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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2002
COMMISSION FILE NUMBER: 0-29302
TLC VISION CORPORATION
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(Exact name of registrant as specified in its charter)
NEW BRUNSWICK, CANADA 980151150
(State or jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5280 SOLAR DRIVE, SUITE 300 L4W 5M8
MISSISSAUGA, ONTARIO (Zip Code)
(Address of principal executive offices)
Registrant's telephone, including area code (905) 602-2020
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 August 27, 2002, the aggregate market value of the registrant's
Common Shares held by non-affiliates of the registrant was approximately $102.4
million.
As of August 27, 2002, there were 64,771,450 shares of the registrant's
Common Shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE.
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This Annual Report on Form 10-K (herein, together with all amendments, exhibits
and schedules hereto, referred to as the "Form 10-K") contains certain forward
looking statements within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934, which statements
can be identified by the use of forward looking terminology, such as "may",
"will", "expect", "anticipate", "estimate", "plans" or "continue" or the
negative thereof or other variations thereon or comparable terminology referring
to future events or results. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth elsewhere in this Form
10-K. See the "Risk Factors" section of Item 1 "Business" for cautionary
statements identifying important factors with respect to such forward looking
statements, including certain risks and uncertainties, that could cause actual
results to differ materially from results referred to in forward looking
statements. Unless the context indicates or requires otherwise, references in
this Form 10-K to the "Company" or "TLC Vision" shall mean TLC Vision
Corporation and its subsidiaries. The Company's fiscal year ends on May 31.
Therefore, references in this Form 10-K to a particular fiscal year shall mean
the 12 months ended on May 31 in that year. References to "$" 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 Vision Corporation ("TLC Vision" or the "Company") provides eye
surgery services in four core areas. First, the Company owns and manages premium
branded refractive eye care centers throughout North America and, together with
its relationships with affiliated eye care doctors, specializes in laser vision
correction services to treat common refractive vision disorders such as myopia
(nearsightedness), hyperopia (farsightedness) and astigmatism. Laser vision
correction surgery 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. Second, through the Company's subsidiary,
Laser Vision Centers, Inc. ("LaserVision"), the Company provides refractive
equipment access and services to independent surgeons through either fixed or
mobile delivery systems. Third, the Company furnishes independent surgeons with
mobile access to cataract surgery equipment and services through Midwest
Surgical Services, Inc. Finally, the Company, through OR Partners, Inc., owns
and operates ambulatory surgery centers where independent surgeons perform a
variety of surgical procedures.
In accordance with an Agreement and Plan of Merger with LaserVision,
the Company completed a business combination with LaserVision on May 15, 2002.
LaserVision is a leading access service provider of excimer lasers,
microkeratomes and other equipment and value and support services to eye
surgeons. The Company believes that the combined companies can provide a broader
array of services to eye care professionals to ensure these individuals may
provide superior quality of care and achieve outstanding clinical results. The
Company believes this will be the long-term determinant of success in the eye
surgery services industry.
The Company continues to focus on maximizing revenues, controlling
costs, providing superior quality of care and clinical results and pursuing
additional growth opportunities.
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
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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 farsightedness. A variation of RK,
Astigmatic Keratotomy, is used to correct astigmatism.
LASER CORRECTION PROCEDURES
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 treat vision disorders by changing the curvature of the cornea.
There are currently two procedures that use the excimer laser to treat 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
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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. To
date the FDA has approved for sale excimer lasers from approximately seven
different manufacturers for LASIK and from approximately eight different
manufacturers for PRK. 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").
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. 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.
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
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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 95% of the excimer laser
procedures currently performed at the Company's eye care centers are LASIK.
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, Market Scope's
2001 U.S. LASIK Patient Profile Report estimates that approximately 56.8% of the
United States population or 160 million people suffer from some form of
refractive disorder requiring vision correction including myopia
(nearsightedness), hyperopia (farsightedness) and astigmatism. To date, based on
Market Scope's estimate of the number of people who have had procedures, only an
estimated two to three percent of this target population has actually had laser
vision correction.
Estimates by Market Scope indicate 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, 948,000 were performed in 1999, 1.4
million were performed in 2000, 1.3 million were performed in 2001 and an
estimated 1.25 million will be performed in 2002. The Company believes that its
refractive profitability and growth will depend upon continued increasing
acceptance of laser vision correction in the United States and, to a lesser
extent, Canada and upon consumer confidence and the condition of the U.S.
economy.
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 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 unfavorable
publicity involving patient outcomes from laser vision correction could also
adversely affect its acceptance whether or not the procedures are performed at
TLC Vision 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.
MARKET FOR CATARACT SURGERY
According to the American Academy of Ophthalmology, cataract surgery
currently is the most frequently performed surgical procedure in the United
States with more than 1.5 million people having cataract surgery each year.
Medicare pays approximately $3.4 billion a year for 1.0 million patients having
cataract surgery each year. U.S. Census Bureau data indicates that there are
currently 34.99 million Americans who are age 65 or older. According to the
American Academy of Ophthalmology, individuals between the ages of 52 and 64
have a 50% chance of having a cataract. By age 75, almost everyone has a
cataract. Fifty percent of the people between the ages of 75 and 85 with
cataracts have lost some vision as a result. The National Eye Institutes of
Health Cataracts indicates that cataracts are the leading cause of blindness in
the world, and cataracts affects nearly 20.5 million Americans age 65 and older.
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TLC VISION CORPORATION
TLC Vision was originally 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 The Laser Center, Inc. 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. On May 13, 2002, the Company filed articles of continuance with the
province of New Brunswick and changed its name to TLC Vision Corporation. On May
15, 2002, the Company completed its business combination with LaserVision, a
leading provider of access to excimer lasers, microkeratomes and related support
services.
BUSINESS STRATEGY
TLC Vision's strategy is to continue toward the goal of becoming a
diversified eye care services provider by leveraging our relationships with
ophthalmologists and optometrists throughout North America. The Company's
strategy is composed of the following four parts: (1) increase diversification
through new growth opportunities in the eye care industry which leverage
relationships with eye care doctors and capitalize on existing assets; (2)
continue expansion of surgeon relationships to work within the TLC Vision
branded center model and laser access model; (3) increase surgical volume
through developing programs to support eye doctors in patient education and
clinical support; and (4) standardize operations to minimize operating costs and
increase efficiencies without compromising the Company's commitment to assist
its affiliated doctors in providing the highest levels of patient care and
clinical results.
DIVERSIFICATION BEYOND REFRACTIVE LASER BUSINESSES
The first component of TLC Vision's strategy is to diversify into a
broader eye care services company through internal business development and
complementary acquisitions. The Company believes it can continue to leverage its
relationships with a large number of ophthalmologists and optometrists to create
new business opportunities. The main focus of the Company's diversification
strategy is in the United States, where the Company continues to position itself
to take advantage of the growing market for eye care services.
TLC Vision plans to further diversify its business in four ways:
o continuing to develop or acquire single-specialty ophthalmic
ambulatory surgery centers through the OR Partners
subsidiary;
o continuing to expand the Company's existing mobile cataract
business through focused growth strategies and acquisitions of
existing mobile cataract businesses;
o continuing to develop the Company's optometric practice
franchising organization, Vision Source, through increasing
the number of affiliated practice franchises; and
o developing new eye care related businesses that evolve from
strategic technology investments, such as Occulogix, a
rheopheresis joint venture for treating age related macular
degeneration.
EXPANSION OF SURGEON RELATIONSHIPS
TLC Vision believes that its existing relationships with a large number
of eye surgeons represent an important competitive strength. TLC Vision's
business model will focus on implementing new services and business
opportunities which drive revenue to the surgeon.
INCREASE SURGICAL VOLUME
The primary tactic in increasing surgical volume will be through
supporting refractive growth initiatives with ophthalmologists and optometrists.
To accomplish this, TLC Vision will focus on:
o commitment to a co-management model which allows optometrists
to provide the best clinical outcomes for their patients while
retaining them in their practice;
o continuing clinical education to ophthalmologists and
optometrists;
o quality patient outcomes assistance;
o practice development education and tools focused on educating
the staff of the ophthalmologists and optometrists; and
o co-operative marketing programs to build awareness for the
procedure.
CONTROLLING COSTS
TLC Vision has and continues to review its cost structure with a view
to significantly increase efficiencies and leverage economics of scale without
compromising the delivery of quality services to doctors and their patients. On
a day to day operations level, this review seeks to achieve a more comprehensive
approach to reduce corporate and centers costs, capture the potential cost
synergies provided by the merger with LaserVision and make refinements in its
operating models
DESCRIPTION OF BRANDED TLC VISION LASER EYE CENTERS
The Company currently owns and manages 62 TLC Vision branded laser eye
centers in the United States and six centers in Canada. Each TLC Vision branded
laser eye center has a minimum of one excimer laser with many of the centers
having two or more lasers. The majority of the Company's excimer lasers are
manufactured by either VISX Incorporated ("VISX"), Alcon, or Bausch & Lomb.
A typical TLC Vision branded laser eye center has between 3,000 and
5,000 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, the Company generally receives revenues in the form
of management and facility fees paid by doctors who use the TLC Vision branded
laser eye 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. Most TLC Vision branded laser eye
centers have a clinical director, who is an optometrist and oversees the
clinical aspects of the center and builds and supports
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the network of affiliated eye care doctors. Most centers also have a business
manager, a receptionist, ophthalmic technicians and patient consultants. The
number of staff depends on the activity level of the center. One senior staff
person, who is designated as the executive director of the center, assists in
preparation of the annual business plan and supervises the day-to-day operations
of the center. See "Item 2 - Properties" for a list of branded TLC Vision laser
eye centers.
TLC Vision 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 Vision branded laser
eye center to provide a potential candidate with current information on
affiliated doctors throughout North America, to direct a candidate to the
closest TLC Vision branded laser eye 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 TLC Vision branded laser eye centers. TLC Vision has also
introduced a new on-line consumer consultation site on TLC Vision's website
(www.tlcvision.com). This consumer consultation site allows consumers to book
their consultation with the Company online. TLC Vision also maintains a call
center (1-800-CALL TLC VISION) which is staffed seven days a week.
PRICING
At TLC Vision branded laser eye centers in the United States, patients
are typically charged approximately $1,800 per eye for LASIK. At TLC Vision
branded laser eye centers in Canada, patients are typically charged
approximately C$1,700 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 skill of surgeon, customer service reputation, and that a TLC Vision branded
laser eye center's competitiveness is enhanced by its relationships with
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. However, the Company believes it has positioned
itself well in the private insurance and employer market through its Corporate
Advantage program which is now available to more than 80 million individuals.
CO-MANAGEMENT MODEL
The Company has developed and implemented a co-management model under
which it not only establishes, manages and operates TLC Vision branded laser 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 in affiliation with the local TLC Vision
branded laser eye care center. The primary care doctors assess whether patients
are 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 Vision branded laser eye
care 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."
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TLC Vision believes that its strong relationships with its affiliated
eye care doctors, though non-exclusive, represent an important competitive
advantage for the TLC Vision branded laser eye care centers.
The Company believes that primary care doctors' relationships with TLC
Vision and the doctors' 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.
MARKETING PROGRAMS
The Company's "Lifetime Commitment" program, established in 1997 and
offered through a TLC Vision branded laser eye center, entitles patients within
a certain range of vision correction to have certain 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, at the patient's expense, with a TLC Vision affiliated doctor. The purpose
of the program is to respond to a patient's concern that their sight might
regress 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 treated. The Company believes that this
program has been well-received by both patients and doctors.
The Company also seeks to increase its procedure volume and its market
penetration through other innovative marketing programs for the TLC Vision
branded laser eye care centers, particularly in developing stronger
relationships with optometrists.
TLC Vision has also developed marketing programs directed primarily at
large employers and third party providers to provide laser vision correction to
their employees and participants through a TLC Vision branded laser eye center.
Participating employers may partially subsidize the cost of an employee's laser
vision correction at a TLC Vision branded laser eye care center and the
procedure may be provided at a discounted price. The Company has more than 1,500
participating employers. In addition, more than 80 million individuals qualify
for the program through arrangements between TLC Vision and third party
providers. See "Item 1 - Business - Risk Factors - Inability to Execute
Strategy; Management of Growth."
SALES AND MARKETING
While TLC Vision 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 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 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 may receive support from the Company in the development of marketing
programs.
The Company believes that the most effective way to market to doctors
is to be perceived as a leader in the eye care industry. To this end, the
Company strives to be affiliated with clinical leaders,
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educate doctors on laser vision and refractive correction and remain 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.
The Company believes that as market acceptance for laser vision
correction continues to increase, competition among surgical providers will
continue to grow and candidates for laser vision correction will increasingly
select a provider based on factors other than solely price.
OWNERSHIP OF BRANDED EYE CARE CENTERS
The Company's TLC Vision branded laser eye centers are typically owned
and operated by subsidiaries of the Company. The Company has no ownership
interest in the doctors' practices or professional corporations that TLC Vision
manages on behalf of doctors or that have access to a TLC Vision branded laser
eye center to perform laser vision correction services.
SURGEON CONTRACTS
In each market where the Company operates a branded laser eye center,
the Company 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
affiliated 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 the Company collect
the fees on their behalf.
Most surgeons performing laser vision correction procedures through a
TLC Vision branded laser eye center owned, managed or operated by the Company 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 certain
affiliated surgeons performing laser vision correction at the Company's TLC
Vision branded laser eye 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 and must receive training approved by the
manufacturer of the laser on which they perform procedures. 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
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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.
DESCRIPTION OF SECONDARY CARE CENTERS
The Company has an investment in two secondary care entities in the
United States. See "Item 2 - Properties" for a list of TLC Vision 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 patients as well as reimbursement or payment by third party
payors, including Medicare and Medicaid.
DESCRIPTION OF LASER ACCESS BUSINESS
OVERVIEW
LaserVision, TLC Vision's wholly owned subsidiary, provides access to
excimer lasers, microkeratomes, other equipment and value-added support services
such as training, technical support and equipment maintenance to eye surgeons
for the treatment of nearsightedness, farsightedness, astigmatism and cataracts
primarily in the United States. LaserVision's delivery system utilizes both
mobile equipment, which is routinely moved from site to site in response to
market demand, and fixed site locations. LaserVision believes that its flexible
delivery system enlarges the pool of potential locations, eye surgeons and
patients that it can serve, and allows it to effectively respond to changing
market demands. LaserVision also provides a broad range of support services to
the eye surgeons who use its equipment, including arranging for training of
physicians and staff, technical support and equipment maintenance, industry
updates, and marketing advice, clinical advisory service, patient financing,
partnership opportunities and practice satelliting. As of July 31, 2002
LaserVision was utilizing approximately 111 excimer lasers and 241
microkeratomes in connection with its laser access businesses.
Eye surgeons pay LaserVision a fee for each procedure the surgeon
performs using LaserVision's equipment and services. LaserVision typically
provides each piece of equipment to many different eye surgeons, which allows
LaserVision to more efficiently use the equipment and offer it at an affordable
price. LaserVision refers to its practice of providing equipment to multiple eye
surgeons as shared access.
LaserVision's shared access and flexible delivery system benefits eye
surgeons in a variety of ways, including the ability to:
o avoid a large capital investment;
o eliminate the risks associated with buying high-technology
equipment that may rapidly become obsolete;
o obtain technical support provided by LaserVision's laser
engineers and microkeratome technicians;
o use the equipment without responsibility of maintenance or
repair;
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o cost-effectively serve small to medium-sized markets and remote
locations; and
o serve satellite locations even in large markets.
FLEXIBLE DELIVERY SYSTEM
LaserVision seeks to maximize the number of locations, eyes surgeons
and patients which can utilize its access and related services and respond
quickly to changing market demand by utilizing a flexible delivery system that
features both mobile and fixed site locations.
Mobile Access System. LaserVision's mobile access systems are typically
used by eye surgeons who perform fewer than 30 procedures per month or are in
markets where they are able to offer consolidated surgery days to patients. A
certified technician accompanies each excimer laser from location to location.
If an eye surgeon uses LaserVision's microkeratomes, LaserVision generally
supplies one microkeratome, one accessory kit and a second LaserVision employee,
who is certified by the microkeratome manufacturer and acts as a surgical
technician.
Mobile laser equipment is provided by means of a proprietary
"Roll-On/Roll-Off" laser system. The Roll-On/Roll-Off laser system, elements of
which have been patented, consists of an excimer laser mounted on a motorized
air suspension platform. The Roll-On/Roll-Off laser system is transported
between locations in a specifically modified truck and allows an excimer laser
to be easily moved upon reaching its destination. Due to the design of the
Roll-On/Roll-Off system, the laser usually requires only minor adjustments and
minimal set-up time at each destination. As of July 31, 2002, LaserVision had 39
Roll-On/Roll-Off systems in operation, all but two of which were located in the
U.S.
Fixed Site Locations. LaserVision's fixed site lasers are dedicated to
single locations where eye surgeons typically perform more than 40 cases per
month over several surgery days to maintain a competitive offering for patients.
As of July 31, 2002, LaserVision had approximately 70 U.S. fixed sites and one
European fixed sites. Some fixed sites exclusively serve single practice groups
and others are located in ambulatory surgery centers where they can be used by
any qualified eye surgeon.
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VALUE-ADDED SERVICES
LaserVision provides eye surgeons value-added support services that
distinguish us from our competitors, enhance our ability to compete for business
and enable us to grow with our customers by offering them various service and
support arrangements. The following value-added services help our eye surgeon
customers to expand their practices thereby increasing the use of LaserVision's
equipment and services:
o Technical Support and Equipment Maintenance. As of July 31, 2002
LaserVision employed 46 certified laser engineers and 32 microkeratome
technicians. The laser engineers perform most required laser
maintenance and help ensure rapid response to most laser repair or
maintenance needs.
o Staff Training and Development. Through both field and corporate
based practice development support, LaserVision provides its eye
surgeon customers with a comprehensive menu of options to enhance
patient education, staff knowledge, and patient recruitment. Start up
services include our centralized "Right Start" seminars and kits,
refractive coordinator training programs and access to our patient
financing program. These centralized training programs and field based
support provide eye surgeon staff an opportunity to learn best
practices with respect to patient conversion, patient flow, and
marketing programs. Extended services, such as corporate programs,
database management, and networking techniques, enable eye surgeon
customers to experience continued growth in their practice.
o Building Relationships. LaserVision works to form relationships
between eye surgeons and optometrists. These optometric networks are
valuable in referring patients to eye surgeons who use LaserVision's
equipment and services. LaserVision helps to form these referral
networks by training optometrists, who are then able to provide
pre-operative screenings as well as post-surgical follow-up to their
patients. LaserVision also provides eye surgeon customers with
marketing advice designed to foster these referrals and generate new
patients.
o Clinical Advisory Service. TLC Vision maintains a Clinical Advisory
Group which conducts regular conference calls with TLC Vision's eye
surgeon customers. These conference calls are chaired by our clinical
advisors, who are eye surgeons and optometrists with extensive clinical
experience. In addition, TLC Vision conducts clinical advisory meetings
at major industry conferences each year. TLC Vision's clinical advisors
also make themselves available to consult with eye surgeon customers
outside of regularly scheduled conference calls and meetings.
o Practice Satelliting. LaserVision assists eye surgeons with
high-volume practices who desire to serve smaller markets through
satellite surgical locations. This program allows eye surgeon customers
to leverage their time performing eye surgery.
SALES AND MARKETING
LaserVision's business development personnel develop sales leads which
come from sources such as customer contact through trade shows and professional
organizations. After identifying a
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prospective eye surgeon customer, the regional manager guides the eye surgeon
through the contract process. Once an eye surgeon is prepared to initiate
surgeries using our services and equipment, LaserVision's operations department
and business development personnel assume primary responsibility for the ongoing
relationship.
MOBILE AND FIXED ACCESS AGREEMENTS
Under LaserVision's standard refractive mobile access agreements with
physicians, LaserVision provides some or all of the following: laser and
microkeratome equipment, certain related supplies for the equipment (such as
laser gases and per procedure cards and microkeratome blades), laser operator,
microkeratome technician, maintenance and certain technology upgrades. In
addition, LaserVision may provide practice development, marketing assistance,
coordination of surgeon training, and other support services. This access is
provided on agreed upon dates at either the surgeons' offices or a third party's
facility. In return, the surgeons pay a per procedure fee for LaserVision's
services and generally agree to exclusively use LaserVision's equipment for
refractive surgery. LaserVision does not provide medical services to the
patients or any administrative services to the access customers.
Under LaserVision's standard refractive fixed access agreements with
physicians, LaserVision generally provides the following: a fixed based laser
and microkeratome equipment, certain related supplies for the equipment (such as
laser gases and per procedure cards and microkeratome blades), periodic
maintenance and certain technology upgrades. In return, the surgeons pay either
a per procedure fee and guarantee a minimum number of procedures per month, or a
flat monthly fee plus the cost of per procedure cards and blades. In addition,
the surgeons generally agree to exclusively use LaserVision's equipment for
refractive surgery. LaserVision does not provide a laser operator, microkeratome
technician, medical services to the patients or any administrative services to
the access customers.
Under LaserVision's joint venture arrangements, LaserVision directly or
indirectly provides either mobile or fixed based laser access and the following:
microkeratome equipment, certain related supplies for the equipment (such as
laser gases and per procedure cards and microkeratome blades), laser operator,
microkeratome technician, maintenance and certain technology upgrades, the laser
facility, management services which includes administrative services such as
billing and collections, staffing for the refractive practice, practice
development, marketing assistance and funds, and other support services.
LaserVision receives an access fee and management services fees in addition to
being reimbursed for the direct costs paid by LaserVision for the laser facility
operations. In return, the surgeons generally agree to exclusively use
LaserVision's equipment for refractive surgery and/or not to compete with the
LaserVision within a certain area. Neither LaserVision nor the joint ventures
provide medical services to the patients.
DESCRIPTION OF CATARACT BUSINESS
Through its Midwest Surgical Services, Inc division ("MSS"),
LaserVision provides mobile and fixed site cataract equipment and related
services in 37 states throughout the United States. As of August 1, 2002, MSS
employed 45 cataract equipment technicians and operated 45 mobile cataract
systems. A MSS certified surgical technician transports the mobile equipment
from one surgery location to the next and prepares the equipment at each stop so
that the operating room is ready for cataract surgery.
Cataract patients, a majority of which are elderly, prefer to receive
treatment near their homes. MSS focuses on developing relationships between
local hospitals, referring optometrists and eye surgeons in small to
medium-sized markets where MSS's shared-access approach and mobile systems make
it economically feasible for optometrists and surgeons to provide cataract
surgical services which are "close to home."
The MSS sales staff for our cataract division focuses on identifying
small to medium sized markets which usually do not have convenient access to the
services of a cataract eye surgeon. After identifying such a market, MSS' sales
staff will contact the local hospital and local optometrists to develop interest
in "close to home" cataract surgery services. When there is sufficient interest,
the sales staff brings the hospital and optometrists in contact with an eye
surgeon who is willing to provide services to that local market. By bringing
these various parties into contact, MSS seeks to increase demand for our mobile
cataract services and increase convenience for cataract patients.
DESCRIPTION OF AMBULATORY SURGICAL CENTER BUSINESS
As a natural extension of its existing eye care businesses, TLC Vision
has organized OR Partners, Inc. as a wholly owned subsidiary to develop, acquire
and manage single specialty ophthalmology ambulatory surgery centers ("ASCs") in
partnership with ophthalmic surgeons. As of August 1, 2002, TLC Vision operated
one ASC and anticipates that an additional 10 ASCs will be opened during
calendar 2003.
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ASCs provide outpatient eye surgery services to the partner surgeons
and other non-affiliated surgeons in a less institutional and more efficient,
productive and cost efficient setting than traditional surgical hospitals. The
two primary procedures performed in the ASCs are cataract extraction with IOL
implantation and YAG capsulotomies. However, the ASCs will have the capability
to accommodate additional ophthalmic surgical procedures such as occuloplastic,
cornea, glaucoma and retina
OR Partners focus is seeking partnerships with eye surgeons who are
already performing a sufficient number of cataract surgeries to support the
ASCs. In a typical ASC partnership, OR Partners and the surgeon partners
contribute enough capital to cover the start up costs and initial operations.
The partnership formed is jointly owned by OR Partners and the surgeons, with OR
Partners owning an equity interest and receiving a management fee for assuming
overall administrative management of the facility. As manager, OR Partners
manages the clinical services, marketing, administration, business operations
and staffing, licensing and certification, facility accreditation and financing
reporting of the ASC, which allows surgeon partners to focus on providing high
levels of quality patient care.
In addition to OR Partners, Aspen Healthcare Inc. ("Aspen"), a
subsidiary of TLC Vision, is a health care consulting, development and
management firm specializing in ambulatory surgery center joint-venture
development and management. Aspen offers experienced management services to both
surgery centers and hospitals. Aspen also consults, plans, designs, develops,
implements and operates ambulatory surgery centers nationwide. The Company is
party to an agreement to sell 100% of Aspen in September 2002. See Note 23 to
the consolidated financial statements, Subsequent Events.
ANCILLARY BUSINESSES AND SUPPORT PROGRAMS
TLC Vision has made investments in other businesses with the primary
objective of diversification with other vision care businesses and the secondary
objective of capitalizing on its management and marketing skills and
relationships with eye care providers.
OTHER BUSINESSES
Vision Source is a majority 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.
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SUPPORT PROGRAMS
CLINICAL ADVISORY GROUP
The Company's Clinical Advisory Group is comprised of refractive
surgeons and optometrists selected based upon clinical experience and previous
involvement with TLC Vision. The Clinical Advisory Group acts as both a clinical
and business resource to the Company by providing an eye care professional's
perspective on market competition, proposed policies and operational strategies.
Additionally, the Clinical Advisory Group also acts as a resource to the
Company's employees and affiliated doctors. The Clinical Advisory Group has
scheduled meetings throughout the year and meets as necessary to consider
clinical issues as they arise.
EMERGING TECHNOLOGIES
The Company considers itself a leader in the provision of vision
correction technology. The Company's medical directors continually evaluate new
vision correction technologies and procedures to seek to ensure that affiliated
doctors have access to state of the art technology to provide the highest level
of care. TLC Vision's branded eye care centers in Ontario are state of the art
facilities that are used to examine and evaluate new technologies for TLC
Vision. The Company's Clinical Advisory Group monitors emerging technologies and
procedures being developed by third party equipment and device manufacturers to
address whether these technologies may complement or improve our service
offerings.
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 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, including programs in conjunction with several of the major
optometry schools in the United States. In addition, the Company has an
education and training relationship with the University of Waterloo, the only
English language optometry school in Canada.
WEBSITE
TLC Vision has linked its branded eye care centers, network doctors and
potential patients through its website www.tlcvision.com which provides a
directory of TLC Vision affiliated eye care providers and contains questions and
answers about laser vision correction. TLC Vision's website also contains
various other useful information for shareholders and investors.
EQUIPMENT AND CAPITAL FINANCING
The Company utilizes the VISX, Alcon, and Bausch & Lomb excimer lasers.
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
17
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.
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.
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 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 Market Scope, as of June 30, 2001,
independent surgeon owned centers accounted for the largest percentage of total
procedure volume 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 the Company's branded eye care center and its affiliated
doctors, the Company believes that the important factors affecting competition
in the laser vision correction market are quality of service, surgeon skill and
reputation, and 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, 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.
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During the past several years, 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 Vision 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, in June, 2001 ICON Laser Eye Centers, Inc. was placed in
receivership and Vision America also declared bankruptcy during fiscal 2002. 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 2001 and 2002.
TLC Vision competes in fragmented geographic markets. The Company's
principal corporate competitors include LCA-Vision Inc. and Lasik Vision
Institute, Inc. On May 15, 2002, the Company completed its merger with
LaserVision. See "Item 1 - Business - Overview".
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 use 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. 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 Vision 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 the Company's branded 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-approved uses and conducts periodic inspections of manufacturers to
determine compliance with Quality System Regulations.
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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 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. Approximately 42 states in which the Company currently does
business limit or prohibit corporations from practicing medicine and employing
or engaging physicians to practice medicine.
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 Vision will comply
with such laws in all material respects, although it cannot assure such
compliance by doctors.
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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 affiliated with the Company's ambulatory surgery company, OR
Partners, Inc., the Company's mobile cataract services business, MSS, or 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 for the Department of Health and Human Services,
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 ambulatory surgery business, mobile cataract business and
secondary care centers also triggers potential application of the Stark Law. The
co-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
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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. The Company'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 these arrangements do not violate any of the 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 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
22
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. The Company expects that
ophthalmologists and optometrists affiliated with TLCVision will comply with the
applicable regulations, although it cannot assure 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
Vision centers will comply with such laws, although it cannot assure 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 Vision does not allow optometrists to perform the procedure at
TLC Vision centers in Canada.
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 eye care 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 believes that in those states that require a CON,
it will be able to do so.
The Company is not aware of any Canadian health regulations which
impose facility licensing requirements on the operation of eye care centers.
23
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 Vision expects that
affiliated doctors will comply with such laws in all material respects, although
it cannot assure 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 names "TLC The Laser Center" and slogan "See the Best" are
registered United States service marks of TLC Vision and registered trademarks
in Canada. TLC Vision has registered "TLC Laser Eye Centers" with the TLC Vision
eye design as a trademark in the United States and Canada. "Laser Vision,"
"Laser Vision Centers and Design," Laser Vision Centers," "LVC," and "LVCI," are
registered trademarks in the United States utilized by LaserVision. LaserVision
has secured a patent for certain aspects of its Roll-On/Roll-Off system. In
addition, TLC Vision owns a patent in the United States on the treatment of a
potential side effect of laser vision correction generally known as "central
islands." The patent expires in May 2014. The Company's service marks, patents
and other intellectual property may offer the Company a competitive advantage in
the marketplace and could be important to the success of the Company. One or all
of the registrations of the service marks may 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.
24
EMPLOYEES
As of July 31, 2002, the Company had approximately 950 employees. The
Company, through its subsidiaries contracts with approximately 84 optometrists
to furnish non-clinical services, including management and administrative
functions and, in some states, clinical services. Additionally, the Company,
through its subsidiaries contracts with approximately 6 ophthalmologists to
furnish non-clinical services, consistent with those of a medical director, and
in some states clinical services. 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
TLC Vision reported net losses of $161.9 million, $37.8 million, and
$5.9 for fiscal 2002, 2001 and 2000, respectively. As of May 31, 2002, TLC
Vision reported an accumulated deficit of $242.0 million. TLC Vision may not
become profitable and if it does become profitable, its profitability may vary
significantly from quarter to quarter. TLC Vision's profitability will depend on
a number of factors, including:
o the Company's ability to increase demand for its services and
control costs;
o the Company's ability to execute its strategy and effectively
integrate acquired businesses and assets;
o the Company's ability to obtain adequate insurance against
malpractice claims;
o economic conditions in the Company's markets, including the
availability of discretionary income;
o concerns about the safety and effectiveness of laser vision
correction;
o competitive factors;
o regulatory developments;
o the Company's ability to achieve expected cost savings and
synergies; and
o the Company's ability to retain and attract qualified personnel.
See "Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations".
CHANGES IN GENERAL ECONOMIC CONDITIONS MAY CAUSE FLUCTUATIONS IN TLC VISION'S
REVENUES AND PROFITABILITY.
The cost of laser vision correction procedures is typically not
reimbursed by health care insurance companies or other third party payors.
Accordingly, the operating results of TLC Vision may vary based upon the impact
of changes in economic conditions on the disposable income of consumers
interested in
25
laser vision correction. A significant decrease in consumer disposable income in
a weakening economy may result in decreased procedure levels and revenues for
TLC Vision. For example, the recent downturn in the North American economy has
contributed to a 27% decline in the number of paid procedures at TLC Vision's
branded centers and a 22.6% decline in total revenues for fiscal 2002 compared
to fiscal 2001. In addition, weakening economic conditions may result in an
increase in the number of TLC Vision's customers which experience financial
distress or declare bankruptcy, that may negatively impact TLC Vision's accounts
receivable collection experience.
THE MARKET FOR LASER VISION CORRECTION IS INTENSELY COMPETITIVE AND COMPETITION
MAY INCREASE.
Some of the Company's competitors or companies that may choose to enter
the industry in the future, including laser manufacturers themselves, may have
substantially greater financial, technical, managerial, marketing and/or other
resources and experience than the Company and may compete more effectively than
TLC Vision. TLC Vision competes with hospitals, individual ophthalmologists,
other corporate laser centers and manufacturers of excimer laser equipment in
offering laser vision correction services and access to excimer lasers. TLC
Vision's principal corporate competitors will include LCA-Vision Inc. and Lasik
Vision Institute, Inc.
Competition in the market for laser vision correction could increase as
excimer laser surgery becomes more commonplace and the number of
ophthalmologists performing the procedure increases. In addition, competition
would increase if state laws were amended to permit optometrists, in addition to
ophthalmologists, to perform laser vision correction. TLC Vision will compete on
the basis of quality of service, surgeon skill and reputation, and price. If
more providers offer laser vision correction in a given geographic market, the
price charged for such procedures may decrease. In recent years, competitors
have offered laser vision correction at prices considerably lower than TLC
Vision's prices. The laser vision correction industry has been significantly
affected by reductions in the price for laser vision correction, including the
failure of many businesses that provided laser vision correction. Market
conditions may compel TLC Vision to lower prices to remain competitive and any
reduction in its prices may not be offset by an increase in its procedure volume
or decreases in its costs. A decrease in either the fees or procedures performed
at TLC Vision's eye care centers or in the number of procedures performed at its
centers could cause TLC Vision's revenues to decline and its business and
financial condition to weaken.
Laser vision correction competes with other surgical and non-surgical
means of correcting refractive disorders, including eyeglasses, contact lenses,
other types of refractive surgery and other technologies currently under
development, such as intraocular lenses and surgery with different types of
lasers. TLC Vision's management, operations and marketing plans may not be
successful in meeting this competition. Optometry chains and other suppliers of
eyeglasses and contact lenses may have substantially greater financial,
technical, managerial, marketing and other resources and experience than the
Company and may promote alternatives to laser vision correction or purchase
laser systems and offer laser vision correction to their customers.
If the price of excimer laser systems decreases, additional competition
could develop. The price for excimer laser systems could decrease for a number
of reasons, including technological innovation and increased competition among
laser manufacturers. Further reductions in the price of excimer lasers could
reduce demand for TLC Vision's laser access services by making it economically
more attractive for eye surgeons to buy excimer lasers rather than utilize TLC
Vision's services.
Although doctors performing laser vision correction at TLC Vision's eye
care centers and significant employees of TLC Vision have agreed to restrictions
on competing with TLC Vision, or
26
soliciting patients or employees associated with their facilities, these
non-competition agreements may not be enforceable.
THE MARKET ACCEPTANCE OF LASER VISION CORRECTION IS UNCERTAIN.
TLC Vision believes that the profitability and growth of TLC Vision
will depend upon broad acceptance of laser vision correction in the United
States and, to a lesser extent, Canada. TLC Vision may have difficulty
generating revenue and growing its business if laser vision correction does not
become more widely accepted by eye care doctors or the general population as an
alternative to existing methods of treating refractive vision disorders. Laser
vision correction may not become more widely accepted due to a number of
factors, including:
o its cost, particularly since laser vision correction typically is
not covered by government or private insurers;
o general resistance to surgery;
o effective and less expensive alternative methods of correcting
refractive vision disorders are widely available;
o the lack of long-term follow-up data;
o the possibility of unknown side effects; and
o reported adverse events or other unfavorable publicity involving
patient outcomes from laser vision correction.
CONCERNS ABOUT POTENTIAL SIDE EFFECTS AND LONG-TERM RESULTS OF LASER VISION
CORRECTION MAY NEGATIVELY IMPACT MARKET ACCEPTANCE OF LASER VISION CORRECTION
AND PREVENT TLC VISION FROM GROWING ITS BUSINESS.
Concerns have been raised with respect to the predictability and
stability of results and potential complications or side effects of laser vision
correction. Any complications or side effects of laser vision correction may
call into question the safety and effectiveness of laser vision correction,
which in turn may damage the likelihood of market acceptance of laser vision
correction. Complications or side effects of laser vision correction could lead
to product liability, malpractice or other claims against TLC Vision. Also,
complications or side effects could jeopardize the approval by the U.S. Food and
Drug Administration of the excimer laser for sale for laser vision correction.
Although results of a study showed that the majority of patients experienced no
serious side effects six years after laser vision correction using the
Photorefractive Keratectomy procedure, known as PRK, complications may be
identified in further long-term follow-up studies of PRK or Laser In-Situ
Keratomileusis, known as LASIK, the procedure more often performed in recent
years.
There is no independent industry source for data on side effects or
complications from laser vision correction. In addition, TLC Vision does not
track side effects. Some of the possible side effects of laser vision correction
are:
o foreign body sensation,
o pain or discomfort,
o sensitivity to bright lights,
27
o blurred vision,
o dryness or tearing,
o fluctuation in vision,
o night glare,
o poor or reduced visual quality,
o overcorrection or undercorrection,
o regression, and
o corneal flap or corneal healing complications.
TLC Vision believes that the percentage of patients who experience serious side
effects as a result of laser vision correction at its centers is likely less
than one percent. However, there is no study to support this belief. In
addition, rates of complications in the industry may be higher than those
experienced by TLC Vision.
Laser vision correction may also involve the removal of "Bowman's
membrane," an intermediate layer between the outer corneal layer and the middle
corneal layer of the eye. Although several studies have demonstrated no
significant adverse reactions to excimer laser removal of Bowman's membrane, the
effect of the removal of Bowman's membrane on patients is unclear.
TLC VISION MAY BE UNABLE TO ENTER INTO OR MAINTAIN AGREEMENTS WITH DOCTORS OR
OTHER HEALTH CARE PROVIDERS ON SATISFACTORY TERMS.
TLC Vision will have difficulty generating revenue if it is unable to
enter into or maintain agreements with doctors or other health care providers on
satisfactory terms. Most states prohibit TLC Vision, from practicing medicine,
employing doctors to practice medicine on TLC Vision's behalf or employing
optometrists to render optometric services on TLC Vision's behalf. In most
states TLC Vision may only own and manage centers and enter into affiliations
with doctors and other health care providers. Also, affiliated doctors have
provided a significant source of patients for TLC Vision and are expected to
provide a significant source of patients for TLC Vision. Accordingly, the
success of TLC Vision's business 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 TLC
Vision.
QUARTERLY FLUCTUATIONS IN OPERATING RESULTS MAKE FINANCIAL FORECASTING
DIFFICULT.
TLC Vision may experience future quarterly losses which may exceed
prior quarterly losses of TLC Vision and LaserVision on a combined basis. TLC
Vision's expense levels will be based, in part, on its expectations as to future
revenues. If actual revenue levels are below expectations, TLC Vision's
operating results would deteriorate. Historically, the quarterly results of
operations of TLC Vision and LaserVision have varied, and future results may
continue to fluctuate significantly from quarter to quarter. Accordingly,
quarter-to-quarter comparisons of TLC Vision's operating results may not be
meaningful and should not be relied upon as indications of its future
performance or annual operating results. Quarterly results will depend on
numerous factors, including economic conditions in TLC Vision's
28
geographic markets, market acceptance of its services, seasonal factors and
other factors described in this Form 10K.
THE MARKET PRICE OF TLC VISION'S COMMON SHARES MAY BE VOLATILE.
Historically, the market price of TLC Vision's common shares has been
very volatile. For example, the market price of TLC Vision's common shares
decreased from a high of $53.50 to a low of $1.125 between July 1999 and August
2002. TLC Vision's common shares will likely be volatile in the future due to
industry developments and business-specific factors such as:
o the Company's ability to effectively penetrate the laser vision
correction market;
o the Company's ability to execute its business strategy;
o new technological innovations and products;
o changes in government regulations;
o adverse regulatory action;
o public concerns about the safety and effectiveness of laser
vision correction;
o loss of key management;
o announcements of extraordinary events such as acquisitions or
litigation;
o variations in its financial results;
o fluctuations in competitors' stock prices;
o the issuance of new or changed stock market analyst reports and
recommendations concerning its common shares or competitors'
stock;
o changes in earnings estimates by securities analysts;
o the Company's ability to meet analysts' projections;
o changes in the market for medical services; or
o general economic, political and market conditions.
In addition, in recent years the prices and trading volumes of publicly
traded shares, particularly those of companies in health care related markets,
have been extremely volatile. This volatility has substantially affected the
market prices of many companies' securities for reasons frequently unrelated or
disproportionate to their operating performance. Following the terrorist attacks
in the United States in September 2001, stock markets have experienced extreme
volatility and stock prices have declined, in some cases substantially.
Continued volatility may reduce the market price of the common shares of TLC
Vision.
29
TLC VISION MAY BE UNABLE TO EXECUTE ITS BUSINESS STRATEGY.
TLC Vision's business strategy will be to focus on:
o maximizing revenues through a co-management model and innovative
marketing programs;
o controlling costs without compromising superior quality of care
or clinical outcomes; and
o pursuing additional growth opportunities outside of its laser
vision correction business
If TLC Vision does not successfully execute this strategy or if the strategy is
not effective, TLC Vision may be unable to maintain or grow its revenues or
achieve profitability.
TLC VISION MAY MAKE INVESTMENTS THAT MAY NOT BE PROFITABLE.
TLC Vision has made investments which are intended to support its core
business, such as TLC Vision's investment in LaserSight Inc. These investments
have generally been made in companies in the laser vision correction business or
that own emerging technologies that TLC Vision believes will support the
company's core business. TLC Vision has taken a charge of approximately $26.1
million in the fiscal year ended May 31, 2002 primarily as a result of the
decline in the value of its investments, including the investment in LaserSight.
TLC Vision may make similar investments in the future, some of which may be
material or may become material over time. If TLC Vision is unable to manage
these investments, or if these investments are not profitable or do not generate
the expected returns, then future operating results may be adversely impacted.
THE GROWTH STRATEGY OF TLC VISION DEPENDS ON ITS ABILITY TO MAKE ACQUISITIONS OR
ENTER INTO AFFILIATION ARRANGEMENTS.
The success of the growth strategy of TLC Vision will be dependent on
increasing the number of procedures at its eye care centers, increasing the
number of eye care centers through internal development or acquisitions and
entering into affiliation arrangements with local eye care professionals in
markets not large enough to justify a corporate center.
The addition of new centers will present challenges to management,
including the integration of new operations, technologies and personnel. The
addition of new centers also present special risks, including:
o unanticipated liabilities and contingencies;
o diversion of management attention; and
o possible adverse effects on operating results resulting from:
o possible future goodwill impairment;
o increased interest costs;
o the issuance of additional securities; and
30
o increased costs resulting from difficulties related to the
integration of the acquired businesses.
TLC Vision's ability to achieve growth through acquisitions will depend on a
number of factors, including:
o the availability of attractive acquisition opportunities;
o the availability of capital to complete acquisitions;
o the availability of working capital to fund the operations
of acquired businesses; and
o the effect of existing and emerging competition on
operations.
TLC Vision may not be able to successfully identify suitable
acquisition candidates, complete acquisitions on acceptable terms, if at all, or
successfully integrate acquired businesses into its operations. TLC Vision's
past and possible future acquisitions may not achieve adequate levels of
revenue, profitability or productivity or may not otherwise perform as expected.
A DECLINE IN TLC VISION'S STOCK PRICE COULD PREVENT IT FROM COMPLETING
ACQUISITIONS AND COULD RESULT IN INCREASED DILUTION TO EXISTING SHAREHOLDERS.
TLC Vision may have substantial future capital requirements, and TLC
Vision's ability to obtain additional funding is uncertain.
TLC Vision will be unable to predict with certainty the timing or the
amount of its future capital requirements. Continued operating losses or changes
in TLC Vision's operations, expansion plans or capital requirements may consume
available cash and other resources more rapidly than TLC Vision anticipates and
more funding may be required before TLC Vision becomes profitable. TLC Vision's
capital needs depend on many factors, including:
o the rate and cost of acquisitions of businesses, equipment and
other assets;
o the rate of opening new centers or expanding existing centers;
o market acceptance of laser vision correction; and
o actions by competitors.
TLC Vision may not have adequate resources to finance the growth in its
business, and it may not be able to obtain additional capital through subsequent
equity or debt financings on terms acceptable to TLC Vision or at all. If TLC
Vision does not have adequate resources and cannot obtain additional capital,
TLC Vision will not be able to implement its expansion strategy successfully,
TLC Vision's growth could be limited and its net income and financial condition
could be adversely affected.
TLC VISION MAY BE UNABLE TO SUCCESSFULLY IMPLEMENT AND INTEGRATE NEW OPERATIONS
AND FACILITIES.
The success of TLC Vision depends on its ability to manage its existing
operations and facilities and to expand its businesses consistent with the
Company's business strategy. In the past, TLC Vision has grown rapidly in the
United States. TLC Vision's future growth and expansion will increase its
management's responsibilities and demands on operating and financial systems and
resources. TLC Vision's business and financial results are dependent upon a
number of factors, including its ability to:
31
o implement upgraded operations and financial systems, procedures
and controls;
o hire and train new staff and managerial personnel;
o adapt or amend TLC Vision's business structure to comply with
present or future legal requirements affecting its arrangements
with doctors, including state prohibitions on fee-splitting,
corporate practice of optometry and medicine and referrals to
facilities in which doctors have a financial interest; and
o obtain regulatory approvals, where necessary, and comply with
licensing requirements applicable to doctors and facilities
operated, and services offered, by doctors.
TLC Vision's failure or inability to successfully implement these and
other factors may adversely affect the quality and profitability of its business
operations.
TLC VISION DEPENDS ON KEY PERSONNEL WHOSE LOSS COULD ADVERSELY AFFECT ITS
BUSINESS.
TLC Vision's success and growth depends in part on the active
participation of key medical and management personnel, including Mr. Vamvakas
and Mr. Wachtman. TLC Vision maintains key person insurance for each of Mr.
Vamvakas, Mr. Wachtman and several key ophthalmologists. Despite having this
insurance in place, the loss of any one of these key individuals could adversely
affect the quality, profitability and growth prospects of TLC Vision's business
operations.
TLC Vision will have employment or similar agreements with the above
individuals and other key personnel. The terms of these agreements will include,
in some cases, entitlements to substantial severance payments in the event of
termination of employment by either TLC Vision or the employee.
TLC VISION MAY BE SUBJECT TO MALPRACTICE AND OTHER SIMILAR CLAIMS AND MAY BE
UNABLE TO OBTAIN OR MAINTAIN ADEQUATE INSURANCE AGAINST THESE CLAIMS.
The provision of medical services at TLC Vision's centers entails an
inherent risk of potential malpractice and other similar claims. Through
September 30, 2002, former LaserVision sites have a $25,000 deductible per
claim. As of October 1, 2002 all of TLC Vision's professional malpractice
insurance will likely have a $250,000 deductible per claim. Patients at TLC
Vision's centers execute informed consent statements prior to any procedure
performed by doctors at TLC Vision's centers, but these consents may not provide
adequate liability protection. Although TLC Vision does not engage in the
practice of medicine or have responsibility for compliance with regulatory and
other requirements directly applicable to doctors and doctor groups, claims,
suits or complaints relating to services provided at TLC Vision's centers may be
asserted against TLC Vision in the future, and the assertion or outcome of these
claims could result in higher administrative and legal expenses, including
settlement costs or litigation damages.
TLC Vision currently maintains malpractice insurance coverage that it
believes is adequate both as to risks and amounts covered. In addition, TLC
Vision requires the doctors who provide medical services at its centers to
maintain comprehensive professional liability insurance and most of these
doctors have agreed to indemnify TLC Vision against certain malpractice and
other claims. TLC Vision's insurance coverage, however, may not be adequate to
satisfy claims, insurance maintained by the doctors may not protect TLC Vision
and such indemnification may not be enforceable or, if enforced, may not be
sufficient. TLC Vision's inability to obtain adequate insurance or an increase
in the future cost of insurance to TLC Vision and the doctors who provide
medical services at the centers may have a material adverse effect on its
business and financial results.
32
The excimer laser system uses hazardous gases which if not properly
contained could result in injury. TLC Vision may not have adequate insurance for
any liabilities arising from injuries caused by the excimer laser system or
hazardous gases. While TLC Vision believes that any claims alleging defects in
TLC Vision's excimer laser systems would be covered by the manufacturers'
product liability insurance, the manufacturers of TLC Vision's excimer laser
systems may not continue to carry adequate product liability insurance.
TLC VISION MAY FACE CLAIMS FOR STATE SALES AND USE TAXES ON THE SERVICES IT
PROVIDES.
TLC Vision provides, through its subsidiary LaserVision, access to
excimer lasers to eye doctors and provides a variety of other services to eye
doctors in connection with eye surgery procedures. Under TLC Vision's laser
access contracts with individual eye doctors, TLC Vision may provide eye
surgeons with the services of a laser operator/technician, laser maintenance and
other value-added services. TLC Vision owns, operates and/or manages branded eye
care centers where laser vision correction procedures are performed and is
responsible for overall management and operation of the centers. The laws of
various states in which TLC Vision operates typically exempt from sales and use
taxation activities which constitute a service. TLC Vision has historically
taken the position that, among other things, services which they provide to the
eye doctor are integral to the surgical procedures provided by the eye doctor
and, therefore, constitute a service exempt from sales and use taxation.
Of the 48 states in which TLC Vision conducts operations, TLC Vision is
aware of a total of SIX states which have asserted that its laser access
arrangements with eye doctors do not constitute a service exempt from sale and
use taxation. Tax authorities in these states have indicated that they consider
the substance of the transaction between the eye doctor and TLC Vision to be the
eye doctor's access to the laser, not the other services provided by TLC Vision.
As such, they have indicated that they consider the arrangement to be a taxable
lease or rental of equipment rather than an exempt service. One of these states
performed an initial review and determined that no further action or assertion
of tax was necessary. Two other states have assessed sales and use taxes on TLC
Vision's customers, but have not assessed any taxes on TLC Vision. Tax
authorities in the remaining three states have contacted TLC Vision and issued
proposed adjustments for various periods from 1995 through February 2002 in the
aggregate amount of approximately $1.8 million. TLC Vision has objected to the
proposed assessments and is engaged in discussions with the respective state tax
authorities. TLC Vision believes that, under applicable laws and TLC Vision's
contracts with its eye surgeon customers, each customer is ultimately
responsible for the payment of any applicable sales and use taxes in respect of
TLC Vision's services. However, TLC Vision may be unable to collect any such
amounts from its customers, and in such event would remain responsible for
payment. Moreover, the imposition of state sales or use taxes could make TLC
Vision's products and services less competitive comparable to other
alternatives. TLC Vision cannot yet predict the outcome of these assessments or
similar actions, if any, which may be undertaken by other state tax authorities.
The Company believes that it has adequate provisions in its accounts with
regards to this matter.
COMPLIANCE WITH INDUSTRY REGULATIONS IS COSTLY AND ONEROUS.
TLC Vision's operations are subject to extensive federal, state and
local laws, rules and regulations. TLC Vision's efforts to comply with these
laws, rules and regulations may impose significant costs, and failure to comply
with these laws, rules and regulations may result in fines or other charges
being imposed on TLC Vision.
Many state laws limit or prohibit corporations from practicing medicine
and optometry and many federal and state laws extensively regulate the
solicitation of prospective patients, the structure of TLC Vision's fees, and
its contractual arrangements with hospitals, surgery centers, ophthalmologists
and optometrists,
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among others. Some states also impose licensing requirements. Although TLC
Vision has tried to structure its business and contractual relationships in
compliance with these laws in all material respects, if any aspect of its
operations were found to violate applicable laws, TLC Vision could be subject to
significant fines or other penalties, required to cease operations in a
particular state, prevented from commencing operations in a particular state or
otherwise be required to revise the structure of its business or legal
arrangements. Many of these laws and regulations are ambiguous, have not been
definitively interpreted