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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2004
COMMISSION FILE NUMBER: 0-29302
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TLC VISION CORPORATION
(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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). [X] Yes [ ] No
As of June 30, 2004, the aggregate market value of the registrant's Common
Shares held by non-affiliates of the registrant was approximately $746.1
million.
As of March 11, 2005, there were 70,174,000 shares of the registrant's
Common Shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Definitive Proxy Statement for the Company's 2005 annual shareholders
meeting (incorporated in Part III to the extent provided in Items 10, 11, 12 and
13).
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This Annual Report on Form 10-K (herein, together with all amendments, exhibits
and schedules hereto, referred to as the "Form 10-K") contains certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which
statements may be identified by the use of forward looking terminology, such as
"may", "will", "expect", "anticipate", "estimate", "plans" or "continue" or the
negative thereof or other variations thereon or comparable terminology referring
to future events or results. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth elsewhere in this Form
10-K. See "Item 1. Business - Risk Factors" for cautionary statements
identifying important factors with respect to such forward-looking statements,
including certain risks and uncertainties, that could cause actual results to
differ materially from results referred to in forward-looking statements. Unless
the context indicates or requires otherwise, references in this Form 10-K to the
"Company" or "TLCVision" shall mean TLC Vision Corporation and its subsidiaries.
During 2002, the Company changed its fiscal year end from May 31 to December 31.
Therefore, references in this Form 10-K to "fiscal 2002" shall mean the 12
months ended May 31, 2002 and "transitional period 2002" shall mean the seven
months ended December 31, 2002. References to "$" 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 (formerly TLC Laser Eye Centers Inc.) is a
diversified eye care services company dedicated to improving lives through
better vision by providing eye doctors with the tools and technologies they need
to deliver high quality patient care. The majority of the Company's revenues
come from refractive surgery, which involves using an excimer laser to treat
common refractive vision disorders such as myopia (nearsightedness), hyperopia
(farsightedness) and astigmatism. The Company's business models include
arrangements ranging from owning and operating fixed site centers to providing
access to lasers through fixed site and mobile service relationships. In
addition to refractive surgery, the Company is diversified into other eye care
businesses. Through its Midwest Surgical Services, Inc. ("MSS") subsidiary, the
Company furnishes hospitals and independent surgeons with mobile or fixed site
access to cataract surgery equipment and services. Through its OR Partners,
Aspen Healthcare and Michigan subsidiaries, TLCVision develops, manages and has
equity participation in single-specialty eye care ambulatory surgery centers and
multi-specialty ambulatory surgery centers. The Company also owns a 51% majority
interest in Vision Source, which provides franchise opportunities to independent
optometrists. The Company is also a 51% majority owner of OccuLogix, Inc.
(formerly Vascular Sciences Corporation), a public company focused on the
treatment of a specific eye disease known as dry age-related macular
degeneration, via rheopheresis, a process for filtering blood.
In accordance with an Agreement and Plan of Merger with Laser Vision
Centers, Inc. ("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 merger enabled the combined companies to provide a
broader array of services to eye care professionals to support these individuals
in providing 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 focuses on three main strategic initiatives: (1) continue to
leverage our core refractive business, through same store growth in centers,
expand into new markets through shared equity relationships, and continue to
protect our access base; (2) grow our non-refractive businesses MSS, OR Partners
and Vision Source; and (3) expand into new eye care segments. Financial
information about the Company's business segments is contained in Note 17
"Segment Information" to the consolidated financial statements.
REFRACTIVE DISORDERS
The eye is a complex organ composed of many parts, and normal vision requires
these parts to work well together. When a person looks at an object, light rays
are reflected from the object to the cornea. In response, the cornea and lens
refract and focus the light rays directly on the retina. At the retina, the
light rays are converted to electrical impulses that are transmitted through the
optic nerve to the brain, where the image is translated and perceived.
Any deviation from normal vision is called a refractive error. Myopia,
hyperopia, astigmatism and presbyopia are different types of refractive errors.
2
- Myopia (nearsightedness) means the eye is longer than normal resulting
in difficulty seeing distant objects as clearly as near objects.
- Hyperopia (farsightedness) means the eye is shorter than normal
resulting in difficulty seeing near objects as clearly as distant
objects.
- Astigmatism means the cornea is oval-shaped resulting in blurred
vision.
- Presbyopia is the loss of lens and eye muscle flexibility, due to the
natural aging process, that causes difficulty in focusing on near
objects and usually requires people age 40 and older to wear bifocals
or reading glasses. Because vision correction surgery cannot reverse
the aging process, presbyopia cannot be corrected surgically; however,
there are surgical and non-surgical techniques available that can
effectively manage presbyopia.
TREATMENT FOR REFRACTIVE DISORDERS
Eyeglasses. Eyeglasses remain the most common method of correcting
refractive errors because they are safe and relatively inexpensive.
Eyeglasses correct nearsightedness and farsightedness by using appropriate
lenses to diverge or converge light rays and focus them directly on the
retina. The drawbacks of eyeglasses are possible dissatisfaction with
personal appearance, inability to participate in certain sports or work
activities and possible distortion in visual images when eyeglasses are
used to correct large refractive errors.
Contact Lenses. Contact lenses correct nearsightedness, farsightedness and
astigmatism similarly to eyeglasses. If fitted and used as directed,
contact lenses are an effective and safe way to correct refractive errors.
However, daily use of contact lenses can result in the increased risk of
corneal infections, hypersensitivity reactions and other problems.
Surgical Procedures. Vision correction surgery is an elective procedure
available to correct refractive errors. Vision correction surgery alters
the way light rays are focused directly on the retina to eliminate or
dramatically reduce the need for eyeglasses or contact lenses. Vision
correction surgery is not for everyone and is associated with potential
risks and complications. Prospective patients should carefully consider the
vision correction surgeries available and the benefits and risks associated
with each of them. Vision correction surgeries available at TLCVision
include:
- LASIK (Laser In Situ Keratomileusis). LASIK corrects nearsightedness,
farsightedness and astigmatism by using an excimer laser to reshape
the cornea. Because LASIK creates a corneal flap to reshape the cornea
and does not disrupt the front surface of the cornea, it generally is
less painful, has a quicker recovery period and shorter post-operative
need for steroid eye drops than other surgical procedures. LASIK is
currently the most common vision correction surgery and may be the
treatment of choice for patients desiring a more rapid visual
recovery.
- CustomLASIK, widely introduced in 2003, is a technologically supported
advancement to LASIK. CustomLASIK involves increased pre-operative
diagnostic capabilities that measure the eye from front to back using
"wavefront" technology to create a three dimensional corneal map. The
information from that map guides the laser in customizing the laser
ablation to an individual's visual irregularities, beyond myopia,
hyperopia and astimgatism. CustomLASIK using wavefront technology has
the potential to improve not only how much a person can see, in terms
of visual acuity measured by the standard 20/20 eye chart, but also
how well an individual can see in terms of contrast sensitivity and
fine detail. This translates to a reduced occurrence of night vision
disturbances post-LASIK.
- PRK (Photorefractive Keratectomy). PRK corrects nearsightedness,
farsightedness and astigmatism by using an excimer laser to reshape
the cornea without making a flap. PRK removes the protective surface
layer of the cornea to reshape the cornea. The risk of pain, infection
and corneal scarring is higher with PRK than with LASIK; however, the
intra-operative risks are lessened with PRK because no corneal flap is
created.
- LASEK (Laser Assisted Sub-Epithelial Keratectomy). LASEK corrects
nearsightedness, farsightedness and astigmatism by using an excimer
laser to reshape the cornea. Unlike LASIK that creates a corneal flap,
LASEK loosens and folds the protective outer layer of the cornea (the
epithelium) during the procedure and, as a result, combines the
advantages of LASIK with the safety of PRK. The risk of pain,
infection and corneal scarring is higher with LASEK than with LASIK;
however, the intra-operative risks are lessened with LASEK because the
flap which is created is only in the epithelium. The United States
Food and Drug Administration has not yet approved use of the excimer
laser for LASEK.
- AK (Astigmatic Keratotomy). AK corrects astigmatism by making
microscopic incisions in the cornea to relax and change the shape of
the cornea.
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- INTACS. INTACS corrects very low levels of nearsightedness (-1.00
diopters to -3.00 diopters) by implanting rings in the cornea to
reshape it rather than surgically altering the cornea. INTACS may also
be used to correct irregularities in the shape of the cornea.
- CK (Conductive Keratoplasty). For patients age 40 and older, CK is
designed for the temporary reduction of farsightedness (+.75 to +3.25
diopters) and uses radio frequency instead of a laser to reshape the
cornea.
- PTK (Phototherapeutic Keratectomy). PTK treats abrasions, scars or
other abnormalities of the cornea caused by injury or surgery. PTK
uses an excimer laser to remove superficial opacities and
irregularities of the cornea to improve vision or reduce symptoms of
pain or discomfort due to an underlying eye condition.
- Refractive IOL Procedures. Intraocular lenses (IOL's) are permanent or
semi-permanent, plastic lenses that are implanted to replace or
supplement the eye's natural crystalline lens. While not a common
procedure for correcting refractive errors, the placement of a
refractive IOL can help patients who are not candidates for LASIK.
IOL's have been used in the United States since the late 1960's to
restore visual function to cataract patients, and more recently are
being used in refractive surgery procedures. There are several types
of refractive IOL's: phakic IOL's, multi-focal IOL's and accommodating
IOL's. Patient suitability and quality of visual outcome for each of
these lens options varies.
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. Prior
to the procedure being performed, the doctor develops a treatment plan taking
into consideration the exact correction required utilizing the results of each
individual patient's eye examination and diagnostic tests performed, such as
topography and wavefront analysis. The treatment plan is entered into the laser
and 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. These procedures are performed on an outpatient basis using
only topical anesthetic eye drops that promote patient comfort during the
procedure. Patients are reclined in a chair, an eyelid holder is inserted to
prevent blinking, and the surgeon positions the patient in direct alignment with
the fixation target of the excimer laser. The surgeon uses a foot switch to
apply the excimer beam that 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 between 15 to 90
seconds, depending on the amount of correction required.
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 ("FDA"). An FDA PMA is specific for each
laser manufacturer and model and sets out a range of approved indications.
However, the FDA is not authorized to regulate the practice of medicine.
Therefore, in the same way that doctors often prescribe drugs for "off-label"
uses (i.e., uses for which the FDA did not originally approve the drug), a
doctor may use a device such as the excimer laser for a procedure or an
indication not specifically approved by the FDA, if that doctor determines that
it is in the best interest of the patient. The initial FDA PMA approval for the
sale of an excimer laser for refractive procedures was granted in 1995 for the
laser of Summit Technologies, Inc. (now Alcon Laboratories, Inc., a division of
Nestle, S.A.). That first approval was for the treatment of myopia. 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, including VISX, Inc. the market leader and the provider of most of the
Company's excimer lasers. In Canada and Europe, 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.
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
October 2004 Comprehensive Report on the Refractive Market estimates that the
2005 refractive market potential is 37% of the U.S. population or 110.5 million
people. To date, based on Market Scope's estimate of the number of people who
have had procedures, only an estimated 7% of this target population has had
laser vision correction.
4
Estimates by Market Scope indicate that 1.2 million laser vision correction
procedures were performed in the U.S. in 2002, 1.1 million were performed in
2003, 1.3 million were performed in 2004, and an estimated 1.4 million will be
performed in 2005. The Company believes that the profitability and growth of its
refractive business 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 procedures
also could adversely affect its acceptance whether or not the procedures are
performed at TLCVision eye care centers. Market acceptance also could 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 non-elective surgical procedure in
the United States, with more than 2.6 million people having cataract surgery
each year. Medicare pays approximately $3.4 billion annually for 1.7 million
patients having cataract surgery. 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 affect
more than 20 million Americans aged 65 and older. U.S. Census Bureau data
indicates that there are approximately 35 million Americans who are age 65 or
older.
TLC VISION CORPORATION
TLCVision 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 U.S. provider of access to excimer lasers, microkeratomes, cataract
equipment and related support services.
BUSINESS STRATEGY
TLCVision's business strategy is to be a diversified eye care services
company, leveraging its relationships with over 13,000 ophthalmologists and
optometrists throughout North America to 1) grow the core refractive business
while 2) continuing to expand the non-refractive business segment.
GROWING THE CORE REFRACTIVE BUSINESS
The company will focus on growing the core refractive business through
increasing surgical volume through existing TLC branded centers, expanding the
TLC branded center model to new markets and supporting our access customer base.
The primary tactic in increasing surgical volume will be through various
initiatives with ophthalmologists and optometrists.
5
To accomplish this, TLCVision will focus on:
- commitment to a co-management model, which allows primary care
doctors to provide the best clinical outcomes for their patients
while retaining them in their practice;
- continuing clinical education to ophthalmologists and
optometrists;
- quality patient outcomes support through the TLCVision quality
assurance and improvement system;
- practice development education and tools focused on educating the
staff of the ophthalmologists and optometrists;
- cooperative marketing/advertising programs to build awareness for
the procedure;
- access to emerging technologies, and
- selected expansion into new and existing markets.
DIVERSIFICATION BEYOND REFRACTIVE LASER BUSINESSES
TLCVision's diversification strategy is to expand 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 primary focus of the Company's diversification strategy is in
the United States, where the Company continues to position itself to benefit
from the growing market for eye care services.
TLCVision plans to further diversify its business in four ways:
- continuing to expand the Company's existing cataract service
business, MSS, through focused growth strategies and acquisitions
of existing mobile cataract businesses;
- continuing to develop the Company's optometric practice
franchising organization, Vision Source, through increasing the
number of affiliated practice franchises;
- continuing to develop or acquire ophthalmic ambulatory surgery
centers through the Company's OR Partners subsidiary; and
- developing new eye care related businesses that evolve from
strategic technology investments, such as OccuLogix, Inc., a
company focused on the treatment of a specific eye disease known
as dry age-related macular degeneration which completed its
initial public offering in December 2004.
DESCRIPTION OF BRANDED TLCVISION LASER EYE CENTERS
The Company currently owns and manages 73 TLCVision branded laser eye
centers in the United States, five centers in Canada and one in Europe. Each
TLCVision 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 VISX Incorporated ("VISX").
A typical TLCVision branded laser eye center has between 3,000 and 5,000
square feet of space and is located in a medical or general office building.
Although the legal and payment structures can vary from state to state depending
upon state law and market conditions, the Company generally receives revenues in
the form of (1) amounts charged patients for procedures performed at laser
centers, (2) management and facility fees paid by doctors who use the TLCVision
branded laser eye center to perform laser vision correction procedures and (3)
administrative fees for billing and collection services from doctors who
co-manage patients treated at the centers. Most TLCVision branded laser eye
centers have a clinical director, who is an optometrist and oversees the
clinical aspects of the center and builds and supports the network of affiliated
eye care doctors. Most centers also have 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.
6
TLCVision has developed proprietary management and administrative software
and systems designed to assist eye care professionals in providing high levels
of patient care. The software permits TLCVision branded laser eye centers to
provide a potential candidate with current information on affiliated doctors
throughout North America, to help them locate the closest TLCVision 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 TLCVision branded
laser eye centers. TLCVision also has an on line consumer consultation site on
its website (www.tlcvision.com). This consumer consultation site allows
consumers to book their consultation with the Company online. TLCVision also
maintains a call center (1-800-CALL TLC VISION), which is staffed seven days a
week.
The Company's "Lifetime Commitment" program, established in 1997 and
offered through TLCVision branded laser eye centers, entitles patients within a
certain range of vision correction to have certain enhancement procedures for
further correction at no cost at any time during their lifetime, if necessary.
To remain eligible for the program, patients are required to have an annual eye
exam, at the patient's expense, with a TLCVision affiliated doctor. The purpose
of the program is to respond to a patient's concern that the patient's 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.
PRICING
At TLCVision branded laser eye centers in the United States, patients are
typically charged between $1,500 and $2,500 per eye for LASIK (or on average
approximately $2,000 per eye). The Company typically charges an additional $350
to $500 per eye for custom ablation. At TLCVision branded laser eye centers in
Canada, patients are typically charged approximately C$1,700 per eye for LASIK.
The primary care eye doctor also charges patients an average of $400 or 20% of
the patient fee for pre- and post-operative care, 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 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 offers discounts to participants and is now available to more
than 90 million individuals.
CO-MANAGEMENT MODEL
The Company has developed and implemented a medical co-management model
under which it not only establishes, manages and operates TLCVision 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 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 follow-up visits. The co-management model permits the surgeon to
focus on providing laser vision correction surgery while the primary care doctor
provides pre- and post-operative care. In addition, most TLCVision branded laser
eye care centers have 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."
TLCVision believes that its strong relationships with its affiliated eye
care doctors, though non-exclusive, represent an important competitive advantage
for its branded laser eye care centers.
The Company believes that primary care doctors' relationships with
TLCVision 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 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.
7
SALES AND MARKETING
The Company also seeks to increase its refractive procedure volume and its
market penetration through other innovative marketing programs for the TLCVision
branded laser eye care centers, particularly in developing stronger
relationships with optometrists.
While TLCVision 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 doctors, corporations and directly to the public. A
large part of the Company's marketing resources are devoted to joint marketing
programs with affiliated doctors. The Company provides doctors with brochures,
videos, posters and other materials that 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, educate doctors on laser vision
and refractive correction and remain current with new procedures, technology 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
increases, competition among surgical providers will continue to grow and many
candidates for laser vision correction will increasingly select a provider based
on factors other than solely price.
TLCVision 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 TLCVision branded laser eye center.
Participating employers may partially subsidize the cost of an employee's laser
vision correction at a TLCVision 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 90 million individuals qualify
for the program through arrangements between TLCVision and third party
providers. See "Item 1 - Business - Risk Factors - Inability to Execute
Strategy; Management of Growth."
Tiger Woods, world-famous golfer and TLC Laser Eye Centers patient, serves
as spokesperson for the Company in marketing efforts, including those aimed
directly to the public. The Company uses a variety of traditionally accepted
advertising, direct marketing and public relations efforts to reach potential
patients. The Company maintains a comprehensive Internet strategy with the goal
of having a leading refractive presence on the Internet, through TLCVision-owned
websites and partnerships and sponsorships with other websites. To date, the
Company continues to rank in the top placement for various LASIK-related search
terms through the major search engines.
OWNERSHIP OF BRANDED EYE CARE CENTERS
The Company's 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 TLCVision manages on behalf
of doctors or that have access to a TLCVision branded laser eye center to
perform laser vision correction services.
CONTRACTS WITH EYE DOCTORS
In each market where the Company operates a branded laser eye center, the
Company works with 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
TLCVision branded laser eye center owned, managed or operated by the Company do
so under one of three types of standard agreements (as 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,
8
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 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 "Item 1 - Business - 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 or maintain agreements
with doctors or other health care providers on satisfactory terms or that such
agreements will be profitable to the Company. Failure to enter into or maintain
such agreements with a sufficient number of qualified doctors will have a
material adverse effect on the Company's business, financial condition and
results of operations.
DESCRIPTION OF SECONDARY EYE CARE CENTERS
The Company has an investment in three secondary eye care centers in the
United States. 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, TLCVision's wholly owned subsidiary, provides access to
excimer laser platforms, 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 and astigmatism
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 support, patient financing,
partnership opportunities and practice satelliting. As of December 31, 2004,
LaserVision was utilizing approximately 81 excimer lasers and 160 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:
- avoid a large capital investment;
- reduce the risks associated with buying high technology equipment
that may become obsolete;
- obtain technical support provided by LaserVision's laser
engineers and microkeratome technicians;
- use the equipment without responsibility of maintenance or
repair;
- cost-effectively serve small to medium-sized markets and remote
locations; and
9
- serve satellite locations even in large markets.
FLEXIBLE DELIVERY SYSTEM
LaserVision seeks to maximize the number of locations, eye surgeons and
patients that 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.
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 laser 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 December 31, 2004, LaserVision
had 32 Roll-On/Roll-Off systems in operation, all but one of which were located
in the United States.
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 December 31, 2004,
LaserVision had approximately 43 U.S. fixed sites and two 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.
VALUE-ADDED SERVICES
LaserVision provides eye surgeons value-added support services that
distinguish it from its competitors, enhance the Company's ability to compete
for business and enable it to grow with its customers by offering them various
service and support arrangements. The following value-added services help
LaserVision's eye surgeon customers to expand their practices, thereby
increasing the use of LaserVision's equipment and services:
- Technical Support and Equipment Maintenance - As of December 31,
2004, LaserVision employed 37 certified laser engineers and 25
microkeratome technicians. The laser engineers perform most
required laser maintenance and help ensure rapid response to most
laser repair or maintenance needs.
- 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 centralized refractive coordinator
training programs and access to 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.
- 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.
- Clinical Advisors - TLCVision maintains a Clinical Advisory Group
which conducts regular conference calls with LaserVision's eye
surgeon customers. Our clinical advisors, who are eye surgeons
and optometrists with extensive clinical experience, chair these
conference calls. In addition, TLCVision conducts clinical
advisory meetings at major industry conferences each year. The
clinical advisors also make themselves available to consult with
eye surgeon customers in addition to regularly scheduled
conference calls and meetings.
10
- 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 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
surgeons, LaserVision provides some or all of the following: laser platform and
microkeratome equipment, certain related supplies for the equipment (such as
laser gases, per procedure cards and microkeratome blades), laser operator,
microkeratome technician, maintenance and certain technology upgrades. In
addition, LaserVision may provide 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 surgeon customer.
Under LaserVision's standard refractive fixed access agreements with
surgeons, LaserVision generally provides the following: a fixed-base laser
platform and microkeratome equipment, certain related supplies for the equipment
(such as laser gases, 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 use exclusively LaserVision's equipment for
refractive surgery. LaserVision does not provide a laser operator, microkeratome
technician, medical services or any administrative services to the access
surgeon customer.
Under LaserVision's joint venture arrangements, LaserVision directly or
indirectly provides either mobile or fixed-base laser access and the following:
microkeratome equipment, certain related supplies for the equipment (such as
laser gases, per procedure cards and microkeratome blades), laser operator,
microkeratome technician, maintenance and certain technology upgrades, the laser
facility, management services which include administrative services such as
billing and collections, staffing for the refractive practice, 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 LaserVision within a certain area.
Neither LaserVision nor the joint ventures provide medical services to the
patients.
DESCRIPTION OF MOBILE CATARACT BUSINESS
Through its Midwest Surgical Services, Inc. subsidiary ("MSS"), TLCVision
provides mobile and fixed site cataract equipment and related services in 40
states. As of December 31, 2004, MSS employed 56 cataract equipment technicians
and operated 54 mobile cataract systems. An 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. Technicians are also certified to scrub for cataract cases as
requested by the surgeon and facility. A typical service offering will include
cataract equipment (a phaco emulsifier, a surgical microscope) the IOL, surgical
instruments and supplies. Related services, including YAG capsulotomies and SLT
lasers treatments, are also offered.
Cataract patients, the majority of whom are elderly, typically 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 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's sales staff will contact the
local hospital and local
11
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 its 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, TLCVision 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 December 31, 2004, TLCVision has an
ownership position in five ASCs and anticipates that more ASCs will be opened
during 2005.
ASCs provide outpatient surgery services in a less institutional, more
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 have the capability to
accommodate additional ophthalmic surgical procedures as well as additional
procedures from compatible surgical specialties.
DESCRIPTION OF OPTOMETRIC FRANCHISING BUSINESS
Vision Source is a majority-owned subsidiary that provides marketing,
practice development and purchasing power to independently-owned and operated
optometric practices in the United States. As of December 31 2004, Vision Source
had 1,182 practices under franchise agreements across the United States, and in
exchange for providing services to its franchisees, it received franchise fees
equal to a predetermined percentage of gross practice billings. This business
supports the development of independent practices and complements the Company's
co-management model.
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 TLCVision. 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 acts as a resource to the Company's
employees and affiliated doctors. The Clinical Advisory Group holds 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.
TLCVision's branded eye care centers in Canada are state-of-the-art facilities
that are used to examine and evaluate new technologies for TLCVision. 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.
12
WEBSITE
TLCVision has linked its branded eye care centers, network doctors and
potential patients through its website, www.tlcvision.com, which provides a
directory of affiliated eye care providers and contains questions and answers
about laser vision correction. TLCVision's website also contains other useful
information for shareholders and investors.
TLCVision makes available free of charge on or through its website
(http://www.tlcvision.com) its Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934. The material is made available through the Company's website as soon as
reasonably practicable after the material is electronically filed with or
furnished to the Commission. All of TLCVision's filings may be read or copied at
the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington D.C.
20549. Information on the operation of the Public Reference Room can be obtained
by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet website
(http://www.sec.gov) that contains reports, proxy and information statements
regarding issuers that file electronically.
EQUIPMENT AND CAPITAL FINANCING
The Company primarily utilizes the VISX, Alcon and Bausch & Lomb excimer
lasers for refractive surgery. See "Industry Background - Laser Vision
Correction."
Although there can be no assurance, the Company believes that based on the
number of existing manufacturers, the current inventory levels of those
manufacturers and the number of suitable, previously owned and, in the case of
U.S. 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 up to $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 the FDA approves additional
procedures, 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 may 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 October 31, 2004,
independent surgeon-owned centers accounted for the largest percentage of total
procedure volume in the industry with a 63% market share. Corporate-owned
centers accounted for 26% of total procedures performed. The remaining 11% of
laser vision correction procedures were performed at institution-owned centers,
such as hospitals or universities.
13
Although many 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 its 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.
During 2004, the laser vision correction industry experienced a strong
rebound after experiencing several years of lower demand. Additionally, average
LASIK pricing continued to increase from the dramatically reduced pricing
experienced from late 2000 until mid-2003, as a number of providers dramatically
reduced price in an effort to gain market share. During this period, TLCVision
maintained its premium-pricing model emphasizing 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
among prospective patients. A series of negative news stories focusing on
patients with unfavorable outcomes from procedures performed at competing
centers further adversely affected procedure volumes. In addition, being an
elective procedure, laser eye surgery volumes were also depressed by weak
economic conditions in North America during 2001 and 2002.
TLCVision competes in fragmented geographic markets. The Company's
principal corporate competitors include LCA-Vision Inc. and Lasik Vision
Institute, Inc. See "Item 1 - Business - Overview."
GOVERNMENT REGULATION
EXCIMER LASER REGULATION
UNITED STATES
Medical devices, such as the excimer lasers used in the Company's U.S.
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 TLCVision eye care centers,
may perform the LASIK procedure, using lasers with a PMA for PRK only (off-label
use) in an exercise of professional judgment 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
judgment 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.
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-
14
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
are 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 been violated. 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, as well as 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 TLCVision will comply with such
laws in all material respects, although it cannot ensure such compliance by
doctors.
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 harbor 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 referrals for the
provision of Medicare or Medicaid-covered "designated health services" between a
physician and another entity with which the physician (or an immediate family
member) has a financial relationship (which includes ownership and compensation
arrangements). This law, known as the "Stark Law," does not apply outside of the
Medicare and Medicaid programs or to items or services that are not one of the
11 designated health services.
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 laser vision correction business, but the Company
may be subject to similar state laws.
15
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 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 operations.
The Administrative Simplification provisions of the Health Insurance
Portability and Accountability Act of 1996 ("HIPAA") were enacted to (a) improve
the efficiency and effectiveness of the healthcare system by standardizing the
exchange of electronic information for certain administrative and financial
transactions and (b) protect the confidentiality and security of health
information. HIPAA directed the U.S. Department of Health and Human Services to
promulgate a set of interlocking regulations to implement the goals of HIPAA.
The regulations apply to "covered entities" which include health plans,
healthcare clearinghouses and healthcare providers who transmit patient health
information ("PHI") in electronic form in connection with certain administrative
and billing transactions. These regulations can be divided into the following:
- Privacy Regulations designed to protect and enhance the rights of
patients by providing patient access to their PHI and controlling the
use of their PHI;
- Security Regulations designed to protect electronic health information
by mandating certain physical, technical and administrative
safeguards;
- Electronic Transactions and Code Sets Regulations designed to
standardize electronic data interchange in the health care industry;
- Standard Unique Employer Identifier Regulations designed to
standardize employer identification numbers used in certain electronic
transactions; and
- Standard Unique Health Identifier for Health Care Providers
Regulations designed to standardize the identification of health care
providers used in electronic transactions.
While the regulations are all in final form, the compliance date for each
set of regulations varies. Compliance with the Privacy Regulations was required
by April 14, 2003 (except for "small" health plans) and compliance with the
Electronic Transaction and Code Sets Regulations was required by October 16,
2003. Compliance with the Standard Unique Employer Identifier Regulations was
16
required by July 30, 2004; April 21, 2005 for the Security Regulations; and May
23, 2005 for the Standard Unique Health Identifier for Health Care Providers
Regulations.
The Company has instituted new policies and procedures designed to comply
with the Privacy Regulations at various centers throughout the Company. Because
the Company is self-insured and meets the definition of "small" health plan, the
Company's health plan had until April 14, 2004 to comply with the Privacy
Regulations. The Company's plan sponsor has taken steps to institute new
policies and procedures to comply with the Privacy Regulations. The Company is
implementing employee-training programs explaining how the regulations apply to
their job role. The Company intends to implement programs to ensure compliance
with the other HIPAA regulations by the applicable compliance date.
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 by 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 to applicable state anti-kickback statutes in all
material respects, there can be no assurance that each state will agree with the
Company's position and would not challenge the Company. If the Company were not
successful in defending against such a challenge, the result may be civil or
criminal fines or penalties for the Company as well as the ophthalmologists and
optometrists. Such a result would require the Company to revise the structure of
its legal arrangements, and this could have a material adverse effect on the
Company's business, financial condition and results of operations.
Similarly, just as in the case of the federal Stark Law, while the Company
believes that it is operating in compliance with applicable state
anti-self-referral laws in all material respects, there can be no assurance that
each state will agree with the Company's position or that there will not be a
change in the state's interpretation or enforcement of its own law. In such
case, the Company may be subject to fines and penalties as well as other
administrative sanctions and would likely be required to revise the structure of
its legal arrangements. This could have a material adverse effect on the
Company's business, financial condition and results of operations
17
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 ensure such compliance by doctors.
The laws of certain Canadian provinces prohibit health care professionals
from splitting fees with non-health care professionals and prohibit non-licensed
entities (such as the Company) from practicing medicine or optometry and, in
certain circumstances, from employing physicians or optometrists directly. The
Company believes that its operations comply with such laws in all material
respects, and expects that doctors affiliated with TLCVision centers will comply
with such laws, although it cannot ensure such compliance by doctors.
Optometrists and ophthalmologists are subject to varying degrees and types
of provincial regulation governing professional misconduct, including
restrictions relating to advertising, and in the case of optometrists, a
prohibition against exceeding the lawful scope of practice. In Canada, laser
vision correction is not within the permitted scope of practice of optometrists.
Accordingly, TLCVision does not allow optometrists to perform the procedure at
TLCVision 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. There can be no assurance that the Company will be able
to obtain facility licenses in all states which may require facility licensure.
Some states require the permission of the 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. 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 is not aware of any Canadian health regulations which impose
facility-licensing requirements on the operation of eye care centers.
NASDAQ QUORUM EXEMPTION
The Company has received an exemption from the Nasdaq Stock Market with
respect to compliance with Rule 4350(f) of the Nasdaq corporate governance rules
which require that a quorum for any meeting of shareholders shall be not less
than 33 1/3% of the outstanding shares of voting common stock. As permitted
under the laws of New Brunswick, Canada, the Company's Bylaws provide that a
quorum for a meeting of shareholders consists of at least two persons present in
person and each entitled to vote at the meeting and holding at least 20% of the
outstanding TLCVision common shares.
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, TLCVision expects that
affiliated doctors will comply with such laws in all material
18
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," "TLCVision," and slogans "See the Best,"
"Feel the Difference. See the Results" are registered U.S. service marks of
TLCVision and registered trademarks in Canada. TLCVision has registered "TLC
Laser Eye Centers" with the TLCVision eye design as a trademark in the United
States and Canada. "Laser Vision," "Laser Vision Centers and Design," and "Laser
Vision Centers" 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, TLCVision 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. Although the Company currently leases or purchases excimer lasers and
other technology from the manufacturers, 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 favorable 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.
EMPLOYEES
Including part-time employees, the Company had 1,138 employees as of
December 31, 2004. 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
TLCVISION HAS REPORTED ACCUMULATED DEFICITS; FUTURE PROFITABILITY UNCERTAIN
TLCVision reported net losses of $9.4 million, $43.3 million and $161.8
million for the year ended December 31, 2003, the transitional period ended
December 31, 2002 and fiscal 2002, respectively. As of December 31, 2004,
TLCVision reported an accumulated deficit of $251.0 million. Even though
TLCVision reported net income of $43.7 million for the year ended December 31,
2004, that amount included a gain of $25.8 million attributable to the initial
public offering of its OccuLogix, Inc. subsidiary, and the Company may not be
able to sustain its profitability. TLCVision's profitability will depend on a
number of factors, including:
- demand for the Company's services;
- the Company's ability to control costs;
- the Company's ability to execute its strategy and effectively
integrate acquired businesses and assets;
- the Company's ability to obtain adequate insurance against
malpractice claims and reduce the number of claims;
- economic conditions in the Company's markets, including the
availability of discretionary income;
- concerns about the safety and effectiveness of laser vision
correction;
- competitive factors;
- regulatory developments;
- the Company's ability to retain and attract qualified personnel;
and
19
- doctors' ability to obtain adequate insurance against malpractice
claims at reasonable rates.
In addition, OccuLogix, Inc. expects to report significant net losses at
least through 2006 and possibly beyond. The Company will continue to report
OccuLogix, Inc. on a consolidated basis for the foreseeable future.
See "Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations."
CHANGES IN GENERAL ECONOMIC CONDITIONS MAY CAUSE FLUCTUATIONS IN
TLCVISION'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 TLCVision may vary based upon the impact of changes in
economic conditions on the disposable income of consumers interested in laser
vision correction. A significant decrease in consumer disposable income in a
weakening economy may result in decreased procedure levels and revenues for
TLCVision. For example, the downturn in the North American economy contributed
to a 17% decline in the number of paid procedures at TLCVision's branded centers
and a 22% decline in total revenues for the seven months ended December 31, 2002
compared to the corresponding period in 2001. In addition, weakening economic
conditions may result in an increase in the number of TLCVision's customers, who
experience financial distress or declare bankruptcy, which may negatively impact
TLCVision'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
TLCVision. TLCVision 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. TLCVision's
principal corporate competitors 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. TLCVision 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 TLCVision'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 TLCVision 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 TLCVision's
eye care centers or in the number of procedures performed at its centers could
cause TLCVision'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.
TLCVision's management, operations and marketing plans may not be successful in
meeting this competition. Certain competitive 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 TLCVision's laser access services by making it economically
more attractive for eye surgeons to buy excimer lasers rather than utilize
TLCVision's services.
Most affiliated surgeons performing laser vision correction at TLCVision's
eye care centers and significant employees of TLCVision have agreed to
restrictions on competing with TLCVision, or soliciting patients or employees
associated with their facilities; however, these non-competition agreements may
not be enforceable.
20
THE MARKET ACCEPTANCE OF LASER VISION CORRECTION IS UNCERTAIN.
TLCVision believes that the profitability and growth of TLCVision will
depend upon broad acceptance of laser vision correction in the United States
and, to a lesser extent, Canada. TLCVision may have difficulty generating
revenue and growing its business if laser vision correction does not become more
widely accepted by 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:
- its cost, particularly since laser vision correction typically is
not covered by government or private insurers;
- general resistance to surgery;
- effective and less expensive alternative methods of correcting
refractive vision disorders are widely available;
- the lack of long-term follow-up data;
- the possibility of unknown side effects; and
- 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 TLCVISION 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 TLCVision. 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 seven 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. There are no long-term
studies on the side effects of 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, TLCVision does not
track side effects. Some of the possible side effects of laser vision correction
are:
- foreign body sensation,
- pain or discomfort,
- sensitivity to bright lights,
- blurred vision,
- dryness or tearing,
- fluctuation in vision,
- night glare,
- poor or reduced visual quality,
- overcorrection or undercorrection,
- regression, and
- corneal flap or corneal healing complications.
TLCVision 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 1%. However, there is no study to support this belief.
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
long-term effect of the removal of Bowman's membrane on patients is unclear.
TLCVISION MAY BE UNABLE TO ENTER INTO OR MAINTAIN AGREEMENTS WITH DOCTORS
OR OTHER HEALTH CARE PROVIDERS ON SATISFACTORY TERMS.
21
TLCVision 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 TLCVision from practicing medicine,
employing doctors to practice medicine on its behalf or employing optometrists
to render optometric services on its behalf. In most states TLCVision 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 TLCVision and are expected to provide a significant source of
patients for TLCVision. Accordingly, the success of TLCVision'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 it owns
or manages.
QUARTERLY FLUCTUATIONS IN OPERATING RESULTS MAKE FINANCIAL FORECASTING
DIFFICULT.
TLCVision may experience future quarterly losses, which may exceed prior
quarterly losses. TLCVision's expense levels will be based, in part, on its
expectations as to future revenues. If actual revenue levels were below
expectations, TLCVision's operating results would deteriorate. Historically, the
quarterly results of operations of TLCVision have varied, and future results may
continue to fluctuate significantly from quarter to quarter. Accordingly,
quarter-to-quarter comparisons of TLCVision'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 the Company's geographic
markets, market acceptance of its services, seasonal factors and other factors
described in this Form 10-K.
THE MARKET PRICE OF TLCVISION'S COMMON SHARES MAY BE VOLATILE.
Historically, the market price of TLCVision's common shares has been
volatile. For example, the market price of TLCVision's common shares decreased
from a high of $53.50 to a low of $0.79 between July 1999 and March 2003, then
increased to $13.13 by April 2004. TLCVision's common shares will likely be
volatile in the future due to industry developments and business-specific
factors such as:
- the Company's ability to effectively penetrate the laser vision
correction market;
- the impact of OccuLogix, Inc. on results of operations;
- perception of the potential for rheopheresis for dry AMD
- the Company's ability to execute its business strategy;
- new technological innovations and products;
- changes in government regulations;
- adverse regulatory action;
- public concerns about the safety and effectiveness of laser
vision correction;
- loss of key management;
- announcements of non-routine events such as acquisitions or
litigation;
- variations in its financial results;
- fluctuations in competitors' stock prices;
- the issuance of new or changed stock market analyst reports and
recommendations concerning its common shares or competitors'
stock;
- changes in earnings estimates by securities analysts;
- the Company's ability to meet analysts' projections;
- changes in the market for medical services;
- general economic, political and market conditions; or
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 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 experienced volatility and
stock prices declined, in some cases substantially. Continued volatility may
reduce the market price of the common shares of TLCVision.
TLCVISION MAY BE UNABLE TO EXECUTE ITS BUSINESS STRATEGY.
22
TLCVision's business strategy is to be a diversified eye care services
company, leveraging its relationships with over 13,000 ophthalmologists and
optometrists throughout North America to 1) grow the core refractive business
while 2) continuing to expand the non-refractive business segment.
If TLCVision does not successfully execute this strategy or if the strategy
is not effective, TLCVision may be unable to maintain or grow its revenues and
profitability.
TLCVISION MAY MAKE INVESTMENTS THAT MAY NOT BE PROFITABLE.
TLCVision has made investments that were intended to support its strategic
business purposes, such as TLCVision's investment in LaserSight Inc. These
investments were generally made in companies in the laser vision correction
business or that owned emerging technologies that TLCVision believed would
support the Company's refractive business. TLCVision recognized a charge of
approximately $26.1 million, $2.1 million and $0.4 million in the fiscal year
ended May 31, 2002, the seven-month period ended December 31, 2002 and the year
ended December 31, 2003, respectively, primarily as a result of the decline in
the value of its investments, including the investment in LaserSight. The
remaining value of the investment in LaserSight was written off in 2003 when
LaserSight declared bankruptcy. TLCVision may make similar investments in the
future, some of which may be material or may become material over time. If
TLCVision is unable to successfully manage its current and future investments,
including ASC 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 TLCVISION DEPENDS ON ITS ABILITY TO MAKE
ACQUISITIONS OR ENTER INTO AFFILIATION ARRANGEMENTS.
The success of TLCVision's growth strategy will be dependent on increasing
the number of procedures at its eye care centers and/or 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 presents special risks, including:
- unanticipated liabilities and contingencies;
- diversion of management attention; and
- possible adverse effects on operating results resulting from:
- possible future goodwill impairment;
- increased interest costs;
- the issuance of additional securities; and
- increased costs resulting from difficulties related to the
integration of the acquired businesses.
TLCVision's ability to achieve growth through acquisitions will depend on a
number of factors, including:
- the availability of attractive acquisition opportunities;
- the availability of capital to complete acquisitions;
- the availability of working capital to fund the operations of
acquired businesses; and
- the effect of existing and emerging competition on operations.
TLCVision 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. TLCVision's past
and possible future acquisitions may not achieve adequate levels of revenue,
profitability or productivity or may not otherwise perform as expected.
TLCVISION MAY BE UNABLE TO SUCCESSFULLY IMPLEMENT AND INTEGRATE NEW
OPERATIONS AND FACILITIES.
The success of TLCVision 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, TLCVision has grown rapidly in the
United States. TLCVision's future growth and expansion will increase its
management's responsibilities and demands on operating information technologies
and
23
financial systems and resources. TLCVision's business and financial results are
dependent upon a number of factors, including its ability to:
- implement upgraded operations, information technologies and
financial systems, procedures and controls;
- hire and train new staff and managerial personnel;
- adapt or amend TLCVision'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
- obtain regulatory approvals, where necessary, and comply with
licensing requirements applicable to doctors and facilities
operated, and services offered, by doctors;
TLCVision's failure or inability to successfully implement these and other
factors may adversely affect the quality and profitability of its business
operations.
TLCVISION DEPENDS ON KEY PERSONNEL WHOSE LOSS COULD ADVERSELY AFFECT ITS
BUSINESS.
TLCVision's success and growth depends in part on the active participation
of key medical and management personnel, including Mr. Elias Vamvakas, Chairman
of the Board of Directors, and Mr. James Wachtman, Chief Executive Officer.
TLCVision 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 TLCVision's business operations.
TLCVision has employment or similar agreements with the above individuals
and other key personnel. The terms of these agreements include, in some cases,
entitlements to substantial severance payments in the event of termination of
employment by either TLCVision or the employee.
TLCVISION 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 TLCVision's centers entails an
inherent risk of potential malpractice and other similar claims. Beginning
October 1, 2002, all of TLCVision's U.S. professional malpractice insurance had
a $250,000 deductible per claim. For the period from June 1, 2003 through May
31, 2004, the Company was self-insured for Canadian claims. Patients at
TLCVision's centers execute informed consent statements prior to any procedure
performed by doctors at TLCVision's centers, but these consents may not provide
adequate liability protection. Although TLCVision 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 TLCVision's centers may be
asserted against TLCVision 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.
TLCVision currently maintains malpractice insurance coverage and accruals
that it believes is adequate both as to risks and amounts covered. In addition,
TLCVision 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 TLCVision against certain malpractice and other
claims. TLCVision's insurance coverage, however, may not be adequate to satisfy
claims, insurance maintained by the doctors may not protect TLCVision and such
indemnification may not be enforceable or, if enforced, may not be sufficient.
TLCVision's inability to obtain adequate insurance or an increase in the future
cost of insurance to TLCVision and the doctors who provide medical services at
the centers may have a material adverse effect on its business and financial
results.
The excimer laser system uses hazardous gases which if not properly
contained could result in injury. TLCVision may not have adequate insurance for
any liabilities arising from injuries caused by the excimer laser system or
hazardous gases. While TLCVision believes that any claims alleging defects in
TLCVision's excimer laser systems would usually be covered by the manufacturers'
product liability insurance, the manufacturers of TLCVision's excimer laser
systems may not continue to carry adequate product liability insurance.
TLCVISION MAY FACE CLAIMS FOR FEDERAL, STATE AND LOCAL TAXES.
TLCVision operates in 48 states and two Canadian provinces and is subject
to various federal, state and local income, payroll, unemployment, property,
franchise, capital, sales and use tax on its operations, payroll, assets and
services. TLCVision endeavors to
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comply with all such applicable tax regulations, many of which are subject to
different interpretations, and has hired outside tax advisors who assist in the
process. Many states and other taxing authorities have been interpreting laws
and regulations more aggressively to the detriment of taxpayers such as
TLCVision and its customers. TLCVision believes that it has adequate provisions
and accruals in its financial statements for tax liabilities, although it cannot
predict the outcome of future tax assessments.
Tax authorities in three states have contacted TLCVision and issued
proposed sales tax adjustments in the aggregate amount of approximately $0.8
million for various periods through 2004 on the basis that certain of
TLCVision's business arrangements constitute at least a partially taxable
transaction rather than an exempt service. TLCVision's discussions with these
three states are ongoing. If it is determined that any sales tax is owed,
TLCVision believes that, under applicable laws and TLCVision's contracts with
its customers, each customer is ultimately responsible for the payment of any
applicable sales and use taxes in respect of TLCVision's services. However,
TLCVision may be unable to collect any such amounts from its customers and in
such event would remain responsible for payment. TLCVision cannot yet predict
the outcome of t