SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 2001
COMMISSION FILE NUMBER: 0-29302
TLC LASER EYE CENTERS INC.
--------------------------
(Exact name of registrant as specified in its charter)
Ontario, Canada 980151150
(State or jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5280 Solar Drive, Suite 300 L4W 5M8
Mississauga, Ontario (Zip Code)
(Address of principal executive offices)
Registrant's telephone, including area code (905) 602-2020
SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:
Common Shares, No Par Value
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. |_|
As of July 31, 2001, the aggregate market value of the registrant's Common
Shares held by non-affiliates of the registrant was approximately $150.3
million.
As of July 31, 2001, there were 38,048,748 of the registrant's Common
Shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Definitive Proxy Statement for the Company's 2001 annual shareholder's meeting
(incorporated in Part III to the extent provided in Items 10, 11, 12, and 13).
2
This Annual Report on Form 10-K (herein, together with all amendments, exhibits
and schedules hereto, referred to as the "Form 10-K") contains certain forward
looking statements within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934, which statements
can be identified by the use of forward looking terminology, such as "may",
"will", "expect", "anticipate", "estimate", "plans" or "continue" or the
negative thereof or other variations thereon or comparable terminology referring
to future events or results. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth elsewhere in this Form
10-K. See the "Risk Factors" section of Item 1 "Business" for cautionary
statements identifying important factors with respect to such forward looking
statements, including certain risks and uncertainties, that could cause actual
results to differ materially from results referred to in forward looking
statements. Unless the context indicates or requires otherwise, references in
this Form 10-K to the "Company" or "TLC" shall mean TLC Laser Eye Centers Inc.
and its subsidiaries. The Company's fiscal year ends on May 31. Therefore,
references in this Form 10-K to a particular fiscal year shall mean the 12
months ended on May 31 in that year. References to "$" 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.
PART I
ITEM 1. BUSINESS
Overview
TLC Laser Eye Centers Inc. ("TLC" or the "Company") is one of the largest
providers of laser vision correction services in North America. TLC owns and
manages eye care centers which, together with TLC's network of over 12,500 eye
care doctors, provide laser vision correction of common refractive vision
disorders such as myopia (nearsightedness), hyperopia (farsightedness) and
astigmatism. Laser vision correction is an out-patient procedure that is
designed to change the curvature of the cornea to reduce or eliminate a
patient's reliance on eyeglasses or contact lenses. TLC, which commenced
operations in September 1993, currently has 59 eye care centers in 26 states and
provinces throughout the United States and Canada. More than 350,000 paid
refractive procedures have been performed at TLC centers, including over 122,800
performed at the Company's centers during fiscal 2001.
In the past year, TLC affirmed its strategy to position itself as a
premium provider of laser vision correction services in the face of an industry
price war. The Company believes that superior quality of care and outstanding
clinical results will be the long-term determinants of success in the laser
vision correction industry.
To this end, the Company's focus has remained on maximizing revenues,
controlling costs, providing superior quality of care and clinical results and
pursuing additional growth opportunities for the premium business.
On August 27, 2001, the Company announced that it had entered into an
Agreement and Plan of Merger with Laser Vision Centers, Inc. ("Laser Vision").
Laser Vision provides access to excimer lasers, microkeratomes, other equipment
and value added support services to eye surgeons for laser vision correction and
the treatment of cataracts. The merger will be effected as an all-stock
combination at a fixed exchange rate of 0.95 common shares of the Company for
3
each of the approximately 25.9 million outstanding shares of common stock of
Laser Vision. In addition, each of the approximately 7.8 million outstanding
options or warrants to acquire stock of Laser Vision shall be assumed by the
Company and become options or warrants to acquire common shares of the Company
based on the 0.95 exchange rate. The merger is expected to be effected on a
tax-free basis to shareholders and accounted for under the purchase method. The
Company's Chairman and Chief Executive Officer, Elias Vamvakas, will be the
Chairman and Chief Executive Officer of the merged company . John J. (Jack)
Klobnak, Laser Vision's current Chairman and CEO, will assume a non-executive
Vice Chairmanship and continue as a corporate director for approximately one
year, after which time he intends to retire. James Wachtman, President and Chief
Operating Officer of Laser Vision will serve as the merged company's President &
Chief Operating Officer. The merged company's Chief Financial Officer will be
Charles Bono, who is currently Chief Financial Officer of Laser Vision. The
board of directors of the merged company is expected to be composed of members
from both companies' current boards of directors. Completion of the transaction,
expected to occur in December, 2001, is subject to shareholder and regulatory
approval and other conditions usual and customary in such transactions.
Industry Background
Refractive Disorders
The primary function of the human eye is to focus light. The eye works
much like a camera: light rays enter the eye through the cornea, which provides
most of the focusing power. Light then travels through the lens where it is
fine-tuned to focus properly on the retina. The retina, located at the back of
the eye, acts like the film in the camera, changing light into electric impulses
that are carried by the optic nerve to the brain. To see clearly, light must be
focused precisely on the retina. Refractive disorders, such as myopia
(nearsightedness), hyperopia (farsightedness) and astigmatism, result from an
inability of the cornea and the lens to focus images on the retina properly. The
amount of refraction required to properly focus images depends on the curvature
of the cornea and the size of the eye. If the curvature is not correct, the
cornea cannot properly focus the light passing through it onto the retina, and
the viewer will see a blurred image.
Surgical Procedures
Refractive disorders have historically been treated primarily by
eyeglasses or contact lenses. Increasingly, they are being treated by surgical
techniques, the most common of which in the United States, prior to the excimer
laser being approved for sale for laser vision correction, was Radial Keratotomy
("RK"). RK is a surgical procedure, first performed in the 1970s, that corrects
myopia by altering the shape of the cornea. This is accomplished by making
incisions in a "radial" pattern along the outer portion of the cornea using a
hand-held diamond-tipped blade. These very fine incisions are designed to help
flatten the curvature of the cornea, thereby allowing light rays entering the
eye to properly focus on the retina. The incisions penetrate 90% of the depth of
the cornea. Because RK involves incisions into the corneal tissue, it may weaken
the structure of the cornea, which can have adverse consequences following
traumatic injury. RK also produces incisional scarring, and may cause
fluctuation of vision and progressive
4
farsightedness. Industry sources estimate that in 1994 over 200,000 RK
procedures were performed in the United States. A variation of RK, Astigmatic
Keratotomy, is used to correct astigmatism.
Laser Vision Correction
Excimer laser technology was developed by International Business Machines
Corporation in 1976 and has been used in the computer industry for many years to
etch sophisticated computer chips. Excimer lasers have the desirable qualities
of producing very precise ablation (removal of tissue) without affecting the
area outside of the target zone. In 1981, it was shown that the excimer laser
could ablate corneal tissue. Each pulse of the excimer laser can remove 0.25
microns of tissue in 12 billionths of a second. The first laser experiment on
human eyes was performed in 1985 and the first human eye was treated with the
excimer laser in the United States in 1988.
Excimer laser procedures are designed to reshape the outer layers of the
cornea to correct vision disorders by changing the curvature of the cornea.
There are currently two procedures that use the excimer laser to correct vision
disorders: Photorefractive Keratectomy ("PRK") and Laser In-Situ Keratomileusis
("LASIK"). In the case of both PRK and LASIK, prior to the procedure, the doctor
makes an assessment of the exact correction required and programs the excimer
laser. The software of the excimer laser then calculates the optimal number of
pulses needed to achieve the intended corneal correction using a specially
developed algorithm. Both PRK and LASIK are performed on an outpatient basis
without general anesthesia, using only topical anesthetic eye drops. An eyelid
holder is inserted to prevent blinking while the eye drops eliminate the reflex
to blink. The patient reclines in a chair, his or her eye focused on a fixation
target, and the surgeon positions the patient for the procedure. The surgeon
uses a foot pedal to apply the excimer laser beam, which emits a rapid
succession of excimer laser pulses. The typical procedure takes 10 to 15
minutes, from set-up to completion, with the length of time of the actual
excimer laser treatment lasting 15 to 90 seconds.
In order to market an excimer laser for commercial sale in the United
States, the manufacturer must obtain pre-market approval ("PMA") from the United
States Food and Drug Administration (the "FDA"). An FDA PMA is specific for each
laser manufacturer and model and sets out a range of approved indications.
However, the FDA is not authorized to regulate the practice of medicine.
Therefore, in the same way that doctors often prescribe drugs for "off-label"
uses (i.e., uses for which the FDA did not originally approve the drug), a
doctor may use a device such as the excimer laser for a procedure or an
indication not specifically approved by the FDA, if that doctor determines that
it is in the best interest of the patient. The initial FDA PMA approval for the
sale of an excimer laser for refractive procedures was the approval of the
Summit Autonomous, Inc. (now Alcon Laboratories Inc. division of Nestle, S.A.)
("Alcon") laser for the treatment of myopia granted in 1995. Figures l and 2 set
out a list of lasers approved for LASIK and PRK and other procedures as of March
29, 2001. In Canada, neither the sale nor the use of excimer lasers to perform
refractive surgery is currently subject to regulatory approval, and excimer
lasers have been used to treat myopia since 1990 and to treat hyperopia since
1996. The Company expects that future sales of any new excimer laser models in
Canada may require the approval of the Health Protection Branch of Health Canada
("HPB").
5
Figure 1
FDA-Approved lasers for LASIK
- -----------------------------------------------------------------------------------------------
Company and Model Approval Number and Date Approved Indications
(D = Diopters)
- -----------------------------------------------------------------------------------------------
Autonomous Technology P970043/S5 Myopia less than -9.0D with or without
- - LADARVision 5/9/00 astigmatism from -0.5 to -3.0D
- -----------------------------------------------------------------------------------------------
Bausch & Lomb Surgical P990027 Myopia from -1.0 to -7.0D with or without
- -Technolas 217a 2/23/00 astigmatism less than -3.0D
- -----------------------------------------------------------------------------------------------
CRS/VISX P990010 Myopia less than -14.0D with or without
- -Start S2 11/9/99 astigmatism between -0.5 to -5.0D
- -----------------------------------------------------------------------------------------------
Dishler P970049 Myopia from -0.5 to -13.0D with or without
12/16/99 astigmatism between -0.5 to -4.0D
- -----------------------------------------------------------------------------------------------
Kremer P970005 Myopia from -1.0 to -15.9D with or without
7/30/98 astigmatism less than -5.0D
- -----------------------------------------------------------------------------------------------
Nidek P970053/S2 Myopia from -1.0 to -14.0D with or without
- -EC5000 4/14/00 astigmatism less than 4.0D
- -----------------------------------------------------------------------------------------------
Summit P930034/S13 Myopia less than -14.0D with or without
- -Apex Plus 10/21/99 astigmatism from 0.5 to 5.0D
- -----------------------------------------------------------------------------------------------
Summit Autonomous P970043/S7 Hyperopia less than 6.0D with or without
- -LADARVision 9/22/00 astigmatism less than -6.0D
- -----------------------------------------------------------------------------------------------
Figure 2
FDA-Approved Lasers for PRK and Other Refractive Surgeries
- -------------------------------------------------------------------------------------------------------
Company and Model Approval Number and Date Approved Indications
(D = Diopters)
- -------------------------------------------------------------------------------------------------------
Bausch & Lomb Surgical P970056 PRK; Myopia from - 1.5 to - 7.0D with or
- - Keracor 116 9/28/99 without astigmatism less than - 4.5D
- -------------------------------------------------------------------------------------------------------
Autonomous Technology P970043 PRK; Myopia from - 1.0 to - 10.0D with or
- - LADARVision 11/2/98 without astigmatism less than - 4.5D
- -------------------------------------------------------------------------------------------------------
LaserSight P980008 PRK; Myopia from - 1.0 to - 6.0D with or
- - LaserScan LSX 11/12/99 without astigmatism less than 1.0D
- -------------------------------------------------------------------------------------------------------
Nidek P970053 PRK; Myopia from - 0.75 to - 13.0D
- - EC5000 12/17/98
- -------------------------------------------------------------------------------------------------------
Nidek P970053/S1 PRK; Myopia from - 1.0 to - 8.0D with or
- - EC5000 9/29/99 without astigmatism from - 0.5 to -4.0D
- -------------------------------------------------------------------------------------------------------
Summit P930034 PRK; Myopia from - 1.5 to - 7.0D
- - Apex & Apex Plus 10/25/98
- -------------------------------------------------------------------------------------------------------
Summit P930034/S9 PRK; Myopia from -1.0 to -6.0D with or
- - Apex Plus 3/11/98 without astigmatism from -1.0 to -4.0D
- -------------------------------------------------------------------------------------------------------
Summit P930034/S12 PRK; Hyperopia from + 1.5 to + 4.0D with
- - Apex Plus 12/21/99 or without astigmatism less than - 1.0D
- -------------------------------------------------------------------------------------------------------
Summit Autonomous P970043/S8 Name Change Only
- - LADARVision 7/11/00
- -------------------------------------------------------------------------------------------------------
Sunrise P99078 Laser Thermokeratoplasty (LTK);
- -Hyperion 6/30/00 Hyperopia from + 0.75 to + 2.5D with or
without astigmatism less than 0.75D
- -------------------------------------------------------------------------------------------------------
VISX P930016 PRK; Myopia from 0 to - 6.0D
- - Model B & C (Star & Star S2) 3/27/96
- -------------------------------------------------------------------------------------------------------
VISX P930016/S3 PRK; Myopia from 0 to - 6.0D with or
- - Model B & C (Star & Star S2) 4/24/97 without astigmatism from - 0.75 to - 4.0D
- -------------------------------------------------------------------------------------------------------
VISX P930016/S5 PRK; Myopia from 0 to - 12.0D with or
- - Model B & C (Star & Star S2) 1/29/98 without astigmatism from 0 to - 4.0D
- -------------------------------------------------------------------------------------------------------
VISX P930016/S7 PRK; Hyperopia from + 1.0 to + 6.0D
- - Star S2 11/2/98
- -------------------------------------------------------------------------------------------------------
VISX P990010/S1 Same as S2, except with eye tracker
Star S3 (EyeTracker) 4/20/00
- -------------------------------------------------------------------------------------------------------
VISX P930016/S10 PRK; Hyperopia from + 0.5 to + 5.0D with
- - Star S2 & S3 10/18/00 or without astigmatism + 0.5 to + 4.0D
- -------------------------------------------------------------------------------------------------------
Source: U.S. Food and Drug Administration fda.gov website
6
Photorefractive Keratectomy
With PRK, no scalpels are used and no incisions are made. The surgeon
prepares the eye by gently removing the surface layer of the cornea called the
epithelium. The surgeon then applies the excimer laser beam, reshaping the
curvature of the cornea. Deeper cell layers remain virtually untouched. Since a
layer typically about as slender as a human hair is removed, the cornea
maintains its original strength. A clear contact lens bandage is then placed on
the eye to protect it. Following PRK, a patient typically experiences blurred
vision and discomfort until the epithelium heals. A patient usually experiences
a substantial improvement in clarity of vision within a few days following PRK,
normally seeing well enough to drive a car within one to two weeks. However, it
generally takes one month, but may take up to six months, for the full benefit
of PRK to be realized.
PRK has been used commercially since 1988 and industry sources estimate
that to date over one million PRK procedures have been performed worldwide.
Clinical trials conducted by Alcon prior to receiving FDA approval for the sale
of its excimer laser showed that one year after the PRK procedure, approximately
81% of the patients could see 20/20 or better and approximately 99% could see
20/40 or better (the minimum level required to drive without corrective lenses
in most states). Clinical data submitted to the FDA by Alcon has shown that
patient satisfaction is very high with over 95% indicating they would
enthusiastically recommend PRK to a friend. In addition, a study published in
the February, 1998 issue of Ophthalmology reported the results of 83 patients in
the United Kingdom who underwent PRK for myopia of up to 7 diopters in 1989. The
study found that the patients experienced stable vision and the majority of
patients experienced no side effects. No complications were observed such as
cataracts, retinal detachment or long term elevated intraocular pressure and no
patients developed an infection.
7
Laser In-Situ Keratomileusis
LASIK came into commercial use in Canada in 1994 and in the United States
in 1996. In LASIK, an automated microsurgical instrument called a microkeratome
is used to create a thin corneal flap which remains hinged to the eye. The
corneal flap is 160 to 180 microns thick, about 30% of the corneal thickness.
Patients do not feel or see the cutting of the corneal flap, which takes only a
few seconds. The corneal flap is then flipped back and excimer laser pulses are
applied to the inner stromal layers of the cornea to treat the eye with the
patient's prescription. The corneal flap is then closed and the flap and
interface rinsed. Once the procedure is completed, most surgeons wait two to
three minutes to ensure the corneal flap has fully re-adhered. At this point,
patients can blink normally and the corneal flap remains secured in position by
the natural suction within the cornea. Since the surface layer of the cornea
remains intact with LASIK, no bandage contact lens is required and the patient
experiences virtually no discomfort. LASIK has the advantage of more rapid
recovery than PRK, with most typical patients seeing well enough to drive a car
the next day and healing completely within one to three months. Currently, the
majority of laser vision correction procedures in the United States and Canada
are LASIK. More than 90% of the excimer laser procedures currently performed at
the Company's eye care centers are LASIK. The Company's medical directors
believe LASIK generally allows for more precise correction than PRK for higher
levels of myopia and hyperopia (with or without astigmatism), greater
predictability of results and decreased probability of regression.
The Refractive Market
While estimates of market size should not be taken as projections of
revenues or of the Company's ability to penetrate that market, an industry
source estimates that approximately 50% of the United States population or 145
million people suffer from some form of refractive disorder requiring vision
correction including myopia (nearsightedness), hyperopia (farsightedness) and
astigmatism. To date, only an estimated two to three percent of this target
population has actually had laser vision correction.
Industry sources estimate that 105,000 laser vision correction procedures
were performed in the United States in 1996, 215,000 were performed in 1997,
480,000 were performed in 1998, 700,000 were performed in 1999, 1.4 million were
performed in 2000 and 1.7 million will be performed in 2001. Laser eye surgery
has become the most widely performed surgical procedure in North America. The
Company believes that its profitability and growth will depend upon continued
increasing acceptance of laser vision correction in the United States and, to a
lesser extent, Canada and competition.
There can be no assurance that laser vision correction will be more widely
accepted by eye care doctors or the general population as an alternative to
existing methods of treating refractive disorders. The acceptance of laser
vision correction may be affected adversely by its cost (particularly since
laser vision correction is typically not covered fully or at all by government
insurers or other third party payors and, therefore, must be paid for primarily
by the individual receiving treatment), concerns relating to its safety and
effectiveness, general
8
resistance to surgery, the effectiveness of alternative methods of correcting
refractive vision disorders, the lack of long term follow-up data and the
possibility of unknown side effects. There can be no assurance that long term
follow-up data will not reveal complications that may have a material adverse
effect on the acceptance of laser vision correction. Many consumers may choose
not to have laser vision correction due to the availability and promotion of
effective and less expensive nonsurgical methods for vision correction. Any
future reported adverse events or other unfavourable publicity involving patient
outcomes from laser vision correction could also adversely affect its acceptance
whether or not the procedures are performed at TLC eye care centers. Market
acceptance could also be affected by regulatory developments. The failure of
laser vision correction to achieve continued increased market acceptance would
have a material adverse effect on the Company's business, financial condition
and results of operations.
TLC Laser Eye Centers Inc.
TLC was incorporated by articles of incorporation under the Business
Corporations Act (Ontario) on May 28, 1993. By articles of amendment dated
October 1, 1993, the name of the Company was changed to TLC The Laser Center
Inc., and by articles of amendment dated March 22, 1995, certain changes were
effected in the issued and authorized capital of the Company with the effect
that the authorized capital of the Company became an unlimited number of Common
Shares. On September 1, 1998, TLC amalgamated under the laws of Ontario with
certain wholly-owned subsidiaries. By Articles of Amendment filed November 5,
1999, the Company changed its name to TLC Laser Eye Centers Inc.
The Company owns and manages eye care centers throughout North America
and, together with its network of over 12,500 eye care doctors, specializes in
laser vision correction services to correct common refractive vision disorders
such as myopia (nearsightedness), hyperopia (farsightedness) and astigmatism.
The Company is one of the largest providers of laser vision correction services
in North America.
TLC began operations in September 1993 when it opened an eye care center
in Windsor, Ontario, Canada. TLC currently owns or operates 59 eye care centers
in 26 states and provinces throughout the United States and Canada. See Item 2
"Properties" for a current list of the Company's eye care centers.
More than 90% of the excimer laser procedures currently performed at the
Company's eye care centers are LASIK. The Company's medical directors believe
LASIK generally allows for more precise correction than PRK for higher levels of
myopia and hyperopia (with or without astigmatism), greater predictability of
results and decreased probability of regression. TLC considers itself a clinical
leader in the field of vision correction procedures. TLC's medical directors
continually evaluate new vision correction technologies and procedures and seek
to ensure that patients at TLC's eye care centers are receiving the highest
quality vision care.
Expansion Plans
Overview
After a year of industry turmoil instigated by providers who treated laser
vision correction as a commodity and employed deep discount pricing strategies
in an effort to gain market share, the
9
Company believes that the industry turmoil is subsiding and that the average
price per procedure across the industry is stabilizing. Based on estimates that
only two to three percent of the 145 million people in the United States who
have some type of refractive disorder have had laser vision correction, the
Company believes that the potential for growth remains strong.
In response to the recent industry turmoil and deep discounting price war,
the Company retained the services of a national consulting firm and undertook an
extensive review of its internal structures, market position, resources and
future strategies. That review supported the Company's decision to maintain its
premium brand model and not participate in the industry price war. TLC decided
that its focus would remain on maximizing revenues through the Company's
co-management model and innovative marketing programs, controlling costs without
compromising superior quality of care and clinical outcomes and pursuing
additional growth opportunities for its core laser vision correction business
through its TLC Affiliate Centers Program and strategic acquisitions.
Maximizing Revenues
Co-Management Model
The Company has developed and implemented a co-management model under
which it not only establishes and operates eye care centers and provides an
array of related support services, but also coordinates the activities of
primary care doctors (usually optometrists), who co-manage patients, and
refractive surgeons (ophthalmologists), who perform laser vision correction
procedures. The primary care doctors assess candidates for laser vision
correction and provide pre- and post-operative care, including an initial eye
examination and a minimum of six follow-up visits. The co-management model
permits the eye care center surgeon to focus on providing laser vision
correction surgery while the primary care doctor provides pre- and
post-operative care. In addition, each TLC center has an optometrist on staff
who works to support and expand the local network of affiliated doctors. The
staff optometrist provides a range of clinical training and consultation
services to affiliated primary care doctors to support these doctors' individual
practices and to assist them in providing quality patient care. See "Item 1 -
Business - Government Regulation - Regulation of Optometrists and
Ophthalmologists."
TLC believes that its relationship with its more than 12,500 affiliated
eye care doctors, though non-exclusive, represents an important competitive
advantage. The Company believes that its affiliated doctor network, which
includes approximately 25% of the licensed practicing optometrists in the United
States, is the largest such network in the laser vision correction field.
TLC believes that a primary care doctor's relationship with TLC and the
doctor's acceptance of laser vision correction enhances the doctors' practices.
The affiliated eye doctors (usually optometrists) charge fees to assess
candidates for laser vision correction and provide pre- and post-operative care,
including an initial eye examination and a minimum of six follow-up visits. The
primary care doctor's potential revenue loss from sales of contact lenses and
eyeglasses may be offset by professional fees earned from both laser vision
correction pre- and post-operative care and examinations required under the
Company's "Lifetime Commitment" program.
10
Marketing Programs
TLC's "Lifetime Commitment" program, established in mid-1997, entitles
patients within a certain range of vision correction to have enhancement
procedures at no cost at any time during their lifetime for further correction,
if necessary. To remain eligible for the program, patients are required to have
an annual eye exam with a TLC affiliated doctor. The purpose of the program is
to respond to a patient's concern that their sight might decrease over time,
requiring an enhancement procedure. In addition, the program responds to the
doctors' concern that patients may not return for their annual eye examination
once their eyes are corrected. The Company believes that this program has been
well-received by both patients and doctors.
TLC also seeks to increase its procedure volume and its market penetration
through other innovative marketing programs. TLC believes that as market
acceptance for laser vision correction continues to increase, competition among
providers will grow and candidates for laser vision correction will increasingly
select a provider based on factors other than solely the advice of a doctor. TLC
believes that the selection decision for laser vision correction will more often
be determined by brand recognition in the future. TLC believes it is developing
a strong reputation and brand recognition. The Company has been dedicating
greater resources towards enhancing its marketing programs directed both at its
network doctors and the public, to increase TLC's brand recognition.
TLC believes it will enhance its brand recognition through the endorsement
of TLC by such well-known professional athletes as Tiger Woods and Se Ri Pak.
TLC has also developed marketing programs directed primarily at large
employers and third party providers to provide laser vision correction to their
employees and participants. Participating employers may partially subsidize the
cost of an employee's laser vision correction at a TLC eye care center and the
procedure may be provided at a discounted price. TLC has more than 1,600
participating employers which include such organizations as Office Depot, Inc.,
Ernst & Young LLP and Duracell Batteries (Canada). In addition, more than 84
million individuals qualify for the program through arrangements between TLC and
third party providers. See "Item 1 - Business - Risk Factors - Inability to
Execute Strategy; Management of Growth."
Controlling Costs
TLC has and continues to review its cost structure with a view to
significantly reducing complexity and overall costs. On a day to day operations
level, this review seeks to achieve a more comprehensive approach to corporate
office cost reduction, refinements in the center operating model to increase
efficiency without compromising patient care and better leveraging of TLC's
economies of scale. On a strategic level, this review resulted in the Company's
decision in fiscal 2001 to terminate the operations of its e-commerce subsidiary
eyeVantage.com, Inc., close three eye care centers, terminate plans to construct
another center and sell its ownership interest in another center. See Note 18 to
"Item 8 - "Financial Statements and Supplementary Data" and "Item 2 -
Properties".
11
Additional Growth Opportunities
TLC Affiliate Centers Program
As penetration of the primary markets large enough the support the cost of
acquiring or developing a full size Company owned center nears completion, the
Company believes that the fastest growing segment of laser vision provider will
be the local eye care professional owned center. In order to target this growing
segment, TLC recently launched a pilot test of its affiliate centers program.
The affiliate centers program is designed to provide TLC's high quality of
patient care and service in association with local independent eye care
professionals servicing the premium market in secondary markets which are not
large enough to justify the development or acquisition of a full sized TLC
center. The program enables local providers to leverage TLC's brand reputation
in their practices and TLC to participate in markets it might not otherwise
target. Pursuant to the TLC Affiliate Center Program, TLC may provide equipment
and clinical, management and marketing support to local eye care professionals
in exchange for a management fee. Equipment may include an excimer laser and/or
a microkeratome. Clinical support may include access to TLC's support services,
training of staff and technicians and complications support from TLC's Clinical
Affairs department. Management support may include the services of a laser
vision correction manager, a license to use TLC's proprietary patient management
software and access to TLC's negotiated purchasing discounts from suppliers.
Marketing support may include a license to use TLC's trademark design and
identify the center as a TLC Affiliate Center, co-marketing, use of TLC's
marketing materials and brochures and participation in the Lifetime Commitment
Program.
Strategic Acquisions
The final component of TLC's strategy is the expansion of its business
through internal development and acquisition of eye care businesses. The major
focus of the Company's expansion strategy is the United States, where the
Company continues to position itself to take advantage of the growing market for
laser vision correction.
TLC plans to expand its business by acquiring other eye care centers and
businesses that operate eye care centers and increasing their procedure volumes
and efficiency. The Company implements the same business model and marketing
programs in improving existing or acquired centers. TLC seeks to increase the
volume of procedures performed at each eye care center by training the network
doctors to advise patients about laser vision correction and by developing local
marketing plans for each center. The Company's management and administrative
software and systems are intended to increase the efficiency of TLC's eye care
centers, permitting a higher volume of procedures to be performed without
significant additional fixed costs. Wherever possible, TLC will seek to
establish its position as the leader in laser vision correction in an area or
region and then seek to expand in areas contiguous to its existing centers.
TLC's senior executive team regularly examines acquisition and development
opportunities in the refractive market. The Company continually identifies
opportunities and discusses potential strategic alliances with leading
practitioners. In acquiring an existing eye
12
care center business or opening new centers, TLC generally requires a number of
criteria to be met, including a sufficient population base with desirable
demographics, the support of a core group of local doctors, traditionally more
than 50, and the availability of one or two highly skilled laser vision
correction surgeons that are supported by the local network doctors and
subscribe to the co-management model. In addition, the center must be expected
to provide TLC with a satisfactory return on investment. It is intended that the
cost to develop or acquire new centers or businesses that operate centers will
be funded through funds available for general corporate purposes. See "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Item 1 - Business - Risk Factors -- Risk of Inability to
Execute Strategy; Management of Growth".
Description of Eye Care Centers
The Company currently owns and manages 53 eye care centers in the United
States and 6 eye care centers in Canada. Each eye care center has a minimum of
one excimer laser with many of the centers having two or more lasers. In the
United States, the majority of the Company's excimer lasers are manufactured by
either VISX Incorporated ("VISX") or Alcon, with a number manufactured by
LaserSight. In Canada, the majority of the Company's excimer lasers are
manufactured by Chiron Vision Corporation, a subsidiary of Bausch & Lomb
Inc.("B&L").
A typical TLC eye care center has between three and five thousand square
feet of space and is located in an office building. Although the legal and
payment structures can vary from state to state depending upon local law and
market conditions, TLC generally receives revenues in the form of management and
facility fees paid by doctors who use the center to perform laser vision
correction procedures and administrative fees for billing and collection
services from doctors who co-manage patients treated at the centers. Every TLC
center has a clinical director, who is an optometrist and oversees the clinical
aspects of the center and builds and supports the network of affiliated eye care
doctors. Each center also has a business manager, a receptionist, ophthalmic
technicians and patient consultants. The number of staff depends on the activity
level of the center. Most TLC centers also have a professional relations
coordinator who works with the clinical director to support the doctor network
and market TLC's services. One senior staff person, who is designated as the
executive director of the center, prepares the annual business plan and
supervises the day-to-day operations of the center. See "Item 2 - Properties"
for a list of TLC eye care centers.
TLC has developed proprietary management and administrative software and
systems that are designed to permit eye care centers to provide high levels of
patient care. The software permits any TLC center to provide a potential
candidate with current information on affiliated doctors throughout North
America, to direct a candidate to the closest eye care center, to permit
tracking of calls and procedures, to coordinate patient and doctor scheduling
and to produce financial and surgical outcome reporting and analysis. The
software has been installed in all of the Company's eye care centers. It is also
expected that the software will be installed in most affiliated centers. TLC has
also introduced a new on-line consumer consultation site on TLC's website
(www.tlcvison.com). This consumer consultation site allows consumers to book
their consultation with TLC online. TLC also maintains a call center (1-800-CALL
TLC) which is staffed seven days a week.
13
Pricing
Early in fiscal 2001, the Company made the strategic decision not to
participate in an escalating price war instigated by a number of providers who
employed dramatically reduced pricing in an effort to gain market share,
marketing laser vision correction as a commodity rather than recognizing it as a
surgical procedure. The Company's analysis indicated that the market for laser
vision correction could support a premium model in the United States. At TLC eye
care centers in the United States, patients are typically charged approximately
$1,550 to $2,200 per eye for LASIK. At TLC eye care centers in Canada, patients
are typically charged approximately C$1,000 to C$3,000 per eye for LASIK.
Patients are also charged an average of $400 for pre- and post-operative care by
their primary care eye doctor, though the total procedure costs to the patients
are often included in a single invoice. See "Item 1 - Business - Risk Factors -
Procedure Fees". Although competitors in certain markets continue to charge less
for these procedures, the Company believes that important factors affecting
competition in the laser vision correction market, other than price, are quality
of service, reputation and brand recognition, and that its competitiveness is
enhanced by a strong network of affiliated doctors. See "Item 1 - Business -
Risk Factors - Competition".
The cost of laser vision correction procedures is not covered by
provincial health care plans in Canada or reimbursable under Medicare or
Medicaid in the United States. Increasingly, these procedures are covered in
part by health management organizations or third party payors under managed care
contracts or by other insurers. The Company has positioned itself well to take
advantage of this increasing market through its TLC Corporate Advantage program
which is now available to more than 84 million individuals and accounts for more
than 25% of the Company's paid procedure volume.
Procedure Fees
In the United States, TLC is typically required to pay a per procedure
royalty fee to the manufacturer of the excimer laser which is used for the
procedure. The majority of the excimer lasers used by TLC in the United States
are manufactured by VISX and Alcon. The royalty fee for laser vision correction
on VISX's excimer laser is over $100 per eye. Alcon royalty fees are higher but
include scheduled service. There can be no assurance that payments made by the
Company to a manufacturer of an excimer laser in the United States will preclude
a patent dispute with another manufacturer of an excimer laser or a patentholder
with respect to technology or activities purported to be covered by the relevant
patents or the Company's equipment or methods will not infringe patents held by
other parties. See "Item 1 - Business - Risk Factors - Intellectual Property".
Description of Secondary Care Centers
The Company has an investment in three secondary care entities in the
United States. See "Item 2 - Properties" for a list of TLC secondary care
centers. A secondary care center is equipped for doctors to provide advanced
levels of eye care, which may include eye surgery for the treatment of disorders
such as glaucoma, cataracts and retinal disorders. Generally, a secondary care
center does not provide primary eye care, such as eye examinations, or dispense
eyewear or contact lenses. Sources of revenue for secondary care centers are
direct payments by
14
patients as well as reimbursement or payment by third party payors, including
Medicare and Medicaid.
Ownership of Eye Care Centers
TLC's eye care centers are typically owned and operated by subsidiaries of
the Company. Under the TLC Affiliate Center program, TLC will have no ownership
interest in affiliated centers. Typically, the affiliated center will be owned
and operated by one or more local eye care professionals. TLC also has no
ownership interest in the doctors' practices or professional corporations that
TLC manages on behalf of doctors or that have access to TLC centers to perform
laser vision correction services.
Sales and Marketing
While TLC believes that many myopic and hyperopic people are potential
candidates for laser vision correction, these procedures must compete with
corrective eyewear and surgical and non-surgical treatments for myopia and
hyperopia. The decision to have laser vision correction largely represents a
choice dictated by an individual's desire to reduce or eliminate their reliance
on eyeglasses or contact lenses.
The Company aggressively markets to both doctors and the public. A large
part of the Company's marketing resources is devoted to joint marketing programs
with affiliated doctors, the goal of which is to build their practices. The
Company provides doctors with brochures, videos, posters and other materials
which help them educate their patients about laser vision correction. Those
doctors who wish to market directly to their patients or the public receive
support from the Company in the development of marketing programs. Each eye care
center has a relationship with a corporate marketing staff person who assists
the center in developing marketing/public relations plans unique to the needs of
that center.
The Company believes that the most effective way to market to doctors is
to be perceived as the leading provider of quality eye care. To this end, the
Company strives to be the clinical leader, educates doctors on laser vision and
refractive correction and remains current with new procedures and techniques.
See "Item 1 - Business - Ancillary Businesses and Support Programs." The Company
also promotes its services to doctors in Canada and the United States through
conferences, advertisements in journals, direct marketing, its Web sites and
newsletters.
TLC believes that as market acceptance for laser vision correction
continues to increase, competition among service providers will continue to grow
and candidates for laser vision correction will increasingly select a provider
based on factors other than solely the advice of a doctor. TLC believes that the
selection decision for laser vision correction will more often be determined by
brand recognition in the future, and TLC believes it has and continues to
develop a strong reputation and brand recognition. The Company has historically
provided a limited amount of marketing directly to the public through radio and
print advertisements, videos, brochures and seminars. In fiscal 2001, TLC
dedicated additional resources towards enhancing its marketing programs directed
at network doctors and the public to increase TLC's brand recognition. TLC has
also developed innovative marketing programs such as the Corporate
15
Advantage program to expand TLC's position as the leader in the North American
market for laser vision correction services.
Surgeon Contracts
In each market where TLC operates, TLC has formed a network of eye care
doctors (mostly optometrists) who perform the pre-operative and post-operative
care for patients who have had laser vision correction. Those doctors then
"co-manage" their patients with TLC surgeons in that the surgeon performs the
laser vision correction procedure itself, while the optometrist performs the
pre-operative screening and post-operative care. In most states, co-management
doctors have the option of charging the patient directly for their services or
having TLC collect the fees on their behalf.
Most surgeons performing laser vision correction procedures at TLC eye
care centers do so under one of three types of standard agreements (which have
been modified for use in the various U.S. states as required by state law). Each
agreement typically prohibits surgeons from disclosing confidential information
relating to the center, soliciting patients or employees of the center, or
participating in any other eye care center within a specified area. However,
although surgeons performing laser vision correction at the Company's eye care
centers have agreed to certain restrictions on competing with, or soliciting
patients or employees associated with, the Company, there can be no assurance
that such agreements will be enforceable. See "Risk Factors - Dependence on
Affiliated Doctors".
Surgeons must meet the credentialing requirements of the state or province
in which they practice, the FDA and the manufacturer of the laser on which they
perform procedures and must complete training arranged by the Company, unless
the Company is otherwise satisfied that the surgeon has been properly trained.
Surgeons are responsible for maintaining appropriate malpractice insurance and
most agree to indemnify the Company and its affiliates for any losses incurred
as a result of the surgeon's negligence or malpractice. See "Item 1 - Business -
Risk Factors - Potential Liability and Insurance".
Most states prohibit the Company from practicing medicine, employing
physicians to practice medicine on the Company's behalf or employing
optometrists to render optometric services on the Company's behalf. Because the
Company does not practice medicine or optometry, its activities are limited to
owning and managing eye care centers and affiliating with other health care
providers. Affiliated doctors provide a significant source of patients for laser
vision correction at the Company's centers. Accordingly, the success of the
Company's operations depends upon its ability to enter into agreements on
acceptable terms with a sufficient number of health care providers, including
institutions and eye care doctors, to render surgical and other professional
services at facilities owned or managed by the Company. There can be no
assurance that the Company will be able to enter into agreements with doctors or
other health care providers on satisfactory terms or that such agreements will
be profitable to the Company. Failure to enter into or maintain such agreements
with a sufficient number of qualified doctors will have a material adverse
effect on the Company's business, financial condition and results of operations.
16
Ancillary Businesses and Support Programs
TLC has made investments in other businesses with the primary objective of
supporting its laser vision correction business and the secondary objective of
capitalizing on its management and marketing skills.
Other Businesses
eyeVantage.com, Inc., a subsidiary of TLC, provided e-business services
for eye care professionals. As part of its strategy to focus on its core
business of providing laser vision correction surgery services and to reduce
costs, the Company announced in October 2000 that it had chosen to terminate the
activities of eyeVantage.com, Inc. See Note 18 to "Item 8 - "Financial
Statements and Supplementary Data".
Pure Laser Hair Removal & Treatment Clinics Inc. ("Pure"), a subsidiary of
TLC, offers a variety of aesthetic services and treatments including hair
removal and skin care. Pure has one center in Ontario, three centers in Illinois
and three centers in Michigan.
Aspen Healthcare Inc. ("Aspen"), a subsidiary of TLC, is a health care
consulting, development and management firm specializing in ambulatory surgery
center joint-venture development, management and ownership. Aspen offers
experienced management services to both surgery centers and hospitals. Aspen
also consults, plans, designs, develops, implements and operates ambulatory
surgery centers nationwide.
Vision Source is a wholly owned subsidiary that provides marketing,
management and buying power to independently owned and operated optometric
practices in the United States. This business supports the development of
independent practices and complements the Company's co-management model.
The Company continues to work to maximize its return on investments in
non-core businesses and focuses on ensuring that non-core businesses are
self-sustaining.
Support Programs
National Medical Board
The Company's National Medical Board is comprised of refractive surgeons,
selected based upon clinical experience and previous involvement with TLC, that
represent the geographic centers in which TLC currently owns or manages an eye
care center. The National Medical Board, established in March 1998, together
with the Company's co-national medical directors, is responsible for developing
protocols and procedures that are recommended for doctors using TLC's eye care
centers. The National Medical Board has scheduled meetings
17
quarterly throughout the year and meets as necessary to consider clinical issues
as they arise. The National Medical Board also serves as a quality assurance
peer group to seek to ensure that TLC's eye care centers provide high quality
vision care.
Emerging Technologies
The Company considers itself a clinical leader in vision correction
procedures. The Company's medical directors continually evaluate new vision
correction technologies and procedures to seek to ensure that TLC eye care
centers provide the highest level of care. TLC's eye care centers in Ontario are
state of the art facilities that are used to examine and evaluate new
technologies for TLC eye care centers. In February 2001, TLC announced that it
had entered into a strategic refractive technology alliance with Alcon,
manufacturer of the Summit/Autonomous excimer laser and a global leader in the
research, development, manufacture and marketing of ophthalmic products. The
Company is also developing custom LASIK procedures capable of addressing the
inherent uniqueness of each human eye. TLC currently operates the only center in
North America that offers custom LASIK vision correction procedures.
National Advisory Council
The Company's National Advisory Council is comprised of optometrists that
represent the geographic centers in which TLC currently manages or intends to
manage an eye care center. By providing regional representation, the National
Advisory Council serves as a channel of communication to local doctors. The
National Advisory Council advises the Company from time to time on a broad range
of clinical and strategic issues, and its feedback is incorporated into the
Company's strategic development.
Training
The Company conducts a comprehensive training program under the
supervision of Dr. Jeffery Machat or Dr. Stephen Slade. Dr. Machat and Dr. Slade
are the Co-National Medical Directors of TLC, and both are prominent
ophthalmologists and experts in the field of laser vision correction. Both have
been working with excimer lasers since 1990 and have lectured and trained
surgeons in North America, South America, Europe, South Africa, Australia and
Asia. The Company believes that Dr. Slade was among the first surgeons to
perform LASIK in the United States and Dr. Machat was the first surgeon to
perform LASIK in Canada. In addition, Dr. Machat and Dr. Slade are qualified by
Chiron (Bausch & Lomb) to certify surgeons to perform LASIK procedures using
Chiron excimer lasers.
Education
The Company believes that ophthalmologists, optometrists and other eye
care professionals who endorse laser vision correction are a valuable resource
in increasing general awareness and acceptance of the procedures among potential
candidates and in promoting the Company as a service provider. The Company seeks
to be perceived by eye care professionals as the clinical leader in the field of
laser vision correction. One way in which it hopes to achieve
18
this objective is by participating in the education and training of eye care
doctors in Canada and the United States.
The Company provides educational programs to doctors in all aspects of
clinical study, primarily in conjunction with several of the major optometry
schools in the United States. In addition, TLC has an education and training
relationship with the University of Waterloo, the only English language
optometry school in Canada.
Website
TLC has linked its eye care centers, network doctors and potential
patients through its website www.tlcvision.com which provides a directory of TLC
eye care providers and contains questions and answers about laser vision
correction.
Equipment and Capital Financing
In the United States, most of TLC's eye care centers are equipped with
either or both VISX or Alcon excimer lasers. Due to its strategic alliance with
Alcon, the Company expects that the number of Alcon lasers will increase. In
Canada, excimer lasers manufactured by B&L, LaserSight and Alcon are now being
used. See "Industry Background - Laser Vision Correction".
Although there can be no assurance, the Company believes that based on the
number of existing manufacturers, the current inventory levels of those
manufacturers and the number of suitable, previously owned and (in the case of
United States centers) FDA approved lasers available for sale in the market, the
supply of excimer lasers is more than adequate for the Company's future
operations and expansion plans.
A new excimer laser costs approximately $300,000. However, the industry
trend in the sale of excimer lasers is moving away from a flat purchase price to
the alternative of charging the purchaser a per procedure fee. Excimer lasers
require periodic servicing, generally after 300 procedures.
As available technology improves and additional procedures are approved by
the FDA, the Company expects to upgrade the capabilities of its lasers. See
"Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources".
Competition
Consumer Market for Vision Correction
Within the consumer market, excimer laser procedures performed at the
Company's centers compete with other surgical and non-surgical treatments for
refractive disorders, including eyeglasses, contact lenses, other types of
refractive surgery and technologies currently under development such as corneal
rings, intraocular lenses and surgery with different types of lasers. Although
the Company believes that eyeglass and contact lens use will continue to be the
most popular form of vision correction in the foreseeable future, as market
acceptance for laser
19
vision correction continues to increase, competition within this market will
grow. There can be no assurance that the Company's management, operations and
marketing plans are or will be successful in meeting this variety of
competition. Further, there can be no assurance that the Company's competitors'
access to capital, financing or other resources or their market presence will
not give these competitors an advantage against the Company. In addition, other
surgical and non-surgical techniques to treat vision disorders are currently in
use and under development and may prove to be more attractive to consumers than
laser vision correction.
Market for Laser Vision Correction
Within the consumer market for laser vision correction, the Company
continues to face increasing competition from other service providers. As market
acceptance for laser vision correction continues to increase, competition within
this market will grow. Laser vision correction providers are divided into three
major segments: corporate owned centers; independent surgeon owned centers; and
institution owned centers. According to an industry source, as of June 30, 2001,
independent surgeon owned centers accounted for the largest percentage of total
procedure value in the industry with a 54.6% market share. Corporate owned
centers accounted for 31.5% of total procedures performed. The remaining 13.9%
of laser vision correction procedures were performed at institution owned
centers, such as hospitals or universities.
Although some competitors continue to charge less for laser vision
correction than TLC and its affiliated doctors, the Company believes that the
important factors affecting competition in the laser vision correction market
are quality of service, reputation, brand recognition along with price and that
competitiveness is enhanced by a strong network of affiliated doctors. Suppliers
of conventional vision correction (eyeglasses and contact lenses), such as
optometric chains, may also compete with the Company either by marketing
alternatives to laser vision correction or by purchasing excimer lasers and
offering refractive surgery to their customers. These service providers may have
greater marketing and financial resources and experience than the Company and
may be able to offer laser vision correction at lower rates. Competition has
also increased in part due to the greater availability and lower costs of
excimer lasers.
During the past year, the laser vision correction industry was thrown into
turmoil by a number of providers who employed dramatically reduced pricing in an
effort to gain market share. TLC refused to participate in the price war and
maintained its premium pricing model with superior quality of care and outcomes.
In April 2001, LasikVision Corporation and Lasik Vision Canada Inc.,
subsidiaries of ICON Laser Eye Centers, Inc., made assignments in bankruptcy and
in June, 2001 ICON Laser Eye Centers, Inc. was placed in receivership. The
Company believes that these filings, together with related media reports, had a
negative impact on procedure volumes by generating a great deal of short-term
concern and confusion amongst prospective patients. A series of negative news
stories focusing on patients with unfavourable outcomes from procedures
performed at competing centers further adversely affected procedure volumes. In
addition, being an elective procedure, laser eye surgery volumes may have been
further depressed by economic conditions in early 2001.
TLC competes in fragmented geographic markets. The Company's principal
corporate competitors include Laser Vision Centers, Inc., LCA-Vision Inc., Laser
Vision Institute, Inc. and
20
Aris Vision Institute. On August 27, 2001, the Company announced that it had
entered into an Agreement and Plan of Merger with Laser Vision Centers, Inc. See
"Item 1 - Business - Overview". In each geographical market, TLC's primary
competitors will often be independent surgeon and institution owned centers.
Government Regulation
Excimer Laser Regulation
United States
Medical devices, such as the excimer lasers used in the Company's United
States centers, are subject to stringent regulation by the FDA and cannot be
marketed for commercial sale in the United States until the FDA grants
pre-market approval ("PMA") for the device. To obtain a PMA for a medical
device, excimer laser manufacturers must file a PMA application that includes
clinical data and the results of pre-clinical and other testing sufficient to
show that there is a reasonable assurance of safety and effectiveness of their
excimer lasers. Human clinical trials must be conducted pursuant to
Investigational Device Exemptions issued by the FDA in order to generate data
necessary to support a PMA. Figures 1 and 2 at pages 5 and 6 set out a list of
lasers approved for LASIK, PRK and other procedures as at March 29, 2001. See
"Item 1 - Business - Industry Background - Laser Vision Correction".
The FDA is not authorized to regulate the practice of medicine, and
ophthalmologists, including those affiliated with TLC eye care centers, may
perform the LASIK procedure, using lasers with a PMA for PRK only (off-label
use) in an exercise of professional judgement in connection with the practice of
medicine.
The use of an excimer laser to treat both eyes on the same day (bilateral
treatment) has not been approved by the FDA. The FDA has stated that it
considers the use of the excimer laser for bilateral treatment to be a practice
of medicine decision, which the FDA is not authorized to regulate.
Ophthalmologists, including those affiliated with TLC eye care centers, widely
perform bilateral treatment in an exercise of professional judgement in
connection with the practice of medicine. There can be no assurance that the FDA
will not seek to challenge this practice in the future.
Any excimer laser manufacturer which obtains PMA approval for use of its
excimer lasers will continue to be subject to regulation by the FDA. Although
the FDA does not specifically regulate surgeons' use of excimer lasers, the FDA
actively enforces regulations prohibiting marketing of products for
non-indicated uses and conducts periodic inspections of manufacturers to
determine compliance with good manufacturing practice regulations.
Failure to comply with applicable FDA requirements could subject the
Company, its affiliated doctors or laser manufacturers to enforcement action,
including product seizure, recalls, withdrawal of approvals and civil and
criminal penalties, any one or more of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
Further, failure to comply with regulatory requirements, or any adverse
regulatory action, including a reversal of the FDA's current position that the
"off-label" use of excimer lasers by doctors outside the FDA approved guidelines
is a practice of medicine decision, which the FDA
21
is not authorized to regulate, could result in a limitation on or prohibition of
the Company's use of excimer lasers which in turn could have a material adverse
effect on the Company's business, financial condition and results of operations.
The marketing and promotion of laser vision correction in the United
States is subject to regulation by the FDA and the Federal Trade Commission
("FTC"). The FDA and FTC have released a joint communique on the requirements
for marketing laser vision correction in compliance with the laws administered
by both agencies. The FTC staff also issued more detailed staff guidance on the
marketing and promotion of laser vision correction and has been monitoring
marketing activities in this area through a non-public inquiry to identify areas
that may require further FTC attention.
Canada
The use of excimer lasers in Canada to perform refractive surgery is not
subject to regulatory approval, and excimer lasers have been used to treat
myopia since 1990 and hyperopia since 1996. The Health Protection Branch of
Health Canada ("HPB") regulates the sale of devices, including excimer lasers
used to perform procedures at the Company's Canadian eye care centers. Pursuant
to the regulations prescribed under the Canadian Food and Drugs Act, the HPB may
permit manufacturers or importers to sell a certain number of devices to perform
procedures provided the devices are used in compliance with specified
requirements for investigational testing. Permission to sell the device may be
suspended or cancelled where the HPB determines that its use endangers the
health of patients or users or where the regulations have not been complied
with. Devices may also be sold for use on a non-investigational basis where
evidence available in Canada to the manufacturer or importer substantiates the
benefits and performance characteristics claimed for the device. The Company
believes that the sale of the excimer lasers to its eye care centers, and their
use at the centers, complies with HPB requirements. There can be no assurance
that Canadian regulatory authorities will not impose restrictions which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Regulation of Optometrists and Ophthalmologists
United States
The health care industry in the United States is highly regulated. The
Company and its operations are subject to extensive federal, state and local
laws, rules and regulations, including those prohibiting corporations from
practicing medicine and optometry, prohibiting unlawful rebates and division of
fees, anti-kickback laws, fee-splitting laws, self-referral laws, laws limiting
the manner in which prospective patients may be solicited, and professional
licensing rules.
The Company has reviewed these laws and regulations with its health care
counsel and, although there can be no assurance, the Company believes that its
operations currently comply with applicable laws in all material respects. Also,
the Company expects that doctors affiliated with TLC centers will comply with
such laws in all material respects, although it cannot ensure such compliance by
doctors.
22
Federal Law. A federal law (known as the "anti-kickback statute")
prohibits the offer, solicitation, payment or receipt of any remuneration which
is intended to induce, or is in return for, the referral of patients for, or the
ordering of, items or services reimbursable by Medicare or any other federally
financed health care program. This statute also prohibits remuneration intended
to induce the purchasing of, or arranging for, or recommending the purchase or
order of any item, good, facility or service for which payment may be made under
federal health care programs. This statute has been applied to otherwise
legitimate investment interests if one purpose of the offer to invest is to
induce referrals from the investor. Safe harbour regulations provide absolute
protection from prosecution for certain categories of relationships. In
addition, a recent law broadens the government's anti-fraud and abuse
enforcement responsibilities to include all health care delivery systems
regardless of payor.
Subject to certain exceptions, federal law also prohibits a physician from
ordering or prescribing certain designated health services or items if the
service or item is reimbursable by Medicare or Medicaid and is provided by an
entity with which the physician has a financial relationship (including
investment interests and compensation arrangements). This law, known as the
"Stark Law", does not restrict a physician from ordering an item or service not
reimbursable by Medicare or Medicaid or an item or service that does not fall
within the categories designated in the law.
Laser vision correction is not reimbursable by Medicare, Medicaid or other
federal programs. As a result, neither the anti-kickback statute nor the Stark
Law applies to the Company's eye care centers but the Company is subject to
similar state laws.
Doctors at the Company's secondary care centers provide services that are
reimbursable under Medicare and Medicaid. Further, ophthalmologists and
optometrists co-manage Medicare and Medicaid patients who receive services at
the Company's secondary care centers. The co-management model is based, in part,
upon the referral by an optometrist for surgical services performed by an
ophthalmologist and the provision of pre- and post-operative services by the
referring optometrist. The Office of the Inspector General, the government
agency responsible for enforcing the anti-kickback statute, has stated publicly
that to the extent there is an agreement between optometrists and
ophthalmologists to refer back to each other, such an agreement could constitute
a violation of the anti-kickback statute. The Company believes, however, that
its co-management program does not violate the anti-kickback statute, as
patients are given the choice whether to return to the referring optometrist or
to stay with the ophthalmologist for post-operative care. Nevertheless, there
can be no guarantee that the Office of the Inspector General will agree with the
Company's analysis of the law. If the Company's co-management program were
challenged as violating the anti-kickback statute and the Company were not
successful in defending against such a challenge, then the result may be civil
or criminal fines and penalties, including exclusion of the Company, the
ophthalmologists, and the optometrists from the Medicare and Medicaid programs,
or the requirement that the Company revise the structure of its co-management
program or curtail its activities, any of which could have a material adverse
effect upon the Company's business, financial condition and results of
operations.
The provision of services covered by the Medicare and Medicaid programs in
the Company's secondary care centers also triggers potential application of the
Stark Law. The co-
23
management model could establish a financial relationship, as defined in the
Stark Law, between the ophthalmologist and the optometrist. Similarly, to the
extent that the Company provides any designated health services, as defined in
the statute, the Stark Law could be triggered as a result of any of the several
financial relationships between the Company and ophthalmologists. Based on its
current interpretation of the Stark Law as set forth in the final rule published
in 2000, the Company believes that the referrals from ophthalmologists and
optometrists either will be for services which are not designated health care
services as defined in the statute or will be covered by an exception to the
Stark Law. There can be no assurance, however, that the government will agree
with the Company's position or that there will not be changes in the
government's interpretation of the Stark Law. In such case, the Company may be
subject to civil penalties as well as administrative exclusion and would likely
be required to revise the structure of its legal arrangements or curtail its
activities, any of which could have a material adverse effect on the Company's
business, financial condition, and results of operation.
State Law. In addition to the requirements described above, the regulatory
requirements that the Company must satisfy to conduct its business will vary
from state to state, and, accordingly, the manner of operation by the Company
and the degree of control over the delivery of refractive surgery by the Company
may differ among the states.
A number of states have enacted laws which prohibit what is known as the
corporate practice of medicine. These laws are designed to prevent interference
in the medical decision-making process from anyone who is not a licensed
physician. Many states have similar restrictions in connection with the practice
of optometry. Application of the corporate practice of medicine prohibition
varies from state-to-state. Therefore, while some states may allow a business
corporation to exercise significant management responsibilities over the
day-to-day operation of a medical or optometric practice, other states may
restrict or prohibit such activities. The Company believes that it has
structured its relationship with eye care doctors in connection with the
operation of eye care centers as well as in connection with its secondary care
centers so that they conform to applicable corporate practice of medicine
restrictions in all material respects. Nevertheless, there can be no assurance
that, if challenged, those relationships may not be found to violate a
particular state corporate practice of medicine prohibition. Such a finding may
require the Company to revise the structure of its legal arrangements or curtail
its activities, and this may have a material adverse effect on the Company's
business, financial condition, and results of operations.
Many states prohibit a physician from sharing or "splitting" fees with
persons or entities not authorized to practice medicine. TLC's co-management
model for refractive procedures presumes that a patient will make a single
global payment to the laser center, which is a management entity acting on
behalf of the ophthalmologist and optometrist to collect fees on their behalf.
In turn, the ophthalmologist and optometrist pay facility and management fees to
the laser center out of their patient fees collected. While the Company believes
that such arrangements do not violate any such prohibitions in any material
respects, there can be no assurance that one or more states will not interpret
this structure as violating the state fee-splitting prohibition, thereby
requiring the Company to change its procedures in connection with billing and
collecting for services. Violation of state fee-splitting prohibitions may
subject the ophthalmologists and optometrists to sanctions, and may result in
the Company incurring
24
legal fees, as well as being subjected to fines or other costs, and this could
have a material adverse effect on the Company's business, financial condition,
and results of operations.
Just as in the case of the federal anti-kickback statute, while the
Company believes that it is conforming with applicable state anti-kickback
statutes in all material respects, there can be no assurance that each state
will agree with the Company's position and would not challenge the Company. If
the Company were not successful in defending against such a challenge, the
result may be civil or criminal fines or penalties for the Company as well as
the ophthalmologists and optometrists. Such a result would require the Company
to revise the structure of its legal arrangements, and this could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Similarly, just as in the case of the federal Stark Law, while the Company
believes that it is operating in compliance with applicable state
anti-self-referral laws in all material respects, there can be no assurance that
each state will agree with the Company's position or that there will not be a
change in the state's interpretation or enforcement of its own law. In such
case, the Company may be subject to fines and penalties as well as other
administrative sanctions and would likely be required to revise the structure of
its legal arrangements. This could have a material adverse effect on the
Company's business, financial condition and results of operations.
Canada
Conflict of interest regulations in certain Canadian provinces prohibit
optometrists, ophthalmologists or corporations owned or controlled by them from
receiving benefits from suppliers of medical goods or services to whom the
optometrist or ophthalmologist refers his or her patients. In certain
circumstances, these regulations deem it a conflict of interest for an
ophthalmologist to order a diagnostic or therapeutic service to be performed by
a facility in which the ophthalmologist has any proprietary interest. This does
not include a proprietary interest in a publicly traded company. Certain of the
Company's eye care centers in Canada are owned and managed by a subsidiary in
which affiliated doctors own a minority interest. TLC expects that
ophthalmologists and optometrists affiliated with TLC will comply with the
applicable regulations, although it cannot ensure such compliance by doctors.
The laws of certain Canadian provinces prohibit health care professionals
from splitting fees with non-health care professionals and prohibit non-licensed
entities (such as the Company) from practicing medicine or optometry and, in
certain circumstances, from employing physicians or optometrists directly. The
Company believes that its operations comply with such laws in all material
respects, and expects that doctors affiliated with TLC centers will comply with
such laws, although it cannot ensure such compliance by doctors.
Optometrists and ophthalmologists are subject to varying degrees and types
of provincial regulation governing professional misconduct, including
restrictions relating to advertising, and in the case of optometrists, a
prohibition against exceeding the lawful scope of practice. In Canada, laser
vision correction is not within the permitted scope of practice of optometrists.
Accordingly, TLC does not allow optometrists to perform the procedure at TLC
centers in Canada.
25
Facility Licensure and Certificate of Need
The Company believes that it has all licenses necessary to operate its
business. The Company may be required to obtain licenses from the state
Departments of Health, or a division thereof in the various states in which it
opens TLC centers. While there can be no assurance that the Company will be able
to obtain facility licenses in all states which may require facility licensure,
the Company has no reason to believe that in such states, it will not be able to
obtain such a license without unreasonable expense or delay.
Some states require the permission of the State Department of Health or a
division thereof, such as a Health Planning Commission, in the form of a
Certificate of Need ("CON") prior to the construction or modification of an
ambulatory care facility, such as a laser center, or the purchase of certain
medical equipment in excess of an amount set by the state. While there can be no
assurance that the Company will be able to acquire a CON in all states where a
CON is required, the Company has no reason to believe that in those states that
require a CON, it will not be able to do so.
The Company is not aware of any Canadian health regulations which impose
licensing requirements on the operation of eye care centers.
Risk of Non-Compliance
Many of these laws and regulations governing the health care industry are
ambiguous in nature and have not been definitively interpreted by courts and
regulatory authorities. Moreover, state and local laws vary from jurisdiction to
jurisdiction. Accordingly, the Company may not always be able to predict clearly
how such laws and regulations will be interpreted or applied by courts and
regulatory authorities and some of the Company's activities could be challenged.
In addition, there can be no assurance that the regulatory environment in which
the Company operates will not change significantly in the future. Numerous
legislative proposals have been introduced in Congress and in various state
legislatures over the past several years that would, if enacted, effect major
reforms of the U.S. health care system. The Company cannot predict whether any
of these proposals will be adopted and, if adopted, what impact such legislation
would have on the Company's business. The Company has reviewed existing laws and
regulations with its health care counsel and, although there can be no
assurance, the Company believes that its operations currently comply with
applicable laws in all material respects. Also, TLC expects that doctors
affiliated with TLC centers will comply with such laws in all material respects,
although it cannot ensure such compliance by doctors. The Company could be
required to revise the structure of its legal arrangements or the structure of
its fees, incur substantial legal fees, fines or other costs, or curtail certain
of its business activities, reducing the potential profit to the Company of some
of its legal arrangements, any of which may have a material adverse effect on
the Company's business, financial condition and results of operations.
Intellectual Property
The name "TLC The Laser Center" and slogan "See the Best" are registered
United States service marks of the Company and registered trade-marks in Canada.
The Company also has applied for registration of "TLC Laser Eye Centers" with
the TLC eye design in the United States and "TLC Laser Eye Centers" with the TLC
eye design is a registered trade-mark in Canada. In addition, the Company owns a
patent in the United States on the treatment of a
26
potential side effect of laser vision correction generally known as "central
islands." The patent expires in May 2014. The Company's service marks, patent
and other intellectual property may offer the Company a competitive advantage in
the marketplace and could be important to the success of the Company. There can
be no assurance that one or all of the registrations of the service marks will
not be challenged, invalidated or circumvented in the future.
The medical device industry, including the ophthalmic laser sector, has
been characterized by substantial litigation in the United States and Canada
regarding patents and proprietary rights. There are a number of patents
concerning methods and apparatus for performing corneal procedures with excimer
lasers. In the event that the use of an excimer laser or other procedure
performed at any of the Company's refractive or secondary care centers is deemed
to infringe a patent or other proprietary right, the Company may be prohibited
from using the equipment or performing the procedure that is the subject of the
patent dispute or may be required to obtain a royalty bearing license, which may
not be available on acceptable terms, if at all. The costs associated with any
such licensing arrangements may be substantial and could include ongoing royalty
payments. In the event that a license is not available, the Company may be
required to seek the use of products which do not infringe the patent. The
unavailability of such products may cause the Company to cease operations in the
United States or Canada or delay the Company's continued expansion into the
United States. If the Company is prohibited from performing laser vision
correction at any of its laser centers, the Company's business, financial
condition and results of operations will be materially adversely affected.
Employees
As part of its initiative to reduce costs, the Company has significantly
reduced its staffing levels over the past year. As of July 31, 2001, the Company
had more than 760 employees, as compared to more than 1,034 employees a year
ago. The Company's progress to date has been highly dependent upon the skills of
its key technical and management personnel both in its corporate offices and in
its eye care centers, some of whom would be difficult to replace. There can be
no assurance that the Company can retain such personnel or that it can attract
or retain other highly qualified personnel in the future. No employee of the
Company is represented by a collective bargaining agreement, nor has the Company
experienced a work stoppage. The Company considers its relations with its
employees to be good. See "Item 1 - Business - Risk Factors - Dependence on Key
Personnel".
Risk Factors
Losses from Operations; Uncertainty of Future Profitability
The Company had net losses of $10.4 million, $4.6 million, $5.9 million
and $37.8 million for fiscal 1998, 1999, 2000 and 2001, respectively. As of May
31, 2001, the Company had an accumulated deficit of $80.2 million. The Company's
ability to achieve or maintain profitability will depend in part on its ability
to increase demand for its services and control costs, its ability to execute
its strategy and effectively integrate acquired businesses and assets, economic
conditions in the Company's markets, competitive factors and regulatory
developments. Accordingly, the extent of future profits, if any, and the time
required to achieve sustained profitability is uncertain. Moreover, the level of
such profitability cannot be predicted
27
and may vary significantly from quarter to quarter. See "Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations".
Uncertainty of Market Acceptance
The Company believes that its profitability and growth will depend upon
broad acceptance of laser vision correction in the United States and, to a
lesser extent, Canada. There can be no assurance that laser vision correction
will be more widely accepted by eye care doctors or the general population as an
alternative to existing methods of treating refractive disorders. The acceptance
of laser vision correction may be affected adversely by its cost (particularly
since laser vision correction is typically not fully covered or covered at all
by government insurers or other third party payors and, therefore, must be paid
for by the individual receiving treatment), economic conditions, concerns
relating to its safety and effectiveness, general resistance to surgery, the
effectiveness of alternative methods of correcting refractive vision disorders,
the lack of long term follow-up data and the possibility of unknown side
effects. There can be no assurance that long term follow-up data will not reveal
complications that may have a material adverse effect on the acceptance of laser
vision correction. Many consumers may choose not to have laser vision correction
due to the availability and promotion of effective and less expensive
nonsurgical methods for vision correction. Any future reported adverse events or
other unfavourable publicity involving patient outcomes from laser vision
correction could also adversely affect its acceptance whether or not the
publicized procedures are performed at TLC eye care centers. Market acceptance
could also be affected by regulatory developments and by the ability of the
Company and other participants in the laser vision correction market to train a
broad population of ophthalmologists in performing the procedure. Acceptance of
laser vision correction by ophthalmologists could also be affected by the cost
of excimer laser systems. The failure of laser vision correction to achieve
broad market acceptance would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Item 1 - Business
- - The Refractive Market".
Dependence on Affiliated Doctors
Many states prohibit the Company from practicing medicine, employing
physicians to practice medicine on the Company's behalf or employing
optometrists to render optometric services on the Company's behalf. Because the
Company does not practice medicine or optometry, its activities are limited to
owning and managing centers and affiliating with other health care providers.
Affiliated doctors provide a significant source of patients for the Company.
Accordingly, the success of the Company's operations depends upon its ability to
enter into agreements on acceptable terms with a sufficient number of health
care providers, including institutions and eye care doctors to render or arrange
surgical and other professional services at facilities owned or managed by the
Company. There can be no assurance that the Company will be able to enter into
agreements with eye care doctors or other health care providers on satisfactory
terms or that such agreements will be profitable to the Company. Failure to
enter into or maintain such agreements with a sufficient number of qualified eye
care doctors will have a material adverse effect on the Company's business,
financial condition and results of operations. See "Item 1 - Business - Surgeon
Contracts".
28
Competition
Laser vision correction is subject to intense competition. The Company
competes with other entities, including hospitals, individual ophthalmologists,
other corporate laser centers and certain manufacturers of excimer laser
equipment, in offering laser vision correction. The Company's eye care centers
compete on the basis of quality of service, reputation, brand recognition and
price. There can be no assurance that competitors with substantially greater
financial, technical, managerial, marketing and other resources and experience
than the Company will not compete more effectively than the Company. If more
providers offer laser vision correction in a given geographic market, the price
charged for such procedures may decrease. In the past year, competitors have
offered laser vision correction at prices considerably lower than TLC's prices.
At TLC centers, Canadian residents are typically charged between C$1,000 to
C$3,000 per eye for LASIK procedures and United States residents are typically
charged from $1,550 to $2,200 per eye for LASIK procedures, in addition to a
charge of approximately $400 by the patient's primary care eye doctor for pre-
and post-operative care, while competitors in some markets have advertised LASIK
procedures for as low as C$500 per eye. Notwithstanding its recent refusal to
participate in an industry price war, market conditions may compel the Company
to lower its prices to remain competitive in some or all of its markets. There
can be no assurance that any reduction in prices charged will be compensated for
by an increase in procedure volume or decreases in the Company's costs. A
decrease in either the fees for procedures performed at TLC's eye care centers
or in the number of procedures performed at TLC's centers could have a material
adverse effect on the Company's business, financial condition and results of
operations.
In addition, laser vision correction competes with other surgical and
non-surgical treatments for refractive disorders, including eyeglasses, contact
lenses, other types of refractive surgery and other technologies currently under
development such as corneal rings, intraocular lenses and surgery with different
types of lasers. Suppliers of conventional vision correction alternatives
(eyeglasses and contact lenses), such as optometry chains, with substantially
greater financial, technical, managerial, marketing and other resources and
experience than the Company may compete with the Company by promoting
alternatives to laser vision correction or by purchasing laser systems and
offering laser vision correction to their customers. There can be no assurance
that the Company's management, operations and marketing plans are or will be
successful in meeting this variety of competition. Further, there can be no
assurance that the Company's competitors' access to capital, financing or other
resources or their market presence will not give these competitors an advantage
against the Company.
Competition has increased in part due to the greater availability and
lower cost of excimer lasers. Further competition could develop if a significant
decrease in the price of excimer laser systems were to occur, because the high
price of excimer laser systems currently is a barrier to entry for many
potential competitors, particularly individual ophthalmologists and
ophthalmologists participating in group practices. A price decrease could occur
for a number of reasons, including increased competition among laser
manufacturers. Competition in the market for laser vision correction could
increase if state laws were amended to permit optometrists (in addition to
ophthalmologists) to perform laser vision correction.
29
In addition, although surgeons performing laser vision correction at the
Company's eye care centers and certain other employees have generally agreed to
certain restrictions on competing with, or soliciting patients or employees
associated with, the Company, there can be no assurance that such agreements
will be enforceable.
Quarterly Fluctuations in Operating Results
Results of operations have varied and may continue to fluctuate
significantly from quarter to quarter and will depend on numerous factors,
including: (i) market acceptance of the Company's services; (ii) seasonal
factors (historically, fewer procedures are scheduled during the summer); (iii)
the purchase or upgrade of lasers and other equipment; (iv) economic conditions
in the geographic areas in which the Company operates; (v) the timing of new
enhancements by the Company, its suppliers and its competitors; (vi) the
opening, closing or expansion of centers; (vii) regulatory matters; (viii)
litigation; (ix) acquisitions; (x) competition; (xi) fluctuations in currency
exchange rates (a portion of the Company's operations are conducted in Canadian
dollars) and (xii) other extraordinary events. There can be no assurance that
the growth in revenues achieved by the Company in years prior to fiscal 2001
will resume and continue or that revenues or net income in any particular
quarter will not be lower, or losses greater, than those of the preceding
quarters, including comparable quarters of prior fiscal years. The Company's
expense levels are based, in part, on its expectations as to future revenues. If
revenue levels are below expectations, operating results are likely to be
adversely affected. In light of the foregoing, quarter-to-quarter comparisons of
the Company's operating results are not necessarily meaningful and should not be
relied upon as indications of likely future performance or annual operating
results. Reductions in revenues or net income between quarters or the failure of
the Company to achieve expected quarterly earnings per share could have a
material adverse effect on the market price of the Common Shares.
Potential Side Effects and Long-Term Results of Laser Vision Correction
Concerns with respect to the safety and efficacy of laser vision
correction include predictability and stability of results and potential
complications or side effects, including but not limited to the following:
post-operative discomfort; corneal haze during healing (an increase in
light-scattering properties of the cornea); glare/halos (disturbed night
vision); decrease in contrast sensitivity (reduced visual quality of sharpness);
temporary increases in intraocular pressure in reaction to post-procedure
medication; modest fluctuations in astigmatism and modest decreases in best
corrected vision (i.e., with eyeglasses); loss of fixation during the procedure;
unintended over- or under-correction; instability, reversion or regression of
effect; corneal scars (blemishing marks left on the cornea); corneal ulcers
(inflammatory lesions resulting in loss of corneal tissue); and corneal healing
disorders (compromised or weakened immune system or connective tissue disease
which causes poor healing). Laser vision correction may involve the removal of
"Bowman's layer", an intermediate layer between the epithelium (outer corneal
layer) and the stroma (middle corneal layer). Although several studies conducted
to date have demonstrated no significant adverse reactions to excimer laser
removal of Bowman's layer, it is unclear what effect this may have on the
patient. Although recently released results of a study showed that the majority
of patients experienced no serious side effects six years after laser vision
correction using the PRK procedure, there can be no assurance that complications
will not be identified in further long-term follow-up studies. Any such
30
complications or side effects may call into question the safety and
effectiveness of laser vision correction, which in turn may negatively affect
the approval by the FDA of the excimer laser for sale for laser vision
correction and the market acceptance of such procedures and lead to product
liability, malpractice or other claims against the Company. Any such occurrence
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Potential Liability and Insurance
The provision of medical services entails an inherent risk of potential
malpractice and other similar claims. Although patients at the Company's centers
execute informed consent statements prior to any procedure performed by doctors
at the Company's centers, there can be no assurance that such consents will
provide adequate liability protection. In addition, although the Company does
not engage in the practice of medicine or have responsibility for compliance
with certain regulatory and other requirements directly applicable to doctors
and doctor groups, there can be no assurance that claims, suits or complaints
relating to services provided at the Company's centers will not be asserted
against the Company in the future. The Company currently maintains malpractice
insurance coverage that it believes is adequate both as to risks and amounts, in
the amount of C$50,000,000 for each occurrence and in the aggregate annually for
all eye care centers in Canada and the United States. Such insurance extends to
professional liability claims that may be asserted against employees of the
Company that work on site at the centers. In addition, the doctors who provide
medical services at the Company's centers are required to maintain comprehensive
professional liability insurance, although there can be no assurance that any
such insurance will be adequate to satisfy claims or that insurance maintained
by the doctors will protect the Company.
The availability and cost of professional liability insurance has been
affected by various factors, many of which are beyond the control of the
Company. An increase in the future cost of such insurance to the Company and the
doctors who provide medical services at the centers may have a material adverse
effect on the Company's business, financial condition and results of operations.
Successful malpractice or other claims asserted against any of the doctors who
provide medical services or the Company that exceed applicable policy limits or
are not covered by policy terms could have a material adverse effect on the
Company's business, financial condition and results of operations. Although the
doctors providing medical services at the centers are required to carry
malpractice insurance and while most have agreed to indemnify the Company
against certain malpractice and other claims, there can be no assurance that
such indemnification is enforceable or, if enforced, that it will be sufficient.
The excimer laser system utilizes certain poisonous gases which if not
properly contained could result in bodily injury. Any such occurrence could
result in a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the use of excimer laser
systems may give rise to claims by patients, doctors, technicians or others
against the Company resulting from laser-related injuries, which may not become
evident for a number of years. While the Company believes that any claims
alleging defects in its excimer laser systems would be covered by the
manufacturers' product liability insurance, there can be no assurance that the
Company's excimer laser manufacturers will continue to carry product liability
insurance or that any such insurance will be adequate to protect the Company.
The
31
Company may not have adequate insurance for any liabilities arising from
injuries caused by poisonous gases or laser equipment.
There can be no assurance that adequate insurance will continue to be
available, either at existing or increased levels of coverage on commercially
reasonable terms, if at all, for the Company's existing and future operations
and centers, or that the Company's existing insurance will be adequate to cover
any future claims that may be made. The unavailability of adequate insurance at
acceptable rates could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, even if a claim
against the Company is covered by insurance, the cost of defending the action
and/or the assessment of damages in excess of insurance coverage could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Management of Growth
The Company's success will depend on its ability to expand and manage its
operations and facilities. The Company's focus of expansion remains the United
States. The Company's growth and expansion has resulted in and may continue to
result in new and increased responsibilities for management and additional
demands on management, operating and financial systems and resources. In
particular, the Company will need to successfully hire, train and retain
management for each of its eye care centers. There can be no assurance that the
Company will be able to hire, train or retain qualified managers. The Company's
ability to continue to expand in the United States is dependent upon factors
such as its ability to: (i) implement new, expanded or upgraded operations and
financial systems, procedures and controls; (ii) hire and train new staff and
managerial personnel; (iii) expand the Company's infrastructure; (iv) adapt or
amend the Company's structure to comply with present or future legal
requirements affecting the Company's arrangements with doctors, including state
prohibitions on fee-splitting, corporate practice of medicine and referrals to
facilities in which doctors have a financial interest; and (v) obtain regulatory
approvals and Certificates of Need, where necessary, and comply with licensing
requirements applicable to doctors and facilities operated, and services
offered, by doctors. Any failure or inability to successfully implement these
and other factors may have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance that
the Company will be able to successfully integrate and manage the eye care
centers it opens or acquires or achieve the economies of scale and/or the
patient base required to achieve profitability in the eye care centers. If the
Company's management is unable to successfully implement its growth strategy or
manage growth effectively, the Company's business, financial condition and
results of operations could be materially adversely affected.
Inability to Execute Strategy
In response to recent industry turmoil and a deep discounting price war,
the Company retained the services of a national consulting firm and undertook an
extensive review of its internal structures, market position, resources and
future strategies. As a result of that review, the Company confirmed its
decision to maintain its premium brand model and not participate in the industry
price war. The Company decided to continue to focus on maximizing revenues
through the Company's co-management model and innovative marketing programs,
controlling costs without compromising superior quality of care or clinical
outcomes and pursuing additional
32
growth opportunities for its core laser vision correction business through the
TLC Affiliate Centers Program, strategic acquisitions and opening new centers
There can be no assurance that the Company will be successful in executing its
new strategy or, if successful in executing the strategy, that it will be
effective. If the Company is unable to implement its strategy, or if its
strategy proves to be ineffective, the Company's business, financial condition
and results of operations could be materially adversely affected.
Acquisitions and Affiliate Centers
The Company's growth strategy is dependent on increasing the number of
procedures at existing eye care centers, increasing the number of TLC eye care
centers through internal development or acquisitions and entering into TLC
Affiliate Center arrangements with local eye care professionals in markets not
large enough to justify a corporate center.
The addition of new centers can be expected to present challenges to
management, including the integration of new operations, technologies and
personnel, and special risks, including unanticipated liabilities and
contingencies, diversion of management attention and possible adverse effects on
operating results resulting from increased goodwill amortization, increased
interest costs, the issuance of additional securities and increased costs
resulting from difficulties related to the integration of the acquired
businesses. The future ability of the Company to achieve growth through
acquisitions will depend on a number of factors, including the availability of
attractive acquisition opportunities, the availability of funds needed to
complete acquisitions, the availability of working capital needed to fund the
operations of acquired businesses and the effect of existing and emerging
competition on operations. There can be no assurance that the Company will be
able to successfully identify suitable acquisition candidates, complete
acquisitions on acceptable terms, if at all, or successfully integrate acquired
businesses into its operations. The Company's past and possible future
acquisitions may not achieve adequate levels of revenue, profitability or
productivity or may not otherwise perform as expected. The future ability to
achieve growth through the Affiliate Center program will depend on a number of
factors, including the success of the pilot program, the availability and
willingness of local eye care practitioners to participate in the program and
the ability of the local affiliate to integrate his or her practice with TLC's
methods of operations and to maintain the goodwill generated by the TLC brand.
There can be no assurance that the Company will be able to enter into a
sufficient number of affiliate center arrangements to generate significant
growth in revenues or that affiliate center arrangements will be profitable.
If the Company seeks to issue Common Shares to finance acquisitions, a
decline in the price of the Common Shares may result in the Company being
required to issue a greater number of Common Shares which could have a material
adverse effect on the Company's ability to complete acquisitions and could
result in increased dilution to existing shareholders.
There can be no assurance that the Company will have adequate resources to
finance acquisitions. If the Company does not have adequate resources, its
growth could be limited, and its existing operations impaired, unless it is able
to obtain additional capital through subsequent equity or debt financings. There
can be no assurance that the Company will be able to obtain such financing or
that, if available, such financing will be on terms acceptable to the Company.
33
As a result, there can be no assurance that the Company will be able to
implement its expansion strategy successfully. Failure by the Company to
successfully implement its acquisition strategy and integrate and operate the
acquired businesses efficiently would have a material adverse effect on the
Company's business, financial condition and results of operations.
Future Capital Requirements; Uncertainty of Additional Funding
It is not possible to predict with certainty the timing or the amount of
future capital requirements. However, the Company may require significant
additional funding to expand in the future. Such additional funding may be
raised through additional public or private equity or debt financings or other
sources and may, if obtained by way of subsequent equity financing, result in
dilution to the holders of the Common Shares. The Company believes that its
existing cash balances and funds expected to be generated from operations and
available credit facilities should be sufficient to fund its anticipated level
of operations and its current expansion and acquisition plans for the
foreseeable future. There can be no assurance that the Company's operations,
expansion plans or capital requirements will not change in a manner that would
consume available resources more rapidly than anticipated, or that substantial
additional funding will not be required before the Company can achieve and
maintain profitable operations. The Company's capital needs depend on many
factors, including the rate and cost of acquisitions of businesses, equipment
and other assets, the rate of opening new centers or expanding existing centers,
market acceptance of laser vision correction and actions by competitors.
Further, additional funding may not be available on terms satisfactory to the
Company, if at all. If adequate funds are not available, the Company may be
required to cut back or abandon its expansion plans and curtail operations
significantly, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
Government Regulation and Supervision
Regulation of Health Care Industry
United States
The Company and its operations are subject to extensive federal, state and
local laws, rules and regulations, including those prohibiting corporations from
practicing medicine and optometry, prohibiting unlawful rebates and division of
fees, and limiting the manner in which prospective patients may be solicited.
Further, contractual arrangements with hospitals, surgery centers,
ophthalmologists and optometrists, among others, are extensively regulated by
federal and state laws. Many of these laws and regulations are ambiguous in
nature and have not been definitively interpreted by courts and regulatory
authorities. Moreover, state and local laws vary from jurisdiction to
jurisdiction. Accordingly, the Company may not always be able to predict clearly
how such laws and regulations will be interpreted or applied by courts and
regulatory authorities and some of the Company's activities could be challenged
by regulators, competitors or others. In addition, there can be no assurance
that the regulatory environment in which the Company operates will not change
significantly in the future. In response to new or revised laws, regulations or
interpretations, the Company could be required to revise the structure of its
legal arrangements or the structure of its fees, incur substantial legal fees,
fines or other costs, or curtail its business activities, reducing the potential
profit to the Company of some of its legal
34
arrangements, any of which may have a material adverse effect on the Company's
business, financial condition and results of operations. Among the laws and
regulations that affect the Company's operations are anti-kickback laws,
fee-splitting laws, corporate practice of medicine restrictions, self-referral
laws and professional licensing rules.
Anti-Kickback Statutes. In the United States, the federal anti-kickback statute
prohibits the knowing and wilful solicitation, receipt, offer or payment of any
remuneration, whether direct or indirect, in return for or to induce the
referral of patients or the ordering or purchasing of items or services payable
in whole or in part under Medicare, Medicaid or other federal health care
programs. Certain federal courts have interpreted the anti-kickback statute
broadly and, in some cases, have interpreted the law to prohibit payments
intended to induce the referral of Medicare or Medicaid business, irrespective
of any other legitimate motives. Sanctions for violations of the anti-kickback
statute include criminal penalties, such as imprisonment or criminal fines of up
to $25,000 per violation, civil penalties of up to $50,000 per violation, and
exclusion from the Medicare or Medicaid programs and other federal programs. The
federal Office of the Inspector General, the agency responsible for the
interpretation and enforcement of the anti-kickback statute, has stated that if
ophthalmologists and optometrists engage in agreements to refer, they may be
violating the anti-kickback statute. The Inspector General also has taken the
position that the anti-kickback statute is implicated, even if non-Medicare or
Medicaid covered services are involved, if the arrangement has an impact on the
referral pattern for services covered by Medicare or Medicaid. Moreover, some
states have enacted statutes similar to the federal anti-kickback statute which
are applicable to referrals of patients regardless of payor source. Although the
Company has endeavoured to structure its contractual relationships in compliance
with these laws, federal and/or state authorities could determine that
prohibitions contained in anti-kickback or similar statutes apply to the
Company's co-management strategy and to the Company's contractual relationship
with ophthalmologists in connection with the Company's secondary care center
holdings, which could have a material adverse effect on the Company's business,
financial condition and results of operations.
Fee-Splitting. Many states in the United States prohibit professionals,
including ophthalmologists and optometrists, from paying a portion of a
professional fee to another individual (including another professional) unless
the individual is an employee or partner in the same professional practice.
Violation of a state's fee-splitting prohibition may result in civil or criminal
fines, as well as sanctions imposed against the professional through licensing
proceedings. Many states do not have any clear precedent or regulatory guidance
on what relationships constitute fee-splitting, particularly in the context of
providing management services for doctors. Although the Company has endeavoured
to structure its contractual relationships in compliance with these laws in all
material respects, state authorities could find that fee-splitting prohibitions
are implicated in the Company's co-management programs or in the management
services agreements between doctors and the Company in connection with the
Company's eye care centers and secondary care centers. Such findings may require
the Company to revise the structure of its legal arrangements and this could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Corporate Practice of Medicine and Optometry. The laws of many states in the
United States prohibit business corporations, such as the Company, from
practicing medicine and employing or
35
engaging physicians to practice medicine and some states prohibit business
corporations from practicing optometry or employing or engaging optometrists to
practice optometry. Such laws preclude companies that are not owned entirely by
eye care professionals from employing eye care professionals, having control
over clinical decision-making or engaging in other activities that are deemed to
constitute the practice of optometry or ophthalmology. This prohibition is
generally referred to as the prohibition against the corporate practice of
medicine or optometry. Violation of a state's corporate practice of medicine or
optometry prohibition may result in civil or criminal fines, as well as
sanctions imposed against the professional through licensing proceedings.
Although the Company has endeavoured to structure its contractual relationships
in compliance with these laws in all material respects, if any aspect of the
Company's operations were found to violate applicable state corporate practice
of medicine or optometry prohibitions, the Company would be required to revise
the structure of its legal arrangements which could have a material adverse
effect on the Company's business, financial condition and results of operations.
Self-Referral Laws. Under the United States federal self-referral law (the
"Stark Law") physicians (which, under the statute, includes optometrists) are
prohibited from referring their Medicare or Medicaid patients for the provision
of designated health services (including clinical laboratory, diagnostic imaging
and prosthetic devices) to any entity with which they or their immediate family
members have a financial relationship, unless the referral fits within one of
the specific exceptions in the statute or regulations. The penalties for
violating the Stark Law include denial of payment for the designated health
services performed, civil fines of up to $15,000 for each service provided
pursuant to a prohibited referral, a fine of up to $100,000 for participation in
a circumvention scheme, and possible exclusion from the Medicare and Medicaid
programs. Many of the Company's subsidiaries that operate refractive or
secondary care centers are partially owned by doctors affiliated with those
centers. While the Company believes that its present arrangements in connection
with the performance of PRK and LASIK in its eye care centers will not be
affected once the final rule becomes effective, there can be no assurance that
the Stark Law will not require the Company to revise the structure of its legal
arrangements, and this could have a material adverse effect on the Company's
business, financial condition and results of operations.
Many states in the United States also have laws similar to the Stark Law
prohibiting self-referrals. The services covered by such laws vary from state to
state. While the Company believes that its present arrangements are consistent
with applicable state law in all material respects, there can be no assurance
that state officials will not take the position that certain referrals are
prohibited under state law. Such findings could require the Company to revise
the structure of its legal arrangements, and this could have a material adverse
effect on the Company's business, financial condition and results of operations.
State Licensing Limitations. State medical boards and state boards of optometry
generally set the limits of the activities in which the professional may engage.
In some instances, issues have been raised as to whether participation in a
co-management program violates a physician's responsibility to provide adequate
care to the patient, constitutes an abandonment of the patient, or constitutes
conspiring to promote the unlicensed practice of medicine by an optometrist. The
conclusions of these regulatory bodies often are not consistent. The issue is
further complicated by the dual jurisdiction exercised by boards of medicine and
boards of optometry. While a board
36
of medicine generally has no jurisdiction over optometrists, it could hold an
ophthalmologist culpable for conspiracy to promote the unlicensed practice of
medicine by an optometrist. Yet, in the same state, the board of optometry may
hold that the post-operative services rendered by the optometrist are within the
scope of the practice of optometry. Participation in the Company's co-management
program may place ophthalmologists and optometrists at risk of violating state
licensing laws. Such a finding could require the Company to revise the structure
of its legal arrangements and may result in affiliated doctors terminating their
relationships with the Company, either of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
Other Anti-Fraud Provisions. There are also federal and state civil and criminal
statutes imposing penalties, including substantial civil and criminal fines and
imprisonment, on health care providers and those who provide services to such
providers (including management businesses such as the Company) which
fraudulently or wrongfully bill government or other third-party payors for
health care services. In addition, the federal law prohibiting false
Medicare/Medicaid billings allows a private person to bring a civil action in
the name of the United States government for violations of its provisions and
obtain a portion of the false claims recovery if the action is successful. The
Company believes that it and its affiliated doctors are in material compliance
with such laws, but there can be no assurance that the Company's activities will
not be challenged or scrutinized by governmental authorities or private parties
asserting a false claim action in the name of the United States government which
could have a material effect on the Company's business, financial condition and
results of operations.
Facility Licensure and Certificate of Need. The Company may be required to
obtain licenses from the State Departments of Health, or a division thereof, in
the various states in which it opens or acquires a center. The Company believes
that it has obtained the necessary licensure in states where licensure is
required and that it is not required to obtain licenses in other states.
However, some of the regulations governing the need for licensure are unclear
and there is no applicable precedent or regulatory guidance to cover certain
interpretive issues. Therefore, it is possible that a state regulatory authority
could determine that the Company is operating a center inappropriately without a
license, which could subject the Company to significant fines or other
penalties, result in the Company being required to cease operations in that
state or otherwise have a material adverse effect on the Company's business,
financial condition and results of operations. With respect to future entry into
new geographic markets, although there can be no assurance that the Company will
be able to obtain any required license, the Company has no reason to believe
that, in those states that require such facility licensure, it will be not able
to obtain such a license without unreasonable expense or delay.
Some states require the permission of the State Department of Health or a
division thereof, such as a Health Planning Commission, in the form of a
Certificate of Need ("CON") prior to the construction or modification of an
ambulatory care facility, or the purchase of certain medical equipment in excess
of an amount set by the state. The Company believes that it has obtained the
necessary CONs in states where a CON is required and that it is not required to
obtain CONs in other states. However, some of the regulations governing the need
for CONs are unclear and there is no applicable precedent or regulatory guidance
to cover certain interpretative issues. Therefore, it is possible that a state
regulatory authority could determine that the
37
Company is operating a center inappropriately without a CON, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. While there can be no assurance that the Company will be
able to acquire a CON in all states where a CON is required, the Company has no
reason to believe that in those states that require a CON, it will not be able
to do so.
Canada
Conflict of interest regulations in certain Canadian provinces prohibit
optometrists, ophthalmologists or corporations owned or controlled by them from
receiving benefits from suppliers of medical goods or services to whom the
optometrist or ophthalmologist refers his or her patients. In addition, the laws
of certain Canadian provinces prohibit health care professionals from splitting
fees with non-health care professionals and prohibit non-licensed entities (such
as the Company) from practicing medicine or optometry and, in certain
circumstances, from employing ophthalmologists or optometrists directly.
Although the Company is not aware of any Canadian health regulations which
impose licensing restrictions on the operation of its centers, there can be no
assurance that such restrictions will not be adopted. Changes in the
interpretation or enforcement of existing regulatory requirements or the
adoption of new requirements could have a material adverse effect on the
Company's business, financial condition and results of operations. There can be
no assurance that the Company will not be required to incur significant costs to
comply with laws and regulations in the future or that laws and regulations will
not have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, many of the Company's
operations have not been subject to review by regulators and there can be no
assurance that a review of the Company's operations or the operations of its
affiliated doctors will not result in a determination that could have a material
adverse effect on the Company's business, financial condition and results of
operations.
United States Food and Drug Administration
To date, some FDA approvals granted for certain excimer lasers have
applied only to the PRK procedure, and not for the LASIK procedure. The FDA,
however, is not authorized to regulate the practice of medicine, and
ophthalmologists, including those affiliated with TLC eye care centers, may
perform the LASIK procedure in an exercise of professional judgement in
connection with the practice of medicine.
Also, the use of an excimer laser to treat both eyes on the same day
(bilateral treatment) has not been approved by the FDA. The FDA has stated that
it considers the use of the excimer laser for bilateral treatment to be a
practice of medicine decision, which the FDA is not authorized to regulate.
Ophthalmologists, including those affiliated with TLC eye care centers, widely
perform bilateral treatment in an exercise of professional judgement in
connection with the practice of medicine.
Failure to comply with applicable FDA requirements could subject the
Company, its affiliated doctors or laser manufacturers to enforcement action,
including product seizure, recalls, withdrawal of approvals and civil and
criminal penalties, any one or more of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
38
Further, failure to comply with regulatory requirements, or any adverse
regulatory action, including a reversal of the FDA's current position that the
"off-label" use of excimer lasers by doctors outside the FDA approved guidelines
is a practice of medicine decision, which the FDA is not authorized to regulate,
could result in a limitation on or prohibition of the Company's use of excimer
lasers which in turn could have a material adverse effect on the Company's
business, financial condition and results of operations.
Most of the Company's eye care centers in the United States use VISX
and/or Alcon excimer lasers. The failure of VISX, Alcon or other excimer laser
manufacturers to comply with applicable federal, state or foreign regulatory
requirements, or any adverse action against or involving such manufacturers,
could limit the supply of lasers, substantially increase the cost of excimer
lasers, limit the number of patients that can be treated at the Company's
centers and limit the ability of the Company to use the lasers, which could have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Item 1 - Business - Governmental Regulation."
Intellectual Property/Proprietary Technology
The medical device industry, including the ophthalmic laser sector, has
been characterized by substantial litigation in the United States and Canada
regarding patents and proprietary rights. There are a number of patents
concerning methods and apparatus for performing corneal procedures with excimer
lasers. In the event that the use of an excimer laser or other procedure
performed at any of the Company's centers is deemed to infringe a patent or
other proprietary right, the Company may be prohibited from using the equipment
or performing the procedure that is the subject of the patent dispute or may be
required to obtain a royalty bearing license, which may not be available on
acceptable terms, if at all. The costs associated with any such licensing
arrangements may be substantial and could include ongoing royalty payments. In
the event that a license is not available, the Company may be required to seek
the use of products which do not infringe the patent. The unavailability of such
products may cause the Company to cease operations in the United States or
Canada or delay the Company's expansion. If the Company is prohibited from
performing laser vision correction at its eye care centers, the Company's
business, financial condition and results of operations will be materially
adversely affected. See "Item 1 - Business - Intellectual Property/Proprietary
Technology".
Technological Change
Modern medical technology is characterized by extensive research and rapid
technological change. Newer or enhanced technologies may be developed with
better performance or lower cost than the excimer laser equipment currently used
by the Company. Medical companies, academic and research institutions and others
have developed and could develop new therapies, including new or enhanced
medical devices or surgical procedures for the conditions targeted by the
Company. For instance, the FDA recently approved for marketing intraocular
lenses (i.e., implantable contact lenses) and other vision correction
alternatives, such as corneal rings, are being developed. New and potential
therapies could be more medically effective and less expensive than the
procedures performed at the Company's eye care centers and could potentially
render laser vision correction obsolete, uneconomical or otherwise undesirable.
In addition, competitors may develop procedures that involve lower per procedure
costs. There can be no assurance that the Company will have the capital
resources available to it
39
to upgrade its excimer laser equipment, acquire any such new or enhanced medical
devices or adopt such new or enhanced procedures at the time that any advanced
or more efficient technology or procedure is developed or introduced. The
inability of the Company to do so successfully could have a material adverse
effect on the Company's business, financial condition and results of operations.
Dependence on Key Personnel
The success of the Company is dependent in part on the services of certain
key medical and management personnel, including Dr. Jeffrey Machat and Mr. Elias
Vamvakas. The experience of these individuals will be an important factor
contributing to the Company's continued success and growth. The loss of either
of these individuals could have a material adverse effect on the Company's
business, financial condition and results of operations.
Potential Volatility of Stock Price
The market price of the Common Shares historically has been subject to
substantial price volatility. Such volatility can be expected to recur in the
future due to industry developments or business-specific factors such as the
Company's ability to effectively penetrate the laser vision correction market,
implement its strategies, new technological innovations and products, changes in
government regulations, adverse regulatory action, public concerns with regard
to the safety and effectiveness of various medical procedures, any loss of key
management, announcements of extraordinary events such as litigation or
acquisitions, variations in the Company's financial results, fluctuations in the
stock prices of the Company's competitors, the issuance of new or changed stock
market analyst reports and recommendations concerning the Company or its
competitors, changes in earnings estimates by securities analysts, the Company's
ability to meet analysts' projections, as well as changes in the market for
medical services and general economic, political and market conditions or other
unforeseen factors. In addition, stock markets have experienced extreme price
and volume trading volatility in recent years. This volatility has had a
substantial effect on the market prices of securities of many companies for
reasons frequently unrelated or disproportionate to the operating performance of
the specific companies. These broad market fluctuations may adversely affect the
market price of the Common Shares.
ITEM 2. PROPERTIES
The Company's centers are located in leased premises. The leases are
negotiated on market terms and typically have a term of five to ten years. See
Note 14 to "Item 8 - Financial Statements and Supplementary Data". The following
chart contains the location and acquisition or opening date of each TLC eye care
center:
40
Eye care centers
United States Canada
------------- ------
Location Opened Location Opened Location Opened
California New York New Brunswick
Brea September 1996 Garden City May 1996 Moncton September 1997
Newport Beach July 1999 New York January 1996 Ontario
Ontario July 1999 White Plains April 1996 London November 1994
Palm Desert March 2000 Albany April 2000 Toronto (York Mills) December 1994
Sacramento December 1999 North Carolina Toronto (BCE Place) May 1995
Silicon Valley June 2000 Charlotte June 1997 Waterloo May 1999
Torrance May 2000 Raleigh August 1997 Windsor September 1993
Colorado Ohio
Denver August 1996 Cleveland November 1997
Connecticut Columbus October 1998
Fairfield September 1999 Oklahoma
Florida Oklahoma City October 1996
Boca Raton January 1996 Tulsa October 1995
Coral Gables December 2000 Pennsylvania
Fort Lauderdale January 1997 Plymouth Meeting April 1996
Tampa January 1997 Pittsburgh June 1998
Georgia South Carolina
Atlanta August 1996 Greenville June 1996
Illinois Charleston October 2000
Westchester March 1997 Tennessee
Indiana Johnson City April 1997
Indianapolis March 1996 Texas
Maryland Austin June 1996
Annapolis July 1999 Arlington June 1996
Baltimore June 1999 Houston August 1996
Rockville January 1996 San Antonio June 1996
Massachusetts Virginia
Waltham September 1997 Fairfax April 1996
Michigan Reston August 2001
Ann Arbor June 2001 Wisconsin
Detroit November 1997 Madison October 1996
Kalamazoo April 1999 Milwaukee April 1999
Lansing May 1998
Minnesota
Minnetonka June 2000
Missouri
St. Louis August 2000
Montana
Billings March 1997
Nevada
Las Vegas January 2000
New Jersey
Elmwood Park March 1996
Mount Laurel June 1997
The Company has leased premises for consultation offices in Halifax, Nova
Scotia, Chicago, Illinois and Sheboygan, Michigan which have been set up to
provide all aspects of patient care except provision of the actual surgery
itself.
During fiscal 2001, the Company closed centers in Green Bay, Wisconsin,
Seattle, Washington and Irvine, California. The Company sold its controlling
interest in a center in Vancouver, British Columbia and abandoned plans to
develop a center in Pasadena, California.
The Company also maintains investment interests in three secondary care
practices located in Michigan, Oklahoma and Washington. The secondary care
practice in Michigan has five satellite locations, the secondary care practice
in Oklahoma has two satellite locations and the secondary care practice in
Washington has seven satellite locations.
41
The Company also has two corporate offices. The International Headquarters
is located in premises currently owned and operated by the Company in
Mississauga, Ontario, Canada. The Company's U.S. Corporate Office is located in
leased premises in Bethesda, Maryland. The Company has entered into negotiations
concerning the possible sale and lease back of its International Headquarters
building. See "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations".
ITEM 3. LEGAL PROCEEDINGS
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Common Shares are listed on The Toronto Stock Exchange under the
symbol "TLC" and on the Nasdaq National Market under the symbol "TLCV." The
following table sets forth, for the periods indicated, the high and low closing
prices per Common Share of the Common Shares on The Toronto Stock Exchange and
the Nasdaq National Market:
The
Toronto Nasdaq
Stock National
Exchange Market
----------------------- -----------------------
High Low High Low
------- ------ ------ -----
Fiscal 2001
First Quarter C$12.20 C$7.70 $8.313 $5.00
Second Quarter 8.20 3.55 5.50 2.25
Third Quarter 12.00 1.67 7.875 1.125
Fourth Quarter 14.20 7.11 9.25 4.64
Fiscal 2000
First Quarter C$78.80 C$37.65 $53.50 $25.50
Second Quarter 47.50 23.75 31.82 16.16
Third Quarter 27.65 16.60 18.75 11.00
Fourth Quarter 22.50 9.50 15.44 6.50
42
Record Holders
As of July 31, 2001, there were approximately 499 record holders of the
Common Shares.
Dividends
The Company has never declared or paid cash dividends on the Common
Shares. It is the policy of the Board of Directors of the Company to retain
earnings to finance growth and development of its business and, therefore, the
Company does not anticipate paying cash dividends on its Common Shares in the
near future.
ITEM 6. SELECTED FINANCIAL DATA
Set forth in the following pages are selected historical consolidated
financial data as of and for each of the fiscal years in the five-year period
ended May 31, 2001, which have been derived from and should be read in
conjunction with the Consolidated Financial Statements of the Company and the
notes thereto included elsewhere in this Form 10-K. See Note 1 to "Item 8 -
Financial Statement and Supplementary Data".
43
Year Ended May 31
-----------------
1997 1998 1999 2000 2001
------ ------- ------- ------- -------
Income Statement Data
Amounts under U.S.
GAAP(1)
Net revenues(3) 20,112 59,122 146,910 201,223 174,006
Expenses
Operating and doctor 21,074 54,763 115,289 183,485 165,030
compensation
Interest and other 752 1,434 2,245 (4.492) (2,543)
Depreciation and 3,463 9,460 14,934 21,688 27,593
amortization
Start-up and development 4,292 3,267 3,606 0 0
expenses
Restructuring charges -- -- 12,924 0 19,075
Gain (Loss) before income (9,469) (9,802) (2,088) 542 (35,149)
taxes and non-controlling
interest
Income Taxes (105) (1,071) (2020) (3,454) (2,239)
Non-controlling interest -- 593 (448) (3,006) (385)
Net loss for the period - (9,574) (10,280) (4,556) (5,918) (37,773)
U.S. GAAP
Loss per share - (0.47) (0.37) (0.13) (0.16) (1.00)
U.S. GAAP
Weighted average number 20,617 28,035 34,090 37,178 37,779
of Common Shares
outstanding (in thousands)
44
Year Ended May 31
-----------------
1997 1998 1999 2000 2001
------ ------ ------ ------- -------
Operating Data
Number of eye care centers (at end of period) 27 45 55 62 59
Number of secondary care centers (at end of period) 7 15 14 5 3
Number of laser vision correction procedures 11,026(4) 35,859(5) 90,600 134,000 122,800
As of May 31
1997 1998 1999 2000 2001
------- ------- ------- ------- -------
Balance Sheet Data
Cash and cash equivalents 13,230 1,895 125,598 78,531 47,987
Working capital 8,055 53,153 146,884 59,481 36,837
Total assets 73,746 164,212 295,675 289,364 238,438
Total debt, excluding current portion 10,935 17,911 11,030 6,728 8,313
Shareholders' equity
Capital Stock 63,522 143,554 269,454 269,953 276,277
Warrants -- -- -- 532 532
Deficit (12,141) (22,421) (31,267) (42,388) (80,161)
Accumulated other comprehensive income (loss) -- 407 5,936 (4,451) (9,542)
51,381 121,540 244,123 223,646 187,106
(1) In the financial information provided, the Company has reported in U.S.
GAAP. In years prior to fiscal 2000, Form 10-K submissions and quarterly
Form 10-Q submissions were reported in Canadian GAAP.
(2) Certain comparative figures have been reclassified to conform to the
presentation for fiscal 2000.
(3) Includes primarily those revenues pertaining to the operation of eye care
centers, the management of refractive and secondary care centers and the
Company's other non-refractive businesses.
(4) Includes procedures performed at centers previously owned by 20/20 Laser
Eye Centers Inc. ("20/20") starting March 1997. 20/20 was acquired by TLC
on February 10, 1997.
(5) Includes procedures performed at centers previously owned by BeaconEye
Inc. ("Beacon"). Beacon was acquired by TLC on April 16, 1998.
45
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with the Consolidated
Financial Statements and the related notes thereto, which are included in Item 8
of this Form 10-K. The following discussion is based upon the Company's results
under United States GAAP. Unless otherwise specified, all dollar amounts are
U.S. dollars. See Note 1 to the Consolidated Financial Statements of the
Company.
Overview
TLC is one of the largest providers of laser vision correction services in
North America. TLC owns and manages eye care centers which, together with TLC's
network of over 12,500 eye care doctors, provide laser vision correction of
common refractive disorders such as myopia (nearsightedness), hyperopia
(farsightedness) and astigmatism. Laser vision correction is an outpatient
procedure which is designed to change the curvature of the cornea to reduce or
eliminate a patient's reliance on eyeglasses or contact lenses. TLC, which
commenced operations in September 1993, currently has 59 eye care centers in 26
states and provinces throughout the United States and Canada. Surgeons performed
over 122,800 procedures at the Company's centers during the fiscal 2001.
The Company recognizes revenues at the time services are rendered. Net
revenues include only those revenues pertaining to owned laser centers and
management fees from managing refractive and secondary care practices. Under the
terms of the practice management agreements, the Company provides management,
marketing and administrative services to refractive and secondary care practices
in return for management fees. Management services revenue is equal to the net
revenue of the physician practice, less amounts retained by the physician
groups. Management services revenue under the terms of the practice management
agreements for laser vision correction procedures are recognized when the
services are performed.
Net revenue of the physician's practice represents amounts charged to
patients for laser vision correction services net of the impact of applicable
patient discounts and related contractual adjustments. Amounts retained by
physician groups may include costs for uncollectible amounts from patients,
professional contractual costs and miscellaneous administrative charges.
Uncollectible amounts from patients are reviewed and provided for on a
regular monthly basis for those amounts due from physicians or patients for
which there is a permanent reduced likelihood of collection in whole or in part.
Procedure volumes represent the number of laser vision correction
procedures completed for which the amount that the patient has been invoiced for
the procedure exceeds a pre-defined company wide per procedure revenue
threshold. Procedures may be invoiced under the threshold amounts primarily for
promotional or marketing purposes and are not included in the procedure volume
numbers reported. By not counting these promotional procedures the net revenue
after
46
doctor's compensation per procedure ratio is higher than if these procedures had
been included in the procedure volumes.
Operating expenses include all fixed and variable expenses relating to the
operation of the Company's businesses. The principal components of operating
expenses are marketing costs, wages, surgeon's fees, laser royalty fees and
facility leasing costs.
The Company continues to pursue a growth strategy in its core refractive
laser vision correction business, which accounts for more than 92% of net
revenues. The Company has experienced its first decrease in annual procedure
volumes since inception. This decrease is indicative of the uncertainty in the
laser vision correction industry which has seen extensive pressure on prices
from deep discount providers, the recent bankruptcies of a number of laser
vision correction companies and negative publicity in the media concerning
competing centers. In addition, being an elective procedure, laser vision
correction volumes may have been further depressed by economic conditions in
early 2001.
The Company has developed and launched a pilot test of a new revenue
model, the TLC Affiliate Center program. Under the program, the Company provides
varying levels of resources, support and expertise to established eye care
professionals ("ECP") in secondary markets in an effort to grow and develop
their current laser vision correction practices. The services provided by TLC
can vary from the Company providing support only in building the ECP's network
of affiliated optometrists to the Company providing facilities, medical
equipment, professional staffing, marketing and administrative support. Revenues
from TLC affiliate centers vary based on the level of services provided by the
Company. The TLC Affiliate Centers program is expected to enable the Company to
expand its presence in secondary markets while significantly reducing the
operational and capital funding normally required to support a typical corporate
laser center model.
47
Results of Operations
2001 Refractive Other 2001 Total
-----------------------------------------
Revenues and physician costs:
Net revenues $ 161,219 $ 12,787 $ 174,006
Doctor compensation 15,538 -- 15,538
-----------------------------------------
Net revenue after doctor compensation $ 145,681 $ 12,787 $ 158,468
-----------------------------------------
Expenses
Operating 134,324 15,168 149,492
Interest and other (2,385) (158) (2,543)
Depreciation of capital assets and assets under capital lease 13,675 1,375 15,050
Amortization of intangibles 10,703 1,840 12,543
Restructuring and other charges 6,433 12,642 19,075
-----------------------------------------
162,750 30,867 193,617
-----------------------------------------
Income (loss) from operations (17,069) (18,080) (35,149)
Income taxes (1,779) (460) (2,239)
Non-controlling interest (370) (15) (385)
-----------------------------------------
Net income (loss) $ (19,218) $ (18,555) $ (37,773)
========================================
Total assets $ 234,355 $ 4,083 $ 238,438
========================================
Total capital and intangible expenditures $ 36,296 $ 140 $ 36,436
========================================
2000 Refractive Other 2000 Total
-----------------------------------------
Revenues and physician costs:
Net revenues $ 190,233 $ 10,990 $ 201,223
Doctor compensation 17,333 2 17,335
-----------------------------------------
Net revenue after doctor compensation $ 172,900 $ 10,988 $ 183,888
-----------------------------------------
Expenses
Operating 153,673 12,477 166,150
Interest and other (4,574) 82 (4,492)
Depreciation of capital assets and assets under capital lease 12,886 1,406 14,292
Amortization of intangibles 6,363 1,033 7,396
-----------------------------------------
168,348 14,998 183,346
-----------------------------------------
Income (loss) from operations 4,552 (4,010) 542
Income taxes (3,141) (313) (3,454)
Non-controlling interest (2,443) (563) (3,006)
-----------------------------------------
Net income (loss) $ (1,032) $ (4,886) $ (5,918)
========================================
Total assets $ 250,279 $ 39,085 $ 289,364
========================================
Total capital and intangible expenditures $ 65,941 $ 8,477 $ 74,418
========================================
Year ended May 31, 2001 compared to Year ended May 31, 2000
Net revenues for fiscal 2001 were $174.0 million, which is a 13.5%
decrease over last year's $201.2 million. Approximately 92% of total net
revenues were derived from refractive services as compared to 94% in fiscal
2000.
Net revenues from eye care centers for fiscal 2001 year were $161.2
million, which is 15.2% lower than last year's $190.2 million. Approximately
122,800 procedures were performed in fiscal 2001 compared to 134,200 procedures
in fiscal 2000. The decrease in procedure volume and the associated reduction of
revenue is indicative of the condition of the laser vision correction industry
which has experienced uncertainty resulting from a wide range in consumer
48
prices for laser vision correction procedures, the recent bankruptcies of a
number of deep discount laser vision correction companies as well as the ongoing
safety and effectiveness concerns arising from the lack of long-term follow-up
data and negative news stories focusing on patients with unfavourable outcomes
from procedures performed at competing centers. The Company maintains its vision
to be a premium provider of laser vision correction services in an industry that
has faced significant pricing pressures. Due to the pricing pressures in the
industry and the lower procedure prices offered pursuant to discounts associated
with the Company's Corporate Advantage Program, the Company's net revenue after
doctor compensation, per procedure, for fiscal 2001 declined by 8% in comparison
to fiscal 2000.
In the final quarter of fiscal 2000 and during fiscal 2001, the Company
completed practice management agreements with a number of surgeons resulting in
an increase in intangible assets to reflect the value assigned to these
agreements. These intangible assets will be amortized over the term of the
applicable agreements. These agreements have resulted either directly or
indirectly in lower per procedure fees being paid to the applicable surgeons and
a corresponding reduction in doctors' compensation to offset the increased
amortization costs. The result is an increase to the net revenue after doctors'
compensation per procedure ratio.
Operating expenses and doctor compensation from refractive activities
decreased to $149.9 million in fiscal 2001 from $171.0 million in fiscal 2000.
This decrease is a result of: (i) reduced variable expenses associated with the
decrease in the number of laser vision correction procedures performed at
existing eye care centers, (ii) significant efforts made by the Company to
reduce costs, (iii) significantly reduced costs associated with the Corporate
Advantage Program and the third party payor programs, and (iv) reduced corporate
costs which are subject to ongoing scrutiny to maintain an effective corporate
structure able to support the current levels of business activity. Operating
expenses and doctor compensation as a percentage of net revenues were 93% of net
revenues in fiscal 2001 as compared to 90% of net revenues in fiscal 2000. This
increase reflects the impact of marketing programs aimed at raising consumer
awareness of TLC's brand as well as the impact on per procedure fees as a result
of discounts offered pursuant to the Corporate Advantage Program, which were not
offset by a higher number of procedures being performed at TLC centers. In
addition, increased infrastructure costs (i.e. people, information systems and
marketing) were incurred to support the continued growth of the Company. The
Company recognized the effects the reduced procedure volumes were going to have
on the operations, and in fiscal 2001 management commenced a number of cost
reduction initiatives.
Net revenues from non-refractive activities were $12.8 million in fiscal
2001, an increase of over 16% in comparison to $11.0 million in fiscal 2001. The
increase in revenues reflects revenue growth of greater then 25% in the network
marketing and management, professional healthcare facility management and hair
removal subsidiaries, while revenues in the secondary care management and asset
management subsidiaries reflected moderate growth.
Net loss from non-refractive activities was $18.6 million in fiscal 2001,
an increase of over 280% in comparison to a net loss of $4.9 million in fiscal
2000. The loss in fiscal 2001 includes a restructuring charge of $11.7 million
(2000 - $0) resulting from the decision made by the Company to no longer support
the activities of its e-commerce subsidiary eyeVantage.com,
49
Inc. Excluding the impact of the restructuring charge, eyeVantage.com, Inc.,
generated losses of $5.6 million (2000 - $3.8 million). The loss from the
remaining non-refractive activities were $1.3 million, an increase from the loss
in fiscal 2000 of $1.1 million. The increased loss in fiscal 2001 is due
primarily to increased amortization of intangibles of $0.4 million at the
Company's network marketing and management subsidiary resulting from increased
goodwill arising from the finalization of the earn-out calculations arising from
the Company's 1997 acquisition of this entity (see "Note 11 - Capital Stock - a)
Common Stock" and "Note 17 - Acquisition - 2001 Transactions - ii and 2000
Transactions iv").
Interest (revenue)/expense and other expenses reflect interest revenue
from the Company's cash position resulting from positive cash flow from
operations and the result of a public offering in the fourth quarter of fiscal
1999. The lack of any material additions to long term debt and capital leases on
equipment has resulted in reducing interest costs on debt as the various debt
instruments approach maturity. Reduced cash and cash equivalent balances during
the year combined with lower interest yields have resulted in lower interest
revenues.
The increase in depreciation expense is largely a result of new centers
and the additional depreciation and amortization associated with the Company's
acquisitions during fiscal 2000 and 2001. The significant increase in the
amortization of intangibles is the result of successfully establishing long term
contractual relationships with a number of surgeons during the final quarter of
fiscal 2000 and during fiscal 2001. Goodwill and intangibles are amortized on a
straight-line basis over the term of the applicable agreement to a maximum of
fifteen years. Current amortization periods range from five to fifteen years. In
establishing the long term contractual relationships with these key surgeons,
the surgeon in many cases has agreed to receive reduced fees for laser vision
correction procedures performed. The reduction in doctors' compensation offsets
in part the increased amortization of the intangible practice management
agreements.
Restructuring and other charges (see "Note 18 - Restructuring and Other
Charges") in fiscal 2001, reflect decisions that were made to:
a) exit from the Company's e-commerce enterprise eyeVantage.com, Inc.
("eyeVantage"). The decision to close activities at eyeVantage was the
result of a number of factors including:
(i) increased difficulty by .com enterprises to obtain funding due
to concerns within the investment community regarding
perceived value;
(ii) eyeVantage was not able to obtain required financing to
continue operations;
(iii) eyeVantage was not able to meet expectations on the
development of its products and services;
(iv) eyeVantage had not established a revenue base sufficient to
meet operating requirements or to attract outside investment;
and
(v) the operating costs on a monthly basis were in excess of $1.0
million and the Company did not feel there was sufficient
future value to continue to fund operations.
50
The decision to close activities resulted in a restructuring charge
of $11.7 million which reflects the estimated impact of the write-down of
goodwill of $8.7 million, loss write down of fixed assets of $2.1 million,
employee termination costs of $1.7 million representing the termination
costs of 29 employees, accounts receivable losses of $0.4 million and $1.1
million of costs incurred in the closing process which includes legal,
administrative and lease commitment costs. These losses were offset by a
gain of $2.3 million resulting from the reduction in the purchase
obligation associated with the Optical Options, Inc. acquisition (see
"Note 17 - Acquisitions - 2001 Transactions - iii").
b) reflect potential losses from a equity investment in secondary care
activities of $1.0 million. Due to a deteriorating relationship with the
operations management team and the Company's strategic decision to
withdraw from the management of secondary care practices where possible,
the Company transferred its investment to an equity investment in return
for a future earnings percentage. The equity investment has not reflected
a liability to the Company for this investment, and the Company has not
received any funds from the equity investment's earnings from the
transferred investment. As a result the Company deemed it prudent to
provide against the potential loss resulting from the inability to recover
value of the investment transferred to the equity investment.
c) close three eye care centers for which it recorded costs of $1.4
million, sell its ownership in another eye care center creating a loss of
$0.3 million and incurred a cost of $0.1 million to terminate plans to
open another eye care center. During fiscal 2001, the Company had
undertaken to restructure its operations to eliminate those centers which
were identified as not capable of being profitable. These centers had been
impacted by a number of challenges such as:
(i) proximity to existing centers managed by the Company;
(ii) local marketplace heavily impacted by discount laser vision
correction providers which impaired the ability to compete as
a premium laser vision correction provider;
(iii) expectations of optometric network to generate sufficient
interest in laser vision correction were not met; and
(iv) the occupancy costs of a center (acquired as part of a
multi-center acquisition) impacting the ability to lower costs
in line with revenues.
d) undertake an extensive review of its internal structures, its
marketplace, its resources and its strategies for the future. The review
resulted in the restructuring of the Company's goals and structures to
meet its future needs. The Company utilized the services of a national
consulting firm to facilitate this internal restructuring process, whose
participation was completed in the third quarter of fiscal 2001 with an
associated cost of $1.6 million.
e) The Company has fully provided for its $0.9 million portfolio
investment in Vision America. This investment was deemed to be permanently
impaired during fiscal
51
2001. Subsequent to this decision Vision America filed for bankruptcy and
is currently in the process of liquidating its assets. The Company will
reflect any amounts recovered from this investment if and when the amount
and timing of any amounts to be recovered becomes determinable.
f) In the fourth quarter, an award from an arbitration hearing involving
TLC Network Services Inc. was issued against TLC. The cumulative liability
arising from the award was $2.1 million which has been fully provided for
in the fourth quarter of fiscal 2001. Payment of this liability has been
deferred until exploration of all legal alternatives has been completed.
The following analysis identifies the allocation of costs for all the
component transactions reported as Restructuring and Other Charges and
identifies the operating impact in fiscal 2001 of those entities which have been
restructured:
52
Summary of Restructuring and Other Charges
($ 000's) Restructuring charges
-------------------------------------------------------
Terminate
eyeVantage Closure of Sale of development of
.com,Inc. laser centers laser center laser center
--------- ------------- ------------ ------------
Severances 1,712 70
Lease commitments 808 280 122
Legal and Administrative costs 296
Professional services
Patient commitments 50
Asset write-downs
Current assets 425 86
Fixed Assets 2,091 865
Intangibles 8,713 34
Investments and other assets 100
Recovery of purchase obligations (2,380)
Write off of minority interest 130
-------------------------------------------------------
Total restructuring and other charges 11,665 1,385 290 122
=======================================================
Impact on Fiscal 2001 earnings
Revenue 21 1,941 1,023 --
Doctor Compensation -- 372 158
-------------------------------------------------------
Net revenues after doctor compensation 21 1,569 865 --
Expenses:
Operating expenses 3,011 1,935 1,191
Interest and other (1) 1,739 226 22
Depreciation of assets 186 395 180
Amortization of intangibles 724 3 --
-------------------------------------------------------
5,660 2,559 1,393 --
-------------------------------------------------------
Loss from operations excluding
restructuring and other charges (5,639) (990) (528) --
=======================================================
Number of months of operations during
fiscal 2001 (2) 5 7 11 n/a
-------------------------------------------------------
Summary of Restructuring and Other Charges
($ 000's) Other charges
---------------------------------------------------- ------
Impairment Legal Potential
in Vision arbitration losses re
Consulting America settlement equity
services investment accrual investment Total
-------- ---------- ------- ---------- -----
Severances 1,782
Lease commitments 1,210
Legal and Administrative costs 2,100 2,396
Professional services 1,600 1,600
Patient commitments
Asset write-downs --
Current assets 511
Fixed Assets 2,956
Intangibles 8,747
Investments and other assets 936 977 3,073
Recovery of purchase obligations (2,380)
Write off of minority interest 130
--
---------------------------------------------------- ------
Total restructuring and other charges 1,600 936 2,100 977 19,075
==================================================== ======
(1) Interest expense at eyeVantage was from funding from affiliated companies
which is eliminated in consolidated reporting.
(2) Reflects weighted average re revenue of three centers being closed
53
The $19.1 million for losses from restructuring and other charges
consisted of $4.7 million of cash payments for severance, lease costs,
consulting services and closure costs and $14.4 million of non-cash charges.
Income tax expense decreased to $2.2 million in fiscal 2001 from $3.5
million in fiscal 2000. This decrease reflects the Company's losses incurred in
fiscal 2001 while including the impact of the tax liabilities associated with
the Company's partners in profitable subsidiaries and the requirement to reflect
minimum tax liabilities relevant in Canada, United States and certain other
jurisdictions.
The loss for fiscal 2001 was $37.8 million or $1.00 per share, compared to
a loss of $5.9 million or $0.16 cents per share for fiscal 2000. This increased
loss reflects the impact of extensive losses from the activities in the eye care
e-commerce subsidiary, restructuring and other charges, reduced revenues,
increased amortization in intangibles and the continuing investment in staff,
information systems and marketing. The Company has undertaken initiatives
intended to address patient, optometric and ophthalmic industry trends and
expectations to improve laser vision correction procedure and revenue volumes.
Cost initiatives are targeting effective use of funds and a growth initiative is
focusing on the future development opportunities for the Company in the laser
vision correction industry.
Year ended May 31, 2000 compared to Year ended May 31, 1999
Net revenues for fiscal 2000 were $201.2 million, which was a 37% increase
over the prior year's $146.9 million. More than 94% of total net revenues were
derived from refractive surgery as compared to 90% in fiscal 1999.
Net revenues from eye care centers for fiscal 2000 were $190.24 million,
which was 44% higher than the prior year's $132.4 million. More than 134,200
procedures were performed in fiscal 2000 compared to 90,600 procedures in fiscal
1999. The increased revenues reflected growth in the number of procedures at
existing sites due to the increased acceptance of the procedure in the
marketplace, as well as the development of new centers and the acquisition of
centers. Despite the pricing pressures in the industry and the development of
the Company's Corporate Advantage Program, the Company's net revenue after
doctor compensation, per procedure, for fiscal 2000 declined less than 3% in
comparison to fiscal 1999.
Operating expenses and doctor compensation from refractive activities
increased to $171.0 million in the fiscal year 2000 from $102.7 million in
fiscal 1999. This increase is a result of: (i) increased variable expenses
associated with the increase in the number of laser vision correction procedures
performed at existing eye care centers, (ii) increased fixed and variable costs
from the addition of new eye care centers, (iii) higher marketing costs, (iv)
costs associated with the Corporate Advantage Program and third party payor
programs, and (v) increased corporate costs to support the higher level of
business activity.
54
Operating expenses and doctor compensation as a percentage of net revenues were
90% of net revenues in fiscal 2000 as compared to 78% of net revenues in fiscal
1999. This increase reflects the impact of marketing programs aimed at raising
consumer awareness of brand reputation and brand recognition of the Company
through the implementation of marketing programs aimed at enhancing brand
recognition as well as through the development of the Corporate Advantage
Program, which have not been fully offset by a higher average number of
procedures being performed at TLC centers. In addition, increased infrastructure
costs (i.e. people, information systems and marketing) were incurred to support
the continued growth of the Company.
Net revenues from non-refractive activities were $11.0 million in fiscal
2000, a decrease in comparison to $14.5 million in fiscal 1999. The decrease in
revenues reflect the divestitures of two of the Company's secondary care
businesses and its managed care business.
Net loss from non-refractive activities excluding restructuring and other
charges was $4.9 million in fiscal 2000 and increase of over 22% in comparison
to a net loss of $4.0 million in fiscal 1999. In fiscal 2000, the Company
incurred losses of $3.8 million from its e-commerce subsidiary eyeVantage.com,
Inc. In fiscal 1999, excluding restructuring and other charges, the Company
incurred losses of $3.6 million from its managed care subsidiary.
Interest (revenue)/expense and other expenses reflected interest revenue
from a strong cash position resulting from positive cashflow from operations and
the result of a public offering in the fourth quarter of fiscal 1999. Improved
financial terms resulted in decreased interest expense on long-term debt and
capital leases on equipment decreased from fiscal 2000 compared to fiscal 1999.
The increase in depreciation and amortization expense was largely a result
of new centers and the additional depreciation and amortization associated with
the Company's acquisitions during fiscal 1999 and 2000. Goodwill and intangibles
are amortized on a straight-line basis over the term of the agreement to a
maximum of fifteen years.
Start up and development costs in the nine months of fiscal 1999 were
incurred by Partner Provider Health ("PPH") for the development of a managed
care business specializing in eye care. The Company sold PPH in May of 1999. The
Company did not incur these expenses in fiscal 2000 and does not expect to incur
these costs in the future.
Income tax expense increased to $3.5 million in fiscal 2000 from $2.0
million in fiscal 1999. This increase was a result of the Company having
utilized most of its tax losses from prior periods and the impact of the tax
liabilities associated with the Company's partners in profitable subsidiaries.
The loss for fiscal 2000 was $5.9 million or $0.16 per share, compared to
a loss of $4.6 million or $0.13 cents per share for fiscal 1999. This loss
reflected the Company's continued investment in staff, information systems and
marketing, which was not fully offset by increased procedure volumes. The
improved performance in secondary care operations and the disposal of the
managed health care business were offset by losses in the eye care e-commerce
subsidiary.
55
Liquidity and Capital Resources
During fiscal 2001 the Company continued to execute its expansion plan by
acquiring the business assets located at the practices of several doctors in
order to solidify its presence in several key markets. These acquisitions and
the development of new centers were the largest uses of cash during the year.
Cash, cash equivalents and short-term investments were $55.7 million at May 31,
2001 as compared to $80.3 million at May 31, 2000. Net current assets at May 31,
2001 reflected a decrease to $36.8 million from $59.5 million at May 31, 2000.
This decrease reflects primarily the reduction in cash and cash equivalents
during fiscal 2001.
The Company's principal cash requirements included normal operating
expenses, debt repayment, capital expenditures and funding requirements of
additional expansion. Normal operating expenses include doctor compensation,
procedure royalty fees, procedure medical supply expenses, travel and
entertainment, professional fees, insurance, rent, equipment maintenance, wages,
utilities and marketing.
During the year the Company invested $10.7 in capital assets. Included in
the investment was the completion of a new corporate headquarters which the
Company intends to sell as part of a sale/leaseback transaction which is
expected to generate $5.0 million for the Company. The Company has forecasted
its capital expenditure requirements for fiscal 2001 will not exceed $5.0
million.
In August 2000, the Company purchased 100% of the membership interests in
Eye Care Management Associates, LLC, a laser vision correction business, in
exchange for cash of $4,000,000, shares of the Company valued at $1,860,000 and
amounts contingent upon future events.
During fiscal 2001, the Company paid $3,620,000 in cash to satisfy
outstanding purchase commitments of its e-commerce subsidiary eyeVantage.com
arising from the acquisition by eyeVantage.com of Optical Options, Inc. The
Company has ceased the operations of eyeVantage.com but continues to pursue
opportunities to sell the assets of the Optical Options, Inc. investment.
In March 2001, the Company acquired certain assets and liabilities of a
Maryland Professional Corporation for $10.0 million payable in four equal
instalments of $2.5 million on the first four anniversary dates of the
transaction. The acquisition of these assets strengthens the Company's
relationship with successful laser vision surgeons in an important market.
During the year, the Company incurred cash costs of $4.7 million for
restructuring and other charges primarily for severance, lease costs, consulting
services and closure costs.
56
The Company has access to vendor financing from a laser vendor at
favourable rates. It has completed an agreement with a competing laser vendor
which provides for payment on a per procedure fee for the laser, associated
medical equipment and supplies, royalty fees and maintenance. The Company
expects to continue to have access to these financing options for at least the
next 18 months.
The Company reflected a liability of $2.1 million resulting from an
arbitration award against the Company in the fourth quarter of fiscal 2001. The
Company has deferred payment of this liability until exploration of all legal
alternatives have been completed. Payment of this liability if necessary is not
anticipated until the latter half of fiscal 2002.
Cash Provided by Operating Activities
Net cash provided by operating activities decreased by $8.0 million to
$15.0 million in fiscal 2001 from $23.0 million in fiscal 2000. Net cash
provided by operating activities in fiscal 2001 primarily represents cash
earnings (defined as net loss adding back amortization and depreciation, gain or
loss on the sale of fixed assets, non-cash restructuring costs, income tax
provision and minority interest included as part of net income) of $8.8 million
(2000 - $23.8 million), a reduction in accounts receivable of $5.2 million (2000
- - $0), reduction in accounts payable of $4.7 million (2000 - increase of $4.2
million ), net refund of prior period tax instalments of $3.8 million (2000 -
payments of $6.7 million) and a reduction of prepaid expenses and other assets
net of liabilities of $1.9 million (2000 - $1.7 million).
Cash Used in Financing Activities
Net cash used in financing activities increased by $1.0 million in fiscal
2001 to $15.0 million from $14.0 million in fiscal 2000. Net cash used in
financing activities in fiscal 2001 primarily represents payments of debt
financing and obligations under capital leases of $7.1 million (2000 - $7.7
million) net of proceeds of debt financing of $0.2 million (2000 - $0.8
million), payments of accrued purchase obligations of $3.6 million (2000 - $0),
distributions to non-controlling interests of $4.9 million (2000 - $1.6
million), payments related to the purchase and cancellation of capital stock of
$0.5 million (2000 - $10.4 million) offset by proceeds from the issuance of
common stock of $0.7 million (2000 - $2.4 million) and contributions by
non-controlling interests $0 (2000 - $2.4 million).
Cash Used in Investing Activities
Net cash used in investing activities decreased by $25.5 million in fiscal
2001 to $30.5 million from $56.0 million in fiscal 2000. Net cash used in
investing activities in fiscal 2001 primarily represents the purchase of fixed
assets and the cash component of assets under capital lease of $10.7 million
(2000 - $26.2 million), cash costs of acquisitions and investments of $17.3
million (2000 - $56.5 million), the purchase of short term investments of $6.1
million (2000 - sale of $26.2 million) offset by proceeds from the sale of fixed
assets, assets under capital lease and investments of $3.6 million (2000 - $0.4
million).
57
The Company estimates that existing cash balances, together with funds
expected to be generated from operations and available credit facilities, will
be sufficient to fund the Company's anticipated level of operations, acquisition
and expansion plans for the foreseeable future.
Other Business Segments
TLC made the decision during fiscal 2001 to no longer support the
activities of its e-commerce subsidiary eyeVantage.com and sustained significant
write-offs and cash costs as a result. The Company's other investments in
non-core activities are currently largely self-sustaining with minimal
requirement for funding support. This segment includes activities in secondary
care practice management, network management and marketing, asset management,
healthcare facility management and hair removal facilities. The Company
continues its efforts to maximize the value of its investments in non-core
businesses.
New Accounting Pronouncements
Under SEC Staff Accounting Bulletin 74, the Company is required to
disclose certain information related to new accounting standards, which have not
yet been adopted due to delayed effective dates.
The Financial Accounting Standards Board ("FASB") issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" and SFAS No. 137,
"Deferral of Effective Date for SFAS No. 133" which are effective for fiscal
years beginning after June 15, 2000. The Company will adopt this standard in
fiscal 2002 which begins on June 1, 2002 and management has determined that the
impact of adopting SFAS No. 133 will not be material on the consolidated
financial position or results of operations of the Company.
The FASB has approved SFAS 141 and 142 on business combinations and
accounting for goodwill and intangibles prospectively and will eliminate the
pooling of interests method of accounting and amortization of goodwill. Under
the new standard, goodwill will be tested annually for impairment. The Company
has $32,752,000 of goodwill included in its balance sheet at May 31, 2001.
Goodwill amortization for the years ended May 31, 2001, 2000 and 1999 was
$3,784,000, $3,053,000 and $3,060,000 respectively and is expected be
approximately $2,832,000 for the year ended May 31, 2002 before the provisions
of the new standard. The new standards are effective for business combinations
completed after June 30, 2001 and for goodwill and intangibles existing at June
30, 2001 for fiscal years beginning after December 15, 2001.
ITEM 7A. MARKET RISK
In the ordinary course of business, the Company is exposed to interest rate
risks and foreign currency risks, which the Company does not currently consider
to be material. These exposures primarily relate to having short-term
investments earning short-term interest rates and to having fixed rate debt. The
Company views its investment in foreign subsidiaries as a long-term commitment,
and does not hedge any translation exposure.
58
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
RESPONSIBILITY FOR FINANCIAL STATEMENTS
The accompanying consolidated financial statements of TLC Laser Eye
Centers Inc. have been prepared by management in conformity with accounting
principles generally accepted in the United States consistently applied. The
most significant of these accounting policies has been set out in Note 1 to the
financial statements. These statements are presented on the accrual basis of
accounting. Accordingly, a precise determination of many assets and liabilities
is dependent upon future events. Therefore, estimates and approximations have
been made using careful judgement. Recognizing that the Company is responsible
for both the integrity and objectivity of the financial statements, management
is satisfied that these financial statements have been prepared within
reasonable limits of materiality.
The Board of Directors has appointed an Audit Committee consisting of four
outside directors. The committee meets during the year to review with management
and the auditors any significant accounting, internal control and auditing
matters and to review and finalize the annual financial statements of the
Company along with the independent auditors' report prior to the submission of
the financial statements to the Board of Directors for final approval.
The financial information throughout the text of this annual report is
consistent with the information presented in the financial statements.
The Company's accounting procedures and related systems of internal
control are designed to provide reasonable assurance that its assets are
safeguarded and its financial records are reliable.
External Auditors
The auditors' opinion is based upon an independent and objective
examination of the Company's financial results for the year, conducted in
accordance with generally accepted auditing standards. This examination
encompasses an understanding and evaluation by the auditors of the Company's
accounting systems as well as the obtaining of a sound understanding of the
Company's business. The external auditors conduct appropriate tests of the
Company's transactions and obtain sufficient audit evidence in order to provide
them with reasonable assurance that the financial statements are presented
fairly in conformity with accounting principles generally accepted in United
States, thus enabling them to issue their report to the shareholders.
Ernst & Young LLP, Chartered Accountants, the Company's external auditors
for fiscal 2001, have examined the consolidated balance sheets of the Company as
of May 31, 2001 and 2000 and the related consolidated statements of loss,
stockholders' equity and cash flows for each of the years in the three year
period ended May 31, 2001 and have reported thereon in their July 6, 2001
report.
59
INDEPENDENT AUDITORS' REPORT
To the Directors of TLC Laser Eye Centers Inc.
We have audited the consolidated balance sheets of TLC Laser Eye Centers Inc. as
at May 31, 2001 and 2000 and the consolidated statements of loss, stockholders'
equity and cash flows for each of the years in the three-year period ended May
31, 2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with Canadian and United States generally
accepted auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at May 31, 2001 and
2000 and the results of its operations and its cash flows for each of the years
in the three-year period ended May 31, 2001 in conformity with United States
generally accepted accounting principles.
We have also audited Schedule II - Valuation and Qualifying Accounts and
Reserves included in the Company's Form 10-K for the years ended May 31, 2001,
2000 and 1999 which is presented for purposes of additional analysis and is not
a required part of the basic financial statements. In our opinion, this schedule
presents fairly the information contained therein in all respects to the
financial statements.
Toronto, Canada, ERNST & YOUNG LLP
---------------------
Chartered Accountants
July 6, 2001, (except as to Note 20, which
is as at August 27, 2001)
60
TLC LASER EYE CENTERS INC.
CONSOLIDATED STATEMENTS OF LOSS
(U.S. dollars, in thousands except per share amounts)
Years Ended May 31,
------------------------------------------------
2001 2000 1999
------------ ------------ ------------
Net revenues
Refractive $ 161,219 $ 190,233 $ 132,428
Other 12,787 10,990 14,482
------------ ------------ ------------
Net revenues (Note 15) 174,006 201,223 146,910
------------ ------------ ------------
Expenses
Doctor compensation
Refractive 15,538 17,335 12,824
Operating 149,492 166,150 102,465
Interest and other (Note 12) (2,543) (4,492) 2,245
Depreciation of capital assets and assets under capital lease (Note 12) 15,050 14,292 11,052
Amortization of intangibles (Note 12) 12,543 7,396 3,882
Start-up and development expenses -- -- 3,606
Restructuring and other charges (Note 18) 19,075 -- 12,924
------------ ------------ ------------
209,155 200,681 148,998
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES AND NON-CONTROLLING INTEREST (35,149) 542 (2,088)
Income taxes (Note 13) (2,239) (3,454) (2,020)
Non-controlling interest (385) (3,006) (448)
------------ ------------ ------------
NET LOSS FOR THE YEAR $ (37,773) $ (5,918) $ (4,556)
============ ============ ============
LOSS PER SHARE - Basic and Diluted $ (1.00) $ (0.16) $ (0.13)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - 37,778,955 37,178,253 34,090,316
============ ============ ============
61
TLC LASER EYE CENTERS INC.
CONSOLIDATED BALANCE SHEETS
(U.S. dollars, in thousands)
As at May 31,
------------------------
2001 2000
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents (Notes 2, 3 and 16) $ 47,987 $ 78,531
Short-term investments (Note 3) 6,063 --
Accounts receivable (Note 16) 9,950 15,527
Income taxes recoverable -- 4,734
Prepaid expenses and sundry assets 4,501 5,922
--------- ---------
Total current assets 68,501 104,714
Restricted cash (Notes 2 and 3) 1,619 1,722
Investments and other assets (Note 4) 23,171 29,478
Intangibles (Note 5) 92,802 89,297
Fixed assets (Note 6) 44,963 53,431
Assets under capital lease (Note 7) 7,382 10,722
--------- ---------
Total assets $ 238,438 $ 289,364
========= =========
LIABILITIES
Current liabilities:
Accounts payable and accrued liabilities $ 15,028 $ 21,467
Accrued purchase obligations (Note 17) 3,000 13,200
Accrued restructuring costs (Note 18) 718 --
Accrued wage costs 3,652 2,974
Accrued legal settlements (Note 18) 2,100 --
Income taxes payable 397 --
Current portion of long-term debt (Notes 8 and 17) 3,826 2,332
Current portion of obligations under capital leases (Note 9) 2,943 5,260
--------- ---------
Total current liabilities 31,664 45,233
Long-term debt (Notes 8 and 17) 7,032 2,922
Obligations under capital leases (Note 9) 1,281 3,806
Deferred rent (Note 10) 617 915
--------- ---------
Total liabilities 40,594 52,876
--------- ---------
Non-controlling interest 10,738 12,842
--------- ---------
Commitments and contingencies (Notes 14 and 17)
STOCKHOLDERS' EQUITY
Capital stock: (Note 11)
Common stock, no par value; unlimited number authorized; 38,031 276,277 269,953
issued and outstanding (2000 - 37,150)
Warrants 532 532
Deficit (80,161) (42,388)
Accumulated other comprehensive loss (9,542) (4,451)
--------- ---------
Total stockholders' equity 187,106 223,646
--------- ---------
Total liabilities and stockholders' equity $ 238,438 $ 289,364
========= =========
Approved on behalf of the Board:
(Signed) ELIAS VAMVAKAS (Signed) WARREN S. RUSTAND
Elias Vamvakas, Director Warren S. Rustand, Director
62
TLC LASER EYE CENTERS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars, in thousands)
Years Ended May 31,
--------------------------------------
2001 2000 1999
-------- --------- ---------
Operating activities
Net loss for the year $(37,773) $ (5,918) $ (4,556)
Items not affecting cash
Depreciation and amortization 27,593 21,688 14,934
Write-off of goodwill -- 489 --
Loss on sale of fixed assets and assets under capital lease 1,946 1,099 229
Deferred income taxes -- 1,320 1,204
Non-cash restructuring and other costs 14,395 -- 11,167
Non-controlling interest 385 3,006 448
Other 292 780 252
Changes in non-cash operating items
Accounts receivable 5,232 (15) (9,247)
Prepaid expenses and sundry assets 1,891 1,047 (2,208)
Accounts payable and accrued liabilities (4,711) 4,153 10,350
Income taxes payable, net 6,051 (4,574) (162)
Deferred rent and compensation (298) (44) (275)
-------- --------- ---------
Cash provided by operating activities 15,003 23,031 22,136
-------- --------- ---------
Financing activities
Restricted cash 103 8 356
Proceeds from debt financing 226 826 25
Principal payments of debt financing (2,257) (2,635) (6,668)
Payments of accrued purchase obligations (3,620) -- --
Principal payments of obligations under capital leases (4,840) (5,063) (3,302)
Contributions from non-controlling interests -- 2,365 1,305
Distributions to non-controlling interests (4,865) (1,569) (1,233)
Payments related to the purchase and cancellation of capital stock (481) (10,365) (5,387)
Proceeds from issuance of capital stock 711 2,384 129,607
-------- --------- ---------
Cash provided by (used in) financing activities (15,023) (14,049) 114,703
-------- --------- ---------
Investing activities
Purchase of fixed assets and assets under capital lease (10,656) (26,153) (17,843)
Proceeds from sale of fixed assets and assets under capital lease 2,491 185 --
Proceeds from the sale of investments 1,117 227 --
Acquisitions and investments (17,345) (56,496) (22,316)
Short-term investments (6,063) 26,212 (26,212)
Other (68) (24) (68)
-------- --------- ---------
Cash used in investing activities (30,524) (56,049) (66,439)
-------- --------- ---------
Net increase (decrease) in cash and cash equivalents during the year (30,544) (47,067) 70,400
Cash and cash equivalents, beginning of year 78,531 125,598 55,198
-------- --------- ---------
Cash and cash equivalents, end of year $ 47,987 $ 78,531 $ 125,598
======== ========= =========
(Note 19 - discusses non-cash transactions, which are not included in the
consolidated statements of cash flows)
63
TLC LASER EYE CENTERS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(U.S. dollars, in thousands)
Common stock Warrants
------------ --------
Number Number
of Shares Amount of Warrants Amount
(000's) $ (000's) $
- --------------------------------------------------------------------------------------------------------------
Balance, May 31, 1998 33,668 143,554 -- --
Shares issued for acquisitions 50 837
Shares issued to acquire other assets 50 728
Shares purchased for cancellation (256) (1,095)
Exercise of stock options 773 3,073
Shares issued as remuneration 40 600
Shares issued as part of the employee share
purchase plan 47 750
Public offering, net of issue costs 2,990 121,007
Comprehensive income (loss)
Net loss
Other comprehensive income (loss)
Unrealized gains/losses on available for-
sale securities
Total comprehensive income (loss)
- --------------------------------------------------------------------------------------------------------------
Balance, May 31, 1999 37,362 269,454 -- --
Warrants issued 100 532
Shares issued for acquisition 302 728
Value determined for shares
issued contingent on meeting
earnings criteria -- 1,397
Shares purchased for cancellation (710) (5,162)
Exercise of stock options 87 1,314
Shares issued as remuneration 44 387
Shares issued as part of the employee share
purchase plan 65 1,696
Reversal of IPO costs, over accrual -- 139
Comprehensive income (loss)
Net loss
Other comprehensive income (loss)
Unrealized gains/losses on available for-
sale securities
Total comprehensive income (loss)
- --------------------------------------------------------------------------------------------------------------
Balance May 31, 2000 37,150 269,953 100 532
==============================================================================================================
Shares issued for acquisition 832 6,059
Shares purchased for cancellation (108) (481)
Exercise of stock options 40 125
Shares issued as remuneration 5 35
Shares issued as part of the employee share
purchase plan 112 586
Comprehensive income (loss)
Net loss
Other comprehensive income (loss)
Unrealized gains/losses on available for-
sale securities
Total comprehensive income (loss)
- --------------------------------------------------------------------------------------------------------------
Balance May 31, 2001 38,031 276,277 100 532
==============================================================================================================
Other
Accumulated
Comprehensive
Deficit Income (Loss) Total
$ $ $
- ------------------------------------------------------------------------------------------
Balance, May 31, 1998 (22,421) 407 121,540
Shares issued for acquisitions 837
Shares issued to acquire other assets 728
Shares purchased for cancellation (4,290) (5,385)
Exercise of stock options 3,073
Shares issued as remuneration 600
Shares issued as part of the employee share
purchase plan 750
Public offering, net of issue costs 121,007
Comprehensive income (loss)
Net loss (4,556)
Other comprehensive income (loss)
Unrealized gains/losses on available for-
sale securities 5,529
Total comprehensive income (loss) 973
- ------------------------------------------------------------------------------------------
Balance, May 31, 1999 (31,267) 5,936 244,123
Warrants issued 532
Shares issued for acquisition 728
Value determined for shares
issued contingent on meeting
earnings criteria 1,397
Shares purchased for cancellation (5,203) (10,365)
Exercise of stock options 1,314
Shares issued as remuneration 387
Shares issued as part of the employee share
purchase plan 1,696
Reversal of IPO costs, over accrual 139
Comprehensive income (loss)
Net loss (5,918)
Other comprehensive income (loss)
Unrealized gains/losses on available for-
sale securities (10,387)
Total comprehensive income (loss) (16,305)
- ------------------------------------------------------------------------------------------
Balance May 31, 2000 (42,388) (4,451) 223,646
==========================================================================================
Shares issued for acquisition 6,059
Shares purchased for cancellation (481)
Exercise of stock options 125
Shares issued as remuneration 35
Shares issued as part of the employee share
purchase plan 586
Comprehensive income (loss)
Net loss (37,773)
Other comprehensive income (loss)
Unrealized gains/losses on available for-
sale securities (5,091)
Total comprehensive income (loss) (42,864)
- ------------------------------------------------------------------------------------------
Balance May 31, 2001 (80,161) (9,542) 187,106
==========================================================================================
64
TLC LASER EYE CENTERS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in U.S. dollars, except where noted and all tabular amounts in
thousands)
Nature of Operations
TLC Laser Eye Centers Inc. and its subsidiaries (the "Company") develop and
manage laser vision correction centers in the United States and Canada. Each
center provides excimer laser and other clinical equipment and all related
management and support services to physicians and physician practices performing
excimer laser procedures in the Company's centers.
The Company currently owns and manages a secondary eye care business with
multiple centers in the state of Michigan. These centers provide all necessary
clinical equipment and infrastructure and provide all related management and
support services to physician practices treating a wide range of vision
disorders.
The Company faces a number of risks and uncertainties given the nature of the
industry in which it operates.
The Company's profitability is dependent upon broad acceptance in the United
States and Canada of laser vision correction as an alternative to existing
methods of treating refractive disorders. Broad market acceptance is dependent
on many factors including cost, the lack of long-term follow-up data and the
resulting concerns relating to safety and effectiveness, future regulatory
developments and uncertainty in the marketplace caused by the recent
bankruptcies occurring in the industry.
The industry in which the Company operates is subject to extensive federal,
state and local laws, rules and regulations. Many of these laws and regulations
are ambiguous in nature and have not been definitively interpreted by courts and
regulatory authorities. Moreover, they vary from jurisdiction to jurisdiction.
Accordingly, the Company may not always be able to predict clearly how such laws
and regulations will be interpreted or applied and some of the Company's
activities could be challenged. In addition, there can be no assurance that the
regulatory environment in which the Company operates will not change
significantly in the future.
Most states in the United States prohibit the Company from practicing medicine
or employing physicians to practice medicine on the Company's behalf. Because
the Company does not practice medicine, its activities are limited to owning and
managing eye care centers and secondary care centers and affiliating with health
care providers to render medical services at the Company's centers. As a result,
the Company is highly dependent on its affiliated doctors.
The provision of medical services entails an inherent risk of potential
malpractice and other similar claims. Although the Company does not engage in
the practice of medicine, there can be no assurance that claims relating to
services provided at the Company's centers will not be asserted against the
Company. The Company currently maintains malpractice insurance that it
65
believes to be adequate both as to risks and amounts. In addition, the doctors
providing medical services at the Company's centers are required to maintain
insurance.
The Company's revenues from managing secondary care centers are derived from
fees paid by or on behalf of patients to the practices affiliated with the
Company. The Company's profitability could be affected by government and private
third-party payors seeking to contain healthcare costs by reducing reimbursement
rates, lowering utilization rates and negotiating reduced payment schedules with
providers of vision care.
1. Summary of Significant Accounting Policies
Basis of Presentation
These consolidated financial statements include the accounts of the Company and
its majority owned subsidiaries, partnerships and other entities in which the
Company has more than a 50% ownership interest and exercises control. The
ownership interests of other parties in less than wholly-owned consolidated
subsidiaries, partnerships and other entities are presented as non-controlling
interests. All significant intercompany transactions and balances have been
eliminated on consolidation.
The Company does not have an ownership interest in, nor does it exercise control
over, the physician practices under its management. Accordingly, the Company
does not consolidate physician practices under its management.
Fixed Assets and Assets Under Capital Lease
Fixed assets and assets under capital lease are recorded at cost less
accumulated depreciation. Depreciation is provided at rates intended to write
off the assets over their productive lives as follows:
Buildings - straight-line over forty years
Computer equipment and software - straight-line over three years
Furniture, fixtures and equipment - 20% diminishing balance
Laser equipment - 20% diminishing balance
Leasehold improvements - straight-line over the initial term of the
lease
Medical equipment - 20% diminishing balance
Vehicles and other - 30% diminishing balance
Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the
identifiable net assets acquired, and is being amortized on a straight-line
basis over the term of the purchase agreement to a maximum of fifteen years.
The practice management agreements represent the cost of obtaining the exclusive
right to manage eye care centers and secondary care centers in affiliation with
the related physician group during the term of the agreements. Practice
management agreements are amortized using
66
the straight-line method over the term of the related employment agreement, to a
maximum of fifteen years. The current amortization periods range from five to
fifteen years.
Impairment of Long-lived Assets
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" establishes accounting standards for the
impairment of long-lived assets. For fixed assets and certain intangibles, the
Company assesses the recoverability by determining whether the carrying value of
such assets can be recovered through projected undiscounted cash flows. If the
sum of expected future cash flows, undiscounted and without interest charges, is
less than net book value, the excess of the net book value over the estimated
fair value is charged to operations in the period in which such impairment is
determined by management.
Start-up and Development Expenses
Start-up and development expenses represent costs incurred to research and
develop potential businesses in North America, including salaries and benefits,
professional fees, advertising, promotion and travel, and costs incurred by
businesses during the period prior to commencement of commercial operations.
Start-up and development expenses are expensed as incurred.
Revenues
Approximately 48% of the Company's net revenue represents management fee revenue
arising from practice management agreements with Physician Owned Companies
("PCs"). Under the terms of the practice management agreements, the Company
provides management, marketing and administrative services to refractive
practices in return for management fees. Management fee revenue is equal to the
net revenue of the PCs, less amounts retained by physician groups, and may
include costs for uncollectible amounts from patients, professional contractual
costs and miscellaneous administrative charges. Net revenues of the PCs
represents amounts charged to patients for laser vision correction procedures
(net of the impact of applicable patient discounts) less contractual
adjustments.
Contractual adjustments arise due to the terms of certain reimbursement and
managed care contracts. Such adjustments represent the difference between the
charges at established rates and estimated recoverable amounts and are
recognized in the period the services are rendered. Any differences between
estimated contractual adjustments and actual final settlements under
reimbursement contracts are recognized as contractual adjustments in the year
final settlements are determined.
Provisions for doubtful accounts reflect amounts for which there is a permanent
reduced likelihood of collection. These amounts are due from physicians and
patients who have a contractual obligation to pay the PC directly and appear
unable to do so in whole or in part. Management fee revenues from PCs on laser
refractive surgeries are recognized as services are performed.
67
Approximately 45% of the Company's net revenue reflects operating revenues
pertaining to Company owned laser centers. Net revenue represents amounts
charged to patients at standard rates for laser vision correction services (net
of the impact of applicable patient discounts) less contractual adjustments and
amounts collected on behalf of co-managing physicians.
Approximately 7% of the Company's net revenue is from the Company's Other
segment which includes management fee revenue from secondary care practices,
network marketing and management, asset management fees, fees for professional
healthcare facility management and revenue from hair removal procedures.
Revenues from all sources are recognized as the service or treatment is
provided.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes.
Deferred tax assets and liabilities are recorded based on the difference between
the income tax basis of assets and liabilities and their carrying amounts for
financial reporting purposes. Deferred tax assets are reduced by a valuation
allowance if, based on the weight of available evidence, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
See note 13 for discussion of income taxes.
Cash equivalents
Cash equivalents include highly liquid short-term investments with original
maturities of 90 days or less. Cash equivalents, are classified as
held-to-maturity securities and are carried at amortized cost.
Short-term investments
Short-term investments, which consist principally of corporate bonds, are
classified as held-to-maturity securities and are carried at amortized cost.
Accounting for Stock-based Compensation
The Company accounts for employee stock options using the intrinsic value method
in accordance with Accounting Principles Board Opinion No 25, "Accounting for
Stock Issued to Employees" and makes the pro forma disclosures required by SFAS
No. 123, "Accounting for Stock-Based Compensation".
Marketing Costs
The Company expenses marketing costs as incurred. Marketing expense for the year
ended May 31, 2001 was approximately $25,598,000 (2000 - $24,202,000). Marketing
expenses consist primarily of print, radio and television media costs plus the
associated production costs required to create the marketing product.
68
Foreign Exchange
The unit of measure of the parent holding company and the Canadian operations is
the U.S. dollar. The Company's Canadian operations are translated into U.S.
dollars using the temporal method. Accordingly, the assets and liabilities of
the Company's Canadian operations are translated into U.S. dollars at exchange
rates prevailing at the consolidated balance sheet date for monetary items and
at exchange rates prevailing at the transaction dates for non-monetary items.
Income and expenses are translated into U.S. dollars at average exchange rates
prevailing during the year with the exception of depreciation and amortization,
which are translated at historical exchange rates. Exchange gains and losses are
included in net loss for the year.
Contingent Consideration
Where the Company has entered into agreements with physicians which allow for
contingent consideration based on the physician being able to achieve certain
pre-defined targets, an analysis is made to determine whether the contingent
consideration will be reflected as an additional purchase price obligation or
deemed to be a compensation expense. The resulting accounting treatment if the
consideration is deemed to be an additional purchase price payment will be to
increase the value assigned to practice management agreements intangible assets
and amortize this additional amount over the applicable period(s) as determined
by the relevant agreement. Where the contingent consideration is deemed to be
compensation the expense is reflected as an operating expense applied over the
applicable periods as determined by the terms of the relevant agreement.
Use of Estimates
The preparation of financial statements in conformity with United States
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from these estimates. These
estimates are reviewed periodically and, as adjustments become necessary, they
are reported in income in the period in which they become known.
New Accounting Standards
The Financial Accounting Standards Board issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" and SFAS No. 137, "Deferral of
Effective Date for SFAS No. 133" which are effective for fiscal years beginning
after June 15, 2000. The Company will adopt this standard in fiscal 2002 which
begins on June 1, 2002 and management has determined that the impact of adopting
SFAS No. 133 will not be material on the consolidated financial position or
results of operations of the Company.
The Financial Accounting Standards Board issued Statement No. 141, "Business
Combinations", which requires that all business combinations initiated after
June 30, 2001 be accounted for using the purchase method of accounting. The
Financial Accounting Standards Board also issued
69
Statement No. 142, "Goodwill and Other Intangible Assets", which eliminates the
amortization of goodwill and indefinite life intangible assets and requires
these assets to be tested annually for impairment. For goodwill and other
intangible assets existing at June 30, 2001, the new Statement must be applied
for fiscal years beginning after December 15, 2001, with earlier adoption
permitted. For goodwill and other intangible assets resulting from business
combinations completed after June 30, 2001, the Statement must be adopted
immediately. The Company is currently determining the impact of the new
statements.
2. Cash and Cash Equivalents
2001 2000
------- -------
Cash and cash equivalents $47,987 $78,531
======= =======
The Company has a banking facility of approximately $650,000 (2000 - $845,000)
available for posting letters of guarantee, under terms whereby the Company must
maintain a similar minimum amount in its bank account. As of May 31, 2001,
$480,000 (2000 - $773,000) of this facility has been utilized. Excluded from
cash and cash equivalents are collateral deposits of $684,000 (2000 - $773,000)
of which $204,000 (2000 - $0) is in the process of being released. In addition,
the Company has posted cash collateral deposits in respect of certain lease
commitments, which amount to $935,400 as of May 31, 2001 (2000 - $949,000).
3. Marketable Securities
The Company's marketable securities by type of security, contractual maturity
and classification in the consolidated balance sheets are as follows:
2001 2000
- --------------------------------------------------------------------------------
Type of security
U.S. dollar corporate debt $17,220 $60,653
U.S. dollar fixed deposit 29,421 14,460
Cdn. dollar fixed deposit 689 773
- --------------------------------------------------------------------------------
$47,330 $75,886
================================================================================
- --------------------------------------------------------------------------------
Contractual maturity
Maturing in one year or less $45,711 $74,164
Maturing after one year through three years 1,619 1,722
- --------------------------------------------------------------------------------
$47,330 $75,886
================================================================================
Classification in the consolidated balance sheets
Cash equivalents $39,648 $74,164
Short-term investments 6,063 --
Restricted cash 1,619 1,722
- --------------------------------------------------------------------------------
$47,330 $75,886
================================================================================
70
4. Investments and Other Assets
2001 2000
------ -------
Portfolio investments (1) 17,649 $23,444
Long-term receivables (2) 4,950 4,904
Other 572 1,130
------ -------
23,171 $29,478
====== =======
(1) On June 8, 1998 the Company made a portfolio investment of $8,000,000 in
cash through the purchase of 2,000,000 preference shares in LaserSight
Incorporated. These preference shares were convertible to LaserSight
Incorporated common shares at $4.00 per share in June 2001. On March 24,
1999, the Company made an additional $2,000,000 investment to purchase
500,000 common shares in LaserSight Incorporated. On January 28, 2000, the
Company made an additional $10,000,000 investment to purchase 1,015,873
common shares of LaserSight Incorporated. LaserSight Incorporated is a
publicly traded United States manufacturer of excimer lasers,
microkeratomes and microkeratome blades with limited approval for its
excimer laser. The Company's fully diluted ownership interest in
LaserSight Incorporated is 15.0%.
In June 2001, the Company's investment of 2,000,000 preferred shares in
Lasersight Incorporated which have a carrying value of $4,860,000 were
converted to common shares.
No provision for loss on the Lasersight Incorporated common and preferred
shares has been reflected, as management does believe a permanent
impairment in value has ocurred.
During fiscal 2000, the Company made a number of portfolio investments in
the amount of $7,188,000 in various companies related to the laser vision
correction industry to support the development of laser vision correction
technology.
(2) Long-term receivables include an amount from a related secondary care
practice which in fiscal 2001, the Company provided funding of $500,000 to
assist in the consolidation of debt. In fiscal 1999, a long-term
receivable arose which was non-interest bearing, unsecured and is to be
repaid based on an escalating percentage of the practice's revenue
collected over the next five years. While the Company is continuing in its
efforts to collect this outstanding receivable, it has taken a provision
of $977,000 against this entire receivable in fiscal 2001.
During fiscal 2001, the Company invested approximately $800,000 in new
investments in industry related activities, reflected equity losses of
$450,000 and collected $83,000 against outstanding amounts.
71
During fiscal 2000, the Company advanced $1,435,000 to a related secondary
care practice in exchange for a five year promissory note bearing a fixed
interest rate of 8%.
During fiscal 2000, the Company advanced $1,000,000 to an unrelated
refractive care service provider in exchange for a convertible
subordinated term note bearing interest at current LIBOR rates to mature
by July 1, 2002.
During fiscal 2000, the Company provided financing of $900,000 at 10% to
an unrelated refractive care service provider for lasers, payable over a
five year period.
5. Intangibles
2001 2000
------- -------
Goodwill (net of amortization of $10,709,000 (2000 - $32,752 $45,311
$8,121,000))
Practice management agreements (net of amortization of
$14,528,000 (2000 - $5,969,000)) 60,050 43,986
------- -------
$92,802 $89,297
======= =======
6. Fixed Assets
2001 2000
---------------------- ----------------------
Accumulated Accumulated
Cost Depreciation Cost Depreciation
------- ------------ ------- ------------
Land and buildings $10,647 $ 750 $ 4,042 $ 619
Computer equipment and 13,492 10,929 15,838 8,034
software
Furniture, fixtures and 7,781 3,933 8,230 3,310
equipment
Laser equipment 13,380 6,001 17,073 5,968
Leasehold improvements 25,637 12,942 26,078 9,510
Medical equipment 14,924 6,807 14,315 5,261
Vehicles and other 828 364 890 333
------- ------- ------- -------
86,689 $41,726 86,466 $33,035
Less accumulated 41,726 33,035
depreciation
------- -------
Net book value $44,963 $53,431
======= =======
72
7. Assets under Capital Lease
2001 2000
----------------------- ----------------------
Accumulated Accumulated
Cost Depreciation Cost Depreciation
------- ------------ ------- ------------
Computer equipment and $ 162 $ 162 $ 164 $ 164
software
Furniture, fixtures and 598 340 629 297
equipment
Laser equipment 12,930 6,899 15,507 6,455
Medical equipment 2,639 1,546 2,616 1,278
------- ------- ------- ------
16,329 $ 8,947 18,916 $8,194
Less accumulated 8,947 8,194
depreciation
------- -------
Net book value $ 7,382 $10,722
======= =======
8. Long-Term Debt
2001 2000
------- ------
Term loans
Interest at 8%, due September 2001, payable to affiliated
physicians $ 32 $ 155
Interest ranging from 5.75% to 12% (1999 - 5.75% to
12%), due November 2001 to March 2007, collateralized
by equipment 10,826 5,099
------- ------
10,858 5,254
Less current portion 3,826 2,332
------- ------
7,032 2,922
======= ======
Aggregate minimum repayments of principal for each of the next five years and
thereafter are as follows:
2002 $ 3,826
2003 2,811
2004 2,092
2005 1,861
2006 69
Thereafter 199
73
9. Obligations under Capital Leases
The leases expire between 2001 and 2004 and include imputed interest at rates
ranging from 6% to 14%. The majority of capital leases are denominated in U.S.
dollars and represent leases for lasers and medical equipment. The capitalized
lease obligations represent the present value of future minimum annual lease
payments as follows:
2001 2000
------- -------
2001 $ -- $ 5,472
2002 3,454 3,589
2003 1,203 1,316
2004 252 326
------- -------
4,909 10,703
Less interest portion 685 1,637
------- -------
4,224 9,066
Less current portion 2,943 5,260
------- -------
$ 1,281 $ 3,806
======= =======
10. Deferred Compensation and Rent
Deferred compensation represents a plan to compensate certain key managerial
executives and was included as part of the acquisition of 20/20 Laser Centers,
Inc. ("20/20"). The plan vested 100% on the earlier of February 15, 1999 or
termination of employment, as defined. On May 31, 1998, $320,000 was accrued on
potential deferred compensation of $320,000. During fiscal 1999, outstanding
options were exercised resulting in the elimination of the outstanding
liability.
Deferred rent represents the benefit of operating lease inducements which are
being amortized on a straight-line basis over the related term of the lease.
11. Capital Stock
As of May 31, 2001, the Company's capital stock position included Common Stock
and Warrants as reflected in the Consolidated Statements of Stockholders' Equity
and also offered options for corporate employees and certain other individuals.
a) Common Stock
i) In connection with the 1997 acquisition of The Vision Source, Inc., during
2000, the Company released 210,902 shares from escrow which had a value of
$1,397,000 based on market prices at the time of settlement. An additional
tranche of 536,764 shares valued at $4,199,000 were issued in 2001 (see
note 17).
74
ii) On November 4, 1999, the Company announced that it intended to purchase up
to 1,870,000 of its common shares, representing approximately 5% of
37,453,188 common shares outstanding at that time. The Company commenced
purchasing shares on November 8, 1999 and terminated purchasing by
September 7, 2000, during which period 803,000 common shares were acquired
at an average market price of U.S. $13.52 per share and were subsequently
cancelled.
iii) During fiscal 1999, the Company introduced an employee share purchase plan
to facilitate the ownership of the Company's common shares by its
employees. Employee purchases are supplemented annually by an additional
25% contribution by the Company, which are charged to earnings.
iv) On September 24, 1998, the Company exercised a contractual option to
purchase 116,771 common shares from the Goldstein Family Trust for
$1,264,411 in cash. The common shares were then cancelled and capital
stock was reduced using the average value of common shares as of November
30, 1998 of Cdn.$6.20 per share. The remaining allocation of the cash paid
for the shares was reflected as a reduction in deficit. In addition,
shares were retired in connection with a divestiture (Note 18).
v) On August 21, 2000, the Company purchased the membership interests in Eye
Care Management Associates, LLC in exchange for $4,000,000 in cash,
295,165 common shares of the Company with a value of $1,860,000 and
amounts contingent upon future events (Note 17).
b) Warrants
Effective January 1, 2000, the Company granted warrants to purchase
100,000 of the Company's common shares at an exercise price of $13.063 per
share, representing the average market price for the common shares during
the 20 trading days prior to the effective date of the grant of the
warrants. These warrants were granted to an employee benefits company in
consideration for establishing a business relationship. The warrants are
non-transferable, have a five-year term and vest over a period of three
years. This transaction was exempt from registration under the Securities
Act pursuant to Section 4(2) as a transaction not involving a public
offering. The fair value of the options granted of $532,000 which is
charged to earnings over the vesting period, was estimated at the date of
grant using the Black-Scholes option pricing model with the following
assumptions: risk free interest of 6.35%; dividend yield of 0%; volatility
factor of the expected market price of the Company's common shares of 0.35
and an expected life of five years.
c) Options
At May 31, 2001, the Company has reserved 5,116,000 common shares for
issuance under its stock option plan for corporate employees and certain
other individuals. Options granted have terms ranging from five to eight
years. Vesting provisions on options granted to date include options that
vest immediately, options that vest in equal amounts annually over the
75
first four years of the option term and options that vest entirely on the
first anniversary from the grant date. Those exercise prices, which are
denominated in Canadian dollars, for options outstanding as of May 31,
2001 range as follows:
- --------------------------------------------------------------------------------------------------------
Outstanding Exercisable
- --------------------------------------------------------------------------------------------------------
Price Range Number of Weighted- Weighted- Number of Weighted-
(Cdn $) Options Average Average Options Average
Contractual Life Exercise Price Exercise Price
(Cdn $) (Cdn $)
- --------------------------------------------------------------------------------------------------------
$1.43 - $1.43 500 4.5 years 1.43 -- --
- --------------------------------------------------------------------------------------------------------
$4.09 - $5.54 722,867 2.9 years 4.10 408,273 4.11
- --------------------------------------------------------------------------------------------------------
$7.25 - $10.55 227,844 2.5 years 7.82 113,050 7.25
- --------------------------------------------------------------------------------------------------------
$10.85 - $19.73 212,929 1.7 years 12.49 201,878 12.41
- --------------------------------------------------------------------------------------------------------
$20.75 - $30.66 457,012 2.6 years 25.54 305,416 25.90
- --------------------------------------------------------------------------------------------------------
$32.18 - $74.50 16,169 3.0 years 45.99 5,585 45.83
- --------------------------------------------------------------------------------------------------------
During the year, options denominated in U.S. dollars were issued and outstanding
with prices ranging as follows:
- --------------------------------------------------------------------------------------------------------
Outstanding Exercisable
- --------------------------------------------------------------------------------------------------------
Price Range Number of Weighted- Weighted- Number of Weighted-
(U.S.$) Options Average Average Options Average
Contractual Life Exercise Price Exercise Price
(U.S.$) (U.S.$)
- --------------------------------------------------------------------------------------------------------
$1.34 - $6.50 797,182 4.4 years 3.91 -- --
- --------------------------------------------------------------------------------------------------------
$6.73 - $17.37 45,692 3.6 years 11.32 13,844 13.59
- --------------------------------------------------------------------------------------------------------
$18.63 - $21.69 363,775 3.0 years 19.13 234,410 19.36
- --------------------------------------------------------------------------------------------------------
$23.66 - $24.53 6,750 3.3 years 23.95 1,688 23.95
- --------------------------------------------------------------------------------------------------------
$27.98 - $50.94 2,407 3.2 years 39.91 602 39.91
- --------------------------------------------------------------------------------------------------------
Weighted Weighted
Average Average
Options Exercise Price Exercise Price
(000's) Per Share Per Share
------- -------------- --------------
May 31, 1998 2,416 Cdn$5.39 US$3.70
Granted 783 26.71 17.65
Exercised (507) 7.21 4.77
May 31, 1999 2,692 Cdn$11.12 US$7.54
Granted 453 30.14 20.62
Exercised (88) 10.71 7.26
------ --------- --------
May 31, 2000 3,057 Cdn$13.95 US$9.49
------ --------- --------
Granted 1,338 5.63 3.74
Exercised (40) 4.73 3.24
Revoked (1,502) 9.48 6.51
------ --------- --------
May 31, 2001 2,853 Cdn$12.65 US$8.46
------ --------- --------
Exercisable at May 31, 2001 1,285 Cdn$15.88 US$10.61
====== ========= ========
76
During 1999, the Company issued 74,668 common shares with a weighted average
exercise price of U.S. $4.87 pursuant to option agreements assumed in connection
with the 20/20 acquisition. At May 31, 1999, no further options relating to
these agreements are outstanding.
During 1999, the Company issued 191,337 common shares at U.S. $0.02665 per share
in connection with options granted to third parties for services rendered to
20/20 that were assumed in connection with the 20/20 acquisition. At May 31,
1999, no further options relating to these agreements are outstanding.
SFAS No. 123, "Accounting for Stock-based Compensation", became effective for
the Company's 1997 fiscal year. The Company continues to account for its
outstanding fixed price stock options under Accounting Principles Board Opinion
No.25, "Accounting for Stock Issued to Employees", which results in the
recording of no compensation expense in the Company's circumstances. Had
compensation expense for stock options granted been determined based upon fair
value at the grant date consistent with the methodology prescribed by SFAS No.
123, the pro forma effects of fiscal 2001, 2000 and 1999 grants on the net loss
and loss per share amounts for the years ended May 31, 2001, 2000 and 1999 would
have been as follows:
2001 2000 1999
--------------------------------
Net loss under U.S. GAAP $(37,773) $(5,918) $(4,556)
Adjustments for SFAS 123 (1,847) (2,806) (3,784)
--------------------------------
Pro forma net loss under U.S. GAAP $(39,620) $(8,724) $(8,340)
================================
Pro forma loss per share under U.S. GAAP $ (1.05) $ (0.23) $ (0.24)
================================
The fair value of the options granted was estimated at the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions: risk free interest of 6.75% for fiscal 1999, 7.5% for fiscal 2000
and 6.5% for fiscal 2001; dividend yield of 0%; volatility factors of the
expected market price of the Company's common shares of 0.66 for fiscal 1999,
0.71 for fiscal 2000 and 0.83 for fiscal 2001; and a weighted average expected
option life of 3.3 years for fiscal 1999, 3.5 years for fiscal 2000 and 4.0
years for fiscal 2001. The fair market value of the options granted during the
fiscal year ended May 31, 2001 is $3,108,000 (2000 - $5,800,000; 1999 -
$6,420,000). The Black-Scholes option pricing model was developed for use in
estimating fair value of traded options which have no vesting restrictions and
are fully transferable. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the above pro forma adjustments
for SFAS 123 are not necessarily a reliable single measure of the fair value of
the Company's employee stock options.
77
12. Interest and Other and Depreciation and Amortization
2001 2000 1999
Interest and other
Interest on long-term debt $ 266 $ 498 $ 810
Interest on obligations under capital lease 1,063 1,720 1,540
Interest and bank charges, net 583 453 1,992
Interest income (4,455) (7,163) (2,097)
-------- -------- --------
$ (2,543) $ (4,492) $ 2,245
======== ======== ========
Depreciation and amortization
Fixed assets $ 13,043 $ 11,880 $ 8,643
Assets under capital lease 2,007 2,412 2,409
Goodwill 3,784 3,053 3,060
Practice management agreements 8,759 4,343 822
-------- -------- --------
$ 27,593 $ 21,688 $ 14,934
======== ======== ========
13. Income Taxes
Deferred income taxes consist of the following temporary differences:
2001 2000 1999
-------- -------- --------
Assets:
Tax benefit of loss carryforwards
Pre-acquisition $ 8,034 $ 9,538 $ 11,785
Post-acquisition 12,913 6,453 6,094
Start-up costs 191 954 1,816
Fixed assets 1,362 -- --
Intangibles 2,444 819 --
Comprehensive income 5,580 2,136 --
Other 1,607 2,296 1,556
Valuation allowance (30,429) (16,346) (17,345)
-------- -------- --------
$ 1,702 $ 5,850 $ 3,906
-------- -------- --------
Liabilities:
Practice management agreements $ 1,702 $ 1,848 $ 1,771
Fixed assets -- 4,002 2,135
-- -- 4,525
-------- -------- --------
Comprehensive income $ 1,702 $ 5,850 $ 8,431
-------- -------- --------
-- -- $ 4,525
======== ======== ========
78
As of May 31, 2001, the Company has non-capital losses available for
carryforward for income tax purposes of approximately $53,765,000, which are
available to reduce taxable income of future years.
The Canadian losses can only be utilized by the source company whereas the
United States losses are utilized on a United States consolidated basis. The
Canadian losses of $9,972,000 expire as follows:
2002 $1,202
2003 2,273
2004 1,468
2005 543
2008 4,486
The United States losses of $43,793,000 expire between 2011 and 2021. The
Canadian and United States losses include amounts of $4,413,000 and $16,129,000
respectively relating to the acquisitions of 20/20 and BeaconEye, the
availability and timing of utilization of which may be restricted.
The differences between the provision for income taxes and the amount computed
by applying the statutory Canadian income tax rate to loss before income taxes
and non-controlling interest were as follows:
2001 2000 1999
-------- ------- -------
Income tax recovery based on the Canadian statutory income
tax rate of 43.2% (2000 - 44.6%; 1999 - 44.6%) $(15,529) $ 241 $(1,070)
Current year's losses not utilized 8,474 1,950 263
Expenses not deductible for income tax purposes 7,764 1,675 4,203
Adjustments of cash vs. accrual tax deductions for U.S. income tax purposes 117 363 223
Utilization of prior year's losses (118) (1,675) (2,355)
Corporate Minimum Tax, Large Corporations Tax and foreign tax 1,255 879 1,129
LLC's taxable income allocated to non-TLC members (127) (192) (312)
Other 403 213 (61)
-------- ------- -------
Provision for income taxes $ 2,239 $ 3,454 $ 2,020
======== ======= =======
79
The provision for income taxes is as follows:
2001 1999 1998
------ ------ ------
Current:
Canada $ 111 $ 322 $ 34
United States - federal 929 2,541 1,441
United States - state 645 502 545
Other 554 89 --
--------------------------
$2,239 $3,454 $2,020
====== ====== ======
14. Commitments and Contingencies
As of May 31, 2001, the Company has entered into operating leases for rental of
office space and equipment, which require future minimum lease payments
aggregating $28,555,000. Future minimum lease payments in aggregate and over the
next five years are as follows:
2002 $7,577
2003 6,787
2004 6,308
2005 4,689
2006 3,194
As of May 31, 2001, the Company has entered into a three year lease agreement
with a major laser manufacturer for the use of that manufacturer's lasers which
require future minimum lease payments aggregating $9,938,000. Future minimum
lease payments in aggregate and over the next three years are as follows:
2002 $4,500
2003 4,388
2004 1,050
One of the Company's subsidiaries, together with other investors, has jointly
and severally guaranteed the obligations of an equity investee. Total
liabilities of the equity investee under guarantee amount to approximately
$2,405,000 at May 31, 2001.
15. Segmented Information
The Company has two reportable segments: refractive and other. The refractive
segment is the core focus of the Company which reflects the provision of laser
vision correction. The other segment includes an accumulation of non-core
business activities including the management of secondary care centers which
provide advanced levels of eye care, activities involving the development of
eyeVantage.com as an internet based company and managed care (applicable only in
1999 and prior). In 1999, activity in the secondary care reflected a larger
portion of the business activity and was presented as a separate segment. The
disposal of the management of
80
certain secondary care sites during 1999 has reduced the magnitude of activities
from secondary care such that a separate segment for secondary care is no longer
meaningful.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on operational components including paid procedures, net revenue after
doctors' fees, fixed costs and income (loss) before income taxes.
Intersegment sales and transfers are minimal and are measured as if the sales or
transfers were to third parties.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies. Most of the
business units were acquired or developed as a unit and management at the time
of acquisition was retained.
The Company's business segments are as follows:
2001 Refractive Other Total
---------------------------------------
Revenues and physician costs:
Net revenues $ 161,219 $ 12,787 $ 174,006
Doctor compensation 15,538 -- 15,538
---------------------------------------
Net revenue after doctor compensation $ 145,681 $ 12,787 $ 158,468
---------------------------------------
Expenses:
Operating 134,324 15,168 149,492
Interest and other (2,385) (158) (2,543)
Depreciation of capital assets and assets under capital lease 13,675 1,375 15,050
Amortization of intangibles 10,703 1,840 12,543
Restructuring and other charges 6,433 12,642 19,075
---------------------------------------
162,750 30,867 193,617
---------------------------------------
Loss from operations (17,069) (18,080) (35,149)
Income taxes (1,779) (460) (2,239)
Non-controlling interest (370) (15) (385)
---------------------------------------
Net loss $ (19,218) $ (18,555) $ (37,773)
=======================================
Total assets $ 234,355 $ 4,083 $ 238,438
=======================================
Total fixed and intangible expenditures $ 36,296 $ 140 $ 36,436
=======================================
81
2000
Refractive Other Total
---------------------------------------
Revenues and physician costs:
Net revenues $ 190,233 $ 10,990 $ 201,223
Doctor compensation 17,333 2 17,335
---------------------------------------
Net revenues after doctor compensation $ 172,900 $ 10,988 $ 183,888
---------------------------------------
Expenses:
Operating 153,673 12,477 166,150
Interest and other (4,574) 82 (4,492)
Depreciation of capital assets and assets under capital lease 12,886 1,406 14,292
Amortization of intangibles 6,363 1,033 7,396
---------------------------------------
168,348 14,998 183,346
---------------------------------------
Income (loss) from operations 4,552 (4,010) 542
Income taxes (3,141) (313) (3,454)
Non-controlling interest (2,443) (563) (3,006)
---------------------------------------
Net (loss) $ (1,032) $ (4,886) $ (5,918)
=======================================
Total assets $ 250,279 $ 39,085 $ 289,364
=======================================
Total fixed and intangible expenditures $ 65,941 $ 8,477 $ 74,418
=======================================
1999 Secondary
Refractive Care Other Total
-----------------------------------------------------
Revenues and physician costs:
Net revenues $ 132,428 $ 11,389 $ 3,093 $ 146,910
Doctor compensation 12,824 -- -- 12,824
-----------------------------------------------------
Net revenues after doctor compensation $ 119,604 $ 11,389 $ 3,093 $ 134,086
-----------------------------------------------------
Expenses:
Operating 89,875 8,972 3,618 102,465
Interest and other 2,343 (125) 27 2,245
Depreciation of capital assets and assets under capital lease 9,804 986 262 11,052
Amortization of intangibles 2,546 1,201 135 3,882
Start-up and development expenses -- -- 3,606 3,606
Restructuring charges (non-cash portion - $11,167) -- 10,298 2,626 12,924
-----------------------------------------------------
104,568 21,332 10,274 136,174
-----------------------------------------------------
Income (loss) from operations 15,036 (9,943) (7,181) (2,088)
Income taxes (1,820) -- (200) (2,020)
Non-controlling interest (800) (376) 728 (448)
-----------------------------------------------------
Net loss $ 12,416 $(10,319) $ (6,653) $ (4,556)
=====================================================
Total assets $ 274,846 $ 16,678 $ 4,151 $ 295,675
=====================================================
Total fixed and intangible expenditures $ 25,803 $ 7,707 $ 2,026 $ 35,536
=====================================================
82
The Company's geographic segments are as follows:
2001 Canada United Total
States
---------------------------------
Revenues and physician costs:
Net revenues $18,114 $155,892 $174,006
Doctor compensation 1,698 13,840 15,538
---------------------------------
Net revenue after doctor compensation $16,416 $142,052 $158,468
=================================
Total fixed assets and intangibles $22,039 $123,108 $145,147
=================================
2000 Canada United Total
States
---------------------------------
Revenues and physician costs:
Net revenues $17,275 $183,948 $201,223
Doctor compensation 2,876 14,459 17,335
---------------------------------
Net revenue after doctor compensation $14,399 $169,489 $183,888
=================================
Total fixed assets and intangibles $22,195 $131,255 $153,450
=================================
1999 Canada United Total
States
---------------------------------
Revenues and physician costs:
Net revenues $16,247 $130,663 $146,910
Doctor compensation 2,583 10,241 12,824
---------------------------------
Net revenue after doctor compensation $13,664 $120,422 $134,086
=================================
Total fixed assets and intangibles $18,895 $ 76,891 $ 95,786
=================================
16. Financial Instruments
Fair Value
The carrying values of cash equivalents, accounts receivable, accounts payable
and accrued liabilities and income taxes recoverable (payable) approximates
their fair values because of the short-term maturities of these instruments.
Given the large number of individual long-term debt instruments and capital
lease obligations held by the Company, it is not practicable within constraints
of timeliness and cost to determine fair value. However, the Company expects
that if it were able to renegotiate such instruments at the current market rates
available to the Company, it would obtain similar or more favorable terms given
the Company's growth and current financial position.
83
The fair values of the Company's short-term investments are based on quotes from
brokers. In fiscal 2001, the Company's short-term investment portfolio consisted
substantially of corporate bonds that had remaining terms to maturity not
exceeding three months.
Portfolio investments consist of the Company's investment in the common and
preferred shares of LaserSight Incorporated (LaserSight Class C preferred shares
held by the Company were automatically convertible to an equal number of common
shares in June 2001) and the common shares of two other publicly traded
companies (2000 - three). The fair value of the Company's portfolio investments,
excluding the LaserSight Incorporated preferred shares, are based on quotes from
brokers in the fair value information presented below:
2001 2000
------- -------
Short-term investments $ 6,063 $ --
Portfolio investments (cost: 2001 - $27,190 ; 2000 - $17,649 $23,444
$27,895)
The fair value of the Company's portfolio investment in Lasersight Incorporated
2.0 million preferred shares has been reflected at $4.00 per share based upon
the fair value of the conversion feature to common shares.
Risk Management
The Company is exposed to credit risk on accounts receivable from its customers.
In order to reduce its credit risk, the Company has adopted credit policies
which include the analysis of the financial position of its customers and the
regular review of credit limits. As of May 31, 2001, the Company had recorded an
allowance for doubtful accounts of $1,160,000 (2000 - $2,849,000). The Company
does not have a significant exposure to any individual customer, except for
amounts due from those refractive and secondary eye practices which it manages
and which are collateralized by the practice's patient receivables.
Cash accounts at the Canadian banks are insured by the Canadian Depository
Insurance Corporation for up to Cdn.$60,000. In the United States, the Federal
Deposit Insurance Corporation insures cash balances up to $100,000. As of May
31, 2001, bank deposits exceeded insured limits by $ 36,329,475 (2000 -
$6,030,492).
The Company operates in Canada and the United States and is therefore exposed to
market risks related to foreign currency fluctuations between these currencies.
As well, there is cash flow exposure to interest rate fluctuations on debt
carrying floating rates of interest.
84
17. Acquisitions
2001 Transactions
The following acquisitions have been accounted for by the purchase method and
the results of operations have been consolidated from the respective purchase
dates:
i. On August 21, 2000, the Company purchased 100% of the membership interests
in Eye Care Management Associates, LLC ("Eye Care Mgmt. Assoc., LLC") in
exchange for $4,000,000 in cash, 295,165 common shares of the Company with
a value of $1,860,000 and amounts contingent upon future events.
Contingent amounts are determined based on fees received by the Company
pursuant to the Membership Purchase Agreement. Contingent amounts have
been deemed to be compensation of the physicians associated with Eye Care
Mgmt. Assoc., LLC. In fiscal 2001 no expense for contingent amounts have
been reflected as the applicable pre-determined targets had not been
achieved.
ii. During the first quarter of fiscal 2001, an additional 536,764 common
shares of the Company, valued at $4,199,000, were issued to the sellers of
The Vision Source, Inc. to reflect the final payment of contingent
consideration which was determined to be payable during fiscal 2000 and
which had been accrued for at May 31, 2000. On December 31, 1999 , the
earn-out period relating to the 1997 acquisition of 100% of The Vision
Source, Inc. was completed. As a result, in fiscal 2000, 210,902 common
shares of the Company with a value of $1,397,000, were released from
escrow to the sellers of The Vision Source.
iii. During the first quarter of fiscal 2001, eyeVantage.com, Inc., an 83%
subsidiary of the Company, paid $3,000,000 to fully satisfy an outstanding
note payable which arose from the fiscal 2000 transaction in which
eyeVantage.com, Inc. acquired the operating assets and liabilities of
Optical Options, Inc., in exchange for shares of eyeVantage.com, Inc. with
a value of $6,000,000, which were to be issued in connection with a
proposed public offering of eyeVantage.com, Inc. shares. Since the public
offering was not completed, the Company was required to issue two notes in
favor of the sellers for $3,000,000 each, the first of which was satisfied
in the second fiscal quarter of 2001 and the second note, which carries an
interest rate of 8%, is payable in eight equal quarterly installments, the
first of which was due on August 1, 2000. The August 1st payment was not
made and the payment of this and future installments were under dispute at
that time. In the third quarter of fiscal 2001, the Company accepted a
proposal from the seller that would reduce the purchase obligation from
$3,000,000 to $620,000. This reduced obligation was paid in the fourth
quarter of fiscal 2001.
iv. During the first quarter of fiscal 2001, eyeVantage.com, Inc., an 83%
subsidiary of the Company, did not make the initial installment on a
$3,000,000 obligation which arose from the 2000 transaction in which
eyeVantage.com, Inc. acquired the operating assets and liabilities of Eye
Care Consultants, Inc. in exchange for shares of eyeVantage.com, Inc. with
a value of $3,000,000 which were to be issued in connection with a
proposed public offering of eye Vantage.com, Inc. shares. Since the public
offering was not completed, the Company
85
was required to make eight equal quarterly installments equaling
$3,000,000, the first of which was due on June 30, 2000. The June 30th
payment was not made and future installments are currently under dispute.
v. On March 2, 2001, the Company acquired certain assets and liabilities of a
Maryland Professional Corporation ("Maryland PC") for $10,000,000 in cash
and notes payable of a further $10,000,000 to be paid in four equal
installments of $2,500,000 on the first four anniversary dates of the
transaction. These notes payable do not carry an interest rate and as such
have been discounted at a rate of 9% with the resulting $8,099,000 being
reported as long term debt for financial statement purposes.
The total consideration on acquisitions was allocated to net assets acquired on
the basis of their fair values as follows:
Maryland Eye Care
PC Mgmt. Other Total
Assoc., LLC
---------------------------------------------
Current assets (including cash of $0) $ 50 $ -- $ 501 $ 551
Fixed assets 150 -- -- 150
Goodwill -- -- 77 77
Practice management agreements 18,149 5,964 1,440 25,553
Non-controlling interest -- -- (1,314) (1,314)
---------------------------------------------
$18,349 $5,964 $ 704 $ 25,017
---------------------------------------------
Funded by:
Issuance of common shares $ -- $1,860 -- $ 1,860
Contribution of cash 10,000 4,000 587 14,587
Notes payable 8,099 -- -- 8,099
Common shares to be issued -- -- -- --
Acquisition costs 250 104 117 471
---------------------------------------------
$18,349 $5,964 $ 704 $ 25,017
=============================================
2000 Transactions
The following acquisitions have been accounted for by the purchase method and
the results of operations have been consolidated from the respective purchase
dates:
i. On June 30, 1999, the Company made a capital contribution of $1,002,000
representing a 50.1% interest in TLC USA LLC, the operating company, for
activities of a strategic alliance with a subsidiary of Kaiser Permanente
with the intention to initially own and operate three eye care centers in
California and to eventually develop additional centers in markets in the
United States where Kaiser Permanente has a significant presence.
86
ii. On July 8, 1999, the Company acquired 50.1% of the operating assets and
liabilities of Laser Eye Care of California, LLC with an investment of
$11,200,000 in cash and certain operating assets and liabilities of the
Company's two Californian eye care centers. Additional amounts were
payable contingent upon achieving certain levels of profit. At December
31, 1999 at the completion of the earn-out period, the required levels of
profit were met and an additional payment of $6,000,000 was made to
complete the transaction.
iii. On August 18, 1999, the Company acquired the laser vision correction
assets of Laser Vision Consultants of Albany, P.L.L.C. in exchange for
$1,000,000 cash and 30,000 common shares with a value of $728,000 which
will be released equally over three years.
iv. On December 17, 1999, eyeVantage.com, Inc., an 83% owned subsidiary of the
Company, acquired the operating assets and liabilities of Eye Care
Consultants, Inc. in exchange for $750,000 in cash, the assumption of
$250,000 of liabilities and shares with a value of $3,000,000 in
eyeVantage.com, Inc. in the course of a public offering of eyeVantage.com,
Inc. shares. The value of $3,000,000 was non-interest bearing payable in
cash as a result of the public offering not being completed within the
guidelines set by the acquisition agreement. (See "17. Acquisitions - 2001
Acquisitions - iv")
v. On December 31, 1999, the earn-out period relating to the 1997 acquisition
of 100% of The Vision Source, Inc. was completed. 210,902 shares of the
Company with a value of $1,397,000 as determined by the acquisition
agreement were released from escrow to the sellers of The Vision Source,
Inc. An additional 536,764 shares valued at $4,199,000 were issued in
August 2001 to the sellers of The Vision Source, Inc. to reflect the final
calculation of contingent amounts as determined by the earn-out formula.
vi. On January 11, 2000, eyeVantage.com, Inc., an 83% subsidiary of the
Company, acquired the operating assets and liabilities of Optical Options,
Inc. in exchange for shares with a value of $6,000,000 in eyeVantage.com,
Inc. in the course of a public offering of eyeVantage.com, Inc. shares.
Since the public offering was not completed within the guidelines set by
the acquisition agreement, the Company was required to issue two notes
payable to the sellers for $3,000,000 each. During 2001, these amounts
were renegotiated (See "17. Acquisitions - 2001 Acquisitions - iii.").
vii. On February 15, 2000, the Company acquired the membership interests of New
Jersey Practice Management LLC for $2,828,000 in cash and amounts
contingent upon future events. $600,000 was being held in escrow for a
period of one year subject to an adjustment of the purchase price
determined by completion of the earn-out period and calculation of a
contingent amount. Preliminary calculations subsequent to the completion
of the earn-out period have resulted in the release of the $600,000 from
escrow back to the Company due to not meeting the necessary earn-out
requirements and finalization of any amounts subject to further clawback
provisions is in process.
87
viii. On March 31, 2000, the Company acquired certain assets of a physician's
practice located in the state of New York ("New York Practice") in
exchange for $11,860,000 in cash and common shares with a value of up to
$3,000,000 contingent upon future events. Contingent amounts are
determined based on fees received by the Company pursuant to an
Administrative Services Agreement. In fiscal 2001, contingent amounts of
$300,000 have been reported as operating expenses, based on pre-determined
targets being achieved pursuant to the Administrative Services Agreement,
and are payable at a future date.
ix. On May 8, 2000, the Company acquired an 80% membership interest in Laser
Eye Care of Torrance, LLC in exchange for $3,222,000 in cash through Laser
Eye Care of California, LLC, a 50.1% subsidiary of the Company.
The total consideration on acquisitions was allocated to net assets acquired on
the basis of their fair values as follows:
Laser Eye New York
Care of Practice Other Total
California
---------------------------------------------------
Current assets (including cash of $1,137) $ 153 $ -- $ 1,102 $ 1,255
Fixed assets 284 -- 564 848
Assets under lease 1,807 -- -- 1,807
Goodwill -- -- 15,588 15,588
Practice management agreements 16,852 12,006 7,802 36,660
Current liabilities (146) -- (913) (1,059)
Long-term debt -- -- (280) (280)
Obligations under capital leases (1,607) -- -- (1,607)
Non-controlling interest (868) -- (1,078) (1,946)
---------------------------------------------------
$ 16,475 $12,006 $ 22,785 $ 51,266
---------------------------------------------------
Funded by:
Issuance of common shares $ -- $ -- $ 2,125 $ 2,125
Contribution of cash 16,000 11,860 7,445 35,305
Notes payable -- -- 9,000 9,000
Common shares to be issued -- -- 4,056 4,056
Acquisition costs 475 146 159 780
---------------------------------------------------
$ 16,475 $12,006 $ 22,785 $ 51,266
===================================================
1999 Transactions
The following acquisitions have been accounted for by the purchase method and
the results of operations have been consolidated from the respective purchase
dates:
i. On June 19, 1998, the Company made a 51% equity investment of $204,000 in
cash in AllSight, Inc., a refractive laser center in the Pittsburgh, PA
area.
88
ii. On July 1, 1998, TLC NorthWest Eye, Inc. a wholly-owned subsidiary of the
Company, acquired in two separate transactions the operating assets and
liabilities of the Figgs Eye Clinic in Yakima, Washington and the practice
of Robert C. Bockoven with three locations in Washington, in exchange for
cash and debt. Consideration was $750,000 for the Figgs Eye Clinic assets
and liabilities and $725,000 for the practice of Robert C. Bockoven.
iii. On September 1, 1998, the Company acquired the 10% minority interest of
Vision Institute of Canada in one of the Company's laser centers in
Toronto in exchange for $332,000 in cash and common shares with a value of
$332,000.
iv. On October 13, 1998, the Company acquired 90% of the operating assets and
liabilities of WaterTower Acquisition, Inc. in exchange for cash of
$625,000 and amounts contingent upon future events. No value will be
assigned to these contingent amounts until completion of the earn out
period and the outcome of the contingency is known. Contingent amounts are
calculated based on a percentage of excess income over a target amount for
the next three years and will be treated as additional purchase price once
the amounts can be determined and the outcome appears probable. No amounts
have been accrued regarding these contingent amounts because management
does not believe that the required targets will be achieved.
v. On November 30, 1998, the Company acquired 85% of the operating assets and
liabilities of Aspen HealthCare, Inc. for cash consideration of $3,800,000
and amounts contingent upon future events. The value is to be assigned to
these contingent amounts once the amounts can be determined and the
outcome appears probable. Contingent amounts are calculated based on
meeting certain annual net income targets over five years. No amounts have
been accrued regarding these contingent amounts because management does
not believe that the required targets will be achieved.
vi. On January 5, 1999, the Company acquired 90% of the outstanding shares of
Baltimore Practice Management, LLC in exchange for cash of $6,060,000 and
an ownership interest in certain future refractive surgery centers. No
value will be assigned to the ownership interest; however, the
non-controlling interest percentage on future earnings attributable to
these new refractive surgery centers will be reflected accordingly upon
consolidation in the future.
vii. On March 1, 1999, the Company made a 51% capital contribution of $205,000
in cash in TLC The Laser Center (Green Bay/Milwaukee) LLC, which operates
a laser center in the Green Bay, Wisconsin area.
During 1999, the Company completed transactions with doctor groups to
enhance the network of optometrists and ophthalmologists in exchange for
common shares with a value of $505,000. Miscellaneous acquisitions were
completed in exchange for cash of $1,407,000.
89
The total consideration on acquisitions was allocated to net assets
acquired on the basis of their fair values as follows:
Current assets (including cash of $2,428) $ 2,261
Fixed assets 1,674
Goodwill 7,648
Practice management agreements 6,060
Current liabilities (621)
Long-term debt (1,221)
Non-controlling interest (476)
--------
$ 15,325
========
Funded by:
Issuance of common shares $ 837
Issuance of debt 738
Contribution of cash 13,465
Acquisition costs 285
--------
$ 15,325
========
Under APB 16, the Company is required to disclose the following information
relating to its acquisitions:
If the operating assets and liabilities of the Maryland PC had been acquired on
June 1, 1999, the unaudited pro forma effects on the consolidated statements of
loss for the fiscal years ended May 31, 2000 and 2001 would have been additional
revenues of $4,212,007 and $3,503,973 respectively, a reduction in losses of
$911,955 and $825,888 respectively and a reduction in the earnings per share
loss of $0.02 in both periods..
If the operating assets and liabilities of Laser Eye Care of California, LLC had
been acquired on June 1, 1998, the unaudited pro forma effects on the
consolidated statements of loss for the fiscal years ended May 31, 1999 and 2000
would have been additional revenues of $14,599,000 and $2,275,000 respectively
and additional losses of $923,000 or $(0.03) per share in the fiscal year ended
May 31, 1999 and a reduction of losses of $65,000 or $0.00 per share in the
fiscal years ended May 31, 2000.
The above unaudited pro forma information is presented for information purposes
only and may not be indicative of the results of operations as they would have
been if the acquisitions had occurred on June 1, 1999 or June 1, 1998, nor is it
necessarily indicative of the results of operations which may occur in the
future. Anticipated efficiencies from the combination have been excluded from
the amounts included in the pro forma information.
18. Restructuring and Other Charges
Fiscal 2001
In fiscal 2001, the decisions were made to: (i) exit from e-commerce enterprise
eyeVantage.com, Inc., (ii) reflect the potential for losses in an equity
investment in a secondary care operation, (iii) identify the estimated costs
associated with the Company's current restructuring initiative as
90
well as the consulting costs closely associated with the restructuring
initiative, (iv) segregate the amounts of an arbitration award against the
Company and (v) provide for the impairment of a portfolio investment. The
following charges were reported in connection with these divestitures and
restructuring:
(a) The decision to close the activities at eyeVantage.com, Inc. resulted in a
restructuring charge of $11.7 million which reflects the estimated impact
of the write-down of goodwill of $8.7 million, loss/write down of fixed
assets of $2.1 million, employee termination costs of $1.7 million
representing the termination costs of 29 employees, accounts receivable
losses of $0.4 million and $1.1 million of costs incurred in the closing
process which includes legal costs and administrative costs. These losses
are offset by a gain of $2.3 million resulting from the reduction in the
purchase obligation associated with the Optical Options, Inc., acquisition
(See "Note 17. Acquisitions - 2001 Transactions - iii.").
(b) The Company has provided $1.0 million for potential losses in amounts
outstanding from an equity investment in a secondary care activity.
(c) The Company has closed three eye care centers, terminated plans for
another and sold its ownership in another and has estimated losses of $1.8
million resulting from these decisions.
(d) The Company has undertaken an extensive review of internal structures, its
marketplace, its resources and its strategies for the future. The review
is resulting in the restructuring of the Company's goals and structures to
meet its future needs. The Company has utilized the services of a national
consulting firm to facilitate this internal restructuring process, whose
participation in this assignment was completed in the third quarter with
an associated cost of $1.6 million.
(e) The Company has provided $0.9 million for losses on portfolio investments
in Vision America where it is felt that there has been a permanent
impairment in the value of the Company's holdings.
(f) In the fourth quarter, an award from an arbitration hearing involving TLC
Network Services Inc. was issued against TLC. The cumulative liability
arising from the award was $2.1 million which has been fully provided for
in the fourth quarter. Payment of this liability has been deferred until
exploration of all legal alternatives has been completed.
In the year ended May 31, 2001, the Company provided for a total of $19.1
million of losses from restructuring and other charges. These losses consisted
of cash payments of $4.7 million primarily for severance, lease costs,
consulting services and closure costs and $14.4 million in non-cash costs.
Non-cash costs were primarily for write-off of goodwill, fixed assets and
current assets resulting from the decision to exit from its e-commerce
enterprise, eyeVantage.com, Inc., the accrual for an arbitration award and
provision for portfolio investments.
Fiscal 1999
In the last quarter of fiscal 1999, management made a decision to restructure
operations in connection with its managed care and secondary care businesses.
The following divestitures were completed in connection with this restructuring:
91
(a) On May 31, 1999, the Company sold certain assets of NorthWest Eye Inc. in
exchange for the assumption of certain liabilities by the purchaser. In
connection with the sale, the Company recorded a restructuring charge of
$10,300,000 relating to the write-off of intangibles and amounts due from
affiliated physician groups and decided not to continue with secondary
care at this location.
(b) On April 27, 1999, the Company sold the fixed assets and intangibles of
TLC The Laser Center (Wisconsin Management) Inc. and TLC Wisconsin Eye
Surgery Center Inc. in exchange for 139,266 common shares of the Company.
These assets had a net book value of $4,047,000 and no gain or loss was
recorded in connection with the transaction. The shares received by the
Company upon disposition of these subsidiaries were cancelled, with
capital stock being reduced using the average value of common shares as at
April 27, 1999 of Cdn.$6.26.
(c) On May 19, 1999, the Company sold all of the assets of its managed care
subsidiary to the former management of the subsidiary. The Company
incurred a loss on the sale of $2.6 million.
19. Supplemental Cash Flow Information
Non-cash transactions:
2001 2000 1999
------ ------- ------
Issue of warrants to be expensed over three years $ -- $ 532 $ --
Capital stock issued as remuneration 35 387 600
Capital stock issued for acquisitions 6,059 2,125 837
Reversal of accrual for costs of IPO -- 139 --
Accrued purchase obligations 3,899 13,200 738
Capital lease obligations relating to equipment purchases -- 1,366 645
Long-term debt cancellation 450 -- --
Cash paid for the following:
2001 2000 1999
------ ------- ------
Interest $1,668 $ 2,671 $4,342
-------------------------------
Income taxes $ 148 $ 5,647 $ 978
-------------------------------
20. Subsequent Events
On August 27, 2001, the Company announced that it had entered into an
Agreement and Plan of Merger with Laser Vision Centers, Inc. ("Laser Vision").
Laser Vision provides access to excimer lasers, microkeratomes, other equipment
and value added support services to eye surgeons for laser vision correction and
the treatment of cataracts. The merger will be effected
92
as an all-stock combination at a fixed exchange rate of 0.95 common shares of
the Company which is expected to result in the issuance of approximately 24.6
million of the Company's common stock. In addition, the Company will assume and
convert existing outstanding options or warrants to acquire stock of Laser
Vision based on the 0.95 exchange rate and expects to be issuing approximately
7.4 million options or warrants to acquire common shares of the Company. The
merger is expected to be accounted for under the purchase method. Completion of
the transaction, expected to occur in December, 2001, is subject to shareholder
and regulatory approval and other conditions usual and customary in such
transactions.
93
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Balance at Deductions- Balance at
beginning Expense Uncollectable end
of year provision Other Amounts of year
------- --------- ----- ------- -------
(in thousands)
Fiscal 1999
Doubtful accounts receivable $1,668 $ 729 $ -- $ (918) $1,479
Provision against investments and other assets -- -- -- -- --
Fiscal 2000
Doubtful accounts receivable 1,479 2,553 -- (1,183) 2,849
Provision against investments and other assets -- -- -- -- --
Fiscal 2001
Doubtful accounts receivable 2,849 646 -- (2,335) 1,160
Provision against investments and other assets $ -- $1,913 $ -- $ -- $1,913
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Except as set forth below in this Item 10, the information required by
this Item 10 is incorporated by reference to the Company's definitive proxy
statement to be filed within 120 days after the end of the Company's fiscal year
ended May 31, 2001.
Directors and Executive Officers
The following table indicates the names, ages and positions of the
Company's directors, officers and key employees. There is no family relationship
between any of the directors, officers or key employees.
94
Name Age Position with Company
- ---- --- ---------------------
Elias Vamvakas (3) 43 Chief Executive Officer and Chairman of the Board of Directors
Thomas G. O'Hare 49 President and Chief Operating Officer
Dr. Jeffery J. Machat 39 Co-National Medical Director and Director
Dr. David C. Eldridge 47 Executive Vice President, Clinical Affairs
Jay Peters 49 Executive Vice President, Chief Marketing Officer
Paul Frederick 56 Executive Vice President, Human Resources
Brian Park 44 Controller
Lloyd D. Fiorini 35 General Counsel and Secretary
William P. Leonard 36 Executive Vice President, Operations
Madeline D. Walker 54 Executive Vice President
Henry Lynn 50 Executive Vice President, Information Systems
John F. Riegert (2)(3) 71 Director
Howard J. Gourwitz (1)(2) 53 Director
Thomas N. Davidson (1)(2) 61 Director
Warren S. Rustand (1)(2)(3) 58 Director
Dr. William David Sullins, Jr.(1)(3) 58 Director
(1) Member of the Company's Compensation Committee.
(2) Member of the Company's Audit Committee.
(3) Member of the Company's Corporate Governance Committee.
ITEM 11 EXECUTIVE COMPENSATION
The information required by this Item 11 is hereby incorporated by
reference to the Company's definitive proxy statement to be filed within 120
days after the end of the Company's fiscal year ended May 31, 2001.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is hereby incorporated by
reference to the Company's definitive proxy statement to be filed within 120
days after the end of the Company's fiscal year ended May 31, 2001.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is hereby incorporated by
reference to the Company's definitive proxy statement to be filed within 120
days after the end of the Company's fiscal year ended May 31, 2001.
95
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(1) The following consolidated financial statements of registrant and its
subsidiaries and report of independent auditors are included in Item 8 hereof.
Report of Independent Auditors.
Consolidated Statements of Income - Years Ended May 31, 1999, 2000 and 2001.
Consolidated Balance Sheets as of May 31, 2000 and 2001.
Consolidated Statements of Deficit - Years Ended May 31, 1999, 2000 and 2001.
Consolidated Statements of Changes in Financial Position -- Years Ended May 31,
1999, 2000 and 2001.
Notes to Consolidated Financial Statements
Schedule II - Valuation and Qualifying Accounts and Reserves
(2) Except as provided below, all schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange Commission
either have been included in the Consolidated Financial Statements or are not
required under the related instructions, or are inapplicable and therefore have
been omitted.
None
96
(3) The following exhibits are provided with this Form 10-K:
Exhibit Number
Description
3.1 Articles of Incorporation (incorporated by reference to
Exhibit 3.1 to the Company's 10-K filed with the
Commission on August 28, 1998).
3.2 Articles of Amendment (incorporated by reference to
Exhibit 3.2 to the Company's 10-K filed with the
Commission on August 29, 2000).
3.3 By-Laws of the Company (incorporated by reference to
Exhibit 3.2 to the Company's 10-K filed with the
Commission on August 28, 1998).
4.1 The Company is a party to several agreements defining the
rights of holders of long-term debt. No such instrument
authorizes an amount of securities in excess of 10 percent
of the total assets of the Company and its subsidiaries on
a consolidated basis. On request, the Company agrees to
furnish a copy of each such instrument to the Commission.
97
10.1 Material Contracts:
Certain Management Contracts, Compensatory Plans,
Contracts or Arrangements:
(a) TLC Amended and Restated Share Option Plan
(incorporated by reference to Exhibit 4(a) to the
Company's Registration Statement on Form S-8 filed
with the Commission on December 31, 1997 (file no.
333-8162))
(b) TLC Share Purchase Plan (incorporated by reference
to Exhibit 4(b) to the Company's Registration
Statement on Form S-8 filed with the Commission on
December 31, 1997 (file no. 333-8162)).
(c) Employment Agreement with Elias Vamvakas
(incorporated by reference to Exhibit 10.1(e) to
the Company's 10-K filed with the Commission on
August 28, 1998).
(d) Escrow Agreement with Elias Vamvakas and Jeffery
J. Machat (incorporated by reference to Exhibit
10.1(f) to the Company's 10-K filed with the
Commission on August 28, 1998).
(e) Consulting Agreement with Excimer Management
Corporation (incorporated by reference to Exhibit
10.1(g) to the Company's 10-K filed with the
Commission on August 28, 1998).
(f) Shareholder Agreement for Vision Corporation
(incorporated by reference to Exhibit 10.1(l) to
the Company's 10-K filed with the Commission on
August 28, 1998).
(g) Employment Agreement with David Eldridge
(incorporated by reference to Exhibit 10.1(k) to
the Company's 10-K filed with the Commission on
August 29, 2000).
(h) Employment Agreement with William Leonard
(incorporated by reference to Exhibit 10.1(l) to
the Company's 10-K filed with the Commission on
August 29, 2000).
(i) Employment Agreement with Thomas O'Hare
(incorporated by reference to Exhibit 10.1(m) to
the Company's 10-K filed with the Commission on
August 29, 2000).
21.1 List of Registrant's Subsidiaries
23.1 Consent of Auditors
98
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 LASER EYE CENTERS INC.
By: /s/ Elias Vamvakas
------------------------------------
Elias Vamvakas
Chief Executive Officer
August 28, 2001
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Elias Vamvakas Chief Executive Officer August 28, 2001
- ---------------------------------- and Chairman of the Board
Elias Vamvakas of Directors
/s/ Brian Parks Controller August 28, 2001
- ---------------------------------- (Principal Financial and
Brian Parks Accounting Officer)
/s/ Jeffery J. Machat Co-National Medical August 28, 2001
- ---------------------------------- Director and Director
Dr. Jeffery J. Machat
/s/ John F. Riegert Director August 28, 2001
- ----------------------------------
John F. Riegert
/s/ Howard J. Gourwitz Director August 28, 2001
- ----------------------------------
Howard J. Gourwitz
/s/ Thomas N. Davidson Director August 28, 2001
- ----------------------------------
Thomas N. Davidson
/s/ Warren S. Rustand Director August 28, 2001
- ----------------------------------
Warren S. Rustand
/s/ Dr. William David Sullins, Jr. Director August 28, 2001
- ----------------------------------
Dr. William David Sullins, Jr.