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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 2001
COMMISSION FILE NUMBER: 0-29302
TLC LASER EYE CENTERS INC.
--------------------------
(Exact name of registrant as specified in its charter)
Ontario, Canada 980151150
(State or jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5280 Solar Drive, Suite 300 L4W 5M8
Mississauga, Ontario (Zip Code)
(Address of principal executive offices)
Registrant's telephone, including area code (905) 602-2020
SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:
Common Shares, No Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. |X| Yes |_| No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. |_|
As of July 31, 2001, the aggregate market value of the registrant's Common
Shares held by non-affiliates of the registrant was approximately $150.3
million.
As of July 31, 2001, there were 38,048,748 of the registrant's Common
Shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Definitive Proxy Statement for the Company's 2001 annual shareholder's meeting
(incorporated in Part III to the extent provided in Items 10, 11, 12, and 13).
2
This Annual Report on Form 10-K (herein, together with all amendments, exhibits
and schedules hereto, referred to as the "Form 10-K") contains certain forward
looking statements within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934, which statements
can be identified by the use of forward looking terminology, such as "may",
"will", "expect", "anticipate", "estimate", "plans" or "continue" or the
negative thereof or other variations thereon or comparable terminology referring
to future events or results. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth elsewhere in this Form
10-K. See the "Risk Factors" section of Item 1 "Business" for cautionary
statements identifying important factors with respect to such forward looking
statements, including certain risks and uncertainties, that could cause actual
results to differ materially from results referred to in forward looking
statements. Unless the context indicates or requires otherwise, references in
this Form 10-K to the "Company" or "TLC" shall mean TLC Laser Eye Centers Inc.
and its subsidiaries. The Company's fiscal year ends on May 31. Therefore,
references in this Form 10-K to a particular fiscal year shall mean the 12
months ended on May 31 in that year. References to "$" or "dollars" shall mean
U.S. dollars unless otherwise indicated. References to "C$" shall mean Canadian
dollars. References to the "Commission" shall mean the U.S. Securities and
Exchange Commission.
PART I
ITEM 1. BUSINESS
Overview
TLC Laser Eye Centers Inc. ("TLC" or the "Company") is one of the largest
providers of laser vision correction services in North America. TLC owns and
manages eye care centers which, together with TLC's network of over 12,500 eye
care doctors, provide laser vision correction of common refractive vision
disorders such as myopia (nearsightedness), hyperopia (farsightedness) and
astigmatism. Laser vision correction is an out-patient procedure that is
designed to change the curvature of the cornea to reduce or eliminate a
patient's reliance on eyeglasses or contact lenses. TLC, which commenced
operations in September 1993, currently has 59 eye care centers in 26 states and
provinces throughout the United States and Canada. More than 350,000 paid
refractive procedures have been performed at TLC centers, including over 122,800
performed at the Company's centers during fiscal 2001.
In the past year, TLC affirmed its strategy to position itself as a
premium provider of laser vision correction services in the face of an industry
price war. The Company believes that superior quality of care and outstanding
clinical results will be the long-term determinants of success in the laser
vision correction industry.
To this end, the Company's focus has remained on maximizing revenues,
controlling costs, providing superior quality of care and clinical results and
pursuing additional growth opportunities for the premium business.
On August 27, 2001, the Company announced that it had entered into an
Agreement and Plan of Merger with Laser Vision Centers, Inc. ("Laser Vision").
Laser Vision provides access to excimer lasers, microkeratomes, other equipment
and value added support services to eye surgeons for laser vision correction and
the treatment of cataracts. The merger will be effected as an all-stock
combination at a fixed exchange rate of 0.95 common shares of the Company for
3
each of the approximately 25.9 million outstanding shares of common stock of
Laser Vision. In addition, each of the approximately 7.8 million outstanding
options or warrants to acquire stock of Laser Vision shall be assumed by the
Company and become options or warrants to acquire common shares of the Company
based on the 0.95 exchange rate. The merger is expected to be effected on a
tax-free basis to shareholders and accounted for under the purchase method. The
Company's Chairman and Chief Executive Officer, Elias Vamvakas, will be the
Chairman and Chief Executive Officer of the merged company . John J. (Jack)
Klobnak, Laser Vision's current Chairman and CEO, will assume a non-executive
Vice Chairmanship and continue as a corporate director for approximately one
year, after which time he intends to retire. James Wachtman, President and Chief
Operating Officer of Laser Vision will serve as the merged company's President &
Chief Operating Officer. The merged company's Chief Financial Officer will be
Charles Bono, who is currently Chief Financial Officer of Laser Vision. The
board of directors of the merged company is expected to be composed of members
from both companies' current boards of directors. Completion of the transaction,
expected to occur in December, 2001, is subject to shareholder and regulatory
approval and other conditions usual and customary in such transactions.
Industry Background
Refractive Disorders
The primary function of the human eye is to focus light. The eye works
much like a camera: light rays enter the eye through the cornea, which provides
most of the focusing power. Light then travels through the lens where it is
fine-tuned to focus properly on the retina. The retina, located at the back of
the eye, acts like the film in the camera, changing light into electric impulses
that are carried by the optic nerve to the brain. To see clearly, light must be
focused precisely on the retina. Refractive disorders, such as myopia
(nearsightedness), hyperopia (farsightedness) and astigmatism, result from an
inability of the cornea and the lens to focus images on the retina properly. The
amount of refraction required to properly focus images depends on the curvature
of the cornea and the size of the eye. If the curvature is not correct, the
cornea cannot properly focus the light passing through it onto the retina, and
the viewer will see a blurred image.
Surgical Procedures
Refractive disorders have historically been treated primarily by
eyeglasses or contact lenses. Increasingly, they are being treated by surgical
techniques, the most common of which in the United States, prior to the excimer
laser being approved for sale for laser vision correction, was Radial Keratotomy
("RK"). RK is a surgical procedure, first performed in the 1970s, that corrects
myopia by altering the shape of the cornea. This is accomplished by making
incisions in a "radial" pattern along the outer portion of the cornea using a
hand-held diamond-tipped blade. These very fine incisions are designed to help
flatten the curvature of the cornea, thereby allowing light rays entering the
eye to properly focus on the retina. The incisions penetrate 90% of the depth of
the cornea. Because RK involves incisions into the corneal tissue, it may weaken
the structure of the cornea, which can have adverse consequences following
traumatic injury. RK also produces incisional scarring, and may cause
fluctuation of vision and progressive
4
farsightedness. Industry sources estimate that in 1994 over 200,000 RK
procedures were performed in the United States. A variation of RK, Astigmatic
Keratotomy, is used to correct astigmatism.
Laser Vision Correction
Excimer laser technology was developed by International Business Machines
Corporation in 1976 and has been used in the computer industry for many years to
etch sophisticated computer chips. Excimer lasers have the desirable qualities
of producing very precise ablation (removal of tissue) without affecting the
area outside of the target zone. In 1981, it was shown that the excimer laser
could ablate corneal tissue. Each pulse of the excimer laser can remove 0.25
microns of tissue in 12 billionths of a second. The first laser experiment on
human eyes was performed in 1985 and the first human eye was treated with the
excimer laser in the United States in 1988.
Excimer laser procedures are designed to reshape the outer layers of the
cornea to correct vision disorders by changing the curvature of the cornea.
There are currently two procedures that use the excimer laser to correct vision
disorders: Photorefractive Keratectomy ("PRK") and Laser In-Situ Keratomileusis
("LASIK"). In the case of both PRK and LASIK, prior to the procedure, the doctor
makes an assessment of the exact correction required and programs the excimer
laser. The software of the excimer laser then calculates the optimal number of
pulses needed to achieve the intended corneal correction using a specially
developed algorithm. Both PRK and LASIK are performed on an outpatient basis
without general anesthesia, using only topical anesthetic eye drops. An eyelid
holder is inserted to prevent blinking while the eye drops eliminate the reflex
to blink. The patient reclines in a chair, his or her eye focused on a fixation
target, and the surgeon positions the patient for the procedure. The surgeon
uses a foot pedal to apply the excimer laser beam, which emits a rapid
succession of excimer laser pulses. The typical procedure takes 10 to 15
minutes, from set-up to completion, with the length of time of the actual
excimer laser treatment lasting 15 to 90 seconds.
In order to market an excimer laser for commercial sale in the United
States, the manufacturer must obtain pre-market approval ("PMA") from the United
States Food and Drug Administration (the "FDA"). An FDA PMA is specific for each
laser manufacturer and model and sets out a range of approved indications.
However, the FDA is not authorized to regulate the practice of medicine.
Therefore, in the same way that doctors often prescribe drugs for "off-label"
uses (i.e., uses for which the FDA did not originally approve the drug), a
doctor may use a device such as the excimer laser for a procedure or an
indication not specifically approved by the FDA, if that doctor determines that
it is in the best interest of the patient. The initial FDA PMA approval for the
sale of an excimer laser for refractive procedures was the approval of the
Summit Autonomous, Inc. (now Alcon Laboratories Inc. division of Nestle, S.A.)
("Alcon") laser for the treatment of myopia granted in 1995. Figures l and 2 set
out a list of lasers approved for LASIK and PRK and other procedures as of March
29, 2001. In Canada, neither the sale nor the use of excimer lasers to perform
refractive surgery is currently subject to regulatory approval, and excimer
lasers have been used to treat myopia since 1990 and to treat hyperopia since
1996. The Company expects that future sales of any new excimer laser models in
Canada may require the approval of the Health Protection Branch of Health Canada
("HPB").
5
Figure 1
FDA-Approved lasers for LASIK
- -----------------------------------------------------------------------------------------------
Company and Model Approval Number and Date Approved Indications
(D = Diopters)
- -----------------------------------------------------------------------------------------------
Autonomous Technology P970043/S5 Myopia less than -9.0D with or without
- - LADARVision 5/9/00 astigmatism from -0.5 to -3.0D
- -----------------------------------------------------------------------------------------------
Bausch & Lomb Surgical P990027 Myopia from -1.0 to -7.0D with or without
- -Technolas 217a 2/23/00 astigmatism less than -3.0D
- -----------------------------------------------------------------------------------------------
CRS/VISX P990010 Myopia less than -14.0D with or without
- -Start S2 11/9/99 astigmatism between -0.5 to -5.0D
- -----------------------------------------------------------------------------------------------
Dishler P970049 Myopia from -0.5 to -13.0D with or without
12/16/99 astigmatism between -0.5 to -4.0D
- -----------------------------------------------------------------------------------------------
Kremer P970005 Myopia from -1.0 to -15.9D with or without
7/30/98 astigmatism less than -5.0D
- -----------------------------------------------------------------------------------------------
Nidek P970053/S2 Myopia from -1.0 to -14.0D with or without
- -EC5000 4/14/00 astigmatism less than 4.0D
- -----------------------------------------------------------------------------------------------
Summit P930034/S13 Myopia less than -14.0D with or without
- -Apex Plus 10/21/99 astigmatism from 0.5 to 5.0D
- -----------------------------------------------------------------------------------------------
Summit Autonomous P970043/S7 Hyperopia less than 6.0D with or without
- -LADARVision 9/22/00 astigmatism less than -6.0D
- -----------------------------------------------------------------------------------------------
Figure 2
FDA-Approved Lasers for PRK and Other Refractive Surgeries
- -------------------------------------------------------------------------------------------------------
Company and Model Approval Number and Date Approved Indications
(D = Diopters)
- -------------------------------------------------------------------------------------------------------
Bausch & Lomb Surgical P970056 PRK; Myopia from - 1.5 to - 7.0D with or
- - Keracor 116 9/28/99 without astigmatism less than - 4.5D
- -------------------------------------------------------------------------------------------------------
Autonomous Technology P970043 PRK; Myopia from - 1.0 to - 10.0D with or
- - LADARVision 11/2/98 without astigmatism less than - 4.5D
- -------------------------------------------------------------------------------------------------------
LaserSight P980008 PRK; Myopia from - 1.0 to - 6.0D with or
- - LaserScan LSX 11/12/99 without astigmatism less than 1.0D
- -------------------------------------------------------------------------------------------------------
Nidek P970053 PRK; Myopia from - 0.75 to - 13.0D
- - EC5000 12/17/98
- -------------------------------------------------------------------------------------------------------
Nidek P970053/S1 PRK; Myopia from - 1.0 to - 8.0D with or
- - EC5000 9/29/99 without astigmatism from - 0.5 to -4.0D
- -------------------------------------------------------------------------------------------------------
Summit P930034 PRK; Myopia from - 1.5 to - 7.0D
- - Apex & Apex Plus 10/25/98
- -------------------------------------------------------------------------------------------------------
Summit P930034/S9 PRK; Myopia from -1.0 to -6.0D with or
- - Apex Plus 3/11/98 without astigmatism from -1.0 to -4.0D
- -------------------------------------------------------------------------------------------------------
Summit P930034/S12 PRK; Hyperopia from + 1.5 to + 4.0D with
- - Apex Plus 12/21/99 or without astigmatism less than - 1.0D
- -------------------------------------------------------------------------------------------------------
Summit Autonomous P970043/S8 Name Change Only
- - LADARVision 7/11/00
- -------------------------------------------------------------------------------------------------------
Sunrise P99078 Laser Thermokeratoplasty (LTK);
- -Hyperion 6/30/00 Hyperopia from + 0.75 to + 2.5D with or
without astigmatism less than 0.75D
- -------------------------------------------------------------------------------------------------------
VISX P930016 PRK; Myopia from 0 to - 6.0D
- - Model B & C (Star & Star S2) 3/27/96
- -------------------------------------------------------------------------------------------------------
VISX P930016/S3 PRK; Myopia from 0 to - 6.0D with or
- - Model B & C (Star & Star S2) 4/24/97 without astigmatism from - 0.75 to - 4.0D
- -------------------------------------------------------------------------------------------------------
VISX P930016/S5 PRK; Myopia from 0 to - 12.0D with or
- - Model B & C (Star & Star S2) 1/29/98 without astigmatism from 0 to - 4.0D
- -------------------------------------------------------------------------------------------------------
VISX P930016/S7 PRK; Hyperopia from + 1.0 to + 6.0D
- - Star S2 11/2/98
- -------------------------------------------------------------------------------------------------------
VISX P990010/S1 Same as S2, except with eye tracker
Star S3 (EyeTracker) 4/20/00
- -------------------------------------------------------------------------------------------------------
VISX P930016/S10 PRK; Hyperopia from + 0.5 to + 5.0D with
- - Star S2 & S3 10/18/00 or without astigmatism + 0.5 to + 4.0D
- -------------------------------------------------------------------------------------------------------
Source: U.S. Food and Drug Administration fda.gov website
6
Photorefractive Keratectomy
With PRK, no scalpels are used and no incisions are made. The surgeon
prepares the eye by gently removing the surface layer of the cornea called the
epithelium. The surgeon then applies the excimer laser beam, reshaping the
curvature of the cornea. Deeper cell layers remain virtually untouched. Since a
layer typically about as slender as a human hair is removed, the cornea
maintains its original strength. A clear contact lens bandage is then placed on
the eye to protect it. Following PRK, a patient typically experiences blurred
vision and discomfort until the epithelium heals. A patient usually experiences
a substantial improvement in clarity of vision within a few days following PRK,
normally seeing well enough to drive a car within one to two weeks. However, it
generally takes one month, but may take up to six months, for the full benefit
of PRK to be realized.
PRK has been used commercially since 1988 and industry sources estimate
that to date over one million PRK procedures have been performed worldwide.
Clinical trials conducted by Alcon prior to receiving FDA approval for the sale
of its excimer laser showed that one year after the PRK procedure, approximately
81% of the patients could see 20/20 or better and approximately 99% could see
20/40 or better (the minimum level required to drive without corrective lenses
in most states). Clinical data submitted to the FDA by Alcon has shown that
patient satisfaction is very high with over 95% indicating they would
enthusiastically recommend PRK to a friend. In addition, a study published in
the February, 1998 issue of Ophthalmology reported the results of 83 patients in
the United Kingdom who underwent PRK for myopia of up to 7 diopters in 1989. The
study found that the patients experienced stable vision and the majority of
patients experienced no side effects. No complications were observed such as
cataracts, retinal detachment or long term elevated intraocular pressure and no
patients developed an infection.
7
Laser In-Situ Keratomileusis
LASIK came into commercial use in Canada in 1994 and in the United States
in 1996. In LASIK, an automated microsurgical instrument called a microkeratome
is used to create a thin corneal flap which remains hinged to the eye. The
corneal flap is 160 to 180 microns thick, about 30% of the corneal thickness.
Patients do not feel or see the cutting of the corneal flap, which takes only a
few seconds. The corneal flap is then flipped back and excimer laser pulses are
applied to the inner stromal layers of the cornea to treat the eye with the
patient's prescription. The corneal flap is then closed and the flap and
interface rinsed. Once the procedure is completed, most surgeons wait two to
three minutes to ensure the corneal flap has fully re-adhered. At this point,
patients can blink normally and the corneal flap remains secured in position by
the natural suction within the cornea. Since the surface layer of the cornea
remains intact with LASIK, no bandage contact lens is required and the patient
experiences virtually no discomfort. LASIK has the advantage of more rapid
recovery than PRK, with most typical patients seeing well enough to drive a car
the next day and healing completely within one to three months. Currently, the
majority of laser vision correction procedures in the United States and Canada
are LASIK. More than 90% of the excimer laser procedures currently performed at
the Company's eye care centers are LASIK. The Company's medical directors
believe LASIK generally allows for more precise correction than PRK for higher
levels of myopia and hyperopia (with or without astigmatism), greater
predictability of results and decreased probability of regression.
The Refractive Market
While estimates of market size should not be taken as projections of
revenues or of the Company's ability to penetrate that market, an industry
source estimates that approximately 50% of the United States population or 145
million people suffer from some form of refractive disorder requiring vision
correction including myopia (nearsightedness), hyperopia (farsightedness) and
astigmatism. To date, only an estimated two to three percent of this target
population has actually had laser vision correction.
Industry sources estimate that 105,000 laser vision correction procedures
were performed in the United States in 1996, 215,000 were performed in 1997,
480,000 were performed in 1998, 700,000 were performed in 1999, 1.4 million were
performed in 2000 and 1.7 million will be performed in 2001. Laser eye surgery
has become the most widely performed surgical procedure in North America. The
Company believes that its profitability and growth will depend upon continued
increasing acceptance of laser vision correction in the United States and, to a
lesser extent, Canada and competition.
There can be no assurance that laser vision correction will be more widely
accepted by eye care doctors or the general population as an alternative to
existing methods of treating refractive disorders. The acceptance of laser
vision correction may be affected adversely by its cost (particularly since
laser vision correction is typically not covered fully or at all by government
insurers or other third party payors and, therefore, must be paid for primarily
by the individual receiving treatment), concerns relating to its safety and
effectiveness, general
8
resistance to surgery, the effectiveness of alternative methods of correcting
refractive vision disorders, the lack of long term follow-up data and the
possibility of unknown side effects. There can be no assurance that long term
follow-up data will not reveal complications that may have a material adverse
effect on the acceptance of laser vision correction. Many consumers may choose
not to have laser vision correction due to the availability and promotion of
effective and less expensive nonsurgical methods for vision correction. Any
future reported adverse events or other unfavourable publicity involving patient
outcomes from laser vision correction could also adversely affect its acceptance
whether or not the procedures are performed at TLC eye care centers. Market
acceptance could also be affected by regulatory developments. The failure of
laser vision correction to achieve continued increased market acceptance would
have a material adverse effect on the Company's business, financial condition
and results of operations.
TLC Laser Eye Centers Inc.
TLC was incorporated by articles of incorporation under the Business
Corporations Act (Ontario) on May 28, 1993. By articles of amendment dated
October 1, 1993, the name of the Company was changed to TLC The Laser Center
Inc., and by articles of amendment dated March 22, 1995, certain changes were
effected in the issued and authorized capital of the Company with the effect
that the authorized capital of the Company became an unlimited number of Common
Shares. On September 1, 1998, TLC amalgamated under the laws of Ontario with
certain wholly-owned subsidiaries. By Articles of Amendment filed November 5,
1999, the Company changed its name to TLC Laser Eye Centers Inc.
The Company owns and manages eye care centers throughout North America
and, together with its network of over 12,500 eye care doctors, specializes in
laser vision correction services to correct common refractive vision disorders
such as myopia (nearsightedness), hyperopia (farsightedness) and astigmatism.
The Company is one of the largest providers of laser vision correction services
in North America.
TLC began operations in September 1993 when it opened an eye care center
in Windsor, Ontario, Canada. TLC currently owns or operates 59 eye care centers
in 26 states and provinces throughout the United States and Canada. See Item 2
"Properties" for a current list of the Company's eye care centers.
More than 90% of the excimer laser procedures currently performed at the
Company's eye care centers are LASIK. The Company's medical directors believe
LASIK generally allows for more precise correction than PRK for higher levels of
myopia and hyperopia (with or without astigmatism), greater predictability of
results and decreased probability of regression. TLC considers itself a clinical
leader in the field of vision correction procedures. TLC's medical directors
continually evaluate new vision correction technologies and procedures and seek
to ensure that patients at TLC's eye care centers are receiving the highest
quality vision care.
Expansion Plans
Overview
After a year of industry turmoil instigated by providers who treated laser
vision correction as a commodity and employed deep discount pricing strategies
in an effort to gain market share, the
9
Company believes that the industry turmoil is subsiding and that the average
price per procedure across the industry is stabilizing. Based on estimates that
only two to three percent of the 145 million people in the United States who
have some type of refractive disorder have had laser vision correction, the
Company believes that the potential for growth remains strong.
In response to the recent industry turmoil and deep discounting price war,
the Company retained the services of a national consulting firm and undertook an
extensive review of its internal structures, market position, resources and
future strategies. That review supported the Company's decision to maintain its
premium brand model and not participate in the industry price war. TLC decided
that its focus would remain on maximizing revenues through the Company's
co-management model and innovative marketing programs, controlling costs without
compromising superior quality of care and clinical outcomes and pursuing
additional growth opportunities for its core laser vision correction business
through its TLC Affiliate Centers Program and strategic acquisitions.
Maximizing Revenues
Co-Management Model
The Company has developed and implemented a co-management model under
which it not only establishes and operates eye care centers and provides an
array of related support services, but also coordinates the activities of
primary care doctors (usually optometrists), who co-manage patients, and
refractive surgeons (ophthalmologists), who perform laser vision correction
procedures. The primary care doctors assess candidates for laser vision
correction and provide pre- and post-operative care, including an initial eye
examination and a minimum of six follow-up visits. The co-management model
permits the eye care center surgeon to focus on providing laser vision
correction surgery while the primary care doctor provides pre- and
post-operative care. In addition, each TLC center has an optometrist on staff
who works to support and expand the local network of affiliated doctors. The
staff optometrist provides a range of clinical training and consultation
services to affiliated primary care doctors to support these doctors' individual
practices and to assist them in providing quality patient care. See "Item 1 -
Business - Government Regulation - Regulation of Optometrists and
Ophthalmologists."
TLC believes that its relationship with its more than 12,500 affiliated
eye care doctors, though non-exclusive, represents an important competitive
advantage. The Company believes that its affiliated doctor network, which
includes approximately 25% of the licensed practicing optometrists in the United
States, is the largest such network in the laser vision correction field.
TLC believes that a primary care doctor's relationship with TLC and the
doctor's acceptance of laser vision correction enhances the doctors' practices.
The affiliated eye doctors (usually optometrists) charge fees to assess
candidates for laser vision correction and provide pre- and post-operative care,
including an initial eye examination and a minimum of six follow-up visits. The
primary care doctor's potential revenue loss from sales of contact lenses and
eyeglasses may be offset by professional fees earned from both laser vision
correction pre- and post-operative care and examinations required under the
Company's "Lifetime Commitment" program.
10
Marketing Programs
TLC's "Lifetime Commitment" program, established in mid-1997, entitles
patients within a certain range of vision correction to have enhancement
procedures at no cost at any time during their lifetime for further correction,
if necessary. To remain eligible for the program, patients are required to have
an annual eye exam with a TLC affiliated doctor. The purpose of the program is
to respond to a patient's concern that their sight might decrease over time,
requiring an enhancement procedure. In addition, the program responds to the
doctors' concern that patients may not return for their annual eye examination
once their eyes are corrected. The Company believes that this program has been
well-received by both patients and doctors.
TLC also seeks to increase its procedure volume and its market penetration
through other innovative marketing programs. TLC believes that as market
acceptance for laser vision correction continues to increase, competition among
providers will grow and candidates for laser vision correction will increasingly
select a provider based on factors other than solely the advice of a doctor. TLC
believes that the selection decision for laser vision correction will more often
be determined by brand recognition in the future. TLC believes it is developing
a strong reputation and brand recognition. The Company has been dedicating
greater resources towards enhancing its marketing programs directed both at its
network doctors and the public, to increase TLC's brand recognition.
TLC believes it will enhance its brand recognition through the endorsement
of TLC by such well-known professional athletes as Tiger Woods and Se Ri Pak.
TLC has also developed marketing programs directed primarily at large
employers and third party providers to provide laser vision correction to their
employees and participants. Participating employers may partially subsidize the
cost of an employee's laser vision correction at a TLC eye care center and the
procedure may be provided at a discounted price. TLC has more than 1,600
participating employers which include such organizations as Office Depot, Inc.,
Ernst & Young LLP and Duracell Batteries (Canada). In addition, more than 84
million individuals qualify for the program through arrangements between TLC and
third party providers. See "Item 1 - Business - Risk Factors - Inability to
Execute Strategy; Management of Growth."
Controlling Costs
TLC has and continues to review its cost structure with a view to
significantly reducing complexity and overall costs. On a day to day operations
level, this review seeks to achieve a more comprehensive approach to corporate
office cost reduction, refinements in the center operating model to increase
efficiency without compromising patient care and better leveraging of TLC's
economies of scale. On a strategic level, this review resulted in the Company's
decision in fiscal 2001 to terminate the operations of its e-commerce subsidiary
eyeVantage.com, Inc., close three eye care centers, terminate plans to construct
another center and sell its ownership interest in another center. See Note 18 to
"Item 8 - "Financial Statements and Supplementary Data" and "Item 2 -
Properties".
11
Additional Growth Opportunities
TLC Affiliate Centers Program
As penetration of the primary markets large enough the support the cost of
acquiring or developing a full size Company owned center nears completion, the
Company believes that the fastest growing segment of laser vision provider will
be the local eye care professional owned center. In order to target this growing
segment, TLC recently launched a pilot test of its affiliate centers program.
The affiliate centers program is designed to provide TLC's high quality of
patient care and service in association with local independent eye care
professionals servicing the premium market in secondary markets which are not
large enough to justify the development or acquisition of a full sized TLC
center. The program enables local providers to leverage TLC's brand reputation
in their practices and TLC to participate in markets it might not otherwise
target. Pursuant to the TLC Affiliate Center Program, TLC may provide equipment
and clinical, management and marketing support to local eye care professionals
in exchange for a management fee. Equipment may include an excimer laser and/or
a microkeratome. Clinical support may include access to TLC's support services,
training of staff and technicians and complications support from TLC's Clinical
Affairs department. Management support may include the services of a laser
vision correction manager, a license to use TLC's proprietary patient management
software and access to TLC's negotiated purchasing discounts from suppliers.
Marketing support may include a license to use TLC's trademark design and
identify the center as a TLC Affiliate Center, co-marketing, use of TLC's
marketing materials and brochures and participation in the Lifetime Commitment
Program.
Strategic Acquisions
The final component of TLC's strategy is the expansion of its business
through internal development and acquisition of eye care businesses. The major
focus of the Company's expansion strategy is the United States, where the
Company continues to position itself to take advantage of the growing market for
laser vision correction.
TLC plans to expand its business by acquiring other eye care centers and
businesses that operate eye care centers and increasing their procedure volumes
and efficiency. The Company implements the same business model and marketing
programs in improving existing or acquired centers. TLC seeks to increase the
volume of procedures performed at each eye care center by training the network
doctors to advise patients about laser vision correction and by developing local
marketing plans for each center. The Company's management and administrative
software and systems are intended to increase the efficiency of TLC's eye care
centers, permitting a higher volume of procedures to be performed without
significant additional fixed costs. Wherever possible, TLC will seek to
establish its position as the leader in laser vision correction in an area or
region and then seek to expand in areas contiguous to its existing centers.
TLC's senior executive team regularly examines acquisition and development
opportunities in the refractive market. The Company continually identifies
opportunities and discusses potential strategic alliances with leading
practitioners. In acquiring an existing eye
12
care center business or opening new centers, TLC generally requires a number of
criteria to be met, including a sufficient population base with desirable
demographics, the support of a core group of local doctors, traditionally more
than 50, and the availability of one or two highly skilled laser vision
correction surgeons that are supported by the local network doctors and
subscribe to the co-management model. In addition, the center must be expected
to provide TLC with a satisfactory return on investment. It is intended that the
cost to develop or acquire new centers or businesses that operate centers will
be funded through funds available for general corporate purposes. See "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Item 1 - Business - Risk Factors -- Risk of Inability to
Execute Strategy; Management of Growth".
Description of Eye Care Centers
The Company currently owns and manages 53 eye care centers in the United
States and 6 eye care centers in Canada. Each eye care center has a minimum of
one excimer laser with many of the centers having two or more lasers. In the
United States, the majority of the Company's excimer lasers are manufactured by
either VISX Incorporated ("VISX") or Alcon, with a number manufactured by
LaserSight. In Canada, the majority of the Company's excimer lasers are
manufactured by Chiron Vision Corporation, a subsidiary of Bausch & Lomb
Inc.("B&L").
A typical TLC eye care center has between three and five thousand square
feet of space and is located in an office building. Although the legal and
payment structures can vary from state to state depending upon local law and
market conditions, TLC generally receives revenues in the form of management and
facility fees paid by doctors who use the center to perform laser vision
correction procedures and administrative fees for billing and collection
services from doctors who co-manage patients treated at the centers. Every TLC
center has a clinical director, who is an optometrist and oversees the clinical
aspects of the center and builds and supports the network of affiliated eye care
doctors. Each center also has a business manager, a receptionist, ophthalmic
technicians and patient consultants. The number of staff depends on the activity
level of the center. Most TLC centers also have a professional relations
coordinator who works with the clinical director to support the doctor network
and market TLC's services. One senior staff person, who is designated as the
executive director of the center, prepares the annual business plan and
supervises the day-to-day operations of the center. See "Item 2 - Properties"
for a list of TLC eye care centers.
TLC has developed proprietary management and administrative software and
systems that are designed to permit eye care centers to provide high levels of
patient care. The software permits any TLC center to provide a potential
candidate with current information on affiliated doctors throughout North
America, to direct a candidate to the closest eye care center, to permit
tracking of calls and procedures, to coordinate patient and doctor scheduling
and to produce financial and surgical outcome reporting and analysis. The
software has been installed in all of the Company's eye care centers. It is also
expected that the software will be installed in most affiliated centers. TLC has
also introduced a new on-line consumer consultation site on TLC's website
(www.tlcvison.com). This consumer consultation site allows consumers to book
their consultation with TLC online. TLC also maintains a call center (1-800-CALL
TLC) which is staffed seven days a week.
13
Pricing
Early in fiscal 2001, the Company made the strategic decision not to
participate in an escalating price war instigated by a number of providers who
employed dramatically reduced pricing in an effort to gain market share,
marketing laser vision correction as a commodity rather than recognizing it as a
surgical procedure. The Company's analysis indicated that the market for laser
vision correction could support a premium model in the United States. At TLC eye
care centers in the United States, patients are typically charged approximately
$1,550 to $2,200 per eye for LASIK. At TLC eye care centers in Canada, patients
are typically charged approximately C$1,000 to C$3,000 per eye for LASIK.
Patients are also charged an average of $400 for pre- and post-operative care by
their primary care eye doctor, though the total procedure costs to the patients
are often included in a single invoice. See "Item 1 - Business - Risk Factors -
Procedure Fees". Although competitors in certain markets continue to charge less
for these procedures, the Company believes that important factors affecting
competition in the laser vision correction market, other than price, are quality
of service, reputation and brand recognition, and that its competitiveness is
enhanced by a strong network of affiliated doctors. See "Item 1 - Business -
Risk Factors - Competition".
The cost of laser vision correction procedures is not covered by
provincial health care plans in Canada or reimbursable under Medicare or
Medicaid in the United States. Increasingly, these procedures are covered in
part by health management organizations or third party payors under managed care
contracts or by other insurers. The Company has positioned itself well to take
advantage of this increasing market through its TLC Corporate Advantage program
which is now available to more than 84 million individuals and accounts for more
than 25% of the Company's paid procedure volume.
Procedure Fees
In the United States, TLC is typically required to pay a per procedure
royalty fee to the manufacturer of the excimer laser which is used for the
procedure. The majority of the excimer lasers used by TLC in the United States
are manufactured by VISX and Alcon. The royalty fee for laser vision correction
on VISX's excimer laser is over $100 per eye. Alcon royalty fees are higher but
include scheduled service. There can be no assurance that payments made by the
Company to a manufacturer of an excimer laser in the United States will preclude
a patent dispute with another manufacturer of an excimer laser or a patentholder
with respect to technology or activities purported to be covered by the relevant
patents or the Company's equipment or methods will not infringe patents held by
other parties. See "Item 1 - Business - Risk Factors - Intellectual Property".
Description of Secondary Care Centers
The Company has an investment in three secondary care entities in the
United States. See "Item 2 - Properties" for a list of TLC secondary care
centers. A secondary care center is equipped for doctors to provide advanced
levels of eye care, which may include eye surgery for the treatment of disorders
such as glaucoma, cataracts and retinal disorders. Generally, a secondary care
center does not provide primary eye care, such as eye examinations, or dispense
eyewear or contact lenses. Sources of revenue for secondary care centers are
direct payments by
14
patients as well as reimbursement or payment by third party payors, including
Medicare and Medicaid.
Ownership of Eye Care Centers
TLC's eye care centers are typically owned and operated by subsidiaries of
the Company. Under the TLC Affiliate Center program, TLC will have no ownership
interest in affiliated centers. Typically, the affiliated center will be owned
and operated by one or more local eye care professionals. TLC also has no
ownership interest in the doctors' practices or professional corporations that
TLC manages on behalf of doctors or that have access to TLC centers to perform
laser vision correction services.
Sales and Marketing
While TLC believes that many myopic and hyperopic people are potential
candidates for laser vision correction, these procedures must compete with
corrective eyewear and surgical and non-surgical treatments for myopia and
hyperopia. The decision to have laser vision correction largely represents a
choice dictated by an individual's desire to reduce or eliminate their reliance
on eyeglasses or contact lenses.
The Company aggressively markets to both doctors and the public. A large
part of the Company's marketing resources is devoted to joint marketing programs
with affiliated doctors, the goal of which is to build their practices. The
Company provides doctors with brochures, videos, posters and other materials
which help them educate their patients about laser vision correction. Those
doctors who wish to market directly to their patients or the public receive
support from the Company in the development of marketing programs. Each eye care
center has a relationship with a corporate marketing staff person who assists
the center in developing marketing/public relations plans unique to the needs of
that center.
The Company believes that the most effective way to market to doctors is
to be perceived as the leading provider of quality eye care. To this end, the
Company strives to be the clinical leader, educates doctors on laser vision and
refractive correction and remains current with new procedures and techniques.
See "Item 1 - Business - Ancillary Businesses and Support Programs." The Company
also promotes its services to doctors in Canada and the United States through
conferences, advertisements in journals, direct marketing, its Web sites and
newsletters.
TLC believes that as market acceptance for laser vision correction
continues to increase, competition among service providers will continue to grow
and candidates for laser vision correction will increasingly select a provider
based on factors other than solely the advice of a doctor. TLC believes that the
selection decision for laser vision correction will more often be determined by
brand recognition in the future, and TLC believes it has and continues to
develop a strong reputation and brand recognition. The Company has historically
provided a limited amount of marketing directly to the public through radio and
print advertisements, videos, brochures and seminars. In fiscal 2001, TLC
dedicated additional resources towards enhancing its marketing programs directed
at network doctors and the public to increase TLC's brand recognition. TLC has
also developed innovative marketing programs such as the Corporate
15
Advantage program to expand TLC's position as the leader in the North American
market for laser vision correction services.
Surgeon Contracts
In each market where TLC operates, TLC has formed a network of eye care
doctors (mostly optometrists) who perform the pre-operative and post-operative
care for patients who have had laser vision correction. Those doctors then
"co-manage" their patients with TLC surgeons in that the surgeon performs the
laser vision correction procedure itself, while the optometrist performs the
pre-operative screening and post-operative care. In most states, co-management
doctors have the option of charging the patient directly for their services or
having TLC collect the fees on their behalf.
Most surgeons performing laser vision correction procedures at TLC eye
care centers do so under one of three types of standard agreements (which have
been modified for use in the various U.S. states as required by state law). Each
agreement typically prohibits surgeons from disclosing confidential information
relating to the center, soliciting patients or employees of the center, or
participating in any other eye care center within a specified area. However,
although surgeons performing laser vision correction at the Company's eye care
centers have agreed to certain restrictions on competing with, or soliciting
patients or employees associated with, the Company, there can be no assurance
that such agreements will be enforceable. See "Risk Factors - Dependence on
Affiliated Doctors".
Surgeons must meet the credentialing requirements of the state or province
in which they practice, the FDA and the manufacturer of the laser on which they
perform procedures and must complete training arranged by the Company, unless
the Company is otherwise satisfied that the surgeon has been properly trained.
Surgeons are responsible for maintaining appropriate malpractice insurance and
most agree to indemnify the Company and its affiliates for any losses incurred
as a result of the surgeon's negligence or malpractice. See "Item 1 - Business -
Risk Factors - Potential Liability and Insurance".
Most states prohibit the Company from practicing medicine, employing
physicians to practice medicine on the Company's behalf or employing
optometrists to render optometric services on the Company's behalf. Because the
Company does not practice medicine or optometry, its activities are limited to
owning and managing eye care centers and affiliating with other health care
providers. Affiliated doctors provide a significant source of patients for laser
vision correction at the Company's centers. Accordingly, the success of the
Company's operations depends upon its ability to enter into agreements on
acceptable terms with a sufficient number of health care providers, including
institutions and eye care doctors, to render surgical and other professional
services at facilities owned or managed by the Company. There can be no
assurance that the Company will be able to enter into agreements with doctors or
other health care providers on satisfactory terms or that such agreements will
be profitable to the Company. Failure to enter into or maintain such agreements
with a sufficient number of qualified doctors will have a material adverse
effect on the Company's business, financial condition and results of operations.
16
Ancillary Businesses and Support Programs
TLC has made investments in other businesses with the primary objective of
supporting its laser vision correction business and the secondary objective of
capitalizing on its management and marketing skills.
Other Businesses
eyeVantage.com, Inc., a subsidiary of TLC, provided e-business services
for eye care professionals. As part of its strategy to focus on its core
business of providing laser vision correction surgery services and to reduce
costs, the Company announced in October 2000 that it had chosen to terminate the
activities of eyeVantage.com, Inc. See Note 18 to "Item 8 - "Financial
Statements and Supplementary Data".
Pure Laser Hair Removal & Treatment Clinics Inc. ("Pure"), a subsidiary of
TLC, offers a variety of aesthetic services and treatments including hair
removal and skin care. Pure has one center in Ontario, three centers in Illinois
and three centers in Michigan.
Aspen Healthcare Inc. ("Aspen"), a subsidiary of TLC, is a health care
consulting, development and management firm specializing in ambulatory surgery
center joint-venture development, management and ownership. Aspen offers
experienced management services to both surgery centers and hospitals. Aspen
also consults, plans, designs, develops, implements and operates ambulatory
surgery centers nationwide.
Vision Source is a wholly owned subsidiary that provides marketing,
management and buying power to independently owned and operated optometric
practices in the United States. This business supports the development of
independent practices and complements the Company's co-management model.
The Company continues to work to maximize its return on investments in
non-core businesses and focuses on ensuring that non-core businesses are
self-sustaining.
Support Programs
National Medical Board
The Company's National Medical Board is comprised of refractive surgeons,
selected based upon clinical experience and previous involvement with TLC, that
represent the geographic centers in which TLC currently owns or manages an eye
care center. The National Medical Board, established in March 1998, together
with the Company's co-national medical directors, is responsible for developing
protocols and procedures that are recommended for doctors using TLC's eye care
centers. The National Medical Board has scheduled meetings
17
quarterly throughout the year and meets as necessary to consider clinical issues
as they arise. The National Medical Board also serves as a quality assurance
peer group to seek to ensure that TLC's eye care centers provide high quality
vision care.
Emerging Technologies
The Company considers itself a clinical leader in vision correction
procedures. The Company's medical directors continually evaluate new vision
correction technologies and procedures to seek to ensure that TLC eye care
centers provide the highest level of care. TLC's eye care centers in Ontario are
state of the art facilities that are used to examine and evaluate new
technologies for TLC eye care centers. In February 2001, TLC announced that it
had entered into a strategic refractive technology alliance with Alcon,
manufacturer of the Summit/Autonomous excimer laser and a global leader in the
research, development, manufacture and marketing of ophthalmic products. The
Company is also developing custom LASIK procedures capable of addressing the
inherent uniqueness of each human eye. TLC currently operates the only center in
North America that offers custom LASIK vision correction procedures.
National Advisory Council
The Company's National Advisory Council is comprised of optometrists that
represent the geographic centers in which TLC currently manages or intends to
manage an eye care center. By providing regional representation, the National
Advisory Council serves as a channel of communication to local doctors. The
National Advisory Council advises the Company from time to time on a broad range
of clinical and strategic issues, and its feedback is incorporated into the
Company's strategic development.
Training
The Company conducts a comprehensive training program under the
supervision of Dr. Jeffery Machat or Dr. Stephen Slade. Dr. Machat and Dr. Slade
are the Co-National Medical Directors of TLC, and both are prominent
ophthalmologists and experts in the field of laser vision correction. Both have
been working with excimer lasers since 1990 and have lectured and trained
surgeons in North America, South America, Europe, South Africa, Australia and
Asia. The Company believes that Dr. Slade was among the first surgeons to
perform LASIK in the United States and Dr. Machat was the first surgeon to
perform LASIK in Canada. In addition, Dr. Machat and Dr. Slade are qualified by
Chiron (Bausch & Lomb) to certify surgeons to perform LASIK procedures using
Chiron excimer lasers.
Education
The Company believes that ophthalmologists, optometrists and other eye
care professionals who endorse laser vision correction are a valuable resource
in increasing general awareness and acceptance of the procedures among potential
candidates and in promoting the Company as a service provider. The Company seeks
to be perceived by eye care professionals as the clinical leader in the field of
laser vision correction. One way in which it hopes to achieve
18
this objective is by participating in the education and training of eye care
doctors in Canada and the United States.
The Company provides educational programs to doctors in all aspects of
clinical study, primarily in conjunction with several of the major optometry
schools in the United States. In addition, TLC has an education and training
relationship with the University of Waterloo, the only English language
optometry school in Canada.
Website
TLC has linked its eye care centers, network doctors and potential
patients through its website www.tlcvision.com which provides a directory of TLC
eye care providers and contains questions and answers about laser vision
correction.
Equipment and Capital Financing
In the United States, most of TLC's eye care centers are equipped with
either or both VISX or Alcon excimer lasers. Due to its strategic alliance with
Alcon, the Company expects that the number of Alcon lasers will increase. In
Canada, excimer lasers manufactured by B&L, LaserSight and Alcon are now being
used. See "Industry Background - Laser Vision Correction".
Although there can be no assurance, the Company believes that based on the
number of existing manufacturers, the current inventory levels of those
manufacturers and the number of suitable, previously owned and (in the case of
United States centers) FDA approved lasers available for sale in the market, the
supply of excimer lasers is more than adequate for the Company's future
operations and expansion plans.
A new excimer laser costs approximately $300,000. However, the industry
trend in the sale of excimer lasers is moving away from a flat purchase price to
the alternative of charging the purchaser a per procedure fee. Excimer lasers
require periodic servicing, generally after 300 procedures.
As available technology improves and additional procedures are approved by
the FDA, the Company expects to upgrade the capabilities of its lasers. See
"Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources".
Competition
Consumer Market for Vision Correction
Within the consumer market, excimer laser procedures performed at the
Company's centers compete with other surgical and non-surgical treatments for
refractive disorders, including eyeglasses, contact lenses, other types of
refractive surgery and technologies currently under development such as corneal
rings, intraocular lenses and surgery with different types of lasers. Although
the Company believes that eyeglass and contact lens use will continue to be the
most popular form of vision correction in the foreseeable future, as market
acceptance for laser
19
vision correction continues to increase, competition within this market will
grow. There can be no assurance that the Company's management, operations and
marketing plans are or will be successful in meeting this variety of
competition. Further, there can be no assurance that the Company's competitors'
access to capital, financing or other resources or their market presence will
not give these competitors an advantage against the Company. In addition, other
surgical and non-surgical techniques to treat vision disorders are currently in
use and under development and may prove to be more attractive to consumers than
laser vision correction.
Market for Laser Vision Correction
Within the consumer market for laser vision correction, the Company
continues to face increasing competition from other service providers. As market
acceptance for laser vision correction continues to increase, competition within
this market will grow. Laser vision correction providers are divided into three
major segments: corporate owned centers; independent surgeon owned centers; and
institution owned centers. According to an industry source, as of June 30, 2001,
independent surgeon owned centers accounted for the largest percentage of total
procedure value in the industry with a 54.6% market share. Corporate owned
centers accounted for 31.5% of total procedures performed. The remaining 13.9%
of laser vision correction procedures were performed at institution owned
centers, such as hospitals or universities.
Although some competitors continue to charge less for laser vision
correction than TLC and its affiliated doctors, the Company believes that the
important factors affecting competition in the laser vision correction market
are quality of service, reputation, brand recognition along with price and that
competitiveness is enhanced by a strong network of affiliated doctors. Suppliers
of conventional vision correction (eyeglasses and contact lenses), such as
optometric chains, may also compete with the Company either by marketing
alternatives to laser vision correction or by purchasing excimer lasers and
offering refractive surgery to their customers. These service providers may have
greater marketing and financial resources and experience than the Company and
may be able to offer laser vision correction at lower rates. Competition has
also increased in part due to the greater availability and lower costs of
excimer lasers.
During the past year, the laser vision correction industry was thrown into
turmoil by a number of providers who employed dramatically reduced pricing in an
effort to gain market share. TLC refused to participate in the price war and
maintained its premium pricing model with superior quality of care and outcomes.
In April 2001, LasikVision Corporation and Lasik Vision Canada Inc.,
subsidiaries of ICON Laser Eye Centers, Inc., made assignments in bankruptcy and
in June, 2001 ICON Laser Eye Centers, Inc. was placed in receivership. The
Company believes that these filings, together with related media reports, had a
negative impact on procedure volumes by generating a great deal of short-term
concern and confusion amongst prospective patients. A series of negative news
stories focusing on patients with unfavourable outcomes from procedures
performed at competing centers further adversely affected procedure volumes. In
addition, being an elective procedure, laser eye surgery volumes may have been
further depressed by economic conditions in early 2001.
TLC competes in fragmented geographic markets. The Company's principal
corporate competitors include Laser Vision Centers, Inc., LCA-Vision Inc., Laser
Vision Institute, Inc. and
20
Aris Vision Institute. On August 27, 2001, the Company announced that it had
entered into an Agreement and Plan of Merger with Laser Vision Centers, Inc. See
"Item 1 - Business - Overview". In each geographical market, TLC's primary
competitors will often be independent surgeon and institution owned centers.
Government Regulation
Excimer Laser Regulation
United States
Medical devices, such as the excimer lasers used in the Company's United
States centers, are subject to stringent regulation by the FDA and cannot be
marketed for commercial sale in the United States until the FDA grants
pre-market approval ("PMA") for the device. To obtain a PMA for a medical
device, excimer laser manufacturers must file a PMA application that includes
clinical data and the results of pre-clinical and other testing sufficient to
show that there is a reasonable assurance of safety and effectiveness of their
excimer lasers. Human clinical trials must be conducted pursuant to
Investigational Device Exemptions issued by the FDA in order to generate data
necessary to support a PMA. Figures 1 and 2 at pages 5 and 6 set out a list of
lasers approved for LASIK, PRK and other procedures as at March 29, 2001. See
"Item 1 - Business - Industry Background - Laser Vision Correction".
The FDA is not authorized to regulate the practice of medicine, and
ophthalmologists, including those affiliated with TLC eye care centers, may
perform the LASIK procedure, using lasers with a PMA for PRK only (off-label
use) in an exercise of professional judgement in connection with the practice of
medicine.
The use of an excimer laser to treat both eyes on the same day (bilateral
treatment) has not been approved by the FDA. The FDA has stated that it
considers the use of the excimer laser for bilateral treatment to be a practice
of medicine decision, which the FDA is not authorized to regulate.
Ophthalmologists, including those affiliated with TLC eye care centers, widely
perform bilateral treatment in an exercise of professional judgement in
connection with the practice of medicine. There can be no assurance that the FDA
will not seek to challenge this practice in the future.
Any excimer laser manufacturer which obtains PMA approval for use of its
excimer lasers will continue to be subject to regulation by the FDA. Although
the FDA does not specifically regulate surgeons' use of excimer lasers, the FDA
actively enforces regulations prohibiting marketing of products for
non-indicated uses and conducts periodic inspections of manufacturers to
determine compliance with good manufacturing practice regulations.
Failure to comply with applicable FDA requirements could subject the
Company, its affiliated doctors or laser manufacturers to enforcement action,
including product seizure, recalls, withdrawal of approvals and civil and
criminal penalties, any one or more of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
Further, failure to comply with regulatory requirements, or any adverse
regulatory action, including a reversal of the FDA's current position that the
"off-label" use of excimer lasers by doctors outside the FDA approved guidelines
is a practice of medicine decision, which the FDA
21
is not authorized to regulate, could result in a limitation on or prohibition of
the Company's use of excimer lasers which in turn could have a material adverse
effect on the Company's business, financial condition and results of operations.
The marketing and promotion of laser vision correction in the United
States is subject to regulation by the FDA and the Federal Trade Commission
("FTC"). The FDA and FTC have released a joint communique on the requirements
for marketing laser vision correction in compliance with the laws administered
by both agencies. The FTC staff also issued more detailed staff guidance on the
marketing and promotion of laser vision correction and has been monitoring
marketing activities in this area through a non-public inquiry to identify areas
that may require further FTC attention.
Canada
The use of excimer lasers in Canada to perform refractive surgery is not
subject to regulatory approval, and excimer lasers have been used to treat
myopia since 1990 and hyperopia since 1996. The Health Protection Branch of
Health Canada ("HPB") regulates the sale of devices, including excimer lasers
used to perform procedures at the Company's Canadian eye care centers. Pursuant
to the regulations prescribed under the Canadian Food and Drugs Act, the HPB may
permit manufacturers or importers to sell a certain number of devices to perform
procedures provided the devices are used in compliance with specified
requirements for investigational testing. Permission to sell the device may be
suspended or cancelled where the HPB determines that its use endangers the
health of patients or users or where the regulations have not been complied
with. Devices may also be sold for use on a non-investigational basis where
evidence available in Canada to the manufacturer or importer substantiates the
benefits and performance characteristics claimed for the device. The Company
believes that the sale of the excimer lasers to its eye care centers, and their
use at the centers, complies with HPB requirements. There can be no assurance
that Canadian regulatory authorities will not impose restrictions which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Regulation of Optometrists and Ophthalmologists
United States
The health care industry in the United States is highly regulated. The
Company and its operations are subject to extensive federal, state and local
laws, rules and regulations, including those prohibiting corporations from
practicing medicine and optometry, prohibiting unlawful rebates and division of
fees, anti-kickback laws, fee-splitting laws, self-referral laws, laws limiting
the manner in which prospective patients may be solicited, and professional
licensing rules.
The Company has reviewed these laws and regulations with its health care
counsel and, although there can be no assurance, the Company believes that its
operations currently comply with applicable laws in all material respects. Also,
the Company expects that doctors affiliated with TLC centers will comply with
such laws in all material respects, although it cannot ensure such compliance by
doctors.
22
Federal Law. A federal law (known as the "anti-kickback statute")
prohibits the offer, solicitation, payment or receipt of any remuneration which
is intended to induce, or is in return for, the referral of patients for, or the
ordering of, items or services reimbursable by Medicare or any other federally
financed health care program. This statute also prohibits remuneration intended
to induce the purchasing of, or arranging for, or recommending the purchase or
order of any item, good, facility or service for which payment may be made under
federal health care programs. This statute has been applied to otherwise
legitimate investment interests if one purpose of the offer to invest is to
induce referrals from the investor. Safe harbour regulations provide absolute
protection from prosecution for certain categories of relationships. In
addition, a recent law broadens the government's anti-fraud and abuse
enforcement responsibilities to include all health care delivery systems
regardless of payor.
Subject to certain exceptions, federal law also prohibits a physician from
ordering or prescribing certain designated health services or items if the
service or item is reimbursable by Medicare or Medicaid and is provided by an
entity with which the physician has a financial relationship (including
investment interests and compensation arrangements). This law, known as the
"Stark Law", does not restrict a physician from ordering an item or service not
reimbursable by Medicare or Medicaid or an item or service that does not fall
within the categories designated in the law.
Laser vision correction is not reimbursable by Medicare, Medicaid or other
federal programs. As a result, neither the anti-kickback statute nor the Stark
Law applies to the Company's eye care centers but the Company is subject to
similar state laws.
Doctors at the Company's secondary care centers provide services that are
reimbursable under Medicare and Medicaid. Further, ophthalmologists and
optometrists co-manage Medicare and Medicaid patients who receive services at
the Company's secondary care centers. The co-management model is based, in part,
upon the referral by an optometrist for surgical services performed by an
ophthalmologist and the provision of pre- and post-operative services by the
referring optometrist. The Office of the Inspector General, the government
agency responsible for enforcing the anti-kickback statute, has stated publicly
that to the extent there is an agreement between optometrists and
ophthalmologists to refer back to each other, such an agreement could constitute
a violation of the anti-kickback statute. The Company believes, however, that
its co-management program does not violate the anti-kickback statute, as
patients are given the choice whether to return to the referring optometrist or
to stay with the ophthalmologist for post-operative care. Nevertheless, there
can be no guarantee that the Office of the Inspector General will agree with the
Company's analysis of the law. If the Company's co-management program were
challenged as violating the anti-kickback statute and the Company were not
successful in defending against such a challenge, then the result may be civil
or criminal fines and penalties, including exclusion of the Company, the
ophthalmologists, and the optometrists from the Medicare and Medicaid programs,
or the requirement that the Company revise the structure of its co-management
program or curtail its activities, any of which could have a material adverse
effect upon the Company's business, financial condition and results of
operations.
The provision of services covered by the Medicare and Medicaid programs in
the Company's secondary care centers also triggers potential application of the
Stark Law. The co-
23
management model could establish a financial relationship, as defined in the
Stark Law, between the ophthalmologist and the optometrist. Similarly, to the
extent that the Company provides any designated health services, as defined in
the statute, the Stark Law could be triggered as a result of any of the several
financial relationships between the Company and ophthalmologists. Based on its
current interpretation of the Stark Law as set forth in the final rule published
in 2000, the Company believes that the referrals from ophthalmologists and
optometrists either will be for services which are not designated health care
services as defined in the statute or will be covered by an exception to the
Stark Law. There can be no assurance, however, that the government will agree
with the Company's position or that there will not be changes in the
government's interpretation of the Stark Law. In such case, the Company may be
subject to civil penalties as well as administrative exclusion and would likely
be required to revise the structure of its legal arrangements or curtail its
activities, any of which could have a material adverse effect on the Company's
business, financial condition, and results of operation.
State Law. In addition to the requirements described above, the regulatory
requirements that the Company must satisfy to conduct its business will vary
from state to state, and, accordingly, the manner of operation by the Company
and the degree of control over the delivery of refractive surgery by the Company
may differ among the states.
A number of states have enacted laws which prohibit what is known as the
corporate practice of medicine. These laws are designed to prevent interference
in the medical decision-making process from anyone who is not a licensed
physician. Many states have similar restrictions in connection with the practice
of optometry. Application of the corporate practice of medicine prohibition
varies from state-to-state. Therefore, while some states may allow a business
corporation to exercise significant management responsibilities over the
day-to-day operation of a medical or optometric practice, other states may
restrict or prohibit such activities. The Company believes that it has
structured its relationship with eye care doctors in connection with the
operation of eye care centers as well as in connection with its secondary care
centers so that they conform to applicable corporate practice of medicine
restrictions in all material respects. Nevertheless, there can be no assurance
that, if challenged, those relationships may not be found to violate a
particular state corporate practice of medicine prohibition. Such a finding may
require the Company to revise the structure of its legal arrangements or curtail
its activities, and this may have a material adverse effect on the Company's
business, financial condition, and results of operations.
Many states prohibit a physician from sharing or "splitting" fees with
persons or entities not authorized to practice medicine. TLC's co-management
model for refractive procedures presumes that a patient will make a single
global payment to the laser center, which is a management entity acting on
behalf of the ophthalmologist and optometrist to collect fees on their behalf.
In turn, the ophthalmologist and optometrist pay facility and management fees to
the laser center out of their patient fees collected. While the Company believes
that such arrangements do not violate any such prohibitions in any material
respects, there can be no assurance that one or more states will not interpret
this structure as violating the state fee-splitting prohibition, thereby
requiring the Company to change its procedures in connection with billing and
collecting for services. Violation of state fee-splitting prohibitions may
subject the ophthalmologists and optometrists to sanctions, and may result in
the Company incurring
24
legal fees, as well as being subjected to fines or other costs, and this could
have a material adverse effect on the Company's business, financial condition,
and results of operations.
Just as in the case of the federal anti-kickback statute, while the
Company believes that it is conforming with applicable state anti-kickback
statutes in all material respects, there can be no assurance that each state
will agree with the Company's position and would not challenge the Company. If
the Company were not successful in defending against such a challenge, the
result may be civil or criminal fines or penalties for the Company as well as
the ophthalmologists and optometrists. Such a result would require the Company
to revise the structure of its legal arrangements, and this could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Similarly, just as in the case of the federal Stark Law, while the Company
believes that it is operating in compliance with applicable state
anti-self-referral laws in all material respects, there can be no assurance that
each state will agree with the Company's position or that there will not be a
change in the state's interpretation or enforcement of its own law. In such
case, the Company may be subject to fines and penalties as well as other
administrative sanctions and would likely be required to revise the structure of
its legal arrangements. This could have a material adverse effect on the
Company's business, financial condition and results of operations.
Canada
Conflict of interest regulations in certain Canadian provinces prohibit
optometrists, ophthalmologists or corporations owned or controlled by them from
receiving benefits from suppliers of medical goods or services to whom the
optometrist or ophthalmologist refers his or her patients. In certain
circumstances, these regulations deem it a conflict of interest for an
ophthalmologist to order a diagnostic or therapeutic service to be performed by
a facility in which the ophthalmologist has any proprietary interest. This does
not include a proprietary interest in a publicly traded company. Certain of the
Company's eye care centers in Canada are owned and managed by a subsidiary in
which affiliated doctors own a minority interest. TLC expects that
ophthalmologists and optometrists affiliated with TLC will comply with the
applicable regulations, although it cannot ensure such compliance by doctors.
The laws of certain Canadian provinces prohibit health care professionals
from splitting fees with non-health care professionals and prohibit non-licensed
entities (such as the Company) from practicing medicine or optometry and, in
certain circumstances, from employing physicians or optometrists directly. The
Company believes that its operations comply with such laws in all material
respects, and expects that doctors affiliated with TLC centers will comply with
such laws, although it cannot ensure such compliance by doctors.
Optometrists and ophthalmologists are subject to varying degrees and types
of provincial regulation governing professional misconduct, including
restrictions relating to advertising, and in the case of optometrists, a
prohibition against exceeding the lawful scope of practice. In Canada, laser
vision correction is not within the permitted scope of practice of optometrists.
Accordingly, TLC does not allow optometrists to perform the procedure at TLC
centers in Canada.
25
Facility Licensure and Certificate of Need
The Company believes that it has all licenses necessary to operate its
business. The Company may be required to obtain licenses from the state
Departments of Health, or a division thereof in the various states in which it
opens TLC centers. While there can be no assurance that the Company will be able
to obtain facility licenses in all states which may require facility licensure,
the Company has no reason to believe that in such states, it will not be able to
obtain such a license without unreasonable expense or delay.
Some states require the permission of the State Department of Health or a
division thereof, such as a Health Planning Commission, in the form of a
Certificate of Need ("CON") prior to the construction or modification of an
ambulatory care facility, such as a laser center, or the purchase of certain
medical equipment in excess of an amount set by the state. While there can be no
assurance that the Company will be able to acquire a CON in all states where a
CON is required, the Company has no reason to believe that in those states that
require a CON, it will not be able to do so.
The Company is not aware of any Canadian health regulations which impose
licensing requirements on the operation of eye care centers.
Risk of Non-Compliance
Many of these laws and regulations governing the health care industry are
ambiguous in nature and have not been definitively interpreted by courts and
regulatory authorities. Moreover, state and local laws vary from jurisdiction to
jurisdiction. Accordingly, the Company may not always be able to predict clearly
how such laws and regulations will be interpreted or applied by courts and
regulatory authorities and some of the Company's activities could be challenged.
In addition, there can be no assurance that the regulatory environment in which
the Company operates will not change significantly in the future. Numerous
legislative proposals have been introduced in Congress and in various state
legislatures over the past several years that would, if enacted, effect major
reforms of the U.S. health care system. The Company cannot predict whether any
of these proposals will be adopted and, if adopted, what impact such legislation
would have on the Company's business. The Company has reviewed existing laws and
regulations with its health care counsel and, although there can be no
assurance, the Company believes that its operations currently comply with
applicable laws in all material respects. Also, TLC expects that doctors
affiliated with TLC centers will comply with such laws in all material respects,
although it cannot ensure such compliance by doctors. The Company could be
required to revise the structure of its legal arrangements or the structure of
its fees, incur substantial legal fees, fines or other costs, or curtail certain
of its business activities, reducing the potential profit to the Company of some
of its legal arrangements, any of which may have a material adverse effect on
the Company's business, financial condition and results of operations.
Intellectual Property
The name "TLC The Laser Center" and slogan "See the Best" are registered
United States service marks of the Company and registered trade-marks in Canada.
The Company also has applied for registration of "TLC Laser Eye Centers" with
the TLC eye design in the United States and "TLC Laser Eye Centers" with the TLC
eye design is a registered trade-mark in Canada. In addition, the Company owns a
patent in the United States on the treatment of a
26
potential side effect of laser vision correction generally known as "central
islands." The patent expires in May 2014. The Company's service marks, patent
and other intellectual property may offer the Company a competitive advantage in
the marketplace and could be important to the success of the Company. There can
be no assurance that one or all of the registrations of the service marks will
not be challenged, invalidated or circumvented in the future.
The medical device industry, including the ophthalmic laser sector, has
been characterized by substantial litigation in the United States and Canada
regarding patents and proprietary rights. There are a number of patents
concerning methods and apparatus for performing corneal procedures with excimer
lasers. In the event that the use of an excimer laser or other procedure
performed at any of the Company's refractive or secondary care centers is deemed
to infringe a patent or other proprietary right, the Company may be prohibited
from using the equipment or performing the procedure that is the subject of the
patent dispute or may be required to obtain a royalty bearing license, which may
not be available on acceptable terms, if at all. The costs associated with any
such licensing arrangements may be substantial and could include ongoing royalty
payments. In the event that a license is not available, the Company may be
required to seek the use of products which do not infringe the patent. The
unavailability of such products may cause the Company to cease operations in the
United States or Canada or delay the Company's continued expansion into the
United States. If the Company is prohibited from performing laser vision
correction at any of its laser centers, the Company's business, financial
condition and results of operations will be materially adversely affected.
Employees
As part of its initiative to reduce costs, the Company has significantly
reduced its staffing levels over the past year. As of July 31, 2001, the Company
had more than 760 employees, as compared to more than 1,034 employees a year
ago. The Company's progress to date has been highly dependent upon the skills of
its key technical and management personnel both in its corporate offices and in
its eye care centers, some of whom would be difficult to replace. There can be
no assurance that the Company can retain such personnel or that it can attract
or retain other highly qualified personnel in the future. No employee of the
Company is represented by a collective bargaining agreement, nor has the Company
experienced a work stoppage. The Company considers its relations with its
employees to be good. See "Item 1 - Business - Risk Factors - Dependence on Key
Personnel".
Risk Factors
Losses from Operations; Uncertainty of Future Profitability
The Company had net losses of $10.4 million, $4.6 million, $5.9 million
and $37.8 million for fiscal 1998, 1999, 2000 and 2001, respectively. As of May
31, 2001, the Company had an accumulated deficit of $80.2 million. The Company's
ability to achieve or maintain profitability will depend in part on its ability
to increase demand for its services and control costs, its ability to execute
its strategy and effectively integrate acquired businesses and assets, economic
conditions in the Company's markets, competitive factors and regulatory
developments. Accordingly, the extent of future profits, if any, and the time
required to achieve sustained profitability is uncertain. Moreover, the level of
such profitability cannot be predicted
27
and may vary significantly from quarter to quarter. See "Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations".
Uncertainty of Market Acceptance
The Company believes that its profitability and growth will depend upon
broad acceptance of laser vision correction in the United States and, to a
lesser extent, Canada. There can be no assurance that laser vision correction
will be more widely accepted by eye care doctors or the general population as an
alternative to existing methods of treating refractive disorders. The acceptance
of laser vision correction may be affected adversely by its cost (particularly
since laser vision correction is typically not fully covered or covered at all
by government insurers or other third party payors and, therefore, must be paid
for by the individual receiving treatment), economic conditions, concerns
relating to its safety and effectiveness, general resistance to surgery, the
effectiveness of alternative methods of correcting refractive vision disorders,
the lack of long term follow-up data and the possibility of unknown side
effects. There can be no assurance that long term follow-up data will not reveal
complications that may have a material adverse effect on the acceptance of laser
vision correction. Many consumers may choose not to have laser vision correction
due to the availability and promotion of effective and less expensive
nonsurgical methods for vision correction. Any future reported adverse events or
other unfavourable publicity involving patient outcomes from laser vision
correction could also adversely affect its acceptance whether or not the
publicized procedures are performed at TLC eye care centers. Market acceptance
could also be affected by regulatory developments and by the ability of the
Company and other participants in the laser vision correction market to train a
broad population of ophthalmologists in performing the procedure. Acceptance of
laser vision correction by ophthalmologists could also be affected by the cost
of excimer laser systems. The failure of laser vision correction to achieve
broad market acceptance would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Item 1 - Business
- - The Refractive Market".
Dependence on Affiliated Doctors
Many states prohibit the Company from practicing medicine, employing
physicians to practice medicine on the Company's behalf or employing
optometrists to render optometric services on the Company's behalf. Because the
Company does not practice medicine or optometry, its activities are limited to
owning and managing centers and affiliating with other health care providers.
Affiliated doctors provide a significant source of patients for the Company.
Accordingly, the success of the Company's operations depends upon its ability to
enter into agreements on acceptable terms with a sufficient number of health
care providers, including institutions and eye care doctors to render or arrange
surgical and other professional services at facilities owned or managed by the
Company. There can be no assurance that the Company will be able to enter into
agreements with eye care doctors or other health care providers on satisfactory
terms or that such agreements will be profitable to the Company. Failure to
enter into or maintain such agreements with a sufficient number of qualified eye
care doctors will have a material adverse effect on the Company's business,
financial condition and results of operations. See "Item 1 - Business - Surgeon
Contracts".
28
Competition
Laser vision correction is subject to intense competition. The Company
competes with other entities, including hospitals, individual ophthalmologists,
other corporate laser centers and certain manufacturers of excimer laser
equipment, in offering laser vision correction. The Company's eye care centers
compete on the basis of quality of service, reputation, brand recognition and
price. There can be no assurance that competitors with substantially greater
financial, technical, managerial, marketing and other resources and experience
than the Company will not compete more effectively than the Company. If more
providers offer laser vision correction in a given geographic market, the price
charged for such procedures may decrease. In the past year, competitors have
offered laser vision correction at prices considerably lower than TLC's prices.
At TLC centers, Canadian residents are typically charged between C$1,000 to
C$3,000 per eye for LASIK procedures and United States residents are typically
charged from $1,550 to $2,200 per eye for LASIK procedures, in addition to a
charge of approximately $400 by the patient's primary care eye doctor for pre-
and post-operative care, while competitors in some markets have advertised LASIK
procedures for as low as C$500 per eye. Notwithstanding its recent refusal to
participate in an industry price war, market conditions may compel the Company
to lower its prices to remain competitive in some or all of its markets. There
can be no assurance that any reduction in prices charged will be compensated for
by an increase in procedure volume or decreases in the Company's costs. A
decrease in either the fees for procedures performed at TLC's eye care centers
or in the number of procedures performed at TLC's centers could have a material
adverse effect on the Company's business, financial condition and results of
operations.
In addition, laser vision correction competes with other surgical and
non-surgical treatments for refractive disorders, including eyeglasses, contact
lenses, other types of refractive surgery and other technologies currently under
development such as corneal rings, intraocular lenses and surgery with different
types of lasers. Suppliers of conventional vision correction alternatives
(eyeglasses and contact lenses), such as optometry chains, with substantially
greater financial, technical, managerial, marketing and other resources and
experience than the Company may compete with the Company by promoting
alternatives to laser vision correction or by purchasing laser systems and
offering laser vision correction to their customers. There can be no assurance
that the Company's management, operations and marketing plans are or will be
successful in meeting this variety of competition. Further, there can be no
assurance that the Company's competitors' access to capital, financing or other
resources or their market presence will not give these competitors an advantage
against the Company.
Competition has increased in part due to the greater availability and
lower cost of excimer lasers. Further competition could develop if a significant
decrease in the price of excimer laser systems were to occur, because the high
price of excimer laser systems currently is a barrier to entry for many
potential competitors, particularly individual ophthalmologists and
ophthalmologists participating in group practices. A price decrease could occur
for a number of reasons, including increased competition among laser
manufacturers. Competition in the market for laser vision correction could
increase if state laws were amended to permit optometrists (in addition to
ophthalmologists) to perform laser vision correction.
29
In addition, although surgeons performing laser vision correction at the
Company's eye care centers and certain other employees have generally agreed to
certain restrictions on competing with, or soliciting patients or employees
associated with, the Company, there can be no assurance that such agreements
will be enforceable.
Quarterly Fluctuations in Operating Results
Results of operations have varied and may continue to fluctuate
significantly from quarter to quarter and will depend on numerous factors,
including: (i) market acceptance of the Company's services; (ii) seasonal
factors (historically, fewer procedures are scheduled during the summer); (iii)
the purchase or upgrade of lasers and other equipment; (iv) economic conditions
in the geographic areas in which the Company operates; (v) the timing of new
enhancements by the Company, its suppliers and its competitors; (vi) the
opening, closing or expansion of centers; (vii) regulatory matters; (viii)
litigation; (ix) acquisitions; (x) competition; (xi) fluctuations in currency
exchange rates (a portion of the Company's operations are conducted in Canadian
dollars) and (xii) other extraordinary events. There can be no assurance that
the growth in revenues achieved by the Company in years prior to fiscal 2001
will resume and continue or that revenues or net income in any particular
quarter will not be lower, or losses greater, than those of the preceding
quarters, including comparable quarters of prior fiscal years. The Company's
expense levels are based, in part, on its expectations as to future revenues. If
revenue levels are below expectations, operating results are likely to be
adversely affected. In light of the foregoing, quarter-to-quarter comparisons of
the Company's operating results are not necessarily meaningful and should not be
relied upon as indications of likely future performance or annual operating
results. Reductions in revenues or net income between quarters or the failure of
the Company to achieve expected quarterly earnings per share could have a
material adverse effect on the market price of the Common Shares.
Potential Side Effects and Long-Term Results of Laser Vision Correction
Concerns with respect to the safety and efficacy of laser vision
correction include predictability and stability of results and potential
complications or side effects, including but not limited to the following:
post-operative discomfort; corneal haze during healing (an increase in
light-scattering properties of the cornea); glare/halos (disturbed night
vision); decrease in contrast sensitivity (reduced visual quality of sharpness);
temporary increases in intraocular pressure in reaction to post-procedure
medication; modest fluctuations in astigmatism and modest decreases in best
corrected vision (i.e., with eyeglasses); loss of fixation during the procedure;
unintended over- or under-correction; instability, reversion or regression of
effect; corneal scars (blemishing marks left on the cornea); corneal ulcers
(inflammatory lesions resulting in loss of corneal tissue); and corneal healing
disorders (compromised or weakened immune system or connective tissue disease
which causes poor healing). Laser vision correction may involve the removal of
"Bowman's layer", an intermediate layer between the epithelium (outer corneal
layer) and the stroma (middle corneal layer). Although several studies conducted
to date have demonstrated no significant adverse reactions to excimer laser
removal of Bowman's layer, it is unclear what effect this may have on the
patient. Although recently released results of a study showed that the majority
of patients experienced no serious side effects six years after laser vision
correction using the PRK procedure, there can be no assurance that complications
will not be identified in further long-term follow-up studies. Any such
30
complications or side effects may call into question the safety and
effectiveness of laser vision correction, which in turn may negatively affect
the approval by the FDA of the excimer laser for sale for laser vision
correction and the market acceptance of such procedures and lead to product
liability, malpractice or other claims against the Company. Any such occurrence
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Potential Liability and Insurance
The provision of medical services entails an inherent risk of potential
malpractice and other similar claims. Although patients at the Company's centers
execute informed consent statements prior to any procedure performed by doctors
at the Company's centers, there can be no assurance that such consents will
provide adequate liability protection. In addition, although the Company does
not engage in the practice of medicine or have responsibility for compliance
with certain regulatory and other requirements directly applicable to doctors
and doctor groups, there can be no assurance that claims, suits or complaints
relating to services provided at the Company's centers will not be asserted
against the Company in the future. The Company currently maintains malpractice
insurance coverage that it believes is adequate both as to risks and amounts, in
the amount of C$50,000,000 for each occurrence and in the aggregate annually for
all eye care centers in Canada and the United States. Such insurance extends to
professional liability claims that may be asserted against employees of the
Company that work on site at the centers. In addition, the doctors who provide
medical services at the Company's centers are required to maintain comprehensive
professional liability insurance, although there can be no assurance that any
such insurance will be adequate to satisfy claims or that insurance maintained
by the doctors will protect the Company.
The availability and cost of professional liability insurance has been
affected by various factors, many of which are beyond the control of the
Company. An increase in the future cost of such insurance to the Company and the
doctors who provide medical services at the centers may have a material adverse
effect on the Company's business, financial condition and results of operations.
Successful malpractice or other claims asserted against any of the doctors who
provide medical services or the Company that exceed applicable policy limits or
are not covered by policy terms could have a material adverse effect on the
Company's business, financial condition and results of operations. Although the
doctors providing medical services at the centers are required to carry
malpractice insurance and while most have agreed to indemnify the Company
against certain malpractice and other claims, there can be no assurance that
such indemnification is enforceable or, if enforced, that it will be sufficient.
The excimer laser system utilizes certain poisonous gases which if not
properly contained could result in bodily injury. Any such occurrence could
result in a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the use of excimer laser
systems may give rise to claims by patients, doctors, technicians or others
against the Company resulting from laser-related injuries, which may not become
evident for a number of years. While the Company believes that any claims
alleging defects in its excimer laser systems would be covered by the
manufacturers' product liability insurance, there can be no assurance that the
Company's excimer laser manufacturers will continue to carry product liability
insurance or that any such insurance will be adequate to protect the Company.
The
31
Company may not have adequate insurance for any liabilities arising from
injuries caused by poisonous gases or laser equipment.
There can be no assurance that adequate insurance will continue to be
available, either at existing or increased levels of coverage on commercially
reasonable terms, if at all, for the Company's existing and future operations
and centers, or that the Company's existing insurance will be adequate to cover
any future claims that may be made. The unavailability of adequate insurance at
acceptable rates could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, even if a claim
against the Company is covered by insurance, the cost of defending the action
and/or the assessment of damages in excess of insurance coverage could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Management of Growth
The Company's success will depend on its ability to expand and manage its
operations and facilities. The Company's focus of expansion remains the United
States. The Company's growth and expansion has resulted in and may continue to
result in new and increased responsibilities for management and additional
demands on management, operating and financial systems and resources. In
particular, the Company will need to successfully hire, train and retain
management for each of its eye care centers. There can be no assurance that the
Company will be able to hire, train or retain qualified managers. The Company's
ability to continue to expand in the United States is dependent upon factors
such as its ability to: (i) implement new, expanded or upgraded operations and
financial systems, procedures and controls; (ii) hire and train new staff and
managerial personnel; (iii) expand the Company's infrastructure; (iv) adapt or
amend the Company's structure to comply with present or future legal
requirements affecting the Company's arrangements with doctors, including state
prohibitions on fee-splitting, corporate practice of medicine and referrals to
facilities in which doctors have a financial interest; and (v) obtain regulatory
approvals and Certificates of Need, where necessary, and comply with licensing
requirements applicable to doctors and facilities operated, and services
offered, by doctors. Any failure or inability to successfully implement these
and other factors may have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance that
the Company will be able to successfully integrate and manage the eye care
centers it opens or acquires or achieve the economies of scale and/or the
patient base required to achieve profitability in the eye care centers. If the
Company's management is unable to successfully implement its growth strategy or
manage growth effectively, the Company's business, financial condition and
results of operations could be materially adversely affected.
Inability to Execute Strategy
In response to recent industry turmoil and a deep discounting price war,
the Company retained the services of a national consulting firm and undertook an
extensive review of its internal structures, market position, resources and
future strategies. As a result of that review, the Company confirmed its
decision to maintain its premium brand model and not participate in the industry
price war. The Company decided to continue to focus on maximizing revenues
through the Company's co-management model and innovative marketing programs,
controlling costs without compromising superior quality of care or clinical
outcomes and pursuing additional
32
growth opportunities for its core laser vision correction business through the
TLC Affiliate Centers Program, strategic acquisitions and opening new centers
There can be no assurance that the Company will be successful in executing its
new strategy or, if successful in executing the strategy, that it will be
effective. If the Company is unable to implement its strategy, or if its
strategy proves to be ineffective, the Company's business, financial condition
and results of operations could be materially adversely affected.
Acquisitions and Affiliate Centers
The Company's growth strategy is dependent on increasing the number of
procedures at existing eye care centers, increasing the number of TLC eye care
centers through internal development or acquisitions and entering into TLC
Affiliate Center arrangements with local eye care professionals in markets not
large enough to justify a corporate center.
The addition of new centers can be expected to present challenges to
management, including the integration of new operations, technologies and
personnel, and special risks, including unanticipated liabilities and
contingencies, diversion of management attention and possible adverse effects on
operating results resulting from increased goodwill amortization, increased
interest costs, the issuance of additional securities and increased costs
resulting from difficulties related to the integration of the acquired
businesses. The future ability of the Company to achieve growth through
acquisitions will depend on a number of factors, including the availability of
attractive acquisition opportunities, the availability of funds needed to
complete acquisitions, the availability of working capital needed to fund the
operations of acquired businesses and the effect of existing and emerging
competition on operations. There can be no assurance that the Company will be
able to successfully identify suitable acquisition candidates, complete
acquisitions on acceptable terms, if at all, or successfully integrate acquired
businesses into its operations. The Company's past and possible future
acquisitions may not achieve adequate levels of revenue, profitability or
productivity or may not otherwise perform as expected. The future ability to
achieve growth through the Affiliate Center program will depend on a number of
factors, including the success of the pilot program, the availability and
willingness of local eye care practitioners to participate in the program and
the ability of the local affiliate to integrate his or her practice with TLC's
methods of operations and to maintain the goodwill generated by the TLC brand.
There can be no assurance that the Company will be able to enter into a
sufficient number of affiliate center arrangements to generate significant
growth in revenues or that affiliate center arrangements will be profitable.
If the Company seeks to issue Common Shares to finance acquisitions, a
decline in the price of the Common Shares may result in the Company being
required to issue a greater number of Common Shares which could have a material
adverse effect on the Company's ability to complete acquisitions and could
result in increased dilution to existing shareholders.
There can be no assurance that the Company will have adequate resources to
finance acquisitions. If the Company does not have adequate resources, its
growth could be limited, and its existing operations impaired, unless it is able
to obtain additional capital through subsequent equity or debt financings. There
can be no assurance that the Company will be able to obtain such financing or
that, if available, such financing will be on terms acceptable to the Company.
33
As a result, there can be no assurance that the Company will be able to
implement its expansion strategy successfully. Failure by the Company to
successfully implement its acquisition strategy and integrate and operate the
acquired businesses efficiently would have a material adverse effect on the
Company's business, financial condition and results of operations.
Future Capital Requirements; Uncertainty of Additional Funding
It is not possible to predict with certainty the timing or the amount of
future capital requirements. However, the Company may require significant
additional funding to expand in the future. Such additional funding may be
raised through additional public or private equity or debt financings or other
sources and may, if obtained by way of subsequent equity financing, result in
dilution to the holders of the Common Shares. The Company believes that its
existing cash balances and funds expected to be generated from operations and
available credit facilities should be sufficient to fund its anticipated level
of operations and its current expansion and acquisition plans for the
foreseeable future. There can be no assurance that the Company's operations,
expansion plans or capital requirements will not change in a manner that would
consume available resources more rapidly than anticipated, or that substantial
additional funding will not be required before the Company can achieve and
maintain profitable operations. The Company's capital needs depend on many
factors, including the rate and cost of acquisitions of businesses, equipment
and other assets, the rate of opening new centers or expanding existing centers,
market acceptance of laser vision correction and actions by competitors.
Further, additional funding may not be available on terms satisfactory to the
Company, if at all. If adequate funds are not available, the Company may be
required to cut back or abandon its expansion plans and curtail operations
significantly, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
Government Regulation and Supervision
Regulation of Health Care Industry
United States
The Company and its operations are subject to extensive federal, state and
local laws, rules and regulations, including those prohibiting corporations from
practicing medicine and optometry, prohibiting unlawful rebates and division of
fees, and limiting the manner in which prospective patients may be solicited.
Further, contractual arrangements with hospitals, surgery centers,
ophthalmologists and optometrists, among others, are extensively regulated by
federal and state laws. Many of these laws and regulations are ambiguous in
nature and have not been definitively interpreted by courts and regulatory
authorities. Moreover, state and local laws vary from jurisdiction to
jurisdiction. Accordingly, the Company may not always be able to predict clearly
how such laws and regulations will be interpreted or applied by courts and
regulatory authorities and some of the Company's activities could be challenged
by regulators, competitors or others. In addition, there can be no assurance
that the regulatory environment in which the Company operates will not change
significantly in the future. In response to new or revised laws, regulations or
interpretations, the Company could be required to revise the structure of its
legal arrangements or the structure of its fees, incur substantial legal fees,
fines or other costs, or curtail its business activities, reducing the potential
profit to the Company of some of its legal
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arrangements, any of which may have a material adverse effect on the Company's
business, financial condition and results of operations. Among the laws and
regulations that affect the Company's operations are anti-kickback laws,
fee-splitting laws, corporate practice of medicine restrictions, self-referral
laws and professional licensing rules.
Anti-Kickback Statutes. In the United States, the federal anti-kickback statute
prohibits the knowing and wilful solicitation, receipt, offer or payment of any
remuneration, whether direct or indirect, in return for or to induce the
referral of patients or the ordering or purchasing of items or services payable
in whole or in part under Medicare, Medicaid or other federal healt