Fixed assets, net ........................................ 53,117 49,159
--------- ---------
Total assets ............................................. $ 290,374 $ 301,043
========= =========
LIABILITIES
Current liabilities:
Accounts payable ...................................... $ 9,675 $ 11,031
Accrued liabilities ................................... 21,715 24,453
Current maturities of long-term debt .................. 6,595 5,268
--------- ---------
Total current liabilities .......................... 37,985 40,752
Other long-term liabilities .............................. 3,132 3,427
Long term-debt, less current maturities .................. 14,236 12,665
Minority interests ....................................... 14,696 35,794
--------- ---------
Total liabilities ........................................ 70,049 92,638
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, no par value; unlimited number authorized .. 449,091 450,703
Option and warrant equity ................................ 1,814 1,861
Accumulated deficit ...................................... (230,580) (244,159)
--------- ---------
Total stockholders' equity ............................... 220,325 208,405
--------- ---------
Total liabilities and stockholders' equity ............... $ 290,374 $ 301,043
========= =========
See the accompanying notes to unaudited interim consolidated financial
statements.
4
TLC VISION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) (In thousands)
SIX MONTHS
ENDED JUNE 30,
----------------------
2006 2005
-------- -----------
AS RESTATED
OPERATING ACTIVITIES
Net income ................................................... $ 13,579 $ 10,362
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization ............................. 7,676 7,988
Deferred taxes ............................................ 2,019 4,126
Minority interests ........................................ 2,752 1,791
Earnings from equity investments .......................... (24) (1,339)
Loss (gain) on sales and disposals of fixed assets ........ 1 (96)
Reimbursements from investments in research and
development arrangements ............................... (300) (300)
Write-down of OccuLogix, Inc. inventory ................... 1,625 --
Gain on sale of OccuLogix, Inc. stock ..................... (1,450) --
Gain on sale of subsidiary ................................ -- (319)
Non-cash compensation expense ............................. 925 206
Other ..................................................... 26 88
Changes in operating assets and liabilities, net of
acquisitions and dispositions:
Accounts receivable .................................... 136 (2,213)
Prepaid expenses, inventory and other current assets ... (1,081) (3,312)
Accounts payable and accrued liabilities ............... (3,103) (4,225)
-------- --------
Cash from operating activities ............................... 22,781 12,757
-------- --------
INVESTING ACTIVITIES
Purchases of fixed assets .................................... (6,349) (5,177)
Proceeds from sales of fixed assets .......................... 516 724
Proceeds from divestitures of investments and
subsidiaries, net ......................................... -- 3,430
Proceeds from sale of OccuLogix, Inc. stock, net ............. 2,226 --
OccuLogix, Inc. cash balance at time of deconsolidation ...... (14,814) --
Distributions and loan payments received from
equity investments ........................................ 1,854 1,387
Reimbursements from investments in research and
development arrangements .................................. 300 300
Acquisitions and equity investments .......................... (3,171) (8,881)
Proceeds from sales of short-term investments ................ 9,925 66,397
Purchases of short-term investments .......................... (3,275) (33,093)
Other ........................................................ (47) (7)
-------- --------
Cash from investing activities ............................... (12,835) 25,080
-------- --------
FINANCING ACTIVITIES
Restricted cash movement ..................................... (35) 25
Principal payments of debt financing and capital leases ...... (1,968) (6,131)
Proceeds from debt financing ................................. 283 1,321
Distributions to minority interests .......................... (4,754) (3,744)
Proceeds from issuances of common stock ...................... 445 1,089
Proceeds from issuances of OccuLogix, Inc. stock ............. 233 107
-------- --------
Cash from financing activities ............................... (5,796) (7,333)
-------- --------
Net increase in cash and cash equivalents during the period .. 4,150 30,504
Cash and cash equivalents, beginning of period ............... 31,729 33,435
-------- --------
Cash and cash equivalents, end of period ..................... $ 35,879 $ 63,939
======== ========
See the accompanying notes to unaudited interim consolidated financial
statements.
5
TLC VISION CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED) (In thousands)
OPTION
COMMON STOCK AND
----------------- WARRANT ACCUMULATED
SHARES AMOUNT EQUITY DEFICIT TOTAL
------ -------- ------- ----------- --------
Balance December 31, 2005 .............................. 68,691 $450,703 $1,861 $(244,159) $208,405
Shares issued as part of the employee share purchase
plan and 401(k) plan ................................ 80 474 474
Exercise of stock options .............................. 135 257 (46) 211
Options expired or forfeited ........................... 1 (1) --
Stock-based compensation ............................... 463 463
Adjustment of utilized net operating loss carryforwards
(see Note 7).......................................... (3,116) (3,116)
Changes in subsidiaries' stockholders' equity .......... 309 309
Net income and comprehensive income .................... 13,579 13,579
------ -------- ------ --------- --------
Balance June 30, 2006 .................................. 68,906 $449,091 $1,814 $(230,580) $220,325
====== ======== ====== ========= ========
See the accompanying notes to unaudited interim consolidated financial
statements.
6
TLC VISION CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006 (Unaudited)
(Tabular amounts in thousands, except per share amounts)
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with the
instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. The
unaudited interim consolidated financial statements included herein should
be read in conjunction with the Annual Report on Form 10-K for the year
ended December 31, 2005 filed by TLC Vision Corporation (the "Company" or
"TLCVision") with the Securities and Exchange Commission. In the opinion
of management, all normal recurring adjustments and estimates considered
necessary for a fair presentation have been included. The results of
operations for the interim periods are not necessarily indicative of the
results that may be expected for the entire year ending December 31, 2006.
The consolidated financial statements as of December 31, 2005 and unaudited
interim consolidated financial statements for the three and six months
ended June 30, 2006 and 2005 include the accounts and transactions of the
Company and its majority-owned subsidiaries that are not considered
variable interest entities ("VIEs") and all VIEs for which the Company is
the primary beneficiary. All significant intercompany accounts and
transactions have been eliminated.
Effective April 1, 2006, the Company deconsolidated OccuLogix, Inc. and
began accounting for its investment in OccuLogix, Inc. under the equity
method (See Note 4).
The unaudited interim consolidated financial statements for the three and
six months ended June 30, 2005 include certain reclassifications to conform
with classifications for the three and six months ended June 30, 2006.
2. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
In conjunction with the issuance of the Company's consolidated financial
statements for the year ended December 31, 2005, the Company restated its
results for the first three quarters of 2005 to correct its accounting for
income taxes. Accordingly, the consolidated financial statements for the
three and six months ended June 30, 2005, included herein, have been
restated. During the three and six months ended June 30, 2005, the Company
reversed a portion of its deferred tax asset valuation allowance as a
reduction to income tax expense. Due to estimated limitations on the
availability of certain portions of the Company's net operating loss
carryforwards as of December 31, 2005, the Company has determined that the
deferred tax asset valuation allowance reversals in the three and six
months ended June 30, 2005 should have been recorded primarily to goodwill
and equity. The adjustments to income tax expense were $1.9 million and
$4.8 million for the three and six months ended June 30, 2005,
respectively, and are primarily non-cash items. The restatement had the
effect of reducing each of basic and diluted earnings per share by $0.03
and $0.07 for the three and six months ended June 30, 2005, respectively.
3. ACCOUNTING CHANGES
Depreciation Method
On January 1, 2006, the Company changed its depreciation policy for the
following asset classifications: furniture, fixtures and equipment; laser
equipment; medical equipment; and vehicles and other. The Company has
changed to the straight-line depreciation method from the 25% declining
balance method for these assets. The change will be reflected prospectively
in the Company's financial statements both for new assets acquired after
January 1, 2006 and for assets previously held from that date forward.
Management's decision to change was based on its judgment that
straight-line depreciation provides a better method of reflecting the
pattern of consumption of the assets being depreciated over their estimated
useful lives given their characteristics and usage patterns. The Company
has determined that the design and durability of these assets diminishes
ratably over time, and it is therefore preferable to recognize the related
cost uniformly over their estimated useful lives on a straight line basis.
During the three and six months ended June 30, 2006, the change in
depreciation method increased net income by approximately $0.3 million (or
$0.00 per diluted share) and $0.4 million (or $0.01 per diluted share),
respectively.
Stock-based Compensation
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
issued Statement No. 123 (revised 2004), "Share-Based Payment,"
("Statement 123(R)") effective January 1, 2006, which is a revision of
FASB Statement No. 123, "Accounting for Stock-Based Compensation"
("Statement 123"). Generally, the approach in Statement 123(R) is
similar to the approach described in Statement 123. However,
Statement 123(R) requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the income statement
based on their fair values. Under Statement 123(R), pro forma disclosure is
no longer permitted.
Prior to January 1, 2006, the Company accounted for stock-based
compensation utilizing the intrinsic value method in accordance with the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for
7
Stock Issued to Employees" and its related interpretations. Accordingly, no
compensation expense was recognized for fixed option plans because the
exercise prices of employee stock options equaled or exceeded the market
prices of the underlying stock on the dates of grant. However, stock-based
compensation has been included in pro forma disclosures in the financial
statement footnotes in prior periods.
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of Statement 123(R) using the modified prospective method of
application, which requires the Company to recognize compensation expense
on a prospective basis. Therefore, prior period financial statements have
not been restated to recognize compensation expense under the provisions of
Statement 123(R). Under this method, in addition to reflecting compensation
expense for new stock-based awards, expense is also recognized to reflect
the remaining service period of awards that had been included in pro forma
disclosures in prior periods. Statement 123(R) also requires that excess
tax benefits related to stock option exercises be reflected as financing
cash inflows instead of operating cash inflows.
Total stock-based compensation for the three months ended June 30, 2006 was
$313,000. Total stock-based compensation includes $178,000 ($159,000 after
tax or less than $0.01 basic and diluted earnings per share) for TLCVision
stock options and its Employee Share Purchase Plan, and $135,000 ($120,000
after tax or less than $0.01 basic and diluted earnings per share) for the
value of stock issued in connection with the Company's 401(k) matching
program.
Total stock-based compensation for the six months ended June 30, 2006 was
$925,000. Total stock-based compensation includes $463,000 ($413,000 after
tax or $0.01 basic and diluted earnings per share) for TLCVision stock
options and its Employee Share Purchase Plan, and $276,000 ($246,000 after
tax or less than $0.01 basic and diluted earnings per share) for the value
of stock issued in connection with the Company's 401(k) matching program.
Total stock-based compensation also includes $186,000 ($95,000 after
minority interests) of stock-based compensation expense recorded by
OccuLogix, Inc. in connection with its adoption of Statement 123(R) for
the three months ended March 31, 2006.
As of June 30, 2006, the total unrecognized compensation expense related to
TLCVision non-vested employee awards was approximately $2.2 million. The
unrecognized compensation expense will be recognized over the remaining
vesting period, which expires March 31, 2010 for certain options.
The following table illustrates the effect on net income and earnings per
share as if Statement 123(R) had been applied to all outstanding awards for
the three and six months ended June 30, 2005:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2005 JUNE 30, 2005
------------------ ----------------
Net income as reported ...................... $3,635 $10,362
Add stock-based employee compensation cost
included in net income ................... -- --
Add OccuLogix, Inc.'s stock-based employee
compensation cost included in net income,
net of minority interests ................ 6 6
Less stock-based employee compensation cost
determined under fair value based method
for all awards, net of related tax
effects .................................. (477) (960)
Less OccuLogix, Inc.'s stock-based employee
compensation cost determined under fair
value based method for all awards, net of
minority interests ....................... (591) (818)
------ -------
Pro forma net income ........................ $2,573 $ 8,590
====== =======
Pro forma earnings per share - basic ........ $ 0.04 $ 0.12
====== =======
Pro forma earnings per share - diluted ...... $ 0.04 $ 0.12
====== =======
For awards granted prior to the adoption of Statement 123(R), the Company
uses the attribution method under FASB Interpretation No. 28, "Accounting
for Stock Appreciation Rights and Other Variable Stock Option Award Plans,"
to amortize stock-based compensation cost. For awards granted subsequent to
the adoption of Statement 123(R), the Company uses the straight-line method
to amortize stock-based compensation cost.
The fair value of stock options granted to employees is estimated on the
date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions: risk-free interest rate of 4.4% and
3.2% for 2006 and 2005, respectively; expected dividend yield of 0%;
expected life of 3 years and 2.5 years for 2006 and 2005, respectively; and
expected volatility of 57% and 75% for 2006 and 2005, respectively.
8
4. ACQUISITIONS AND DISPOSITIONS
On April 11, 2006, the Company sold 800,000 shares of OccuLogix, Inc.
common stock and recorded a gain of $1.4 million. After the sale of stock,
the Company owns approximately 49% of OccuLogix, Inc. Due to the
insignificance of the results of operations of OccuLogix, Inc. from April
1, 2006 through April 11, 2006, the Company deconsolidated OccuLogix, Inc.
effective April 1, 2006 and has accounted for its investment in OccuLogix,
Inc. under the equity method since that date (see Note 5).
On March 1, 2005, the Company sold its interest in Aspen Healthcare, Inc.
to National Surgical Centers, Inc. and recorded a gain of $0.3 million,
which is included in other operating expenses (income).
The Company's strategy includes periodic acquisitions of or investments in
entities that operate in the refractive, cataract or eye care markets.
During the six months ended June 30, 2006, the Company paid over $3 million
to acquire or invest in several entities, none of which were individually
material.
5. INVESTMENTS AND OTHER ASSETS
Included in investments and other assets as of June 30, 2006 is the
Company's equity investment in OccuLogix, Inc., which totaled $18.3
million. During the three months ended June 30, 2006, OccuLogix, Inc.
reported the following:
Net sales ..... $ 83
========
Gross profit .. $ 78
========
Net loss ...... $(69,996)
========
For the three months ended June 30, 2006, the net loss for OccuLogix, Inc.
includes a $65.9 million charge for impairment of goodwill. Because the
Company accounted for its original investment in OccuLogix, Inc. at
historical cost, the Company must eliminate certain items, including the
$65.9 million impairment of goodwill, when it recognizes equity earnings
(losses) from OccuLogix, Inc. For the three and six months ended June 30,
2006, the Company recognized $1.9 million of equity losses from OccuLogix,
Inc.
9
6. OTHER EXPENSES (INCOME), NET
Other expenses (income), net includes the following operating items:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- ---------------
2006 2005 2006 2005
----- ----- ----- -------
Loss (gain) on sales and disposals of fixed
assets .................................... $ (45) $ -- $ 17 $ (96)
Center closing costs ......................... (40) -- (32) --
Gain on sale of subsidiary ................... -- -- -- (319)
Reimbursements from previous research and
development arrangements .................. -- (300) (300) (300)
OccuLogix, Inc. severance accruals ........... -- -- 820 --
Miscellaneous income ......................... (84) (63) (182) (318)
----- ----- ----- -------
$(169) $(363) $ 323 $(1,033)
===== ===== ===== =======
7. INCOME TAXES
During the second quarter of 2006, the Company completed a comprehensive
IRC Section 382 study to determine the specific limitations related to
certain net operating loss carryforwards. The results of that study
indicate that the availability of the Company's net operating loss
carryforwards each year are greater than its original estimate. Based on
the results of this study, the Company has recorded a cumulative catch-up
adjustment for its change in estimate to properly reflect income taxes as
of June 30, 2006. For the three and six months ended June 30, 2006, the
impact of the change in estimate is a $3.4 million decrease to income tax
expense (or a $0.05 increase per diluted share). In addition, as of June
30, 2006 the adjustment for the change in estimate decreases goodwill,
common stock and income taxes payable by $3.9 million, $4.8 million and
$2.5 million, respectively. As of June 30, 2006, the Company's net
operating loss carryforwards for financial reporting purposes total $187.2
million. Due to the uncertainty of the Company's ability to utilize its net
operating loss carryforwards beyond 2006, the Company maintained a
valuation allowance as of June 30, 2006 against its net operating loss
carryforwards.
8. EARNINGS PER SHARE
The following table sets forth the computation of diluted earnings per
share:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------- -----------------
2006 2005 2006 2005
------- ------- ------- -------
Net income ..................................... $10,867 $ 3,635 $13,579 $10,362
======= ======= ======= =======
Weighted-average shares outstanding - basic .... 68,881 70,326 68,819 70,182
Dilutive effect of stock options and warrants .. 949 1,745 1,013 1,875
------- ------- ------- -------
Weighted-average shares outstanding - diluted .. 69,830 72,071 69,832 72,057
------- ------- ------- -------
Earnings per share - diluted ................... $ 0.16 $ 0.05 $ 0.19 $ 0.14
======= ======= ======= =======
9. SEGMENT INFORMATION
The Company has four reportable segments: refractive, mobile cataract,
optometric franchising and age-related macular degeneration ("AMD"). The
refractive segment provides the majority of the Company's revenue and is
in the business of providing corrective laser surgery specifically related
to refractive disorders, such as myopia (nearsightedness), hyperopia
(farsightedness) and astigmatism. This segment is comprised of laser
centers and the fixed and mobile access business. The mobile cataract
segment provides surgery specifically for the treatment of cataracts. The
optometric franchising segment provides marketing, practice development
and purchasing power to independently-owned and operated optometric
practices in the United States. The AMD segment includes the Company's
interest in OccuLogix, Inc. The AMD segment is pursuing commercial
applications for treatments of dry age-related macular degeneration. Other
includes an accumulation of other healthcare business activities including
the management of cataract and secondary care centers that provide
advanced levels of eye care. None of the businesses in the other segment
meet the quantitative criteria to be disclosed separately as a reportable
segment.
10
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different management and marketing strategies. The
Company's reportable segments are as follows:
THREE MONTHS ENDED JUNE 30, 2006 MOBILE OPTOMETRIC
(IN THOUSANDS) REFRACTIVE CATARACT FRANCHISING AMD OTHER TOTAL
-------------------------------- ---------- -------- ----------- ------- ------ -------
Revenues ................................... $53,369 $9,068 $ 6,661 $ -- $7,117 $76,215
Expenses:
Operating ............................... 45,942 7,235 3,627 -- 4,820 61,624
Depreciation and amortization ........... 2,859 660 14 -- 351 3,884
------- ------ ------- ------- ------ -------
48,801 7,895 3,641 -- 5,171 65,508
------- ------ ------- ------- ------ -------
Income from operations ..................... 4,568 1,173 3,020 -- 1,946 10,707
Gain on sale of OccuLogix, Inc. stock ...... -- -- -- 1,450 -- 1,450
Interest income (expense) .................. 554 (30) (87) -- (356) 81
Minority interests ......................... (736) -- (1,437) -- (765) (2,938)
Earnings (losses) from equity investments .. 414 -- -- (1,850) 537 (899)
------- ------ ------- ------- ------ -------
Income (loss) before income taxes .......... 4,800 1,143 1,496 (400) 1,362 8,401
Income tax benefit ......................... 2,466
-------
Net income ................................. $10,867
=======
THREE MONTHS ENDED JUNE 30, 2005 MOBILE OPTOMETRIC
(IN THOUSANDS) REFRACTIVE CATARACT FRANCHISING AMD OTHER TOTAL
-------------------------------- ---------- -------- ----------- ------- ------- -------
Revenues ................................... $47,838 $8,158 $5,617 $ 568 $ 4,639 $66,820
Expenses: ..................................
Operating ............................... 40,652 6,401 3,593 3,989 2,771 57,406
Depreciation and amortization ........... 2,914 708 10 13 326 3,971
------- ------ ------ ------- ------- -------
43,566 7,109 3,603 4,002 3,097 61,377
------- ------ ------ ------- ------- -------
Income (loss) from operations .............. 4,272 1,049 2,014 (3,434) 1,542 5,443
Interest income (expense) .................. 804 (28) (110) 421 (292) 795
Minority interests ......................... (681) -- (933) 1,411 (902) (1,105)
Earnings from equity investments ........... 454 -- -- -- 226 680
------- ------ ------ ------- ------- -------
Income (loss) before income taxes .......... 4,849 1,021 971 (1,602) 574 5,813
Income taxes ............................... (2,178)
-------
Net income ................................. $ 3,635
=======
SIX MONTHS ENDED JUNE 30, 2006 MOBILE OPTOMETRIC
(IN THOUSANDS) REFRACTIVE CATARACT FRANCHISING AMD OTHER TOTAL
-------------------------------- ---------- -------- ----------- ------- -------- --------
Revenues ................................... $112,296 $17,010 $10,820 $ -- $ 13,670 $153,796
Expenses: ..................................
Operating ............................... 95,132 14,147 6,180 5,877 9,514 130,850
Depreciation and amortization ........... 5,579 1,291 28 34 744 7,676
-------- ------- ------- ------- -------- --------
100,711 15,438 6,208 5,911 10,258 138,526
-------- ------- ------- ------- -------- --------
Income (loss) from operations .............. 11,585 1,572 4,612 (5,911) 3,412 15,270
Gain on sale of OccuLogix, Inc. stock ...... -- -- -- 1,450 -- 1,450
Interest income (expense) .................. 1,169 (58) (182) 366 (739) 556
Minority interests ......................... (1,735) -- (2,171) 2,715 (1,561) (2,752)
Earnings (losses) from equity investments .. 830 -- -- (1,850) 1,044 24
-------- ------- ------- ------- -------- --------
Income (loss) before income taxes .......... 11,849 1,514 2,259 (3,230) 2,156 14,548
Income taxes ............................... (969)
--------
Net income ................................. $ 13,579
========
11
SIX MONTHS ENDED JUNE 30, 2005 MOBILE OPTOMETRIC
(IN THOUSANDS) REFRACTIVE CATARACT FRANCHISING AMD OTHER TOTAL
-------------------------------- ---------- -------- ----------- ------- -------- --------
Revenues ................................... $103,014 $14,896 $ 9,153 $ 1,000 $ 9,806 $137,869
Expenses: ..................................
Operating ............................... 82,941 12,065 5,803 7,873 6,539 115,221
Depreciation and amortization ........... 5,920 1,343 20 59 646 7,988
-------- ------- ------- ------- -------- --------
88,861 13,408 5,823 7,932 7,185 123,209
-------- ------- ------- ------- -------- --------
Income (loss) from operations .............. 14,153 1,488 3,330 (6,932) 2,621 14,660
Interest income (expense) .................. 1,501 (55) (232) 776 (581) 1,409
Minority interests ......................... (1,687) -- (1,518) 2,910 (1,496) (1,791)
Earnings from equity investments ........... 849 -- -- -- 490 1,339
-------- ------- ------- ------- -------- --------
Income (loss) before income taxes .......... 14,816 1,433 1,580 (3,246) 1,034 15,617
Income taxes ............................... (5,255)
--------
Net income ................................. $ 10,362
========
10. SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash transactions:
SIX MONTHS ENDED JUNE 30,
-------------------------
2006 2005
------ ------
Capital lease obligations relating to
equipment purchases .................... $4,467 $1,169
Inventory contributed to OccuLogix, Inc. .. 25 --
Option and warrant reduction .............. 47 792
Cash paid for the following:
SIX MONTHS ENDED JUNE 30,
-------------------------
2006 2005
---- ------
Interest .................................. $678 $1,051
Income taxes .............................. 860 415
12
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Quarterly Report on Form 10-Q (herein, together with all amendments,
exhibits and schedules hereto, referred to as the "Form 10-Q") contains certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which
statements can be identified by the use of forward looking terminology, such as
"may," "will," "expect," "anticipate," "estimate," "plans," "intends" or
"continue" or the negative thereof or other variations thereon or comparable
terminology. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including but not limited to those set forth elsewhere in this Form 10-Q in the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and in the Company's Annual Report on Form 10-K for
the period ended December 31, 2005. Unless the context indicates or requires
otherwise, references in this Form 10-Q to the "Company" or "TLCVision" shall
mean TLC Vision Corporation and its subsidiaries. References to "$" or "dollars"
shall mean U.S. dollars unless otherwise indicated. References to "C$" shall
mean Canadian dollars. References to the "Commission" shall mean the U.S.
Securities and Exchange Commission.
OVERVIEW
TLC Vision Corporation and its subsidiaries comprise a diversified
healthcare services company focused on working with eye doctors to help them
provide high quality patient care primarily in the eye care segment. The
majority of the Company's revenues come from refractive surgery, which involves
using an excimer laser to treat common refractive vision disorders such as
myopia (nearsightedness), hyperopia (farsightedness) and astigmatism. The
Company's business models include arrangements ranging from owning and operating
fixed site centers to providing access to lasers through fixed site and mobile
service relationships. In addition to refractive surgery, the Company is
diversified into other eye care businesses. Through its MSS, Inc. subsidiary,
the Company furnishes hospitals and independent surgeons with mobile or fixed
site access to cataract surgery equipment and services. Through its OR Partners
and Michigan subsidiaries, TLCVision develops, manages and has equity
participation in single-specialty eye care ambulatory surgery centers and
multi-specialty ambulatory surgery centers. The Company also owns a 51% majority
interest in Vision Source, which provides franchise opportunities to independent
optometrists. The Company owns approximately 49% of OccuLogix, Inc., a public
company focused on the treatment of a specific eye disease known as dry
age-related macular degeneration, via rheopheresis, a process for filtering
blood.
The Company serves surgeons who performed over 142,000 procedures,
including refractive and cataract procedures, at the Company's centers or using
the Company's equipment during the six months ended June 30, 2006.
The Company continually assesses patient, optometric and ophthalmic
industry trends and developing strategies to improve laser vision correction
revenues and procedure volumes. Additionally, it is pursuing growth initiatives
and investment opportunities in the refractive market and within its other
healthcare services.
RECENT DEVELOPMENTS
On April 11, 2006, the Company sold 800,000 shares of OccuLogix, Inc.
common stock and recorded a gain of $1.4 million. After the sale of stock, the
Company owns approximately 49% of OccuLogix, Inc. Due to the insignificance of
the results of operations of OccuLogix, Inc. from April 1, 2006 through April
11, 2006, the Company deconsolidated OccuLogix, Inc. effective April 1, 2006 and
has accounted for its investment in OccuLogix, Inc. under the equity method
since that date.
The Company's strategy includes periodic acquisitions of or investments in
entities that operate in the refractive, cataract or eye care markets. During
the six months ended June 30, 2006, the Company paid over $3 million to acquire
or invest in several entities, none of which were individually material.
13
RESULTS OF OPERATIONS
The following table sets forth certain center and procedure operating data for
the periods presented:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2006 2005 2006 2005
------ ------ ------ ------
OPERATING DATA (unaudited)
Number of majority owned eye care centers at end
of period ................................... 76 66 76 66
Number of LECC (minority owned) eye care centers
at end of period ............................ 8 8 8 8
------ ------ ------ ------
Number of TLCVision branded eye care centers at
end of period ............................... 84 74 84 74
Number of laser vision correction procedures:
Majority owned centers ...................... 27,200 26,000 57,200 56,600
LECC (minority owned) centers ............... 4,700 4,600 9,800 9,400
------ ------ ------ ------
Total TLCVision branded center procedures ... 31,900 30,600 67,000 66,000
Total access procedures ..................... 17,600 19,300 38,600 42,700
THREE MONTHS ENDED JUNE 30, 2006 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2005
Total revenues for the three months ended June 30, 2006 were $76.2 million,
an increase of $9.4 million, or 14% over revenues of $66.8 million for the three
months ended June 30, 2005. This increase was due to a 12% increase in
refractive revenues and a 20% increase in other healthcare services revenues.
Revenues from the refractive segment for the three months ended June 30,
2006 were $53.4 million, an increase of $5.6 million or 12% from revenues of
$47.8 million for the three months ended June 30, 2005. Refractive revenues
increased as a result of an increased mix of higher priced procedures, primarily
Custom LASIK and Intralase, and an increase in center procedures, offset in part
by a decrease in access procedures.
Revenues from centers for the three months ended June 30, 2006
were $43.6 million, an increase of $5.6 million, or 15% from revenues
of $38.0 million for the three months ended June 30, 2005. The
increase in revenues from centers was due to an increased mix of
higher priced procedures, which accounted for approximately $3.8
million of the revenue increase, and an increase in center procedures,
which accounted for approximately $1.8 million of the revenue
increase. For the three months ended June 30, 2006, majority-owned
center procedures were approximately 27,200, an increase of 1,200 or
4% from procedures of 26,000 for the three months ended June 30, 2005.
Revenues from access services for the three months ended June 30,
2006 and 2005 were $9.8 million. For the three months ended June 30,
2006, access procedures declined by 1,700 or 9% and accounted for a
decrease in revenues of approximately $0.9 million. This decrease in
access revenues was offset by higher average pricing, which accounted
for an increase in access revenues of approximately $0.9 million.
Revenues from other healthcare services for the three months ended June 30,
2006, were $22.8 million, an increase of $3.8 million or 20% from revenues of
$19.0 million for the three months ended June 30, 2005. Approximately 30% of
total revenues for the three months ended June 30, 2006 were derived from other
healthcare services compared to 28% for the three months ended June 30, 2005.
The increase in other healthcare services revenues resulted from a $0.9 million
increase from the mobile cataract segment, a $1.0 million increase from the
optometric franchising segment and a $2.5 million increase from the other
non-refractive businesses. These increases were partially offset by a $0.6
million decrease from the AMD segment.
The cost of refractive revenues for the three months ended June 30, 2006
was $37.1 million, an increase of $4.0 million, or 12% over the cost of
refractive revenues of $33.1 million for the three months ended June 30, 2005.
This increase was primarily attributable to higher costs per procedure partially
offset by a decrease in total refractive procedures. Gross margins for the
refractive business as a whole remained consistent at 31% during the three
months ended June 30, 2006 and 2005.
14
The cost of revenues from centers for the three months ended June
30, 2006 was $29.9 million, an increase of $4.0 million, or 15% from
the cost of revenues of $25.9 million for the three months ended June
30, 2005. This increase was primarily attributable to higher costs per
procedure, which accounted for approximately $2.8 million of the
increase, and an increase in center procedures, which accounted for
approximately $1.2 million of the increase. Gross margins for centers
decreased to 31% during the three months ended June 30, 2006 from 32%
in the prior year period.
The cost of revenues from access services for the three months
ended June 30, 2006 and 2005 was $7.2 million. Higher costs per
procedure accounted for an increase in cost of revenues of
approximately $0.7 million. This increase was offset by a decrease in
access procedures, which accounted for a decrease in cost of revenues
of approximately $0.7 million. Gross margins remained consistent at
27% during the three months ended June 30, 2006 and 2005.
The cost of revenues from other healthcare services for the three months
ended June 30, 2006 was $13.9 million, an increase of $2.7 million or 24% from
cost of revenues of $11.2 million for the three months ended June 30, 2005. The
increase in cost of revenues was due to a $0.8 million increase from the mobile
cataract segment and a $2.6 million increase from the other non-refractive
businesses. These increases were partially offset by a $0.2 million decrease
from the optometric franchising segment and a $0.5 million decrease from the AMD
segment. For the three months ended June 30, 2006, gross margins decreased to
39% from 41% for the prior year period due primarily from lower margins at
certain ambulatory surgery centers in which the Company owns a majority
interest.
General and administrative expenses decreased to $7.1 million for the three
months ended June 30, 2006 from $9.2 million for the three months ended June 30,
2005. The $2.1 million or 23% decrease was primarily due to a $2.0 million
decrease from the AMD segment, which was a result of the deconsolidation of
OccuLogix, Inc.
Marketing expenses increased to $6.7 million for the three months ended
June 30, 2006 from $5.8 million for the three months ended June 30, 2005. The
$0.9 million or 15% increase was primarily due to $1.6 million of costs related
to businesses acquired or opened within the past year including marketing costs
related to the Company's LASIK Select centers. These costs were partially offset
by a decrease related to the deconsolidation of OccuLogix, Inc. and a decrease
in refractive marketing expenses.
Research and development, clinical and regulatory expenses were $1.3
million for the three months ended June 30, 2005. Research and development,
clinical and regulatory expenses were incurred by OccuLogix, Inc. as it
conducted clinical trials related to its rheopheresis application to the FDA.
Due to the deconsolidation of OccuLogix, Inc., the Company did not recognize any
research and development, clinical and regulatory expenses during the three
months ended June 30, 2006.
During the three months ended June 30, 2006, the Company recorded a $1.4
million gain on the sale of 0.8 million shares of OccuLogix's common stock.
There was no such sale of OccuLogix's common stock during the three months ended
June 30, 2005.
Interest income decreased to $0.2 million for the three months ended June
30, 2006 from $1.0 million for the three months ended June 30, 2005. This $0.8
million decrease was primarily due to a $0.4 million decrease from the AMD
segment due to the deconsolidation of OccuLogix, Inc. The remaining decrease was
primarily due to a decrease in the Company's cash and cash equivalents and
short-term investments balances.
Minority interest expense increased to $2.9 million for the three months
ended June 30, 2006 from $1.1 million for the three months ended June 30, 2005.
This $1.8 million increase included a $1.4 million increase from the AMD segment
due to the deconsolidation of OccuLogix, Inc. The remaining increase was due to
increases from the Company's other business segments.
Earnings from equity investments decreased to $0.9 million of losses for
the three months ended June 30, 2006 from $0.7 million of earnings for the three
months ended June 30, 2005. This $1.6 million decrease included a $1.8 million
decrease from the AMD segment due to the Company accounting for its investment
in OccuLogix, Inc. under the equity method beginning in the second quarter of
2006. This decrease was partially offset by an increase in earnings from the
Company's other equity investments including two ASCs in which the Company
acquired a
15
minority ownership in the fourth quarter of 2005.
For the three months ended June 30, 2006, the Company recognized an income
tax benefit of $2.5 million. This benefit includes a $3.4 million benefit
related to a change in estimate based on the results of a comprehensive IRC
Section 382 study that was completed during the second quarter of 2006.
Partially offsetting this $3.4 million benefit is $0.9 million of income tax
expense. Approximately $0.8 million of this expense related to the utilization
of certain net operating loss carryforwards that reduce goodwill. For the three
months ended June 30, 2005, the Company recognized income tax expense of $2.2
million. Approximately $1.0 million and $0.7 million of this expense related to
the utilization of certain net operating loss carryforwards that reduce equity
and goodwill, respectively.
Net income for the three months ended June 30, 2006 increased to $10.9
million or $0.16 per diluted share from $3.6 million or $0.05 per diluted share
for the three months ended June 30, 2005. This $7.3 million increase included a
$1.2 million increase from the AMD segment primarily due to the gain on sale of
OccuLogix, Inc. stock during the three months ended June 30, 2006. Excluding the
impact of the AMD segment, net income increased to $11.3 million or $0.16 per
diluted share for the three months ended June 30, 2006 from $5.2 million or
$0.07 per diluted share for the prior year period.
SIX MONTHS ENDED JUNE 30, 2006 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2005
Total revenues for the six months ended June 30, 2006 were $153.8 million,
an increase of $15.9 million, or 12% over revenues of $137.9 million for the six
months ended June 30, 2005. This increase was due to a 9% increase in refractive
revenues and a 19% increase in other healthcare services revenues.
Revenues from the refractive segment for the six months ended June 30, 2006
were $112.3 million, an increase of $9.3 million or 9% from revenues of $103.0
million for the six months ended June 30, 2005. Refractive revenues increased as
a result of an increased mix of higher priced procedures, primarily Custom LASIK
and Intralase, and an increase in center procedures, offset in part by a
decrease in access procedures.
Revenues from centers for the six months ended June 30, 2006 were
$91.5 million, an increase of $9.7 million or 12% from revenues of
$81.8 million for the six months ended June 30, 2005. The increase in
revenues from centers was due to an increased mix of higher priced
procedures, which accounted for approximately $8.8 million of the
revenue increase, and an increase in center procedures, which
accounted for approximately $0.9 million of the revenue increase. For
the six months ended June 30, 2006, majority-owned center procedures
were approximately 57,200, an increase of 600 or 1% from procedures of
56,600 for the six months ended June 30, 2005.
Revenues from access services for the six months ended June 30,
2006 were $20.8, a decrease of $0.4 million or 2% from revenues of
$21.2 million for the six months ended June 30, 2005. The decrease in
access revenues was due to a decrease in access procedures, which
accounted for approximately $2.1 million of the revenue decrease,
partially offset by higher average pricing, which accounted for an
increase in access revenues of approximately $1.7 million. For the six
months ended June 30, 2006, access procedures were approximately
38,600, an decrease of 4,100 or 10% from access procedures of 42,700
for the six months ended June 30, 2005.
Revenues from other healthcare services for the six months ended June 30,
2006, were $41.5 million, an increase of $6.6 million or 19% from revenues of
$34.9 million for the six months ended June 30, 2005. Approximately 27% of total
revenues for the six months ended June 30, 2006 were derived from other
healthcare services compared to 25% for the six months ended June 30, 2005. The
increase in other healthcare services revenues resulted from a $2.1 million
increase from the mobile cataract segment, a $1.7 million increase from the
optometric franchising segment and a $3.8 million increase from the other
non-refractive businesses. These increases were partially offset by a $1.0
million decrease from the AMD segment.
The cost of refractive revenues for the six months ended June 30, 2006 was
$76.5 million, an increase of $7.4 million, or 11% over the cost of refractive
revenues of $69.1 million for the six months ended June 30, 2005. This increase
was primarily attributable to higher costs per procedure partially offset by a
decrease in total refractive
16
procedures. Gross margins for the refractive business as a whole decreased to
32% during the six months ended June 30, 2006 from 33% in the prior year period.
The cost of revenues from centers for the six months ended June
30, 2006 was $61.8 million, an increase of $7.3 million or 13% from
the cost of revenues of $54.5 million for the six months ended June
30, 2005. This increase was primarily attributable to higher costs per
procedure, which accounted for approximately $6.7 million of the
increase, and an increase in center procedures, which accounted for
approximately $0.6 million of the increase. Gross margins for centers
decreased to 32% during the six months ended June 30, 2006 from 33% in
the prior year period.
The cost of revenues from access services for the six months
ended June 30, 2006 was $14.7 million, an increase of $0.1 million
from the cost of revenues of $14.6 million for the six months ended
June 30, 2005. This increase was primarily attributable to higher
costs per procedure, which accounted for approximately $1.6 million of
the increase, partially offset by a decrease in access procedures,
which accounted for a decrease in cost of revenues of approximately
$1.5 million. Gross margins decreased to 29% during the six months
ended June 30, 2006 from 31% in the prior year period.
The cost of revenues from other healthcare services for the six months
ended June 30, 2006 was $26.9 million, an increase of $5.5 million or 26% from
cost of revenues of $21.4 million for the six months ended June 30, 2005. The
increase in cost of revenues includes a $0.6 million increase from the AMD
segment's cost of revenues, which included a $1.6 million write-down of
OccuLogix, Inc. inventory. The remaining increase in cost of revenues was due to
a $1.6 million increase from the mobile cataract segment, a $0.2 million
increase from the optometric franchising segment and a $3.1 million increase
from the other non-refractive businesses. For the six months ended June 30,
2006, gross margins decreased to 35% from 39% for the prior year period.
Excluding the $1.6 million write-down of OccuLogix, Inc. inventory, gross
margins remained consistent at 39%.
General and administrative expenses decreased to $17.9 million for the six
months ended June 30, 2006 from $18.3 million for the six months ended June 30,
2005. The $0.4 million or 2% decrease included a $2.1 million decrease from the
AMD segment due to the deconsolidation of OccuLogix, Inc. in the second quarter
of 2006. This decrease was partially offset by a $1.1 million increase from
businesses acquired or opened within the past year and $0.5 million of
stock-based compensation, excluding the AMD segment, attributable to the
adoption of Statement 123(R).
Marketing expenses increased to $13.7 million for the six months ended June
30, 2006 from $10.8 million for the six months ended June 30, 2005. The $2.9
million or 26% increase was primarily due to costs related to businesses
acquired or opened within the past year including marketing costs related to the
Company's LASIK Select centers.
Research and development, clinical and regulatory expenses decreased to
$1.5 million for the six months ended June 30, 2006 from $2.7 million for the
six months ended June 30, 2005. Research and development, clinical and
regulatory expenses were incurred by OccuLogix, Inc. as it conducted clinical
trials related to its rheopheresis application to the FDA. The decrease was due
to the deconsolidation of OccuLogix, Inc. in the second quarter of 2006.
For the six months ended June 30, 2006, other operating expenses, net of
$0.3 million primarily included $0.8 million of severance accruals at OccuLogix,
Inc., partially offset by a $0.3 million reimbursement received under a previous
research and development arrangement and $0.2 million of miscellaneous income.
For the six months ended June 30, 2005, other operating income, net of $1.0
million primarily included a $0.3 million gain on the sale of a subsidiary, a
$0.3 million reimbursement received under a previous research and development
arrangement and $0.3 million of miscellaneous income.
During the six months ended June 30, 2006, the Company recorded a $1.4
million gain on the sale of 0.8 million shares of OccuLogix's common stock.
There was no such sale of OccuLogix's common stock during the six months ended
June 30, 2005.
Interest income decreased to $1.2 million for the six months ended June 30,
2006 from $2.1 million for the six
17
months ended June 30, 2005. This $0.9 million decrease was primarily due to a
$0.4 million decrease from the AMD segment due to the deconsolidation of
OccuLogix, Inc. in the second quarter of 2006 The remaining decrease was
primarily due to a decrease in the Company's cash and cash equivalents and
short-term investments balances.
Minority interest expense increased to $2.8 million for the six months
ended June 30, 2006 from $1.8 million for the six months ended June 30, 2005.
This $1.0 million increase included a $0.2 million increase from the AMD segment
due to the deconsolidation of OccuLogix, Inc. in the second quarter of 2006. The
remaining increase of $0.8 million was due to higher income from the Company's
other business segments.
Earnings from equity investments decreased to $24,000 for the six months
ended June 30, 2006 from $1.3 million for the six months ended June 30, 2005.
This decrease included a $1.8 million decrease from the AMD segment due to the
Company accounting for its investment in OccuLogix, Inc. under the equity method
beginning in the second quarter of 2006. This decrease was partially offset by
an increase in earnings from the Company's other equity investments including
two ASCs in which the Company acquired a minority ownership in the fourth
quarter of 2005.
For the six months ended June 30, 2006, the Company recognized income tax
expense of $1.0 million. This expense includes a $3.4 million benefit related to
a change in estimate based on the results of a comprehensive IRC Section 382
study that was completed during the second quarter of 2006. For the six months
ended June 30, 2005, the Company recognized income tax expense of $5.3 million.
Approximately $2.5 million and $1.7 million of this expense related to the
utilization of certain net operating loss carryforwards that reduce equity and
goodwill, respectively.
Net income for the six months ended June 30, 2006 increased to $13.6
million or $0.19 per diluted share from $10.4 million or $0.14 per diluted share
for the six months ended June 30, 2005. Excluding the impact of the AMD segment,
net income increased to $16.8 million or $0.24 per diluted share for the six
months ended June 30, 2006 from $13.6 million or $0.19 per diluted share for the
prior year period.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 2006, the Company continued to focus
its activities primarily on expanding its refractive centers and other
healthcare businesses through internal growth and acquisitions. Cash and cash
equivalents and short-term investments were $45.7 million at June 30, 2006
compared to $69.9 million at December 31, 2005. This decrease is primarily due
to the deconsolidation of OccuLogix, Inc. in the second quarter of 2006. Working
capital at June 30, 2006 was $39.6 million, a decrease of $27.3 million from
$66.9 million at December 31, 2005. This decrease is also primarily due to the
deconsolidation of OccuLogix, Inc.
The Company's principal cash requirements have included normal operating
expenses, debt repayment, distributions to minority partners, capital
expenditures, acquisitions and investments.
During the six months ended June 30, 2006, the Company invested $6.3
million in fixed assets and received vendor lease financing for $4.5 million.
As new technologies emerge in the refractive market, the Company may need
to upgrade its equipment, including excimer lasers and flap-making technology.
The Company has access to vendor financing at fixed interest rates or on a per
procedure fee basis and expects to continue to have access to these financing
options for at least the next 12 months.
The Company estimates that existing cash balances and short-term
investments, together with funds expected to be generated from operations and
credit facilities, will be sufficient to fund the Company's anticipated level of
operations and expansion plans for at least the next 12 to 18 months.
CASH FROM OPERATING ACTIVITIES
Net cash provided by operating activities was $22.8 million for the six
months ended June 30, 2006. The cash flows provided by operating activities
during the six months ended June 30, 2006 were primarily due to net income
18
of $13.6 million plus non-cash items including depreciation and amortization of
$7.7 million, deferred taxes of $2.0 million, minority interests of $2.8
million, write-down of OccuLogix, Inc. inventory of $1.6 million and stock-based
compensation of $0.9 million. These cash flows were partially offset by a gain
on sale of OccuLogix, Inc. stock of $1.5 million and an increase in net
operating assets of $4.0 million. The increase in net operating assets consisted
of a $1.1 million increase in prepaid expenses and other current assets and a
$3.1 million decrease in accounts payable and accrued liabilities partially
offset by a $0.1 million decrease in accounts receivable. The increase in
prepaid expenses and other current assets is primarily due to increases in
prepaid insurance balances since December 31, 2005. The decrease in accounts
payable and accrued liabilities is primarily due to a decrease in income taxes
payable resulting from the cumulative catch-up adjustment recorded to properly
reflect income taxes as of June 30, 2006 (see Note 7). Excluding the impact of
the AMD segment, net cash provided by operating activities for the six months
ended June 30, 2006 would have been $27.6 million, an increase of $4.3 million
over the prior year period.
CASH FROM INVESTING ACTIVITIES
Net cash used in investing activities was $12.8 million for the six months
ended June 30, 2006. The cash used in investing activities primarily included
the cash balance of OccuLogix, Inc. that was deconsolidated in connection with
the Company's sale of OccuLogix, Inc. stock in the second quarter of 2006. The
cash used in investing activities also included capital expenditures of $6.3
million and acquisitions and investments of $3.2 million. These cash outflows
were partially offset by net proceeds from the sales and purchases of short-term
investments of $6.7 million, distributions and loan payments received from
equity investments of $1.9 million, proceeds from the sales of fixed asset of
$0.5 million and a reimbursement of a previous research and development
arrangement of $0.3 million. Excluding the impact of the AMD segment, cash used
in investing activities would have been $10.1 million for the six months ended
June 30, 2006.
CASH FROM FINANCING ACTIVITIES
Net cash used in financing activities was $5.8 million for the six months
ended June 30, 2006. Net cash used in financing activities during the six months
ended June 30, 2006 was primarily related to the repayment of certain notes
payable and capitalized lease obligations of $2.0 million and distributions to
minority interests of $4.8 million, partially offset by proceeds from issuances
of common stock of $0.4 million, proceeds from debt financing of $0.3 million
and proceeds from issuances of OccuLogix, Inc. common stock of $0.2 million.
Excluding the impact of the AMD segment, net cash used in investing activities
would have been $3.8 million for the six months ended June 30, 2006.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the ordinary course of business, the Company is exposed to interest rate
risks and foreign currency risks, which the Company does not currently consider
to be material. These exposures primarily relate to having short-term
investments earning short-term interest rates and having fixed rate debt. The
Company views its investment in foreign subsidiaries as a long-term commitment
and does not hedge any translation exposure.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's reports
under the Securities Exchange Act of 1934, as amended (the "Exchange Act") is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms, and that such
information is accumulated and communicated to the Company's management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
As of the end of the period covered by the report, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and
19
procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act).
Based on that evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures were effective, in all material respects, to ensure that information
required to be disclosed in the reports the Company files and submits under the
Exchange Act is recorded, processed, summarized and reported as and when
required.
There have been no significant changes in the Company's internal controls
over financial reporting that have materially affected, or are reasonably likely
to materially affect the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material changes in legal proceedings from that reported
in the Company's Annual Report on Form 10-K for the year ended December 31,
2005.
ITEM 1A. RISK FACTORS
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of shareholders was held on June 22, 2006. At
the annual meeting, shareholders of the Company voted on the following
proposals: (a) to elect seven directors for the ensuing year; (b) to appoint
Ernst & Young LLP as auditors of the Company for the ensuing year and to
authorize the directors to fix the remuneration to be paid to the auditors; and
(c) to approve certain amendments to the Company's Amended and Restated Share
Option Plan. Each of the proposals, including the election of directors, was
approved at the annual meeting.
With respect to the election of directors, all of the following directors
were elected by a show of hands:
Elias Vamvakas
Thomas N. Davidson
Richard L. Lindstrom, M.D.
Warren S. Rustand
James C. Wachtman
Toby S. Wilt
Michael D. DePaolis, O.D.
With respect to the resolution regarding appointment of Ernst & Young LLP
as auditors of the Company for the ensuing year and to authorize the directors
to fix the remuneration to be paid to the auditors, the resolution passed by a
show of hands.
With respect to the approval of certain amendments to the Company's Amended
and Restated Share Option Plan,
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the following votes were cast:
Votes in Favor Votes Against
- -------------- -------------
23,578,847 13,607,523
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
31.1 CEO's Certification required by Rule 13a-14(a) of the Securities Exchange
Act of 1934, as amended
31.2 CFO's Certification required by Rule 13a-14(a) of the Securities Exchange
Act of 1934, as amended
32.1 CEO's Certification of periodic financial report pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, U.S.C. Section 1350.
32.2 CFO's Certification of periodic financial report pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, U.S.C. Section 1350
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TLC VISION CORPORATION
By: /s/ James C. Wachtman
------------------------------------
James C. Wachtman
Chief Executive Officer
August 9, 2006
By: /s/ Steven P. Rasche
------------------------------------
Steven P. Rasche
Chief Financial Officer
August 9, 2006
22
EXHIBIT INDEX
NO. DESCRIPTION
- --- -----------
31.1 CEO's Certification required by Rule 13a-14(a) of the Securities Exchange
Act of 1934, as amended.
31.2 CFO's Certification required by Rule 13a-14(a) of the Securities Exchange
Act of 1934, as amended.
32.1 CEO's Certification of periodic financial report pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, U.S.C. Section 1350.
32.2 CFO's Certification of periodic financial report pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, U.S.C. Section 1350
23