Back to GetFilings.com
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, 1998
COMMISSION FILE NUMBER: 0-29302
TLC THE LASER CENTER 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
5600 Explorer Drive, Suite 301 L4W 4Y2
Mississauga, Ontario (Zip Code)
(Address of principal executive
offices)
Registrant's telephone, including area code (905) 602-2020
SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:
Common Shares, No Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. |X| Yes |_| No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. |_|
As of August 19, 1998, the aggregate market value of the registrant's
Common Shares held by non-affiliates of the registrant was approximately $355
million.
As of August 19, 1998, there were 33,721,132 of the registrant's Common
Shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Definitive Proxy Statement for the Company's 1998 annual shareholder's meeting
(incorporated in Part III to the extent provided in Items 10, 11, 12, and 13).
TLC THE LASER CENTER INC.
This Annual Report on Form 10-K (herein, together with all amendments, exhibits
and schedules hereto, referred to as the "Form 10-K") contains certain
forward-looking statements within the meaning of Section 27A of the U.S.
Securities and Exchange Act of 1934, which statements can be identified by the
use of forward looking terminology, such as "may", "will", "expect",
"anticipate", "estimate", "plans" or "continue" or the negative thereof or other
variations thereon or comparable terminology. The Company's actual results could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including those set forth elsewhere in this Form
10-K. See the "Risk Factors" section of Item 1 "Business" for cautionary
statements identifying important factors with respect to such forward looking
statements, including certain risks and uncertainties, that could cause actual
results to differ materially from results referred to in forward looking
statements. Unless the context indicates or requires otherwise, references in
this Form 10-K to the "Company" or "TLC" shall mean TLC The Laser Center Inc.
and its subsidiaries. The Company's fiscal year ends on May 31. Therefore,
references in this Form 10-K to a particular fiscal year shall mean the 12
months ended on May 31 in that year. References to "$" 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
The Company owns and manages eyecare centers throughout North America and,
together with its network of eyecare providers, specializes in laser vision
correction to correct common refractive vision disorders such as myopia
(nearsightedness), hyperopia (farsightedness) and astigmatism. The Company is
the largest provider of laser vision correction services in North America, where
it has developed regional networks of over 7,000 doctors who treat patients who
have eye care procedures at both refractive centers for laser vision correction
and secondary care centers for advanced eye care, which may include surgery.
Since commencing operations in September 1993, TLC has opened or acquired 45
refractive centers (including one with secondary care operations) and 17
secondary care centers in the United States and Canada.
On April 9, 1998, the Company acquired approximately 97% of the issued and
outstanding shares of BeaconEye Inc. ("BeaconEye") in exchange for 842,980 of
the Company's Common Shares ("Common Shares"). On May 27, 1998, the Company
completed its acquisition of the remaining issued and outstanding shares of
BeaconEye (bringing the Company's ownership to 100%) in exchange for an
additional 29,312 Common Shares. The Common Shares issued were valued at
approximately $11.7 million, plus TLC assumed obligations and restructuring
costs for a total purchase price of approximately $16.3 million. BeaconEye owns
and manages 11 refractive centers, including nine centers in the United States
and two centers in Canada. As a result of this acquisition, the number of TLC
centers has increased to a total of 45 refractive laser centers and 17 secondary
care centers operating in 25 states and provinces throughout the United States
and Canada.
2
TLC THE LASER CENTER INC.
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 placing
incisions in a "radial" pattern along the outer portion of the cornea using a
hand-held diamond-tipped blade. These very fine incisions are designed to help
flatten the curvature of the cornea, thereby allowing light rays entering the
eye to properly focus on the retina. The incisions penetrate 90% of the depth of
the cornea. Because RK involves incisions into the corneal tissue, it may weaken
the structure of the cornea, which can have adverse consequences following
traumatic injury. RK also produces incisional scarring, and may cause
fluctuation of vision and progressive farsightedness. 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 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
3
TLC THE LASER CENTER INC.
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's
cornea 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"). The initial PMA approval for
the sale of the Summit Technology Inc. ("Summit") laser for the treatment of
myopia was granted by the FDA in 1995. The FDA has granted subsequent approvals
for the sale of the VISX Incorporated ("VISX") excimer laser for the treatment
of myopia and astigmatism and for the sale of the Summit excimer laser for the
treatment of astigmatism. Excimer lasers are currently in clinical trials for
the treatment of hyperopia. 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").
The FDA has only approved the Summit and VISX excimer lasers for PRK
procedures. LASIK came into commercial use in Canada in 1994 and, while to date
the Summit and VISX excimer lasers have not been approved in the United States
for LASIK procedures, surgeons in the United States have performed LASIK since
1996 using their discretion as a practice of medicine matter. FDA regulations
require the laser to be approved, not the procedure. The FDA has stated that it
considers the decision by doctors to use the excimer laser for simultaneous
bilateral treatment or LASIK to be a practice of medicine decision, which the
FDA is not authorized to regulate. 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 not specifically approved by the FDA if that doctor
determines that it is in the best interest of the patient. In addition, on
August 3, 1998, the FDA approved the commercial sale and use of an excimer laser
for LASIK procedures. The rights to commercially produce and distribute such
laser are owned by LaserSight Incorporated ("LaserSight"). Currently, the
majority of laser vision correction procedures being performed in the United
States and Canada are LASIK. See "Item 1 - Business -- Potential Side Effects
and Long Term Results of Laser Vision Correction" and "--Government Regulation-
Regulation of Health Care Industry - United States - U.S. Food and Drug
Administration."
4
TLC THE LASER CENTER INC.
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 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 Summit 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 Summit has shown that
patient satisfaction is very high with over 95% indicating they would
enthusiastically recommend PRK to a friend. In addition, a study published in
the February, 1998 issue of Ophthalmology reported the results of 83 patients in
the United Kingdom who underwent PRK for myopia of up to 7 diopters in 1989. The
study found that the patients experienced stable vision and the majority of
patients experienced no side effects. No complications were observed such as
cataracts, retinal detachment or long term, elevated intraocular pressure and no
patients developed an infection.
Laser In-Situ Keratomileusis
LASIK came into commercial use in Canada in 1994 and in the United States
in 1996. In LASIK, an automated microsurgical instrument called a microkeratome
is used to create a thin corneal flap which remains hinged to the eye. The
corneal flap is 160 to 180 microns thick, about 30% of the corneal thickness.
Patients do not feel or see the cutting of the corneal flap, which takes only a
few seconds. The corneal flap is then laid 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 80% of the excimer laser procedures currently performed at the
Company's refractive centers are LASIK. The Company's medical directors believe
LASIK generally allows
5
TLC THE LASER CENTER INC.
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.
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 the following: post-operative pain;
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 or 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 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.
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 145 million people in the United States currently use or
need eyeglasses or contact lenses to correct refractive vision disorders. An
industry source estimates that approximately 77 million people in the United
States are myopic.
Industry sources also estimate that in 1997, 215,000 laser vision
correction procedures were performed in the United States, an increase of 105%
from 105,000 procedures in 1996. If, each year, only two percent of the myopic
population in the United States (estimated to be 1.5 million people) had the
procedure on both eyes, then, based on current prices, the U.S. market would be
more than $6 billion annually. If FDA approval is granted for the sale of
excimer lasers for the treatment of hyperopia, then the potential U.S. market
for laser vision correction could increase significantly. 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
6
TLC THE LASER CENTER INC.
ophthalmologists, optometrists 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 by government insurers or other
third party payors and, therefore, must be paid for by the individual receiving
treatment), concerns relating to its safety and effectiveness, general
resistance to surgery, the effectiveness of alternative methods of correcting
refractive vision disorders, the lack of long term follow-up data and the
possibility of unknown side effects. There can be no assurance that long term
follow-up data will not reveal complications that may have a material adverse
effect on the acceptance of laser vision correction. Many consumers may choose
not to have laser vision correction due to the availability and promotion of
effective and less expensive nonsurgical methods for vision correction. Any
future reported adverse events or other unfavorable publicity involving patient
outcomes from laser vision correction could also adversely affect its acceptance
whether or not the procedures are performed at TLC refractive 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.
TLC The Laser Center Inc.
The Company owns and manages eyecare centers throughout North America and,
together with its network of over 7,000 eyecare doctors, specializes in laser
vision correction to correct common refractive vision disorders such as myopia
(nearsightedness), hyperopia (farsightedness) and astigmatism. The Company is
the largest provider of laser vision correction services in North America. The
Company also develops and manages regional networks of eye doctors who refer
patients to refractive centers and secondary care centers.
TLC was incorporated on May 23, 1993 and began operations in September
1993 when it opened the TLC Windsor refractive center. Since commencement of
operations, TLC has opened or acquired 45 refractive centers (including two with
secondary care operations) and 17 secondary care centers. Two refractive centers
were opened in fiscal 1995, two centers were opened in fiscal 1996, and 22
refractive centers were opened or acquired in fiscal 1997 (one of which was
closed). In fiscal 1998, TLC has opened or acquired eight refractive centers, in
addition to the 11 refractive centers owned and managed by BeaconEye.
On May 27, 1998, the Company completed its acquisition of all of the
issued and outstanding shares of BeaconEye in exchange for 872,292 Common Shares
valued at approximately $11.7 million, plus TLC assumed obligations and
restructuring costs. BeaconEye owns and manages 11 refractive centers, including
nine centers in the United States and two centers in Canada. See "Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Recent Developments."
7
TLC THE LASER CENTER INC.
Expansion Plans
Overview
The Company is pursuing a strategy designed to expand its position as the
leader in the North American market for laser vision correction. 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. The Company has a four-part strategy: (i) continued
development of local doctor relationships through its co-management model; (ii)
increased market penetration through internal development and strategic
acquisition of refractive centers; (iii) further acquisitions of secondary care
centers to support the core refractive surgery business; and (iv) continued
development of its managed care division and other strategic ancillary
businesses and support programs.
Co-Management Model
The Company has developed and implemented a co-management model under
which it not only establishes and operates refractive centers and provides an
array of related support services, but also develops provider networks of
primary care doctors (usually optometrists), who provide pre- and post-operative
care for patients, and refractive surgeons (ophthalmologists), who perform the
laser vision correction procedure. 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 to monitor
healing and vision improvement. In addition, each TLC center has an optometrist
on staff who works in an administrative capacity to manage operations at the
center and to support and expand the network of affiliated doctors. The staff
optometrist provides a range of clinical training and other 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."
The Company believes that its relationship with its more than 7,000
affiliated doctors represents an important competitive strength. This network
represents more than 20% of the licensed practicing optometrists in the United
States. The Company believes that its affiliated doctor network is the largest
such network in the laser vision correction field in North America.
Increased Market Penetration
The second component of the Company's expansion strategy is the growth of
its core refractive surgery business. TLC plans to grow in the laser vision
correction business in three ways: by building new centers, by acquiring
existing centers and by acquiring other laser vision correction companies that
have multiple centers. The TLC senior executive team regularly examines
acquisition and development opportunities in the refractive market. On February
10, 1997, the Company acquired 99.9% of the shares of 20/20 Laser Centers, Inc.,
a company managing nine refractive centers located in Florida, Maryland, New
Jersey, New York, Pennsylvania and Virginia, for a purchase price of
approximately 21.7 million, paid in Common Shares. On May 27, 1998, the Company
completed its acquisition of all of the outstanding shares
8
TLC THE LASER CENTER INC.
of BeaconEye which operates 11 refractive centers, including nine in the United
States and two in Canada. See "Item 1 Business - Expansion Plans --Risk of
Inability to Execute Acquisition Strategy; Management of Growth."
Acquisition of Additional Secondary Care Centers
The third component of the Company's expansion strategy is the acquisition
of secondary care centers in U.S. cities where it manages refractive centers and
has established a network of affiliated doctors. Secondary care centers are
equipped to provide advanced levels of eyecare and the Company believes that
their development improves TLC's competitive position. The Company believes
additional secondary care centers will allow the Company to: (i) increase the
number of laser vision correction procedures performed at TLC refractive
centers; (ii) enlarge and strengthen the existing TLC provider network of
co-managing doctors; (iii) secure long term relationships with highly skilled
surgeons; and (iv) capitalize on the existing network of TLC doctors to expand
the business of acquired secondary care centers. The TLC senior executive team
regularly examines acquisition opportunities in the secondary care center
market. See "Item 1 - Business -Expansion Plans -- Risk of Inability to Execute
Acquisition Strategy; Management of Growth."
Strategic Ancillary Businesses and Support Programs
The final component of the Company's strategy is to develop strategic
ancillary businesses and support programs. The Company has developed a managed
care division for eyecare services, Partner Provider Health, Inc. ("PPH"), and
other strategic ancillary businesses and programs such as the Eyecare Network
and The Vision Source Inc. to support its core refractive surgery business.
Risk of Inability to Execute Acquisition Strategy; Management of Growth
The Company's growth strategy is dependent on increasing the number of TLC
refractive and secondary care centers through strategic acquisitions. 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, including the acquisition of
BeaconEye, may not achieve adequate levels of revenue, profitability or
productivity or may not otherwise perform as expected.
9
TLC THE LASER CENTER INC.
There can be no assurance that the Company will have adequate resources to
finance acquisitions. 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. See "Item 1 - Business Expansion
Plans -- Future Capital Requirements; Uncertainty of Additional Funding" and
"Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
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 will, if obtained by way of subsequent equity financing, result in
dilution to the holders of the Common Shares. 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 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. See "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
Description of Refractive Centers
A typical TLC refractive center has between four 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 director, who is an optometrist and oversees the administrative
aspects of the clinical operations of the center and builds and supports the
co-management provider network. Each center also has a business manager, a
receptionist, ophthalmic technicians and patient consultants (who answer
patients' questions). 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 is designated as the executive director of the
center and prepares the annual strategic plan and supervises the day-to-day
operations of the center. See Item 2 for a listing of each TLC refractive
center.
The Company's average cost to open a refractive center in the United
States has been $1.3 million. It is intended that the cost to open new centers
will be funded through equipment financing which the Company currently has
available to it and funds available for general
10
TLC THE LASER CENTER INC.
corporate purposes. See "Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations." Generally, the Company expects
that a TLC refractive center will become profitable after it has completed
approximately 18 months of operation.
Description of 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.
The Company manages 17 secondary care centers in the United States
(including two that are also refractive centers). See Item 2 for a listing of
each TLC secondary care center.
The Company generally purchases certain assets of secondary care
practices, such as medical equipment, furniture and fixtures, as well as
acquiring the leasehold for the office space. The Company also enters into a
long term practice management agreement with the doctors whereby the Company
agrees to manage their practice, including providing administrative services and
support staff, and providing the facilities for the secondary care centers, in
exchange for management fees.
The Company's revenues from managing secondary care centers is derived
from management fees paid by doctors; however, the primary source of those funds
is the fees paid to doctors by or on behalf of patients. Government and private
third-party payors are seeking to contain health care costs by imposing lower
reimbursement and lower utilization rates and negotiating reduced payment
schedules with providers of vision care, including care provided at secondary
care centers. Rates paid by many private third-party payors, including those
that provide Medicare supplemental insurance, are based on the doctor's and
center's usual and customary charges, which are generally higher than Medicare
payment rates. A decrease in the number of privately insured patients treated at
the Company's secondary care centers or a further reduction in reimbursement
rates or in payments to doctors could cause the revenues of such centers to
decrease and have a material adverse effect on the Company's business, financial
condition and results of operations, and there can be no assurance that the
Company's revenues from its secondary care centers will be sufficient to achieve
or maintain profitability.
Ownership of Refractive and Secondary Care Centers
The majority of TLC's refractive centers are operated by wholly-owned
subsidiaries of the Company, with minority interests in 10 centers, typically
owned by affiliated doctors or other health care providers. TLC intends to
maintain majority voting control and control of the board of directors of all
subsidiaries owning refractive centers.
The Company, in most cases through majority-owned subsidiaries, manages
doctors' practices at secondary care centers and provides doctors with
administrative services, support staff and facilities in exchange for management
fees. In most cases, doctors practicing in the secondary care centers hold
minority interests in the subsidiaries. In addition, the Company has minority
interests in other managed secondary care centers.
11
TLC THE LASER CENTER INC.
Sales and Marketing
While the Company believes that many myopic and hyperopic people are
potential candidates for laser vision correction, these procedures must compete
with corrective eyewear, RK and other 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.
Since the majority of the Company's patients are referred by affiliated
doctors, a large part of the Company's marketing resources are devoted to
marketing programs with affiliated doctors, the goal of which is to encourage
the use of TLC centers. The Company believes that the most effective way to
market to doctors is to be perceived as the leading provider of quality facility
and management services and as the network with the leading doctors in laser
vision correction. To this end, the Company strives to be the leader in clinical
and training programs, to educate doctors on laser vision correction and to
remain current with new procedures and techniques. See "Item 1 - Business -
Strategic Ancillary Businesses and Support Programs 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 site
and newsletters. The Company provides a limited amount of marketing directly to
members of the public through radio and print advertisements, videos, brochures
and seminars.
Surgeon Contracts
In each area where TLC operates, TLC forms a network of eye doctors
(mostly optometrists) who perform the pre-operative and post-operative care for
patients who have laser vision correction. Those doctors then "co-manage" their
patients with TLC surgeons, which means 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, which amount to approximately 20% of the total
procedure fee, on their behalf.
Most surgeons performing excimer laser procedures at TLC refractive
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 refractive center within a specified area. See "Item
1 - Business -Competition - Laser Vision Correction." However, although surgeons
performing laser vision correction at the Company's refractive centers have
agreed to certain restrictions on competing with, or soliciting doctors
associated with, the Company, there can be no assurance that such agreements
will be enforceable. See "Item 3 - Legal Proceedings."
Surgeons must meet the credentialing requirements of the FDA and the TLC
refractive center in which they perform procedures and must complete training
provided 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 - Potential Liability and Insurance."
12
TLC THE LASER CENTER INC.
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 refractive centers and secondary care 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, ophthalmologists and optometrists, 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.
Strategic Ancillary Businesses and Support Programs
The Company is pursuing other businesses with the primary objective of
supporting the core laser vision correction business.
Managed Care
The Company has established PPH, a managed care subsidiary for eyecare
services, with the goal of strengthening the doctor network and supporting
affiliated doctors. In addition, the Company believes that because of the
economies of scale that it expects to develop through its refractive and
secondary care centers and the geographic area that it expects will be covered
by the TLC network of affiliated doctors, the Company will be in an improved
competitive position to obtain managed care contracts with HMOs, insurance
companies, employer groups and other private third party payors.
The goal of PPH is to implement a business model whereby eyecare providers
collaborate in building successful managed care businesses. PPH develops local
practice associations called VisionMeds, which are intended to expand the market
share of affiliated eye care providers through successful contracting for the
complete range of managed eye care products. TLC secondary care centers as well
as TLC affiliated optometrists are expected to be the immediate beneficiaries of
market share growth in managed care contracting by PPH.
PPH is expected to receive fees from payors for performing certain
management services. PPH was established during fiscal 1997 and that year had
losses of $1.1 million, which included costs incurred prior to the commencement
of commercial operations.
Information Technology
The TLC network of centers and affiliated doctors are being linked by
information technology systems through (i) an on-line communication network;
(ii) practice management software; and (iii) the Internet. The information
technology systems are designed to support TLC's network of affiliated doctors.
On-line Communication Network: The Eye Care Network is an on-line
communication system designed to link affiliated doctors with the Company, each
other and suppliers. The Company believes that the Eye Care Network will be a
significant component of services provided to its network doctors.
13
TLC THE LASER CENTER INC.
Practice Management Software: TLC's practice management software is
designed to facilitate the financial reporting process, including practice
management, cost analysis and patient outcomes.
Internet: TLC's Web sites at www.lasercenter.com and www.lzr.com provide a
directory of TLC eyecare providers, contain questions and answers about laser
vision correction and provide TLC network information for local doctors.
Other Businesses
In July, 1997, TLC acquired The Vision Source, Inc., a corporation
administered by practicing optometrists that provides marketing, management and
buying power to independently owned and operated optometric franchises in the
United States. The Company believes that The Vision Source, Inc. will also be an
important component of the co-management model.
The Company believes that its management and marketing skills may
potentially be applicable to a variety of health care services provided by the
private sector and that the Company's infrastructure and systems may offer the
opportunity to realize synergies. Toward that end, from time to time, the
Company has explored new ventures which may provide opportunities for growth and
profitability in the future. One such venture, in cosmetic laser surgery, was
recently established in Detroit, Michigan in partnership with a local doctor.
Should such ventures prove to be successful, the Company may expand the ventures
to other markets.
Support Programs
National Advisory Council
The Company's Advisory Council is comprised of doctors that represent the
geographic centers in which TLC currently manages or intends to manage a
refractive center. By providing regional representation, the Advisory Council
serves as a channel of communication to local doctors. The 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. Steven 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 the first surgeon 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 Vision
Corporation ("Chiron") to certify surgeons to perform LASIK procedures using
Chiron excimer lasers.
14
TLC THE LASER CENTER INC.
Education
The Company believes that ophthalmologists, optometrists and other eye
care professionals who provide laser vision correction services are a valuable
resource in increasing general awareness and acceptance of the procedures among
potential patients and in promoting the Company as a service provider. The
Company seeks to be perceived by eye care professionals as the leader in the
field of laser vision correction. One way in which it hopes to achieve this
objective is by participating in the education and training of ophthalmologists
and optometrists in Canada and the United States. In the last three years, the
Company has devoted approximately $300,000 to educational initiatives. Most of
this expenditure is attributable to educational programs for eye care
professionals conducted through the TLC Continuing Education Foundation (the
"Foundation").
The Company established the Foundation in November 1994 to provide
educational programs to doctors in all aspects of clinical study, primarily in
conjunction with a number of 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.
Equipment and Capital Financing
Manufacturers of excimer lasers include VISX and Summit, which both have
excimer lasers approved by the FDA for sale for the treatment of myopia and
astigmatism. The excimer laser of Autonomous Technologies Corporation has been
recommended for FDA approval for sale for the treatment of myopia by the FDA
Ophthalmic Devices Advisory Panel, and Chiron is expected to present data to the
FDA for approval of its excimer laser for sale for the treatment of myopia. In
addition, on August 3, 1998, the FDA approved the commercial sale of an excimer
laser for the LASIK procedure. The rights to commercially produce and distribute
such laser are owned by LaserSight. The FDA also has accepted a pre-market
approval application from LaserSight for its development of a scanning laser so
that clinical trials may begin for such laser.
In the United States, most of the Company's excimer lasers are
manufactured by VISX with a small percentage manufactured by Summit. In Canada,
the majority of the Company's excimer lasers are manufactured by Chiron.
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, 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 $500,000. The Company acquires
excimer lasers and other equipment used at its centers under capital lease
arrangements, which typically have a term of five years. 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."
Excimer lasers require periodic servicing, generally after 300 procedures.
As manufacturers' warranties expire, the Company typically enters into service
contracts with manufacturers.
15
TLC THE LASER CENTER INC.
When excimer laser procedures are performed in TLC's centers in the United
States, the Company is required to pay the manufacturer of the excimer laser a
license royalty fee. There can be no assurance that payments made to VISX or
Summit in the United States will preclude a patent dispute with either VISX or
Summit with respect to technology or activities purported to be covered by the
relevant patents or that the Company's equipment or methods will not infringe
patents held by other parties. See "Item 1 - Business -Intellectual
Property/Proprietary Technology."
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 refractive centers and secondary care 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 refractive centers or secondary care 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.
Such insurance extends to professional liability claims that may be asserted
against employees of the Company that work on site at the refractive centers or
secondary care centers. In addition, the doctors who provide medical services at
the Company's refractive centers and secondary care 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 refractive centers and secondary
care 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 refractive centers and secondary care 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
16
TLC THE LASER CENTER INC.
that any such insurance will be adequate to protect the Company. The 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.
Competition
Refractive Centers
Laser vision correction is subject to intense competition. The Company
competes with other entities, including hospitals, individual ophthalmologists,
other laser centers and certain manufacturers of excimer laser equipment, in
offering laser vision correction. The Company's laser centers compete on the
basis of quality of service, reputation and price. The Company's refractive
centers compete in two principal markets: (i) the consumer market for vision
correction and (ii) the market for laser vision correction.
Consumer Market for Vision Correction
Within the consumer market, excimer laser procedures performed by the
Company's centers compete with other surgical and non-surgical treatments for
refractive disorders, including eyeglasses, contact lenses, other types of
refractive surgery including RK, and technologies currently under development
such as corneal implants and intraocular implants and surgery with different
types of lasers. In the foreseeable future, the Company believes that eyeglass
and contact lens use will continue to be the most popular form of vision
correction. It is likely that eyeglass and contact lens manufacturers, many of
whom have greater marketing, financial and managerial resources and experience
than the Company, will continue to develop, enhance and market their products to
make them as attractive as possible to people with refractive vision disorders.
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
manual 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.
17
TLC THE LASER CENTER INC.
Market for Laser Vision Correction
Within the market for laser vision correction, the Company faces
competition from other service providers. Although competitors in certain
markets charge less for laser vision correction, the Company believes that the
primary factors affecting competition in the laser vision correction market are
quality of service, reputation and price and that competitiveness is enhanced by
a strong network of participating doctors. TLC believes that industry experience
to date both in Canada and the United Kingdom suggests that price has been a
less important factor in the patient decision process. If more providers offer
laser vision correction in a given geographic market, the price charged for such
procedures may decrease. Competitors in some markets currently offer laser
vision correction at prices considerably lower than TLC's prices. Market
conditions may compel the Company to lower its prices to remain competitive in
some 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
refractive centers or in the number of procedures performed by the Company could
have a material adverse effect on the Company's business, financial condition
and results of operations. Other service providers include companies with
operations similar to the Company, optometrists (whether individually, in groups
or as retail chains), ophthalmologists, hospitals and managed-care entities
which, in order to offer refractive surgery to existing patients, may purchase
excimer lasers directly from a manufacturer. 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, financial
and managerial resources and experience than the Company and may be able to
offer laser vision correction at lower rates.
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 under a variety of circumstances,
including the increase in the availability of lasers following the failure of
one or more of the participants in the U.S. laser vision correction market.
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. The Company competes in fragmented geographic
markets and does not face any single dominant U.S. or Canadian national
competitor. The Company's principal corporate competitors include LCA-Vision
Inc., Laser Vision Centers, Inc., Physicians Resource Group, Inc., Clear Vision
Laser Centers, Ltd., PrimeVision Health and Vision Twenty-One, Inc.
Secondary Care Centers
The Company believes that the secondary care center market is in a period
of consolidation as a result of the recent focus on cost-containment by HMOs,
insurance companies and employer groups. To remain competitive in the changing
medical service environment, doctors are increasingly affiliating with larger
organizations which provide skilled and innovative management, negotiate
contracts with payors on behalf of their enrollees and provide sophisticated
information systems, greater capital resources and more efficient cost
structures. The Company believes that small to mid-sized doctor groups and
individual practices are at a
18
TLC THE LASER CENTER INC.
relative disadvantage in the changing eye care industry, as these smaller
organizations typically lack the capital to expand, develop information systems,
purchase new technologies and generate economies of scale nor do they usually
have the ability to offer a variety of medical services, thus often reducing
their competitive position relative to larger organizations.
The Company believes that companies with established operating histories
and greater resources than the Company may be pursuing the acquisition of
secondary care centers. The Company's principal competitors in this area include
Physicians Resource Group, Inc., PrimeVision Health and Omega Health Systems,
Inc. Many hospitals, secondary care centers, health care companies, HMOs and
insurance companies engage in activities similar to the activities of the
Company's secondary care centers. There can be no assurance that the Company
will be able to compete effectively with such competitors, that additional
competitors will not enter the market, or that such competition will not make it
more difficult to acquire the assets of, and provide management services to,
secondary care centers on terms beneficial to the Company.
TLC secondary care centers will compete with ophthalmologists, hospitals
and other local eye care service providers as well as managed care
organizations. The Company believes that changes in government and private
reimbursement policies and other factors have resulted in increased competition
for consumers of medical services. The Company believes that the cost,
accessibility and quality of services provided are the principal factors that
affect competition. There can be no assurance that the TLC secondary care
centers will be able to compete effectively in the markets that they serve,
which inability to compete could adversely affect the Company's business,
financial condition and results of operations.
Further, the TLC secondary care centers will compete with other providers
for managed care contracts. The Company believes that trends toward managed care
have resulted in increased competition for such contracts. There can be no
assurance that the Company and the TLC secondary care centers will be able to
successfully acquire sufficient managed care contracts to compete effectively in
the markets they will serve, which inability to compete could adversely affect
the Company's business, financial condition and results of operations. In
addition, although doctors providing medical services at the Company's secondary
care centers and certain other employees have agreed to certain restrictions on
competing with, or soliciting doctors associated with, the Company, there can be
no assurance that such agreements will be enforceable. See "Item 3 - Legal
Proceedings."
Managed Care
In the U.S. market for managed eye and vision care contracting, the
Company competes principally with Vision Service Plan, a U.S. national eye care
plan, and other regional market managed care plans: Davis Optical, Block Managed
Vision Care and Eye Health Network of Omega Health Systems, Inc. In addition,
physician practice management companies, such as EyePA Inc. (a subsidiary of
Physicians Resource Group, Inc.), NovaMed Eyecare Management LLC, PrimeVision
Health and Vision Twenty-One, Inc. have been formed to seek managed care
contracts on behalf of their acquired ophthalmic practices and may compete with
PPH. The Company believes that companies with established operating histories
and greater financial, technical, marketing and other resources and experience
than the Company may be seeking such
19
TLC THE LASER CENTER INC.
managed care contracts. To date, the Company has entered into only two managed
care contracts. There can be no assurance that the Company will be able to
compete effectively with such competitors, that additional competitors will not
enter into the market, or that such competition will not make it more difficult
for the Company to obtain managed care contracts on acceptable terms, if at all.
See "Item 1 - Business - Risk Factors Competition - Managed Care."
Government Regulation
Excimer Laser Regulation
United States
Medical devices, such as the excimer lasers used in the Company's U.S.
centers, are subject to stringent regulation by the FDA and cannot be marketed
for commercial 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.
In the United States, Summit and VISX are currently the only excimer laser
manufacturers to have obtained a PMA for their respective excimer lasers to
treat myopia and astigmatism using PRK. The Summit PMA, which was granted in
October 1995, limits the sale of the excimer laser for use within a six
millimeter ablation zone to correct mild to moderate myopia between -1.5 and
- -7.0 diopters, with astigmatism no greater than 1.5 diopters. In March 1996,
VISX obtained FDA approval for sale of its excimer laser for PRK, subject to
similar use limitations as those applicable to the Summit excimer laser; in
April 1997, VISX received FDA approval for sale of its excimer laser for
treatment of astigmatism using the PRK procedure; and in January 1998, VISX
obtained approval for its excimer laser for treatment of myopia up to 12
diopters using the PRK procedure. On March 12, 1998, the FDA approved a Summit
excimer laser for the treatment of astigmatism.
The FDA Ophthalmic Devices Advisory Panel recommended in February 1998
that the FDA approve the excimer laser of Autonomous Technologies Corporation
for sale for the treatment of myopia with up to 8 diopters of myopia and 4
diopters of astigmatism and Chiron, recently acquired by Bausch & Lomb Inc., is
currently in clinical trials prior to seeking FDA approval for sale of its
excimer laser for treatment of myopia. In addition, on August 3, 1998, the FDA
approved the commercial sale of an excimer laser for the LASIK procedure. The
rights to commercially produce and distribute such laser are owned by
LaserSight. FDA approval has not been obtained by any manufacturer for sale of
the excimer laser for treatment of hyperopia; however, clinical trials for
hyperopia are ongoing.
Use of the excimer laser to treat both eyes at the same time (simultaneous
bilateral treatment) has not been approved by the FDA. The FDA has stated that
it considers the use by doctors of the excimer laser for simultaneous bilateral
treatment to be a practice of medicine decision, which the FDA is not authorized
to regulate. Many of the surgeons at TLC refractive centers perform simultaneous
bilateral treatment as a practice of medicine matter. There can be no assurance
that the FDA will not seek to challenge this practice in the future.
20
TLC THE LASER CENTER INC.
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 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 regulatory
requirements, or any adverse regulatory action, including a reversal of the
FDA's current position that the "off-label" use of excimer lasers by doctors
outside the FDA approved guidelines is a practice of medicine decision, which
the FDA is not authorized to regulate, could result in a limitation on or
prohibition of the Company's use of excimer lasers which in turn could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The marketing and promotion of laser vision correction in the United
States is subject to regulation by the FDA and the Federal Trade Commission
("FTC"). The FDA and FTC have released a joint communique on the requirements
for marketing laser vision correction in compliance with the laws administered
by both agencies. The FTC staff also issued more detailed staff guidance on the
marketing and promotion of laser vision correction and has been monitoring
marketing activities in this area through a non-public inquiry to identify areas
that may require further FTC attention.
Canada
The use of excimer lasers in Canada to perform refractive surgery is not
subject to regulatory approval, and excimer lasers have been used to treat
nearsightedness since June, 1990. However, HPB regulates the sale of devices,
including excimer lasers used to perform procedures at the Company's Canadian
refractive centers. The Company expects that future sales of any new excimer
laser models in Canada may require approval of the HPB. Pursuant to the
regulations prescribed under the 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 canceled 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 HPB has
conditionally approved the sale of the VISX excimer laser to perform procedures
for mild to moderate nearsightedness and low level astigmatism on a
non-investigational basis. The Company believes that the sale of the excimer
lasers to its refractive 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 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. Further, contractual arrangements with hospitals, surgery
centers,
21
TLC THE LASER CENTER INC.
ophthalmologists and optometrists, among others, are extensively regulated by
federal and state laws.
Federal Law. A federal law (known as the "anti-kickback statute")
prohibits the offer, solicitation, payment or receipt of any remuneration which
is intended to induce, or is in return for, the referral of patients for, or the
ordering of, items or services reimbursable by Medicare or any other federally
financed health care program. This statute also prohibits remuneration intended
to induce the purchasing of, or arranging for, or recommending the purchase or
order of any item, good, facility or service for which payment may be made under
federal health care programs. This statute has been applied to otherwise
legitimate investment interests if one purpose of the offer to invest is to
induce referrals from the investor. Safe harbor regulations provide absolute
protection from prosecution for certain categories of relationships. In
addition, a recent law broadens the government's anti-fraud and abuse
enforcement responsibilities to include all health care delivery systems
regardless of payor.
Subject to certain exceptions, federal law also prohibits 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 refractive 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.
22
TLC THE LASER CENTER INC.
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-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 proposed regulations published in January 1998, 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 physicians and optometrists in connection with
the operation of refractive 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
23
TLC THE LASER CENTER INC.
optometrists to sanctions, and may result in the Company incurring legal fees,
as well as being subjected to fines or other costs, and this could have a
material adverse effect on the Company's business, financial condition, and
results of operations.
Just as in the case of the federal anti-kickback statute, while the
Company believes that it is conforming with applicable state anti-kickback
statutes in all material respects, there can be no assurance that each state
will agree with the Company's position and would not challenge the Company. If
the Company were not successful in defending against such a challenge, the
result may be civil or criminal fines or penalties for the Company as well as
the ophthalmologists and optometrists. Such a result would require the Company
to revise the structure of its legal arrangements, and this could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Similarly, just as in the case of the federal Stark Law, while the Company
believes that it is operating in compliance with applicable state
anti-self-referral laws in all material respects, there can be no assurance the
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 refractive 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. In
addition, 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. 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.
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
24
TLC THE LASER CENTER INC.
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 be not able to obtain such a license without unreasonable
expense or delay.
Some states require the permission of the State Department of Health or a
division thereof, such as a Health Planning Commission, in the form of a
Certificate of Need ("CON") prior to the construction or modification of an
ambulatory care facility, 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 refractive centers.
Managed Care
Managed care contracting, provider network operations and related
management services are regulated in the United States by both federal and state
authorities. PPH has obtained or will seek to obtain all required federal and
state permits, licenses and bonds it believes are necessary to operate its
VisionMed subsidiaries and to function as a managed care company in the markets
in which it is developing business. In states where an insurance license is
required by a provider relationship or payor contract, PPH or the local
VisionMed subsidiary or partnership will seek to have such business underwritten
by an appropriate licensed insurer. Managed care is also subject to the federal
anti-kickback and anti-self-referral legislation and by federal anti-trust laws.
PPH intends to structure its local partnerships with providers to comply with
these laws in all of the markets in which it intends to conduct business.
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.
25
TLC THE LASER CENTER INC.
Intellectual Property
The name "TLC The Laser Center" is a registered United States service mark
of the Company and a registered trade-mark in Canada. The Company also has
applied for registration of its logo and slogan "See the Best." In addition, the
Company owns a patent in the United States on the treatment of a potential side
effect of laser vision correction generally known as "central islands." The
patent expires in May 2014. The Company's service marks, trade-mark, 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. A subsidiary of the
Company recently signed an agreement with a subsidiary of LaserSight whereby the
Company has granted an exclusive right to use the central islands patent to
LaserSight.
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 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 of July 31, 1998, the Company had 696 employees. The Company's progress to
date has been highly dependent upon the skills of its key technical and
management personnel, 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
Limited Operating History and Losses from Operations; Uncertainty of Future
Profitability
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 expansion 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 losses
and the time required to achieve profitability is uncertain. There can be no
assurance that
26
TLC THE LASER CENTER INC.
the Company will achieve profitability or that profitability, if achieved, will
be sustained. Moreover, if profitability is achieved, the level of such
profitability cannot be predicted 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 ophthalmologists, optometrists or the general
population as an alternative to existing methods of treating refractive
disorders. See "Item 1 - Business - The Refractive Market".
Dependence on Affiliated Doctors
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, ophthalmologists and optometrists, 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. See "Item 1 - Business -
Surgeon Contracts".
Competition
Laser vision correction, secondary care, and managed care are all subject
to intense competition. The Company competes with other entities, including
hospitals, individual ophthalmologists, other laser centers and certain
manufacturers of excimer laser equipment, in offering its services. The
Company's laser centers compete on the basis of quality of service, reputation
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. See "Item 1
- - Business - Competition".
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. The
Company does experience some seasonality in results, mostly in the second
quarter due to the deferred scheduling of elective procedures as a result of
vacations for patients and doctors, which tends to reduce results for that
quarter.
Potential Liability and Insurance
The provision of medical services entails an inherent risk of potential
malpractice and other similar claims. There can be no assurance that any
insurance maintained by the Company will be adequate to satisfy claims or that
insurance maintained by the doctors will protect the Company. See "Item 1 -
Business - Potential Liability and Insurance".
Risk of Inability to Execute Acquisition Strategy; Management of Growth
The Company's growth strategy is dependent on increasing the number of TLC
refractive and secondary care centers through strategic acquisitions. 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. If the Company's management is unable to
27
TLC THE LASER CENTER INC.
successfully implement its growth strategy or manage growth effectively, the
Company's business, financial condition and results of operations could be
materially adversely affected. See "Item 1 - Business -Risk of Inability to
Execute Acquisition Strategy; Management of Growth."
Future Capital Requirements; Uncertainty of Additional Funding
It is not possible to predict with certainty the timing or the amount of
future capital requirements. 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. See "Item 1 -
Business - Future Capital Requirements - Uncertainty of Additional Funding" and
"Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
Reimbursement
A decrease in the number of privately insured patients treated at the
Company's secondary care centers or a further reduction in reimbursement rates
or in payments to doctors could cause the revenues of such centers to decrease
and have a material adverse effect on the Company's business, financial
condition and results of operations. See "Item 1 - Business Description of
Secondary Care Centers".
Government Regulation
The Company and its operations are subject to extensive federal, state and
local laws, rules and regulations.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. See "Item 1 - Business
- - Governmental Regulation."
Technological Change
Modern medical technology is characterized by extensive research and rapid
technological change. Newer or enhanced technologies may be developed with
better performance or lower cost than the excimer laser equipment currently used
by the Company. Medical companies, academic and research institutions and others
could develop new therapies, including new or enhanced medical devices or
surgical procedures, for the conditions targeted by the Company. These therapies
could be more medically effective and less expensive than the procedures
performed at the Company's refractive centers and could potentially render laser
vision correction obsolete, uneconomical or otherwise undesirable. In addition,
competitors may develop procedures that involve lower per procedure costs. There
can be no assurance that the Company will have the capital resources available
to it to upgrade its excimer laser equipment, acquire any such new or enhanced
medical devices or adopt such new or enhanced procedures at the time that any
advanced technology is developed or introduced. The inability of the Company to
do so successfully could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Item 1 - Business
Competition - Future Capital Requirements; Uncertainty of Additional Funding."
28
TLC THE LASER CENTER INC.
Dependence on Key Personnel
The success of the Company is dependent in part on the services of certain
key medical and management personnel, including Dr. Machat and Mr. Vamvakas. The
experience of these individuals will be an important factor contributing to the
Company's continued success and growth. The loss of either of these individuals
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Intellectual Property/Proprietary Technology
The medical device industry, including the ophthalmic laser sector, has
been characterized by substantial litigation in the United States and Canada
regarding patents and proprietary rights. 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. See "Item 1 - Business - Intellectual Property/Proprietary
Technology".
Potential Volatility of Stock Price
The market price of the Common Shares historically has been subject to
substantial price volatility. Such volatility can be expected to recur in the
future due to industry developments or business-specific factors such as the
Company's ability to effectively penetrate the laser vision correction market,
new technological innovations and products, changes in government regulations,
adverse regulatory action, public concerns with regard to the safety and
effectiveness of various medical procedures, any loss of key management,
announcements of extraordinary events such as litigation or acquisitions,
variations in the Company's financial results, fluctuations in the stock prices
of the Company's competitors, the issuance of new or changed stock market
analyst reports and recommendations concerning the Company or its competitors,
changes in earnings estimates by securities analysts, the Company's ability to
meet analysts' projections, as well as changes in the market for medical
services and general economic, political and market conditions or other
unforeseen factors. In addition, stock markets have experienced extreme price
and volume trading volatility in recent years. This volatility has had a
substantial effect on the market prices of securities of many companies for
reasons frequently unrelated or disproportionate to the operating performance of
the specific companies. These broad market fluctuations may adversely affect the
market price of the Common Shares.
29
TLC THE LASER CENTER INC.
ITEM 2. PROPERTIES
The Company's centers and the corporate office are located in leased
premises. The leases are negotiated on market terms and typically have a term of
five to ten years. See Note 12 to "Item 8 - Consolidated Financial Statements of
the Company." The following chart contains the location and acquisition or
opening date of each TLC refractive center, including BeaconEye centers.
Refractive Centers
United States
-------------
Location Opened
California
Brea September, 1996
Irvine(1) June, 1997
Colorado
Denver August, 1996
Denver(1) August, 1996
Florida
Boca Raton(2) January, 1996
Fort Lauderdale(1) January, 1997
Tampa(1) January, 1997
Georgia
Atlanta(1) August, 1996
Illinois
Westchester(3) March, 1997
Indiana
Indianapolis March, 1996
Maryland
Rockville(2) January, 1996
Massachusetts
Scituate September 1997
Michigan
Detroit November 1997
Lansing (3) May 1998
Montana
Billings March 1997
New Jersey
Elmwood Park(2) March 1996
Mount Laurel June 1997
New York
Garden City(2) May 1996
New York(2) January 1996
White Plains(2) April 1996
North Carolina
Charlotte June 1997
Raleigh August 1997
Winston-Salem March 1997
Ohio
Ada December 1996
Cleveland November 1997
Oklahoma
Oklahoma City October 1996
Tulsa October 1995
Pennsylvania
Plymouth Meeting(2) April 1996
Pittsburgh June 1998
South Carolina
Greenville June 1996
Tennessee
Johnson City April 1997
Texas
Austin(1) June 1996
Arlington(1) June 1996
Houston(1) August 1996
San Antonio June 1996
Virginia
Fairfax(2) April 1996
Washington
Lynnwood July 1996
Wisconsin
Madison (3) October 1996
Canada
------
Location Opened
British Columbia
Vancouver August 1996
New Brunswick
Moncton September 1997
Ontario
London November 1994
Richmond Hill(1) September 1997
Toronto December 1994
Toronto(1) May 1995
Windsor September 1993
(1) BeaconEye center. On May 27, 1998, the Company completed its acquisition
of BeaconEye.
(2) Acquired February 1997 in the acquisition of 20/20.
(3) Also contains a secondary care center.
30
TLC THE LASER CENTER INC.
The following chart contains the location and acquisition or opening date of
each TLC secondary care center:
Secondary Care Centers
Location Date Acquired
Michigan
Battle Creek February 1998
Chelsea February 1998
Jackson February 1998
Lansing(1) February 1998
Ypsilanti February 1998
Illinois
Palos Heights January 1997
Westchester(1) January 1997
Oklahoma
Oklahoma City April 1998
Elk City June 1998
Wisconsin
Madison (1) February 1998
Washington
Auburn March 1996
Burlington December 1997
Mount Vernon March 1996
Seattle March 1996
Sequim February 1998
Sequim March 1996
Smokey Point December 1997
(1) Denotes a center that is also a refractive center.
The Company also leases office space for two corporate offices. The
International Headquarters is located in Mississauga, Ontario in Canada, and the
U.S. Corporate Office is located in Bethesda, Maryland.
ITEM 3. LEGAL PROCEEDINGS
On August 15, 1997, Susan Rachlin, a former patient, filed a suit against TLC
The Laser Center (Northeast) Inc., a subsidiary of TLC (formerly 20/20), along
with Richard Prince MD, David Edmiston MD, Focus Eye Centre and Tri County Eye
Physicians PC, alleging defects in her laser vision correction. The suit was
filed in the Court of Common Pleas, Philadelphia County, Pennsylvania. The
patient initially had laser vision correction, arranged by 20/20 but not
performed by a doctor at a 20/20 center, and had further laser vision correction
by a doctor at a 20/20 center in an attempt to obtain better results. The
patient claims that she continues to have blurry vision and that she still needs
to wear glasses. The case is still in the early pleading stages and damages have
not been quantified. The Company's insurer has assumed the defense of this
claim, and, although there can be no assurance, the Company does not expect this
suit to have a material adverse effect on its business, financial condition or
results of operations.
On January 18, 1998, TLC and its subsidiary, TLC Midwest Eye Laser Center Inc.,
filed a suit in the Circuit Court of Cook County Illinois, Chancery Department,
against Midwest Eye Institute II, Ltd., Midwest Eye Physicians, PC, Herman D.
Sloane, MD, Allen M. Pielet, MD, Floyd W. Woods, OD, Ronald J. Carr, OD, and
Dominick L. Opitz, OD. The suit seeks injunctive relief and compensatory damages
against certain defendants for breach of an administrative services agreement
and seeks an injunction to prevent the defendant doctors from competing with
TLC. The court recently denied the Company's request for an injunction
preventing the defendant doctors from competing with TLC. The Company intends to
appeal this decision. The doctors have made a counterclaim against TLC for
breach of the administrative services agreement and breach of fiduciary duty,
seeking an accounting of funds collected under the agreement, an appointment of
a receiver to collect the practice's receivables and damages in the amount of
31
TLC THE LASER CENTER INC.
$50,000. TLC does not consider the counterclaim to have merit and, although
there can be no assurance, does not expect to be required to pay damages.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Common Shares are listed on The Toronto Stock Exchange under the
symbol "LZR" and , since July 2, 1997 have been listed on the Nasdaq National
Market under the symbol "LZRCF." The following table sets forth, for the periods
indicated, the high and low closing prices per Common Share of the Common Shares
on The Toronto Stock Exchange and the Nasdaq National Market:
The
Toronto Nasdaq
Stock National
Exchange Market
----------------- ------------------
High Low High Low
-------- -------- -------- --------
Fiscal 1997
First Quarter C$8.30 C$5.25 -- --
Second Quarter 8.20 6.90 -- --
Third Quarter 9.40 6.10 -- --
Fourth Quarter 12.00 7.10 -- --
Fiscal 1998
First Quarter C$13.05 C$10.60 US$9.25 US$8.25
Second Quarter 12.80 10.75 9.00 7.75
Third Quarter 20.00 11.10 14.00 7.813
Fourth Quarter 25.00 17.90 17.234 12.688
Record Holders
As of August 20, 1998, there were approximately 637 record holders of the Common
Shares.
Dividends
The Company has never declared or paid cash dividends on the Common Shares. It
is the policy of the Board of Directors of the Company to retain earnings to
finance growth and development of its business and, therefore, the Company does
not anticipate paying cash dividends on its Common Shares in the near future.
32
TLC THE LASER CENTER INC.
ITEM 6. SELECTED FINANCIAL DATA
Set forth in the following pages are selected historical consolidated
financial data as of and for each of the fiscal years in the four-year period
ended May 31, 1998, which have been derived from and should be read in
conjunction with the Consolidated Financial Statements of the Company and the
notes thereto included elsewhere in this Form 10-K. The Company previously
reported in Canadian dollars, but is now reporting in U.S. dollars.
Consequently, all of the numbers set forth below are presented in U.S. dollars.
See note 1 to the Consolidated Financial Statements.
Year Ended May 31,
1995(2) 1996 1997 1998
------- ------- ------- -------
Income Statement Data
Amounts under Canadian
GAAP(1)
Net revenues(3) 3,152 6,426 20,112 59,122
Expenses
Operating and doctor 2,314 5,562 21,074 54,763
compensation
Interest and other 110 675 752 692
Depreciation and 236 601 3,463 9,460
amortization
------- ------- ------- -------
2,660 6,838 25,289 64,915
Income (loss) from 492 (412) (5,177) (5,793)
operations before start-up
and development expenses
Start-up and development 1,034 1,584 4,292 3,267
expenses
Loss before income taxes (542) (1,996) (9,469) (9,060)
and non-controlling
interest
Income taxes
Current 31 72 95 1,071
Deferred -- (89) 10 --
------- ------- ------- -------
31 (17) 105 1,071
Loss before (573) (1,979) (9,574) (10,131)
non-controlling
interest
Non-controlling interest -- -- -- 593
Net loss for the period - (573) (1,979) (9,574) (9,538)
Canadian GAAP
Loss per share - (0.06) (0.16) (0.47) (0.34)
Canadian GAAP
Weighted average number 10,134 12,797 20,617 28,035
of Common Shares
outstanding (in thousands)
Amounts under U.S.
GAAP(1)
Net loss for the period - (609) (3,329) (9,574) (10,280)
U.S. GAAP
Loss per share - (0.06) (0.26) (0.47) (0.37)
U.S. GAAP
33
TLC THE LASER CENTER INC.
Year Ended May 31,
------------------
1995 1996 1997 1998
---- ---- ---- ----
Operating Data
Number of refractive centers
(at end of period) 3 5 27 45
Number of secondary care
centers (at end of period) 0 4 7 15
Number of laser vision
correction procedures 2,176 3,685 11,026(4) 35,859(5)
As of May 31,
-------------
1995 1996 1997 1998
---- ---- ---- ----
Balance Sheet Data
Cash and short-term deposits 397 2,844 13,230 1,895
Working capital (200) 1,656 8,055 54,084
Total assets 2,027 16,819 73,746 164,212
Total debt, excluding current
portion 891 3,104 10,935 17,911
Shareholders' equity
Capital Stock 1,002 13,494 63,522 143,554
Deficit (588) (2,568) (12,141) (21,679)
-------- -------- -------- --------
414 10,926 51,381 121,875
TLC THE LASER CENTER INC.
(1) In certain respects, Canadian GAAP differs from U.S. GAAP. Accordingly,
certain line items with respect to Income Statement Data and Balance Sheet
Data would differ under U.S. GAAP. For a discussion of the principal
differences between Canadian GAAP and U.S. GAAP, see note 17 to the
Consolidated Financial Statements of the Company.
(2) Certain comparative figures have been reclassified to conform to the
presentation for fiscal 1998.
(3) Includes primarily those revenues pertaining to the operation of
refractive centers, the management of refractive and secondary care
centers and The Vision Source Inc.
(4) Includes procedures performed at centers previously owned by 20/20
starting March 1997. 20/20 was acquired by TLC on February 10, 1997.
(5) Includes six weeks of procedures performed at BeaconEye Centers.
34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the Consolidated
Financial Statements and the related notes thereto, which are included in Item 8
of this Form 10-K. The following discussion is based upon the Company's results
under Canadian GAAP. In certain respects, Canadian GAAP differs from U.S. GAAP.
For a discussion of the principal differences between Canadian GAAP and U.S.
GAAP, see note 17 to the Consolidated Financial Statements of the Company. The
Company is now reporting in U.S. dollars. Unless otherwise specified, all dollar
amounts are U.S. dollars. See Note 1 to the Consolidated Financial Statements of
the Company.
Overview
TLC The Laser Center Inc., which began operations in September 1993, owns and
manages eye care centers throughout North America and, together with its network
of eye care providers, specializes in laser vision correction to correct common
vision disorders such as myopia (nearsightedness), hyperopia (farsightedness)
and astigmatism. Laser vision correction is an outpatient procedure, which is
designed to change the curvature of the cornea to reduce or eliminate a
patient's reliance on eyeglasses or contact lenses. To date, the Company has
established or acquired 45 refractive centers and 17 secondary care centers in
the United States and Canada which includes the recent acquisition of 11
BeaconEye centers in April 1998 (The Company acquired 97% of the outstanding
shares of BeaconEye in April, 1998, and completed its acquisition of the
re