UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 (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 November 8, 2006 there were 69,019,000 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
nine months ended September 30, 2006 and 2005
Consolidated Balance Sheets as of September 30, 2006 and
December 31, 2005
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2006 and 2005
Consolidated Statement of Changes in Stockholders' Equity
for the nine months ended September 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
2006 2005 2006 2005
------- -------- -------- --------
AS AS
RESTATED RESTATED
Revenues:
Refractive:
Centers ...................................... $35,422 $ 34,968 $126,959 $116,743
Access ....................................... 8,449 7,846 29,208 29,085
Other healthcare services ....................... 20,618 18,825 62,118 53,680
------- -------- -------- --------
Total revenues ..................................... 64,489 61,639 218,285 199,508
------- -------- -------- --------
Cost of revenues (excluding amortization expense
shown below):
Refractive:
Centers ...................................... 26,260 26,147 88,056 80,597
Access ....................................... 6,655 6,319 21,330 20,929
Other healthcare services ....................... 12,617 11,652 39,549 33,010
------- -------- -------- --------
Total cost of revenues (excluding amortization
expense shown below) ............................ 45,532 44,118 148,935 134,536
------- -------- -------- --------
Gross profit .................................... 18,957 17,521 69,350 64,972
------- -------- -------- --------
General and administrative ......................... 8,066 8,689 25,978 26,976
Marketing and sales ................................ 6,649 5,398 20,324 16,238
Research and development, clinical and regulatory .. -- 1,140 1,475 3,794
Amortization of intangibles ........................ 873 1,047 2,611 3,090
Other expenses (income), net ....................... (230) 32 93 (1,001)
------- -------- -------- --------
15,358 16,306 50,481 49,097
------- -------- -------- --------
Operating income ................................... 3,599 1,215 18,869 15,875
Gain on sale of OccuLogix, Inc. stock .............. -- -- 1,450 --
Interest income .................................... 568 1,071 1,803 3,361
Interest expense ................................... (387) (435) (1,066) (1,316)
Minority interests ................................. (2,210) (609) (4,962) (2,400)
Earnings (losses) from equity investments .......... (604) 487 (580) 1,826
------- -------- -------- --------
Income before income taxes ......................... 966 1,729 15,514 17,346
Income tax expense ................................. (665) (950) (1,634) (6,205)
------- -------- -------- --------
Net income ......................................... $ 301 $ 779 $ 13,880 $ 11,141
------- -------- -------- --------
Earnings per share - basic and diluted ............. $ 0.00 $ 0.01 $ 0.20 $ 0.16
======= ======== ======== ========
Weighted average number of common shares
outstanding - basic ............................. 68,949 69,888 68,863 70,083
Weighted average number of common shares
outstanding - diluted ........................... 69,737 71,524 69,833 71,877
See the accompanying notes to unaudited interim consolidated financial
statements.
3
TLC VISION CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2006 2005
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents ....................... $ 37,057 $ 31,729
Short-term investments .......................... 10,025 38,213
Accounts receivable, net ........................ 21,779 20,583
Prepaid expenses, inventory and other ........... 12,140 17,123
--------- ---------
Total current assets ......................... 81,001 107,648
Restricted cash .................................... 1,035 975
Investments and other assets ....................... 39,290 19,838
Goodwill ........................................... 98,062 99,402
Other intangible assets, net ....................... 21,376 24,021
Fixed assets, net .................................. 54,799 49,159
--------- ---------
Total assets ................................. $ 295,563 $ 301,043
========= =========
LIABILITIES
Current liabilities:
Accounts payable ................................ $ 12,570 $ 11,031
Accrued liabilities ............................. 21,457 24,453
Current maturities of long-term debt ............ 6,667 5,268
--------- ---------
Total current liabilities .................... 40,694 40,752
Other long-term liabilities ........................ 3,053 3,427
Long term-debt, less current maturities ............ 15,791 12,665
Minority interests ................................. 14,937 35,794
--------- ---------
Total liabilities .................................. 74,475 92,638
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, no par value; unlimited number
authorized ...................................... 449,554 450,703
Option and warrant equity .......................... 1,813 1,861
Accumulated deficit ................................ (230,279) (244,159)
--------- ---------
Total stockholders' equity ......................... 221,088 208,405
--------- ---------
Total liabilities and stockholders' equity ......... $ 295,563 $ 301,043
========= =========
See the accompanying notes to unaudited interim consolidated financial
statements.
4
TLC VISION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) (In thousands)
NINE MONTHS
ENDED SEPTEMBER 30,
----------------------------
2006 2005
------------- ------------
AS RESTATED
OPERATING ACTIVITIES
Net income ......................................... $ 13,880 $ 11,141
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization ................... 11,798 12,019
Deferred taxes .................................. 2,744 4,806
Minority interests .............................. 4,962 2,400
Losses (earnings) from equity investments ....... 580 (1,826)
Loss (gain) on sales and disposals of fixed
assets ....................................... 17 (204)
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 ...................... (188) (319)
Non-cash compensation expense ................... 1,306 285
Other ........................................... 26 135
Changes in operating assets and liabilities, net
of acquisitions and dispositions:
Accounts receivable .......................... (275) (1,450)
Prepaid expenses, inventory and other current
assets .................................... (1,165) (4,236)
Accounts payable and accrued liabilities ..... (3,095) (3,325)
-------- --------
Cash from operating activities ..................... 30,465 19,126
-------- --------
INVESTING ACTIVITIES
Purchases of fixed assets .......................... (8,140) (6,664)
Proceeds from sales of fixed assets ................ 635 1,250
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 ..................................... 2,662 1,828
Reimbursements from investments in research and
development arrangements ........................ 300 300
Acquisitions and equity investments ................ (4,859) (42,119)
Proceeds from sales of short-term investments ...... 10,225 98,575
Purchases of short-term investments ................ (3,775) (38,295)
Other .............................................. 9 33
-------- --------
Cash from investing activities ..................... (15,531) 18,338
-------- --------
FINANCING ACTIVITIES
Restricted cash movement ........................... (60) (208)
Principal payments of debt financing and capital
leases .......................................... (4,019) (7,500)
Proceeds from debt financing ....................... 441 1,489
Distributions to minority interests ................ (6,668) (6,024)
Purchases of treasury stock ........................ -- (10,031)
Proceeds from issuances of common stock ............ 467 1,748
Proceeds from issuances of OccuLogix, Inc. stock ... 233 284
-------- --------
Cash from financing activities ..................... (9,606) (20,242)
-------- --------
Net increase in cash and cash equivalents during the
period .......................................... 5,328 17,222
Cash and cash equivalents, beginning of period ..... 31,729 33,435
-------- --------
Cash and cash equivalents, end of period ........... $ 37,057 $ 50,657
======== ========
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.................... 128 591 591
Exercise of stock options........................... 147 290 (47) 243
Options expired or forfeited........................ 1 (1) --
Stock-based compensation............................ 686 686
Adjustment of utilized net operating loss
carryforwards (see Note 7)....................... (3,116) (3,116)
Changes in subsidiaries' stockholders' equity....... 399 399
Net income and comprehensive income................. 13,880 13,880
------ -------- ------ --------- --------
Balance September 30, 2006.......................... 68,966 $449,554 $1,813 $(230,279) $221,088
====== ======== ====== ========= ========
See the accompanying notes to unaudited interim consolidated financial
statements.
6
TLC VISION CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 nine months
ended September 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
nine months ended September 30, 2005 include certain reclassifications to
conform with classifications for the three and nine months ended September
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 nine months ended September 30, 2005, included herein, have been
restated. During the three and nine months ended September 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 nine
months ended September 30, 2005 should have been recorded primarily to
goodwill and equity. The adjustments to income tax expense were $0.9
million and $5.7 million for the three and nine months ended September 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
$0.01 and $0.08 for the three and nine months ended September 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
7
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 nine months ended September 30, 2006, the change in
depreciation method increased net income by approximately $0.1 million (or
$0.00 per diluted share) and $0.5 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
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 September 30,
2006 was $381,000. Total stock-based compensation includes $223,000
($195,000 after tax or less than $0.01 basic and diluted earnings per
share) for TLCVision stock options and its Employee Share Purchase Plan,
and $158,000 ($138,000 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 nine months ended September 30, 2006
was $1,306,000. Total stock-based compensation includes $686,000 ($599,000
after tax or less than $0.01 basic and diluted earnings per share) for
TLCVision stock options and its Employee Share Purchase Plan, and $434,000
($379,000 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 September 30, 2006, the total unrecognized compensation expense
related to TLCVision non-vested employee awards was approximately $2.0
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 nine months ended September 30, 2005:
8
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2005
------------------ -----------------
AS RESTATED AS RESTATED
Net income as reported ................................... $ 779 $11,141
Deduct OccuLogix, Inc.'s stock-based employee compensation
benefit included in net income, net of minority
interests ............................................. (6) --
Less stock-based employee compensation cost determined
under fair value based method for all awards, net of
related tax effects ................................... (633) (1,986)
Less OccuLogix, Inc.'s stock-based employee compensation
cost determined under fair value based method for all
awards, net of minority interests ..................... (562) (1,380)
------ -------
Pro forma net income ..................................... $ (422) $ 7,775
====== =======
Pro forma earnings per share - basic and diluted ......... $(0.01) $ 0.11
====== =======
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 Company granted 0.9 million options during the nine months ended
September 30, 2006, with a fair value of approximately $2.71 per option.
The fair value of stock options granted to employees is estimated on the
date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions: risk-free interest rate of 4.4% and
3.5% for 2006 and 2005, respectively; expected dividend yield of 0% for
both 2006 and 2005; expected life of 3 years and 2.5 years for 2006 and
2005, respectively; and expected volatility of 57% and 75% for 2006 and
2005, respectively.
The Company has issued stock options to employees, directors and certain
other individuals. Options granted have terms ranging from five to ten
years. Vesting provisions on options granted to date include options that
vest immediately, options that vest in equal amounts annually over the
first two years or four years of the option term and options that vest
entirely on the first anniversary of the grant date.
A summary of option activity during the nine months ended September 30,
2006 follows:
WEIGHTED WEIGHTED AGGREGATE AGGREGATE
AVERAGE AVERAGE INTRINSIC INTRINSIC
EXERCISE PRICE EXERCISE PRICE VALUE VALUE
OPTIONS PER SHARE PER SHARE CDN OPTIONS US OPTIONS
------- -------------- -------------- ----------- ----------
December 31, 2005.................. 3,536 Cdn$ 5.26 US$5.53
Granted......................... 908 7.51 6.45
Exercised....................... (147) 2.68 1.72
Forfeited....................... (51) 4.80 4.90
Expired......................... (28) 11.98 8.99
----- --------- -------
September 30, 2006................. 4,218 Cdn$ 5.43 US$5.87 Cdn$857 US$3,650
===== ========= ======= ======= ========
Exercisable at September 30, 2006.. 2,866 Cdn$ 5.35 US$5.98 Cdn$722 US$2,934
===== ========= ======= ======= ========
The weighted average remaining contractual lives of outstanding and
exercisable options as of September 30, 2006 were 2.5 years and 2.1 years,
respectively.
During the nine months ended September 30, 2006, the total intrinsic value
of options exercised, defined as the excess fair value of the underlying
stock over the exercise price of the options, was approximately $0.6
million.
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 owned approximately 49% of OccuLogix, Inc. Due to the
9
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). The Company owns
approximately 41% of OccuLogix, Inc. as of September 30, 2006 due to
additional issuances of shares by OccuLogix, Inc. during the three months
ended September 30, 2006.
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 nine months ended September 30, 2006, the Company paid
approximately $5 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 September 30, 2006 is the
Company's equity investment in OccuLogix, Inc., which totaled $16.8
million. Since April 1, 2006, the Company has accounted for the results of
OccuLogix, Inc. under the equity method. During the three and six months
ended September 30, 2006, OccuLogix, Inc. reported the following:
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, 2006 SEPTEMBER 30, 2006
------------------ ------------------
Net sales ............ $ 85 $ 168
======= ========
Gross profit (loss) .. $ (32) $ 46
======= ========
Net loss ............. $(3,584) $(73,580)
======= ========
For the six months ended September 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 September
30, 2006, the Company recognized $1.5 million and $3.3 million of equity
losses from OccuLogix, Inc.
6. OTHER EXPENSES (INCOME), NET
Other expenses (income), net includes the following operating items:
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- ---------------
2006 2005 2006 2005
----- ----- ----- -------
Loss (gain) on sales and disposals of fixed
assets .................................. $ 16 $ -- $ 17 $ (96)
Center closing costs ....................... (47) 297 (63) 297
Gain on sale of subsidiary ................. (188) -- (188) (319)
Reimbursements from previous research and
development arrangements ................ -- -- (300) (300)
Adjustments to the fair values of
intangibles, long-term receivables and
long-term liabilities ................... -- (215) -- (215)
OccuLogix, Inc. severance accruals ......... -- -- 820 --
Miscellaneous income ....................... (11) (50) (193) (368)
----- ----- ----- -------
$(230) $ 32 $ 93 $(1,001)
===== ===== ===== =======
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 recorded a cumulative catch-up
adjustment for its change in estimate to properly reflect income taxes. The
adjustment for the change in estimate includes a $3.4
10
million decrease to income tax expense of which $0.9 million relates to
periods prior to 2006. In addition, the adjustment for the change in
estimate decreased goodwill, common stock and income taxes payable by $3.9
million, $4.8 million and $2.5 million, respectively. As of September 30,
2006, the Company's net operating loss carryforwards for financial
reporting purposes total $184.9 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 September 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 ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
2006 2005 2006 2005
------- ----------- ------- -----------
AS RESTATED AS RESTATED
Net income ..................................... $ 301 $ 779 $13,880 $11,141
======= ======= ======= =======
Weighted-average shares outstanding - basic .... 68,949 69,888 68,863 70,083
Dilutive effect of stock options and warrants .. 788 1,636 970 1,794
------- ------- ------- -------
Weighted-average shares outstanding - diluted .. 69,737 71,524 69,833 71,877
------- ------- ------- -------
Earnings per share - diluted ................... $ 0.00 $ 0.01 $ 0.20 $ 0.16
======= ======= ======= =======
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 remaining reportable
segments comprise the "Other Healthcare Services" business and include the
mobile cataract, the optometric franchising and AMD segments. 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. In addition, the Company has an accumulation of businesses
that manage cataract and secondary care centers. None of these businesses
meet the quantitative criteria to be disclosed separately as a reportable
segment and are included in "Other" for segment disclosure purposes.
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:
11
THREE MONTHS ENDED SEPTEMBER 30, 2006 MOBILE OPTOMETRIC
(IN THOUSANDS) REFRACTIVE CATARACT FRANCHISING AMD OTHER TOTAL
---------- -------- ----------- ------- ------ -------
Revenues ................................ $43,871 $8,912 $4,805 $ -- $6,901 $64,489
Expenses:
Operating ............................ 41,794 7,326 2,782 -- 4,866 56,768
Depreciation and amortization ........ 3,064 686 15 -- 357 4,122
------- ------ ------ ------- ------ -------
44,858 8,012 2,797 -- 5,223 60,890
------- ------ ------ ------- ------ -------
Income (loss) from operations ........... (987) 900 2,008 -- 1,678 3,599
Interest income (expense) ............... 670 (30) (89) -- (370) 181
Minority interests ...................... (369) -- (939) -- (902) (2,210)
Earnings (losses) from equity
investments .......................... 386 -- -- (1,453) 463 (604)
------- ------ ------ ------- ------ -------
Income (loss) before income taxes ....... (300) 870 980 (1,453) 869 966
Income taxes ............................ (665)
-------
Net income .............................. $ 301
=======
THREE MONTHS ENDED SEPTEMBER 30, 2005 MOBILE OPTOMETRIC
(IN THOUSANDS) REFRACTIVE CATARACT FRANCHISING AMD OTHER TOTAL
---------- -------- ----------- ------- ------ -----------
AS RESTATED
Revenues ................................ $42,814 $8,241 $4,013 $ 635 $5,936 $61,639
Expenses:
Operating ............................ 39,481 6,909 2,537 3,419 4,047 56,393
Depreciation and amortization ........ 3,007 641 12 30 341 4,031
------- ------ ------ ------- ------ -------
42,488 7,550 2,549 3,449 4,388 60,424
------- ------ ------ ------- ------ -------
Income (loss) from operations ........... 326 691 1,464 (2,814) 1,548 1,215
Interest income (expense) ............... 645 (32) (109) 411 (279) 636
Minority interests ...................... (377) -- (664) 1,257 (825) (609)
Earnings from equity investments ........ 262 -- -- -- 225 487
------- ------ ------ ------- ------ -------
Income (loss) before income taxes ....... 856 659 691 (1,146) 669 1,729
Income taxes ............................ (950)
-------
Net income .............................. $ 779
=======
NINE MONTHS ENDED SEPTEMBER 30, 2006 MOBILE OPTOMETRIC
(IN THOUSANDS) REFRACTIVE CATARACT FRANCHISING AMD OTHER TOTAL
---------- -------- ----------- ------- ------- --------
Revenues ................................ $156,167 $25,922 $15,625 $ -- $20,571 $218,285
Expenses:
Operating ............................ 136,926 21,473 8,962 5,877 14,380 187,618
Depreciation and amortization ........ 8,643 1,977 43 34 1,101 11,798
-------- ------- ------- ------- ------- --------
145,569 23,450 9,005 5,911 15,481 199,416
-------- ------- ------- ------- ------- --------
Income (loss) from operations ........... 10,598 2,472 6,620 (5,911) 5,090 18,869
Gain on sale of OccuLogix, Inc. stock ... -- -- -- 1,450 -- 1,450
Interest income (expense) ............... 1,839 (88) (271) 366 (1,109) 737
Minority interests ...................... (2,104) -- (3,110) 2,715 (2,463) (4,962)
Earnings (losses) from equity
investments .......................... 1,216 -- -- (3,303) 1,507 (580)
-------- ------- ------- ------- ------- --------
Income (loss) before income taxes ....... 11,549 2,384 3,239 (4,683) 3,025 15,514
Income taxes ............................ (1,634)
--------
Net income .............................. $ 13,880
========
12
NINE MONTHS ENDED SEPTEMBER 30, 2005 MOBILE OPTOMETRIC
(IN THOUSANDS) REFRACTIVE CATARACT FRANCHISING AMD OTHER TOTAL
---------- -------- ----------- ------- ------- -----------
AS RESTATED
Revenues ................................ $145,828 $23,137 $13,166 $ 1,635 $15,742 $199,508
Expenses:
Operating ............................ 122,723 18,974 8,340 11,292 10,285 171,614
Depreciation and amortization ........ 8,927 1,985 32 88 987 12,019
-------- ------- ------- ------- ------- --------
131,650 20,959 8,372 11,380 11,272 183,633
-------- ------- ------- ------- ------- --------
Income (loss) from operations ........... 14,178 2,178 4,794 (9,745) 4,470 15,875
Interest income (expense) ............... 2,148 (86) (341) 1,187 (863) 2,045
Minority interests ...................... (2,065) -- (2,182) 4,167 (2,320) (2,400)
Earnings from equity investments ........ 1,110 -- -- -- 716 1,826
-------- ------- ------- ------- ------- --------
Income (loss) before income taxes ....... 15,371 2,092 2,271 (4,391) 2,003 17,346
Income taxes ............................ (6,205)
--------
Net income .............................. $ 11,141
========
10. SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash transactions:
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2006 2005
------ -------
Capital lease obligations relating to equipment purchases .. $7,426 $ 2,519
Inventory contributed to OccuLogix, Inc. ................... 25 173
Value of shares issued upon meeting certain
earnings criteria ....................................... -- 181
Retirement of treasury stock ............................... -- 10,031
Accrual for treasury stock ................................. -- 4,668
Option and warrant reduction ............................... 48 1,004
Cash paid for the following:
NINE MONTHS
ENDED
SEPTEMBER 30,
---------------
2006 2005
------ ------
Interest........ $1,065 $1,486
Income taxes.... 1,516 681
11. NEW ACCOUNTING PRONOUNCEMENT
In June 2006, the FASB issued Interpretation 48 "Accounting for Uncertainty
in Income Taxes - an interpretation of FASB Statement No. 109" ("FIN 48").
This interpretation prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. This
interpretation is effective for fiscal years beginning after December 15,
2006. Any adjustments required upon the adoption of this interpretation
must be recorded directly to retained earnings in the year of adoption and
reported as a change in accounting principle. The Company is currently
evaluating the impact of this interpretation on its financial statements.
13
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 41% 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 202,000 procedures,
including refractive and cataract procedures, at the Company's centers or using
the Company's equipment during the nine months ended September 30, 2006.
The Company continually assesses patient, optometric and ophthalmic
industry trends as it strives to improve laser vision correction revenues and
procedure volumes. On November 8, 2006, the Company announced its intention to
reposition a majority of its wholly-owned refractive centers by introducing a
lower entry-level price and adding a direct-to-consumer marketing message to its
existing optometric-referral patient acquisition model. This repositioning could
increase several operating metrics in 2007 including refractive volume,
refractive revenues and marketing expenses, while the impact on net income will
be dependent, in part, on the magnitude of these increases.
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 nine months ended September 30, 2006, the Company paid approximately $5
million to acquire or invest in several entities, none of which were
individually material.
14
RESULTS OF OPERATIONS
The following table sets forth certain center and procedure operating data for
the periods presented:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2006 2005 2006 2005
------ ------ ------- -------
OPERATING DATA (unaudited)
Number of majority owned eye care centers at end of period.......... 76 69 76 69
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 77 84 77
Number of laser vision correction procedures:
Majority owned centers........................................... 22,400 23,000 79,600 79,600
LECC (minority owned) centers.................................... 4,500 4,300 14,300 13,700
------ ------ ------- -------
Total TLCVision branded center procedures........................ 26,900 27,300 93,900 93,300
====== ====== ======= =======
Total access procedures.......................................... 15,000 15,200 53,600 57,800
====== ====== ======= =======
Total TLCVision branded refractive procedures.................... 41,900 42,500 147,500 151,100
====== ====== ======= =======
THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2005
Total revenues for the three months ended September 30, 2006 were $64.5
million, an increase of $2.9 million, or 5% over revenues of $61.6 million for
the three months ended September 30, 2005. This increase was due to a 2%
increase in refractive revenues and a 10% increase in other healthcare services
revenues.
Revenues from the refractive segment for the three months ended September
30, 2006 were $43.9 million, an increase of $1.1 million or 2% from revenues of
$42.8 million for the three months ended September 30, 2005. Refractive revenues
increased as a result of an increased mix of higher priced procedures, primarily
Custom LASIK and Intralase, offset in part by a decrease in center and access
procedures.
Revenues from centers for the three months ended September 30,
2006 were $35.4 million, an increase of $0.4 million, or 1% from
revenues of $35.0 million for the three months ended September 30,
2005. The increase in revenues from centers was due to an increased
mix of higher priced procedures, which accounted for approximately
$1.3 million of the revenue increase, partially offset by a decrease
in center procedures, which accounted for a decrease in revenues of
approximately $0.9 million. For the three months ended September 30,
2006, majority-owned center procedures were approximately 22,400, a
decrease of 600 or 3% from procedures of 23,000 for the three months
ended September 30, 2005.
Revenues from access services for the three months ended
September 30, 2006 were $8.4 million, an increase of $0.6 million, or
8% from revenues of $7.8 million for the three months ended September
30, 2005. For the three months ended September 30, 2006, access
procedures declined by 200 or 1% from the prior year period and
accounted for a decrease in revenues of approximately $0.1 million.
This decrease in access revenues was offset by higher average pricing,
which accounted for an increase in access revenues of approximately
$0.7 million.
Revenues from other healthcare services for the three months ended
September 30, 2006, were $20.6 million, an increase of $1.8 million or 10% from
revenues of $18.8 million for the three months ended September 30, 2005.
Approximately 32% of total revenues for the three months ended September 30,
2006 were derived from other healthcare services compared to 31% for the three
months ended September 30, 2005. The increase in other healthcare services
revenues resulted from a $0.7 million increase from the mobile cataract segment,
a $0.8 million increase from the optometric franchising segment and a $1.0
million increase from the other non-refractive businesses. These increases were
partially offset by a $0.6 million decrease from the AMD segment due to the
deconsolidation of OccuLogix, Inc.
15
The cost of refractive revenues (excluding amortization expense) for the
three months ended September 30, 2006 was $32.9 million, an increase of $0.4
million, or 1% over the cost of refractive revenues of $32.5 million for the
three months ended September 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 increased to
25% during the three months ended September 30, 2006 from 24% in the prior year
period.
The cost of revenues (excluding amortization expense) from centers for
the three months ended September 30, 2006 was $26.3 million, an increase of
$0.2 million from cost of revenues of $26.1 million for the three months
ended September 30, 2005. This increase was primarily attributable to $0.8
million of higher costs primarily associated with higher priced procedures
and costs from centers acquired or opened within the past year. Higher
costs were partially offset by a decrease in center procedures, which
accounted for a decrease in cost of revenues of approximately $0.6 million.
Gross margins for centers increased to 26% during the three months ended
September 30, 2006 from 25% in the prior year period.
The cost of revenues (excluding amortization expense) from access
services for the three months ended September 30, 2006 was $6.7 million, an
increase of $0.4 million or 5% from cost of revenues of $6.3 million for
the three months ended September 30, 2005. This increase was primarily
attributable to $0.4 million of higher costs primarily associated with
higher priced procedures. The decrease in access procedures accounted for a
decrease in cost of revenues of less than $0.1 million. Gross margins
increased to 21% during the three months ended September 30, 2006 from 19%
in the prior year period.
The cost of revenues (excluding amortization expense) from other healthcare
services for the three months ended September 30, 2006 was $12.6 million, an
increase of $0.9 million or 8% from cost of revenues of $11.7 million for the
three months ended September 30, 2005. The increase in cost of revenues was due
to a $0.3 million increase from the mobile cataract segment, a $0.8 million
increase from the other non-refractive businesses, and a $0.2 million increase
from the optometric franchising segment. These increases were partially offset
by a $0.4 million decrease from the AMD segment due to the deconsolidation of
OccuLogix, Inc. For the three months ended September 30, 2006, gross margins
increased to 39% from 38% for the prior year period.
General and administrative expenses decreased to $8.1 million for the three
months ended September 30, 2006 from $8.7 million for the three months ended
September 30, 2005. The $0.6 million or 7% decrease was primarily due to a $2.0
million decrease from the AMD segment due to the deconsolidation of OccuLogix,
Inc. This decrease was partially offset by increases from businesses acquired or
opened within the past year of $0.4 million, stock-based compensation expense of
$0.2 million, and other general expenses.
Marketing expenses increased to $6.6 million for the three months ended
September 30, 2006 from $5.4 million for the three months ended September 30,
2005. The $1.2 million or 23% increase was primarily due to $1.0 million of
costs related to businesses acquired or opened within the past year.
Research and development, clinical and regulatory expenses were $1.1
million for the three months ended September 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 September 30, 2006.
Interest income decreased to $0.6 million for the three months ended
September 30, 2006 from $1.1 million for the three months ended September 30,
2005. This $0.5 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 $2.2 million for the three months
ended September 30, 2006 from $0.6 million for the three months ended September
30, 2005. This $1.6 million increase included a $1.3 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.
16
Earnings from equity investments decreased to $0.6 million of losses for
the three months ended September 30, 2006 from $0.5 million of earnings for the
three months ended September 30, 2005. This $1.1 million decrease included a
$1.4 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 three months ended September 30, 2006, the Company recognized
income tax expenses of $0.7 million. Approximately $0.6 million of this expense
related to the utilization of certain net operating loss carryforwards that
reduce goodwill. For the three months ended September 30, 2005, the Company
recognized income tax expense of $1.0 million. Approximately $0.5 million and
$0.3 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 September 30, 2006 decreased to $0.3
million or $0.00 per diluted share from $0.8 million or $0.01 per diluted share
for the three months ended September 30, 2005. This $0.5 million decrease
included a $0.3 million decrease from the AMD segment. Excluding the impact of
the AMD segment, net income decreased to $1.8 million or $0.03 per diluted share
for the three months ended September 30, 2006 from $1.9 million or $0.03 per
diluted share for the prior year period.
NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 2005
Total revenues for the nine months ended September 30, 2006 were $218.3
million, an increase of $18.8 million, or 9% over revenues of $199.5 million for
the nine months ended September 30, 2005. This increase was due to a 7% increase
in refractive revenues and a 16% increase in other healthcare services revenues.
Revenues from the refractive segment for the nine months ended September
30, 2006 were $156.2 million, an increase of $10.4 million or 7% from revenues
of $145.8 million for the nine months ended September 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 nine months ended September 30, 2006
were $127.0 million, an increase of $10.3 million or 9% from revenues of
$116.7 million for the nine months ended September 30, 2005. The increase
in revenues from centers was primarily due to an increased mix of higher
priced procedures, which accounted for approximately $10.2 million of the
revenue increase. For the nine months ended September 30, 2006 and 2005,
majority-owned center procedures were approximately 79,600.
Revenues from access services for the nine months ended September 30,
2006 were $29.2 million, an increase of $0.1 million from revenues of $29.1
million for the nine months ended September 30, 2005. The increase in
access revenues was due to higher average pricing, which accounted for an
increase in access revenues of approximately $2.4 million, partially offset
by a decrease in access procedures, which accounted for approximately $2.3
million of a revenue decrease. For the nine months ended September 30,
2006, access procedures were approximately 53,600, a decrease of 4,200 or
7% from access procedures of 57,800 for the nine months ended September 30,
2005.
Revenues from other healthcare services for the nine months ended September
30, 2006, were $62.1 million, an increase of $8.4 million or 16% from revenues
of $53.7 million for the nine months ended September 30, 2005. Approximately 28%
of total revenues for the nine months ended September 30, 2006 were derived from
other healthcare services compared to 27% for the nine months ended September
30, 2005. The increase in other healthcare services revenues resulted from a
$2.8 million increase from the mobile cataract segment, a $2.5 million increase
from the optometric franchising segment and a $4.8 million increase from the
other non-refractive businesses. These increases were partially offset by a $1.6
million decrease from the AMD segment due to the deconsolidation of OccuLogix,
Inc. in the second quarter of 2006.
17
The cost of refractive revenues (excluding amortization expense) for the
nine months ended September 30, 2006 was $109.4 million, an increase of $7.9
million, or 8% over the cost of refractive revenues of $101.5 million for the
nine months ended September 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 30% during the nine months ended September 30, 2006 and 2005.
The cost of revenues (excluding amortization expense) from centers for
the nine months ended September 30, 2006 was $88.1 million, an increase of
$7.5 million or 9% from cost of revenues of $80.6 million for the nine
months ended September 30, 2005. This increase was primarily attributable
to $7.4 million of higher costs primarily associated with higher priced
procedures and costs from centers acquired or opened within the past year.
An increase in center procedures also accounted for approximately $0.1
million of the cost of revenues increase. Gross margins for centers
remained consistent at 31% during the nine months ended September 30, 2006
and 2005.
The cost of revenues (excluding amortization expense) from access
services for the nine months ended September 30, 2006 was $21.3 million, an
increase of $0.4 million or 2% from cost of revenues of $20.9 million for
the nine months ended September 30, 2005. This increase was primarily
attributable to $2.1 million of higher costs primarily associated with
higher priced procedures. Higher costs were partially offset by a decrease
in access procedures, which accounted for a decrease in cost of revenues of
approximately $1.7 million. Gross margins decreased to 27% during the nine
months ended September 30, 2006 from 28% in the prior year period.
The cost of revenues (excluding amortization expense) from other healthcare
services for the nine months ended September 30, 2006 was $39.5 million, an
increase of $6.5 million or 20% from cost of revenues of $33.0 million for the
nine months ended September 30, 2005. The increase in cost of revenues includes
a $0.3 million increase from the AMD segment's cost of revenues, which included
a $1.6 million write-down of OccuLogix, Inc. inventory in the first quarter. The
remaining increase in cost of revenues was due to a $2.0 million increase from
the mobile cataract segment, a $0.4 million increase from the optometric
franchising segment and a $3.8 million increase from the other non-refractive
businesses. For the nine months ended September 30, 2006, gross margins
decreased to 36% 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 $26.0 million for the nine
months ended September 30, 2006 from $27.0 million for the nine months ended
September 30, 2005. The $1.0 million or 4% decrease included a $4.2 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 $1.8 million
increase from businesses acquired or opened within the past year and $0.7
million of stock-based compensation, excluding the AMD segment, attributable to
the adoption of Statement 123(R).
Marketing expenses increased to $20.3 million for the nine months ended
September 30, 2006 from $16.2 million for the nine months ended September 30,
2005. The $4.1 million or 25% increase was primarily due to costs related to
businesses acquired or opened within the past year.
Research and development, clinical and regulatory expenses decreased to
$1.5 million for the nine months ended September 30, 2006 from $3.8 million for
the nine months ended September 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.
During the nine months ended September 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 nine months ended
September 30, 2005.
Interest income decreased to $1.8 million for the nine months ended
September 30, 2006 from $3.4 million for the nine months ended September 30,
2005. This $1.6 million decrease was due to a $0.8 million decrease from the AMD
segment, a result of deconsolidating OccuLogix, Inc. in the second quarter of
2006, and a $0.8 million
18
decrease due to a decrease in the Company's cash and cash equivalents and
short-term investments balances.
Minority interest expense increased to $5.0 million for the nine months
ended September 30, 2006 from $2.4 million for the nine months ended September
30, 2005. This $2.6 million increase included a $1.5 million increase from the
AMD segment due to the deconsolidation of OccuLogix, Inc. in the second quarter
of 2006. The remaining increase of $1.1 million was due to higher income from
the Company's other business segments.
Earnings from equity investments decreased to $0.6 million of losses for
the nine months ended September 30, 2006 from $1.8 million of earnings for the
nine months ended September 30, 2005. This $2.4 million decrease included a $3.3
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 nine months ended September 30, 2006, the Company recognized income
tax expense of $1.6 million. This expense includes a $0.9 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
nine months ended September 30, 2005, the Company recognized income tax expense
of $6.2 million. Approximately $2.9 million and $2.0 million of this expense
related to the utilization of certain net operating loss carryforwards that
reduce equity and goodwill, respectively.
Net income for the nine months ended September 30, 2006 increased to $13.9
million or $0.20 per diluted share from $11.1 million or $0.16 per diluted share
for the nine months ended September 30, 2005. Excluding the impact of the AMD
segment, net income increased to $18.6 million or $0.27 per diluted share for
the nine months ended September 30, 2006 from $15.5 million or $0.22 per diluted
share for the prior year period.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 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 $47.1 million at September 30, 2006
compared to $69.9 million at December 31, 2005. This decrease is primarily due
to a $41.3 million decrease from the deconsolidation of OccuLogix, Inc. in the
second quarter of 2006 partially offset by $18.5 million of cash generated from
the Company's other reportable segments. Working capital at September 30, 2006
was $40.3 million, a decrease of $26.6 million from $66.9 million at December
31, 2005. This decrease is also primarily due to a $44.5 million decrease from
the deconsolidation of OccuLogix, Inc. partially offset by a $17.9 million
increase in working capital from the Company's other reportable segments.
The Company's principal cash requirements have included normal operating
expenses, debt repayment, distributions to minority partners, capital
expenditures, acquisitions and investments.
During the nine months ended September 30, 2006, the Company invested $8.1
million in fixed assets and received vendor lease financing for an additional
$8.0 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 and expects
to continue to have access to this financing option 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.
19
CASH FROM OPERATING ACTIVITIES
Net cash provided by operating activities was $30.5 million for the nine
months ended September 30, 2006. The cash flows provided by operating activities
during the nine months ended September 30, 2006 were primarily due to net income
of $13.9 million plus non-cash items including depreciation and amortization of
$11.8 million, deferred taxes of $2.7 million, minority interests of $5.0
million, write-down of OccuLogix, Inc. inventory of $1.6 million and stock-based
compensation of $1.3 million. These cash flows were partially offset by a gain
on sale of OccuLogix, Inc. stock of $1.4 million and an increase in net
operating assets of $4.5 million. The increase in net operating assets consisted
of a $1.2 million increase in prepaid expenses and other current assets, a $3.1
million decrease in accounts payable and accrued liabilities and a $0.3 million
increase in accounts receivable. The increase in prepaid expenses and other
current assets is primarily due to increases in prepaid insurance balances and
inventory since December 31, 2005. The decrease in accounts payable and accrued
liabilities is partially due to a decrease in income taxes payable resulting
from the cumulative catch-up adjustment related to income taxes (see Note 7).
Excluding the impact of the AMD segment, net cash provided by operating
activities for the nine months ended September 30, 2006 would have been $35.3
million, an increase of $1.6 million over the prior year period.
CASH FROM INVESTING ACTIVITIES
Net cash used in investing activities was $15.5 million for the nine months
ended September 30, 2006. The cash used in investing activities primarily
related to the $14.8 million 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 $8.1 million and acquisitions and investments of $4.9
million. These cash outflows were partially offset by net proceeds from the
sales and purchases of short-term investments of $6.5 million, distributions and
loan payments received from equity investments of $2.7 million, proceeds from
the sale of OccuLogix, Inc. stock of $2.2 million, proceeds from the sales of
fixed assets of $0.6 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 $12.8 million for the
nine months ended September 30, 2006.
CASH FROM FINANCING ACTIVITIES
Net cash used in financing activities was $9.6 million for the nine months
ended September 30, 2006. Net cash used in financing activities during the nine
months ended September 30, 2006 was primarily related to the repayment of
certain notes payable and capitalized lease obligations of $4.0 million and
distributions to minority interests of $6.7 million, partially offset by
proceeds from issuances of common stock of $0.5 million, proceeds from debt
financing of $0.4 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 $7.6 million for the nine months ended
September 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
20
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.
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
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
November 8, 2006
By: /s/ Steven P. Rasche
------------------------------------
Steven P. Rasche
Chief Financial Officer
November 8, 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