TLC THE LASER CENTER INC.
ANNUAL INFORMATION FORM
FOR THE YEAR ENDED MAY 31, 1997
SEPTEMBER 30, 1997
TABLE OF CONTENTS
The Company....................................................................2
General Development Of The Business............................................3
Industry Background............................................................5
Business Of The Company........................................................8
Government Regulation.........................................................18
Selected Consolidated Financial Information...................................22
Dividends And Dividend Policy.................................................23
Management's Discussion And Analysis Of Financial Condition And
Results Of Operations.......................................................23
Stock Exchange Listings.......................................................24
Directors And Officers........................................................24
Additional Information........................................................25
Glossary......................................................................27
THE COMPANY
TLC The Laser Center Inc. (the "Company" or "TLC") was incorporated by
articles of incorporation under the BUSINESS CORPORATIONS ACT (Ontario) on
May 28, 1993. By articles of amendment dated October 1, 1993, the name of the
Company changed to its present form, and by articles of amendment dated
March 22, 1995, certain changes were effected in the issued and authorized
capital of the Company with the effect that the authorized capital of the
Company became an unlimited number of Common Shares. The head and principal
office of the Company is located at 5600 Explorer Drive, Suite 301, Mississauga,
Ontario; Telephone: (905) 602-2020; Facsimile: (905) 602-2025. TLC's Internet
address is www.lzr.com.
All references in this Annual Information Form ("AIF") to "$" and "dollars"
are to Canadian dollars, unless otherwise noted. The "Company" or "TLC" means
the Company and its subsidiaries, unless the context otherwise requires.
Certain terms used in this AIF are defined elsewhere in the AIF. (See
"Glossary".)
The following organizational chart illustrates the principal entities owned
by the Company as at May 31, 1997, their jurisdiction of incorporation and the
percentage of voting securities held by each company's parent company (100%
unless specified to the contrary).
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[GRAPHIC] depicting TLC organizational chart
(1) TLC Piedmont Laser Center Inc. and TLC Chicago Laser Center Inc. each
operate a refractive clinic and a secondary care clinic. TLC Midwest Eye
Laser Center Inc. operates two secondary care clinics, one of which is also
a refractive clinic.
(2) Opened September 1997.
(3) Acquired July 23, 1997.
(4) Dissolved effective May 31, 1997. The assets of the dissolved
subsidiaries were transferred to 20/20 Laser Centers, Inc. ("20/20")
(5) As of September 30, 1997, TLC acquired 96.25% of 20/20 Laser Services
(South Florida) Limited Partnership, LLP ( 62% is owned by 20/20 Laser
Centers, Inc. and 34.25% is owned by TLC The Laser Center (Delaware)
Inc.).
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GENERAL DEVELOPMENT OF THE BUSINESS
BACKGROUND
The Company is a provider of integrated eye care in North America,
specializing in excimer laser surgery to correct common refractive vision
disorders such as nearsightedness, farsightedness and astigmatism. The Company
develops and manages regional networks consisting of refractive laser clinics
and secondary care clinics in conjunction with a network of local doctors.
TLC began operation in 1994 when it opened the TLC Windsor clinic. Since
commencement of operations, TLC has opened or acquired 32 refractive clinics
(including three with secondary care operations) and two secondary care clinics.
Two clinics were opened in 1995, three clinics were opened or acquired in 1996
(two in the U.S.), and 24 clinics were opened in 1997, including eight U.S.
clinics managed by 20/20 Laser Centers, Inc. ("20/20") and one clinic in Canada.
On February 10, 1997, the Company acquired 99.9% of the shares of 20/20 to
become the largest provider of laser vision correction in North America.
The Company has developed a network, which as of September 30, 1997 totals
32 refractive clinics (three of which are also secondary care clinics), two
secondary care clinics and 12 network centers in 26 states and provinces across
North America. In Canada, the Company manages five refractive clinics in
Ontario, British Columbia, and New Brunswick. In the U.S., the Company manages
27 refractive clinics in Oklahoma, Indiana, South Carolina, Washington,
Colorado, California, Florida, Wisconsin, Illinois, Ohio, Tennessee, Maryland,
New York, New Jersey, Pennsylvania, Montana, North Carolina, Massachusetts and
Virginia. The Company manages five secondary care clinics in Washington, South
Carolina and Illinois (three of which are also refractive clinics).
Revenues earned by the Company in the U.S. amounted to approximately 60%,
while revenues earned in Canada amounted to approximately 40%. The preponderance
of the Company's business in future is expected to be in the U.S. as the Company
has opened 27 refractive clinics (including three with secondary care
operations) and two secondary care clinics in the United States and may in
future open more centers there.
TLC had approximately 350 employees at May 31, 1997.
REFRACTIVE CLINICS
The Company is pursuing a strategy of expansion of its core refractive
laser surgery business. The major focus of the Company's expansion strategy
continues to be the U.S., where the Company is seeking to position itself to
take advantage of the growing market for excimer laser procedures.
The table below illustrates the growth in the number of procedures
performed at the Company's refractive clinics since the Company began operations
in the second quarter of 1994:
GROWTH IN NUMBER OF PROCEDURES PERFORMED
[bar graph showing growth in number of refractive procedures performed]
(1) Includes 1,326 and 1,478 procedures performed at 20/20 clinics during
the quarters ended February 28, 1997 and May 31, 1997, respectively.
20/20 was acquired by TLC on February 10, 1997.
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The Company has 11 clinics under development. The Company opens refractive
clinics in cities where it has identified strong support from local doctors for
the TLC co-management strategy, and requires at least 50 local doctors to
indicate their intention to affiliate with the Company.
The Company estimates that the cost of opening each refractive clinic in
the U.S. will be $1.5 million. It is intended that such cost will be funded
through equipment financing which the Company currently has available to it and
funds available for general corporate purposes. Generally, it is expected that a
TLC refractive clinic will become profitable after it has completed
approximately eighteen months of operation.
SECONDARY CARE CLINICS
As part of its strategy to expand its core refractive laser surgery
business, the Company intends to acquire, and manage on behalf of doctors,
secondary care clinics in U.S. cities where it has established, or intends to
establish, a refractive clinic. The Company believes that the acquisition of
secondary care clinics in U.S. cities where it manages refractive clinics and
has established a network of affiliated doctors will place TLC in a strong
competitive position to obtain managed care contracts. The operation of both
refractive and secondary care clinics in a single geographical center may result
in operating efficiencies which each clinic might not be able to achieve
individually, including purchasing economies of scale and more efficient use of
equipment and personnel. If achieved, such operating efficiencies should enable
the clinics to provide a range of eye care services at a lower cost than
competing service providers. Acquisitions of existing clinics will also create
an extended patient base, allowing each clinic to increase awareness of its
services among clients of the other.
The Company's strategy is to acquire secondary care clinics for a purchase
price based upon a multiple of earnings satisfied through a combination of cash
and stock of the Company. The Company has entered into two letters of intent
to acquire secondary care clinics. The first letter of intent, with Eye Care
Physicians of Michigan, provides for the formation of a joint venture to
establish refractive clinics and secondary care clinics in Michigan. The second
letter of intent, with Britton Vision Associates, P.C., provides for the
formation of a joint venture to establish a secondary care clinic in Oklahoma.
MANAGED CARE
The Company believes that because of the economies of scale that will be
developed through the network of refractive and secondary care clinics, and the
geographic area that will be covered by the TLC network of affiliated doctors,
the Company will be in a strong competitive position to obtain managed care
contracts with Health Management Organizations ("HMOs"), insurance companies,
employer groups and other private third party payors.
The goal of TLC's managed care subsidiary, Partner Provider Health Inc.
("PPH"), is to implement a business model whereby eye care providers become true
partners in building successful managed care businesses. PPH develops local
partnerships in individual states through the creation of local practice
associations called VisionMeds. PPH has formed five such partnerships, with an
additional eleven expected to be formed within the next nine months. VisionMeds
are expected to expand the market share of affiliated eye care providers through
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successful contracting for the complete range of managed eye care products. TLC
secondary care clinics as well as TLC affiliated optometrists will be the
immediate beneficiaries of market share growth in managed care contracting by
PPH.
NETWORK CENTERS
The Company's network centers, located near TLC refractive clinics, provide
management services similar to those provided by refractive clinics, including
clinical training, patient education, marketing and network development.
Network centers support market development, without the need for large capital
expenditures. The network center is compensated by the affiliated clinic for the
management services it provides. Since June 1, 1996, the Company has opened 12
network centers with three additional centers under development.
INDUSTRY BACKGROUND
EXCIMER LASER PROCEDURES
The human eye, which is approximately 25 millimeters in diameter, functions
much like a camera. It incorporates a lens system that focuses light (the cornea
and the lens), a variable aperture system which regulates the amount of light
passing through the eye (the iris), and a film which records the image (the
retina). The excimer laser is designed to enable a doctor to treat two major
categories of vision disorders - refractive and pathological disorders.
Refractive disorders, such as nearsightedness, farsightedness and
astigmatism, result from an inability of the optic system 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 perceive a blurred image. 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 U.S. is Refractive Keratectomy ("RK"). In the case of RK,
an ophthalmologist uses a scalpel to make a series of incisions around the
cornea in a radial pattern, resulting in a flattening of the corneal surface.
Unlike RK, excimer laser procedures are designed to reshape or sculpt the
outer layers of the cornea to correct vision disorders by changing its
curvature. For instance, in Photorefractive Keratectomy ("PRK"), the excimer
laser emits excimer laser pulses to remove submicron (a micron equals 0.001 of a
millimeter) layers of tissue from the surface of the cornea to reshape the front
surface of the cornea. PRK differs from RK in several respects. PRK depends
less on the surgical skill of the doctor and more on the accuracy of the excimer
laser. After one year, the appearance of an eye treated with PRK is typically
clear with no visible evidence of the PRK procedure. 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. The Company believes that these considerations explain the
decrease in popularity of RK in markets in which PRK is available.
Laser-In-Situ Keratomileusis ("LASIK") is a procedure that came into
commercial use in Canada in 1994. LASIK combines a manual procedure that has
been performed for over ten years with the accuracy of a laser. In LASIK, a
surgical instrument called a microkeratome is used to
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create a thin flap on the surface of the cornea. Excimer laser energy is then
used to make a correction in the inner layers of the cornea, and the flap is
then replaced. The Company believes LASIK allows more precise correction than
PRK for higher levels of nearsightedness, farsightedness and astigmatism, with
greater predictability of results and decreased probability of regression.
In the case of PRK and LASIK, once the doctor makes an assessment of the
exact correction required, the software of the excimer laser system calculates
the optimal number of pulses needed to achieve the intended corneal correction
using a specially developed algorithm. The patient reclines in a chair, his or
her eye focuses on a fixation target, and the doctor positions the patient's
cornea for the excimer laser procedure. The doctor uses a foot pedal to deliver
the excimer laser beam, which emits a rapid succession of excimer laser pulses.
In the case of most excimer lasers, each excimer laser pulse removes
approximately 0.25 microns of corneal tissue, with each succeeding pulse
removing a slightly larger ring of tissue, up to 7.0 mm in diameter. The typical
procedure takes 10 to 15 minutes, from set-up to completion, with the length of
time of the actual excimer laser treatment running 15 - 90 seconds.
PRK and LASIK are done on an out-patient basis without general anesthesia,
and the progress of the eye is monitored in a series of follow-up visits.
Following PRK, a patient typically experiences blurred vision and discomfort
until the outer surface of the cornea heals, which usually occurs within 72 to
96 hours after the procedure has been performed. 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 the procedure to be realized. In the case of LASIK, the surface layer of the
cornea remains intact. Consequently, LASIK has the advantage of more rapid
visual 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.
According to the two-year follow-up data accumulated by Summit Technology
Inc. ("Summit") during clinical trials performed in connection with FDA approval
of its excimer laser, all of the individuals undergoing PRK experienced an
improvement in visual acuity without corrective eyewear. Prior to PRK, 95% of
the eyes treated were 20/200 or worse. Of the eyes treated, approximately 91%
improved to 20/40 or better, the legal requirement to obtain a driver's license
in most States without corrective eyewear, while the remaining 9% experienced
improved vision without corrective eyewear, but still required corrective
eyewear to achieve 20/40 or better.
REFRACTIVE CLINIC MARKET
While estimates of market size should not be taken as projections of
revenues or of the Company's ability to penetrate that market, the U.S.
Department of Health and Human Services estimates that approximately 90 million
people in the U.S. alone are nearsighted. Of those individuals, most
traditionally resort to non-surgical treatment. In 1993, industry sources
estimated that 60 million nearsighted persons used glasses or contact lenses to
correct their vision disorder, with approximately 90% of nearsighted persons
having low-level nearsightedness, which can be treated by excimer laser
procedures within the limitations imposed by the FDA on its approval for use of
an excimer laser in the U.S. It is also estimated that an additional 65 million
farsighted persons wear glasses or contact lenses to correct their vision
disorder. At present, the FDA has not
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approved the use of excimer lasers in the U.S. for treatment of farsightedness
but the Company is performing surgery to correct farsightedness at its TLC
Toronto clinic. (See "Government Regulation - Excimer Laser Regulation -
United States".) In 1994, industry sources estimated that U.S. consumers spent
approximately US$13 billion on eyeglasses and contact lenses. The Company
believes that with excimer laser procedures many of these people could reduce or
eliminate their reliance on corrective eyewear. In 1993, when PRK was not yet
available in the U.S., approximately 250,000 RK procedures were performed in the
U.S.
While the Company believes that many nearsighted and farsighted people are
potential candidates for excimer laser procedures, these procedures must compete
with corrective eyewear, RK and other surgical and non-surgical treatments for
nearsightedness and farsightedness. (See "Business of The Company -
Competition - Refractive Clinics - Consumer Market for Vision Correction".) The
decision to have an excimer laser procedure performed largely represents a
lifestyle choice dictated by an individual's desire to reduce or eliminate their
reliance on corrective eyewear, rather than a health decision. Nevertheless, the
Company believes that the market potential for excimer laser procedures is
commercially significant, and that many nearsighted and farsighted people will
perceive that excimer laser procedures have advantages over alternative
treatments.
SECONDARY CARE CLINIC MARKET
Secondary care clinic refers to a clinic which is equipped to enable
physicians to provide advanced levels of eye care, including eye surgery, for
the treatment of disorders such as glaucoma, cataracts and retinal disorders.
Generally, a secondary care clinic does not dispense eyewear or contact lenses,
perform refractions, or provide eye examinations or general diagnostic services.
Although it is difficult to estimate the size of the secondary care clinic
market, in 1994, industry sources estimated that ophthalmologists in the U.S.
performed in excess of 2.4 million major surgical procedures.
Sources of revenues for secondary care clinics are direct payments by
patients as well as reimbursement or payment by third party payors such as
Medicaid and Medicare. There have been recent reductions in the amounts
reimbursed by Medicaid and Medicare for eye care procedures. Future material
reductions in the amounts reimbursed by Medicaid and Medicare could affect the
profitability of secondary care clinics, including those managed by the Company.
The secondary care clinic 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 offer 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. Small to
mid-sized doctor groups and individual practices are at a 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. Additionally, small to mid-sized doctor groups
and individual practices often do not have formal ties with other providers nor
do they have the ability to offer a variety of medical services, thus reducing
their competitive position relative to larger organizations.
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MANAGED CARE MARKET
In the U.S., doctors have traditionally provided medical services to
individual patients on a fee-for-service basis, either through commercial
insurance or through Medicare or Medicaid. The fee-for-service model provides
few incentives for the efficient utilization of resources and has contributed to
increases in health care costs. Concerns over the accelerating cost of health
care have resulted in the increasing prominence of managed care and a decline in
fee-for-service medicine.
Under a typical managed care arrangement, a payor, such as an employer or
HMO, determines covered services and budgets funding for each area of clinical
service. Managed care organizations then bid for the opportunity to become the
supplier of the covered services for a fixed fee or rate. In 1995, according to
the U.S. Department of Labor, over 65% of employed Americans received health
insurance through a managed care organization, such as an HMO.
An HMO typically organizes the delivery of eye care by contracting with
organized groups of private practice optometrists and ophthalmologists. Eye
care procedures are typically a standard benefit provided by managed care
organizations. According to the American Association of Health Plans, in 1996,
over 91% of HMOs provided specific coverage for routine eye examinations.
However, the cost of excimer laser procedures has not been and is not expected
to be covered by the majority of HMOs or most other third party payors under
managed care contracts.
BUSINESS OF THE COMPANY
GENERAL
The Company is a provider of integrated eye care in North America,
specializing in excimer laser surgery to correct common refractive vision
disorders such as nearsightedness, farsightedness and astigmatism. The Company
develops and manages regional networks consisting of refractive laser clinics
and secondary care clinics in conjunction with a network of local doctors.
CO-MANAGEMENT STRATEGY
The Company believes that a true co-management model in which primary care
doctors work jointly with secondary care doctors results in optimal patient
care. TLC refractive clinics offer excimer laser procedures through co-operation
between the Company, the clinic and affiliated doctors. In most cases, excimer
laser procedures are performed by doctors under the terms of an agreement with
the TLC refractive clinic and the Company. (See "- Refractive Clinics" and "-
20/20 Acquisition".) The affiliated doctors assess candidates for excimer laser
procedures and provide pre- and post-operative care, including an initial eye
examination and a minimum of six follow-up visits. There are currently over
6,000 doctors affiliated with TLC in this manner.
In July, 1997, TLC acquired The Vision Source, Inc., a corporation that
provides marketing, management and buyer power to independently owned and
operated optometric franchises in the United States. The Vision Source, Inc.
maintains the goal of providing competitive purchasing power and marketing
opportunities to optometrists while allowing them to remain independent
practitioners. This retention of independence also makes The Vision Source,
Inc. an appealing concept for private practitioners when they begin to seek
affiliations in the managed care environment. The Vision Source, Inc. is
administered by practicing optometrists who have a clear view of the needs of
its members.
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The Company provides courses in co-management and practice management to
affiliated doctors and their staffs. Each TLC refractive clinic has a network of
affiliated doctors whose patients use the clinic, and it is intended that
doctors affiliated with each refractive clinic in the U.S. will have 50%
representation on the board of directors of the subsidiary that owns the clinic.
The Company intends to implement a co-management strategy for its secondary
care clinics. The Company believes that through its network of referring doctors
and its co-management strategy it will have a competitive advantage in both the
secondary care and managed care market in which affiliated service providers,
able to provide a range of eye care services at a lower cost than unaffiliated
providers, appear to be the most successful.
MARKETING RESOURCES
TLC provides marketing and practice management resources to assist
affiliated doctors with marketing their services to the general public. TLC's
marketing department designs advertising programs and templates that can be used
by clinics and affiliated doctors who are part of the TLC network.
INFORMATION TECHNOLOGY SYSTEMS
The TLC network of clinics 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.
On-line Communication System: The Company is implementing an on-line
communication system through Vision Corporation, which is owned 50.1% by the
Company, 39.8% by the ARM Group Inc., a software enterprise unaffiliated with
TLC, and 10.1% by Kelmar Corporation, a corporation controlled by Mr. Ronald J.
Kelly, a director and officer of the Company. It is intended that upon payment
of a modest on-line charge, affiliated doctors will be linked by computer with
the Company, suppliers and each other. The Company believes that the
communication system will become a key component of the TLC co-management
strategy by facilitating and reducing the cost of disseminating information
within TLC. The Company intends to allow its suppliers access to the
communication system in consideration for the payment of advertising fees and
anticipates that such suppliers will offer volume discounts to the affiliated
doctors linked to the communication system. The Company's clinics will also
benefit from any volume discounts that the affiliated doctors obtain from
on-line suppliers.
Practice Management Software: The emergence of managed care has increased
the need for information collection, analysis and management throughout the
entire health care industry so that providers can better quantify the revenues
and expenses associated with managed care contracting. Information management
systems are moving beyond traditional systems that focus primarily on billing,
insurance and simple financial management, and are moving towards computerized
cost management, medical charting, quality control issues and clinical outcomes
analysis, with a particular emphasis on evaluating the risks and profitability
of managed care contracts. The Company is implementing a software system
designed to facilitate the financial reporting process and the transfer of
information relating to practice management, cost analysis and patient outcomes.
The Company believes that the practice management software will enhance the
quality and efficiency of care provided by TLC because it will enable TLC to
assess the results of procedures through the use of medical charting and
clinical outcomes analysis, and thereby identify the need
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for adjustments to training or other practice management initiatives of TLC. The
Company also believes that its ability to attract managed care contracts in
respect of its secondary care clinics will be enhanced because this type of
practice management software will allow TLC to track the statistical information
required by managed care contract providers.
Internet: Doctors, prospective patients and other on-line users can access
TLC's Web sites on the Internet (www.lasercenter.com/tlc and www.lzr.com). In
addition to a directory of TLC care providers, the Web sites offer co-management
information for affiliated doctors as well as information for prospective
patients. The Web sites also have a doctor "sysop" - a doctor experienced in
excimer laser use who answers questions and sources information about refractive
procedures. The Company recently entered into an agreement with America Online
to enable doctors affiliated with TLC to have access to TLC's Web sites.
NATIONAL ADVISORY COUNCIL
The Company's National Advisory Council (the "Advisory Council") is
comprised of doctors that represent the geographic centers in which TLC
currently manages or intends to manage a clinic. By providing regional
representation, the Advisory Council serves as a channel of communication to
doctors in the cities in which TLC manages or intends to manage a clinic. The
Advisory Council advises the Company on a broad range of clinical and strategic
issues, and its feedback is incorporated in the Company's strategic development.
TRAINING
All doctors who perform excimer laser procedures at TLC refractive clinics
are given the opportunity to attend the Company's comprehensive training program
conducted 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 excimer laser
procedures. Both have been working with excimer lasers since 1990, and have
lectured and trained doctors in North America, South America, Europe, South
Africa, Australia and Asia. Dr. Machat was the first surgeon proficient with the
excimer lasers of all three of the following manufacturers: Summit, VISX and
Technolas GmbH ("Technolas") (acquired by Chiron Vision Corporation ("Chiron")).
In addition, Dr. Machat and Dr. Slade are qualified by Chiron to certify doctors
to perform LASIK procedures.
EDUCATION
The Company believes that ophthalmologists, optometrists and other eye care
professionals who endorse excimer laser procedures are a valuable resource in
increasing general awareness and acceptance of the procedures among potential
candidates and in promoting the Company as a service provider. The Company seeks
to be perceived by eye care professionals as the leading provider of excimer
laser eye surgery. 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 U.S. In 1997, the Company devoted approximately $54,000
($100,000 in 1996 and US$200,000 in 1995) 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 certain U.S.
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universities. The Foundation, a non-profit organization, has developed
co-management courses in conjunction with the optometry schools at Northeastern
State University in Oklahoma, the University of Alabama at Birmingham and the
Pacific University in Oregon. The Foundation was established with funding of
US$150,000 from the Company. The Company expects that the Foundation will be
able to operate without any significant additional funding from the Company in
future.
The TLC Windsor and TLC Tulsa clinics are state-of-the-art teaching
facilities. Each clinic occupies over 5,000 sq. ft., and is equipped with
advanced clinical equipment and audio-visual technology. The TLC Windsor clinic
was used by Chiron, a major manufacturer of excimer lasers, as one of its
teaching facilities for ophthalmologists learning to use the excimer laser.
Dr. Machat also teaches courses on PRK and LASIK for ophthalmologists at the TLC
Windsor clinic. The TLC Tulsa clinic is used by the Company to provide training
in the use of medication for eye care and diagnostic, therapeutic and excimer
laser procedures.
On April 7, 1997, the Company entered into a letter of intent with the
School of Optometry at the University of Waterloo to establish a joint venture
at the clinic located at the School of Optometry whereby TLC will provide
training to students. It is expected that the joint venture will enhance
general awareness of refractive procedures.
REFRACTIVE CLINICS
In Canada, the Company manages five refractive clinics in Ontario, New
Brunswick, and British Columbia. In the U.S., the Company manages 27 refractive
clinics (including three with secondary care operations), including 20/20
clinics, in Oklahoma, Indiana, South Carolina, Washington, Colorado, California,
Florida, Wisconsin, Illinois, Ohio, Tennessee, Maryland, New York, New Jersey,
Pennsylvania, Montana, North Carolina, Massachusetts, and Virginia. Schedule A
of this AIF contains a brief description of each TLC clinic. (See "- 20/20
Acquisition" for a description of 20/20 clinics.)
PRK and LASIK have been performed at TLC refractive clinics in Canada since
1993 and 1994 respectively. LASIK now accounts for a majority of procedures
performed at TLC refractive clinics, and Dr. Machat, the Co-National Medical
Director, has performed more LASIK procedures than any other doctor in North
America. The Company believes that LASIK procedures will continue to constitute
the major portion of the procedures performed at TLC clinics in Canada.
The charge per eye for the excimer laser procedures (including all
necessary enhancements) is approximately $2,000 to $2,250 for PRK and $2,400 to
$2,750 for LASIK (U.S. residents pay fees in US$). The cost of excimer laser
procedures is not covered by provincial health care plans in Canada or
reimbursable under Medicare or Medicaid in the U.S. and is not expected to be
covered by the majority of HMOs or most other third party payors under managed
care contracts.
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Most doctors performing excimer laser procedures at TLC refractive clinics
do so under one of three types of standard agreements (which have been modified
for use in the U.S. as required by State law): professional services/full
service management agreements ("Level I Agreements"), professional
service/partial service management agreements (Level II Agreements), or facility
use agreements ("Level III Agreements").
Under Level I Agreements, doctors ("Level I doctors") contract to carry out
excimer laser procedures at the clinic and to provide other management services
for co-managed patients and TLC agrees to provide certain management and
administrative services. The doctor typically retains a fee of approximately
$300 per procedure (approximately US$300 for U.S. residents) and TLC earns a fee
of approximately US$1,300 to US$1,600 for its facility and management services.
The terms of the Level I Agreements typically prohibit Level I doctors from
disclosing confidential information relating to the clinic, soliciting patients
or employees of the clinic, or participating in any other refractive clinic
within a specified area. Level I doctors are responsible for maintaining
appropriate malpractice insurance, and agree to indemnify the Company and its
affiliates for any losses incurred as a result of the doctor's negligence or
malpractice.
Level II Agreements are similar to Level I Agreements except that TLC
agrees to provide a more limited range of management services to the doctor, and
the doctor typically performs pre - and post-operative care on his/her own
patients, rather than co-managing patients. The doctor typically retains a fee
of approximately US$500 for PRK surgery and US$750 for LASIK surgery and an
additional approximately US$400 for pre - and post-operative care. TLC
typically earns a fee of approximately US$1,100 to US$1,300 for its facility and
management services.
Under Level III Agreements, the Company grants facility use rights to
doctors ("Level III doctors") to perform procedures on the doctor's own
patients. TLC does not provide management services under these agreements. The
Level III doctors pay the refractive clinic fees in the range of $750 to $1,000
for each of the first eight excimer laser procedures and in the range of $600 to
$800 for each additional excimer laser procedure performed by them in any one
month (US$750 to US$1,000 and US$600 to US$800, respectively, for U.S.
residents). Level III doctors are responsible for their patients' pre- and
post-operative care, and agree to indemnity, insurance and confidentiality
provisions similar to those in the Level I Agreements.
Doctors must meet the credentialing requirements of the FDA and the TLC
refractive clinic in which they perform procedures and, before performing
procedures, complete training provided by the Company unless the Company is
otherwise satisfied that the doctor has been properly trained.
Where permissible under applicable laws, the subsidiaries incorporated to
operate some refractive clinics may issue minority equity interests to
affiliated doctors. The shares of the relevant subsidiary through which
additional clinics are opened will generally be held pursuant to a shareholders'
agreement that may include, among other things, a buy-sell provision and other
buy-out rights in favor of doctors. In addition, the Company anticipates that at
most refractive clinics opened in the U.S., the affiliated doctors will
designate 50% of the directors of the subsidiary and the affiliated doctors who
are shareholders of the subsidiary will designate that portion of the directors
that corresponds to their percentage ownership in the subsidiary.
-13-
20/20 ACQUISITION
On February 10, 1997, the Company acquired 99.9% of the shares of 20/20 for
a purchase price of $31,642,211, satisfied by the issuance of 4,364,443 Common
Shares of the Company at a price of $7.25 per share. An additional 385,000
Common Shares may be issued at a price of $7.25 per share as 20/20 stock options
are exercised. A majority of the Common Shares issued in connection with the
acquisition are being held in escrow by the Company for at least a one year
period from February 10, 1997, with Common Shares owned by insiders of 20/20
being held in escrow for up to a two year period from February 10, 1997, in each
case to indemnify the Company in the event of a breach of the representations
and warranties made by 20/20.
20/20 manages eight refractive clinics located in Maryland, New York,
Florida, New Jersey, Pennsylvania and Virginia.
Doctors in the 20/20 network provide excimer laser services under a Surgeon
Agreement or an Optometrist Agreement. Under Surgeon Agreements, doctors perform
excimer laser procedures on patients from the doctor's own practice (in which
case, the doctor may perform pre- and post-operative care), on patients referred
by 20/20 optometrists (in which case, the patient is co-managed with the
optometrist performing pre-and post-operative care), and on patients referred to
the doctor through 20/20's marketing efforts. A 20/20 doctor is paid US$500 per
eye for each excimer laser procedure and US$500 for pre- and post-operative care
for patients that are not co-managed with an optometrist. Under Optometrist
Agreements, a 20/20 optometrist performs pre- and post-operative care for
patients treated by 20/20 doctors and is paid a fee of US$500.
20/20's agreements with doctors typically prohibit doctors from disclosing
confidential information relating to the clinic or from soliciting patients or
employees from the clinic, or participating in other refractive clinics in
competition with the 20/20 clinic (except that a 20/20 doctor is not prohibited
from performing procedures at a hospital where the doctor has privileges). All
doctors are responsible for maintaining appropriate malpractice insurance, and
agree to indemnify the 20/20 clinic and its affiliates for any losses incurred
as a result of the doctor's negligence or malpractice.
SECONDARY CARE CLINICS
The Company manages secondary care clinics at which doctors offer treatment
for a range of vision disorders, including cataracts, glaucoma and retinal
disorders. In connection with each of its secondary care clinics, TLC has
entered into long term practice management agreements. Pursuant to these
agreements, TLC manages the doctors' practices at these clinics (including
providing administrative services and support staff) and receives a management
fee.
The Company manages five secondary care clinics in the U.S. (including
three that are also refractive clinics): one in Washington, one in South
Carolina and three in Illinois.
TLC Northwest Eye: On March 25, 1996, the Company acquired all of the
shares of TLC Northwest Eye, a corporation operating the Northwest Eye Center,
located in Seattle, Washington, the operations of which were managed by the
Company pursuant to a management agreement commencing January 1, 1996. TLC
Northwest Eye includes an ambulatory surgical center operated at the principal
practice location, at which ophthalmologic surgeries are performed, and three
-14-
satellite practice locations. TLC Northwest Eye draws patients from Washington
and British Columbia. In connection with the acquisition, a professional service
corporation owned by doctors (who were the shareholders of TLC Northwest Eye and
currently perform surgical procedures at the clinic) entered into a practice
management agreement with TLC Northwest Eye for a period of 40 years.
TLC Piedmont: The Company's clinic in Greenville, South Carolina, which
opened in June 1996, includes secondary care operations which are directed by
Dr. Jonathan Woolfson.
TLC Chicago: In October, 1996, TLC Chicago acquired capital assets from
Horn Eye Centers Ltd. of Chicago, Illinois for a purchase price of US$92,400.
In connection with this acquisition, Horn Eye Centers, Inc. entered into a
practice management agreement with TLC Chicago whereby TLC Chicago manages the
practice at the clinic for a period of twenty years in return for management
fees at predetermined rates which vary according to the revenues of the
practice.
TLC Midwest Eye: On January 1, 1997, TLC Midwest Eye acquired all the
assets of Midwest Eye Institute, Inc., which operates two clinics located in
Palos Heights and Westchester, Illinois (suburban Chicago). The acquisition was
completed for a purchase price of US$1,506,000. TLC Midwest Eye draws on a
local network of over 300 co-managing doctors. In connection with this
acquisition, Midwest Eye Institute II, Inc., a professional services
corporation, entered into a practice management agreement with TLC Midwest Eye
for a period of 20 years.
MANAGED CARE
PPH, owned 90% by TLC The Laser Center (Delaware) Inc. ("TLC U.S.") and 10%
by Dr. Barry Barresi, a director of the Company, began operations in the second
quarter of 1996. PPH's management team is comprised of the following executives
who have held leadership positions in health care service facilities, academic
health centers and managed care companies:
Barry J. Barresi, OD, PhD President and Chief Executive Officer
Kathy L. Wood, MBA Chief Operating Officer
Arthur Roberts, MBA Chief Financial Officer
James Owen, OD, MBA Director, VisionMed Division
Richard A. Radin Director, Management Services
PPH, in conjunction with local doctors, develops and manages Independent
Practice Associations and Specialty Services Organizations as regional companies
that serve health plans, other managed care organizations and health care
purchasers. These local managed care companies are administered from the PPH
corporate office, which provides information technology, sales and marketing
assistance and professional relations.
PPH will receive a fee from payors for performing the following management
services: national sales and marketing; claims adjudication; provider network
administration support; capitation payment design and related product
development; utilization management; quality improvement systems; compliance
reporting; and member satisfaction survey research.
-15-
PPH entered into a letter of intent with Northwest Health Partners, a
physician hospital organization in Seattle, Washington, which provides that PPH
will provide management services to Northwest Health Partners commencing in
January 1998. PPH is expected to incur net losses for 1997 as a result of
development expenses, including staff wages and benefits, professional fees, and
other administrative expenses, incurred in securing managed care agreements and
other revenue-generating management services relationships.
PPH has executed a letter of intent with Primary Eyecare Group, Inc.
("PEG"), an independent practice association, to form a new company called
VisionMed MidAtlantic. VisionMed MidAtlantic will arrange for the provision of
eye and vision care services and administer eye and vision care contracts in
Virginia, Maryland and Washington, D.C. The letter of intent provides that PPH
will assume the administration of PEG's routine vision contract with Aetna
Health Plans of the Mid-Atlantic and Aetna Health Management effective October
1, 1997.
COMPETITION
REFRACTIVE CLINICS
The Company competes in two principal markets: (i) the consumer market for
vision correction and (ii) the market for excimer laser service providers.
Consumer Market for Vision Correction: Within the consumer market, excimer
laser procedures performed by the Company's clinics 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 alternative to PRK and LASIK. Advantages of corrective eyewear include
the comparatively low immediate cost (although the Company believes that
eyeglass and contact lens wearers may spend well in excess of the cost of PRK or
LASIK over their lifetimes) and the avoidance of surgery. It is likely that
eyeglass and contact lens manufacturers, many of whom have greater financial
resources 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. 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 PRK or LASIK.
Market for Excimer Laser Service Providers: Within the market for excimer
laser service providers, the Company faces competition from other service
providers. 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 corrective refractive mediums
(eyeglasses and contact lenses), such as optometric chains, may also compete
with the Company by purchasing excimer lasers and offering refractive surgery to
their customers. These service providers may have greater capital resources than
the Company and may be able to offer refractive surgery at lower rates.
-16-
The Company's principal competitors include Laser Vision Centers, Inc.,
Sight Resource Corporation, BeaconEye Inc., LaserSight Centers, Sterling Vision,
Laser Centers of America Inc., LCA Vision Inc. and Physicians Resource Group
Inc.
SECONDARY CARE CLINICS
The secondary care clinic market is in a period of consolidation. The
Company believes that companies with established operating histories and greater
resources than the Company may be pursuing the acquisition of secondary care
clinics. The Company's principal competitors include Physician Resource
Group, Inc., PrimeVision and Omega Health Services Inc. Some hospitals, clinics,
health care companies, HMOs and insurance companies engage in activities similar
to the activities of the Company. 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 clinics on terms beneficial to the Company.
TLC secondary care clinics will compete with 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 clinics 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 clinics 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 clinics 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.
MANAGED CARE
In the market for managed eye and vision contracting the Company competes
with Vision Service Plan, a national eye care plan, and three 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, Inc., Prime Vision, Inc., MEC (a subsidiary of LaserSight
Inc.) and Vision21 Inc. have been formed to seek managed care contracts on
behalf of their acquired ophthalmic practices and may compete with PPH. 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.
-17-
MARKETING
The Company's marketing efforts are concentrated on joint marketing
programs with affiliated doctors with the goal of encouraging the use of TLC
clinics. The Company believes that the most effective way to market to doctors
is to be perceived as the leading provider of quality eye care. To this end the
Company actively participates in the education of doctors on excimer laser
procedures and strives to remain current with new procedures and techniques.
(See " - Co-Management Strategy".) The Company also promotes its services to
doctors in Canada and the U.S. through conferences, advertising in optometric
and ophthalmological journals and quarterly newsletters.
The Company provides a limited amount of marketing directly to members of
the public, who are informed of the Company's services through radio and print
advertisements, past patient referrals, videos, brochures and seminars.
PROPERTY LEASES, EQUIPMENT AND CAPITAL FINANCING
PROPERTY LEASES
The Company operates its business in leased premises. The leases are
negotiated on market terms and typically have a term of five to ten years.
EQUIPMENT AND CAPITAL FINANCING
VISX excimer lasers cost approximately US$525,000 per machine. The Company
expects to upgrade the excimer lasers at each of the existing Canadian
refractive clinics within five years. The Company acquires excimer lasers and
other equipment used at its clinics under capital lease arrangements.
The lasers require periodic servicing, generally after 300 procedures, and
the annual cost of servicing is dependent on the number of procedures performed.
For example, the Company pays on average $75 per procedure for servicing of the
laser in the TLC Windsor clinic. The VISX lasers used in the U.S. clinics are
currently covered under one or two-year warranties which include servicing but
the Company expects to incur equivalent servicing costs to those in Windsor in
connection with the VISX lasers once the warranties expire.
When excimer laser procedures are performed in the U.S., the Company is
required to pay a user fee to Pillar Point Partners ("Pillar Point") which is
currently in the amount of US$260 for each excimer laser procedure performed.
Pillar Point is a partnership formed by VISX and Summit to license U.S. patents
covering methods and apparatus for performing excimer laser procedures in return
for per procedure royalties and royalties on equipment sales. To the Company's
knowledge, Pillar Point is being investigated by the U.S. Federal Trade
Commission for potential anti-trust violations and has been challenged in two
civil actions as an illegal arrangement.
There can be no assurance that payments made to Pillar Point in the U.S.
will preclude a patent dispute with either VISX or Summit with respect to
technology not covered by the relevant patents or that the Company's activities
will not infringe patents held by other parties.
-18-
GOVERNMENT REGULATION
EXCIMER LASER REGULATION
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, the HPB regulates the sale of
devices, including excimer lasers used to perform procedures at the Company's
refractive clinics. 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 clinics, and their use at the clinics,
complies with HPB requirements.
UNITED STATES
Medical devices, such as the excimer lasers used in the Company's clinics,
are subject to the most stringent form of regulation and oversight by the FDA
and cannot be marketed for commercial sale in the U.S. until the FDA grants
premarket 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 U.S., Summit and VISX are currently the only excimer laser
manufacturers to have obtained a PMA for their respective excimer lasers to
treat nearsightedness using PRK. The Summit PMA, which was granted in October
1995, limits the use of the excimer laser within a six millimeter ablation zone
to correct mild to moderate nearsightedness between -1.5 and -7.0 diopters with
astigmatism no greater than 1.5 diopters. As a result of the limits placed on
the approval, the Summit excimer laser is not authorized for use in the U.S. to
treat more severe cases of nearsightedness and astigmatism. In March, 1996, VISX
obtained FDA approval for PRK use of its excimer laser subject to similar use
limitations as those applicable to the Summit excimer laser. While the
performance of LASIK is currently the subject of a study by the FDA and while
excimer lasers are not yet approved for LASIK by the FDA, doctors in the U.S.,
including those affiliated with TLC refractive clinics, are performing LASIK on
an "off-label" basis, as permitted by applicable law.
Any excimer laser manufacturer which obtains PMA approval for use of its
excimer lasers will continue to be subject to regulation by the FDA. The FDA
actively enforces regulations prohibiting marketing of products for
non-indicated uses and conducts periodic inspections to
-19-
determine compliance with good manufacturing practice regulations. Failure to
comply with applicable regulatory requirements can result in, among other
things, fines, suspensions or delays of approvals, seizures or recalls of
products, operating restrictions or criminal prosecutions.
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. The Company intends to comply with all regulatory
requirements that will be applicable.
The marketing and promotion of PRK in the U.S. 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 PRK in compliance with the
laws administered by both agencies. The FTC staff also issued more detailed
staff guidance on the marketing and promotion of PRK and has been monitoring
marketing activities in this area through a non-public inquiry to identify areas
that may require further FTC attention.
On April 25, 1997, VISX announced that its laser treatment for astigmatism
received approval from the FDA. There can be no assurance if or when the FDA
will grant its approval with respect to the use of excimer lasers to treat
severe myopia or hyperopia, which could adversely affect the Company's ability
to achieve its business projections.
REGULATION OF OPTOMETRISTS AND OPHTHALMOLOGISTS
CANADA
Conflict of interest regulations in certain Canadian provinces prohibit
ophthalmologists or corporations owned or controlled by them from receiving
benefits from suppliers of medical goods or services to whom the 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. Optometrists are also subject to conflict of interest
regulations in Canada. TLC expects that ophthalmologists and optometrists
affiliated with TLC will comply with the applicable regulations.
The laws of certain Canadian provinces prohibit health care professionals
from splitting fees with non-health care professionals and prohibit non-licensed
entities (such as the Company) from practicing medicine or optometry and, in
certain circumstances, from employing physicians or optometrists directly. The
Company believes that its operations comply with such laws, and expects that
doctors affiliated with TLC clinics will comply with such laws, although it
cannot ensure such compliance by doctors.
Optometrists and ophthalmologists are subject to varying degrees and types
of provincial regulation governing professional misconduct, including
restrictions relating to advertising, and in the case of optometrists, a
prohibition against exceeding the lawful scope of practice. In Canada, excimer
laser surgery is not within the permitted scope of practice of optometrists.
Accordingly, TLC does not allow optometrists to perform the procedure at TLC
clinics in Canada.
-20-
UNITED STATES
The health care industry in the U.S. is highly regulated. The Company's
business is subject to both federal and state laws.
Federal Law:
A federal law (known as the "anti-kickback law") 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 law 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 law 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.
PRK and LASIK are not reimbursable by Medicare, Medicaid or other federal
programs. As a result, neither the anti-kickback law nor the Stark law applies
to the Company's refractive clinics.
The Company's secondary care clinics provide services that are reimbursable
under Medicare and Medicaid. However, the Company believes that it has
structured its relationships to comply with the anti-kickback law and the Stark
law. Changes in the interpretation and enforcement of the existing regulatory
requirements or the adoption of new requirements could have a material adverse
effect on the Company's business, financial condition and results of operation.
State Law:
Laws in some states prohibit the offer or receipt of anything of value in
return for referring patients or in return for the ordering or prescribing of
health care items or services. Often, these laws are modeled on the federal
anti-kickback law, which applies only to Federal programs; however, the law may
apply to all payors in some states. Many states have self-referral laws which
generally restrict a doctor from referring a patient to or ordering certain
tests from a facility or entity in which the doctor has a financial interest.
These laws also apply to all payors, but the scope of the laws and the detailed
exceptions vary significantly from state to state. The Company believes that
its operations comply with the laws in the states in which they operate,
including anti-kickback and self-referral legislation.
-21-
Some states have a corporate practice of medicine doctrine which prevents a
business corporation from providing medical services. In some states, this
restriction prohibits business corporations from employing physicians to provide
professional services. In other states, a business corporation is prohibited not
only from employing physicians, but also from exercising responsibility that may
influence how medical services are delivered. Optometrists and ophthalmologists
are also subject to varying degrees and types of professional regulation
governing unprofessional conduct with respect to certain matters including
professional fee-splitting, and in the case of optometrists, their ability to
perform excimer laser procedures, to advertise and to contract with
ophthalmologists to provide pre- and/or post-operative care. The Company
believes that its operations comply, and expects that doctors affiliated with
TLC clinics will comply, with such regulations, although it cannot assure such
compliance by doctors.
FACILITY LICENSURE AND CERTIFICATE OF NEED
The Company may be required to obtain licenses from the State Departments
of Health, or a division thereof in the various states in which it opens TLC
clinics. The Company has no reason to believe that in those states that require
such facility licensure, it will be not able to obtain such a license without
unreasonable expense or delay.
Some states require the permission of the State Department of Health or a
division thereof, such as a Health Planning Commission, in the form of a
Certificate of Need ("CON") prior to the construction or modification of an
ambulatory care facility, 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 clinics.
MANAGED CARE
Managed care contracting, provider network operations and related
management services are regulated in the U.S. by both federal and state
authorities. PPH has obtained or will 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 have such business underwritten by an appropriate licensed
insurer. Managed care is also impacted by 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.
-22-
SELECTED CONSOLIDATED FINANCIAL INFORMATION
For the years ended May 31
(in thousands of Canadian dollars, except per share amounts)
(audited)
1997 1996 1995 1994
---- ---- ---- ----
STATEMENT OF INCOME DATA:
Net Revenues $29,303 $9,363 $4,592 $1,083
Expenses 36,633 9,722 3,877 859
Share of loss of affiliated companies 212 241 - -
------- ------ ------ ------
Income (loss) from operations (7,542) (600) 715 224
Development and start up expenses 6,253 2,308 1,506 205
------- ------ ------ ------
Income (loss) before income taxes (13,795) (2,908) (791) 19
Income taxes 154 (24) 45 40
------- ------ ------ ------
Net Income (loss)
(13,949) (2,884) (836) (21)
------- ------ ------ ------
------- ------ ------ ------
Net Income (loss) per share
(0.68) (0.23) (0.08) (0.00)
------- ------ ------ ------
------- ------ ------ ------
Weighted average number of Common
Shares outstanding 20,617,104 12,796,579 10,134,078 10,000,000
1997 1996 1995 1994
---- ---- ---- ----
BALANCE SHEET DATA:
Cash and short-term deposits $20,977 $4,143 $579 $135
Working capital 13,382 2,412 (292) (223)
Total assets 107,501 24,506 2,953 1,320
Total debt, net of current position 15,933 4,523 1,298 816
Shareholders' equity 74,862 15,920 603 (21)
Capital stock 92,552 19,661 1,460 (-)
------- ------ ----- -----
Retained earnings (deficit) (17,690) (3,741) (857) (21)
------- ------ ----- -----
------- ------ ----- -----
-23-
For the three month periods ended
(in thousands of Canadian dollars, except per share amounts)
(unaudited)
-----------------------------------------------------------------------------------------------------
1997 1996
-----------------------------------------------------------------------------------------------------
Aug. 31 Nov. 30 Feb. 28 May 31 Aug. 31 Nov. 30 Feb. 29 May 31
-----------------------------------------------------------------------------------------------------
Net Revenues $4,912 $5,428 $6,474 $12,489 $1,795 $1,679 $3,034 2,564
Expenses 4,805 6,385 8,306 17,136 1,765 1,204 3,273 2,488
Share of loss of
affiliated companies 28 122 4 58 - - - 241
Income (loss) from
operations 79 (1,079) (1,836) (4,705) 30 475 (239) (165)
Development and
start up expenses 794 1,535 1,582 2,342 159 1,066 413 1,370
Income (loss) before
income taxes (715) (2,614) (3,418) (7,047) (129) (591) (652) (1,535)
Income taxes 49 34 27 44 11 (11) 7 (31)
Net Income (loss) (764) (2,648) (3,445) (7,091) (140) (580) (659) (1,504)
Net Income (loss)
per share (0.05) (0.15) (0.16) (0.28) (0.01) (0.05) (0.06) (0.09)
Weighted average
number of common
shares outstanding 16,712,283 17,732,323 21,519,647 25,149,469 10,989,104 11,228,958 11,228,958 16,589,053
DIVIDENDS AND DIVIDEND POLICY
The Company has never paid cash or other dividends. It is the policy of
the Board of Directors to retain earnings to finance the growth of the Company's
business. Payment of any dividends will depend on the financial condition,
results of operations and capital requirements of the Company as well as other
factors deemed relevant by the Board of Directors.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Reference is made to management's discussion and analysis of financial
condition and results of operations on pages 17 to 22 of the Company's Annual
Report for the year ended May 31, 1997 which is incorporated herein by
reference.
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STOCK EXCHANGE LISTINGS
The common shares of the Company are listed for trading on The Toronto
Stock Exchange under the symbol "LZR" and the NASDAQ National Market under the
symbol "LZRCF" .
DIRECTORS AND OFFICERS
Directors of the Company hold office until the next annual meeting of
shareholders or until a successor is elected or appointed.
NAME AND MUNICIPALITY OF POSITION WITH COMPANY PRINCIPAL OCCUPATION
------------------------ --------------------- --------------------
RESIDENCE
---------
DIRECTORS
---------
Elias Vamvakas . . . . . . . . Director (since May 1993)(1)(2) President, Chief Executive Officer of the Company
Richmond Hill, Ontario and Chairman of the Board of Directors
Dr. Jeffery J. Machat . . . . . Director (since May 1993)(1) Ophthalmologist and Co-National Medical Director
Richmond Hill, Ontario of the Company
James R. Connacher . . . . . . Director (since January 1996) Vice-Chairman, Gordon Capital Corporation
Toronto, Ontario (2)(3) (investment bank)
John F. Riegert . . . . . . . . Director (since June 1995)(1) Secretary of the Company
North York, Ontario
Howard J. Gourwitz . . . . . . Director (since June 1995) Attorney and Counselor-at-Law, shareholder of
Bloomfield Hills, Michigan (3)(4)(5) Gourwitz and Barr, P.C.
Dr. William David Sullins, Jr. Director (since June 1995)(2)(4) Optometrist and Vice-Chairman of TLC's National
Athens, Tennessee Advisory Council
Warren S. Rustand . . . . . . . Nominee Director Chairman, Rural/Metro Corporation (merchant
Tucson, Arizona bank and management consultant)
Ronald J. Kelly, . . . . . . . Director (since June 1995)(5) General Counsel and Vice-President Acquisitions
London, Ontario of the Company
Dr. David C. Eldridge, . . . . Director (since June 1995)(4)(5) Executive Vice-President, Clinical Affairs
Okmulgee, Oklahoma of the Company and Chairman of
TLC's National Advisory Council
Dr. Barry J. Barresi Director (since September 1996) President and Chief Executive Officer of PPH
OFFICERS
Madelaine Diane Walker, . . . Chief Operating Officer Officer of the Company
Mississauga, Ontario
Peter Kastelic, . . . . . . . Chief Financial Officer and Officer of the Company
Toronto, Ontario Treasurer
Frances K. Brotherhood, . . . Senior Vice-President - Officer of the Company
Fort Worth, Texas International
Gary F. Jonas, . . . . . . . . Senior Vice-President - Operations Officer of the Company
Bethesda, Maryland
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Anthony F. Rzepka, . . . . . . Director of Finance and Assistant Officer of the Company
Toronto, Ontario Treasurer
(1) Mr. Vamvakas, Dr. Machat and Mr. Riegert are members of the
Corporation's Executive Committee.
(2) Mr. Vamvakas, Dr. Sullins and Mr. Connacher are members of the
Corporation's Nominating Committee.
(3) Dr. Machat, Mr. Gourwitz and Mr. Connacher are members of the
Corporation's Compensation Committee.
(4) Mr. Gourwitz , Dr. Sullins, Jr. and Dr. Eldridge are members of the
Corporation's Audit Committee.
(5) Mr. Gourwitz, Mr. Kelly and Dr. Eldridge are members of the
Corporation's Corporate Governance Committee.
Mr. Rustand has held his present principal occupation since 1997. For more
than five years prior to 1997, Mr. Rustand was Chairman and Chief Executive
Officer of The Cambridge Company Ltd., a merchant banking and management
consulting company. From 1994 to 1997, Mr. Rustand was also the Chairman of
20/20, which was acquired by the Company on February 10, 1997.
The articles of the Company authorize the Board of Directors to be
comprised of a number of directors between one and ten and the directors have
been authorized by the shareholders to determine the number from time to time
between that minimum and maximum. The Board of Directors resolved on September
25, 1997 that the number of directors to be elected at the annual and special
meeting of shareholders on October 30, 1997 will be seven, having regard to the
composition of the Board and the "Guidelines for Improved Corporate Governance"
contained in the Final Report of The Toronto Stock Exchange Committee on
Corporate Governance in Canada. Mr. Kelly, Dr. Eldridge and Dr. Barresi, all
officers of the Company, have not been nominated for re-election as directors.
ADDITIONAL INFORMATION
Additional information relating to the Company, including information
concerning remuneration of directors and executive officers, indebtedness of
directors and officers, the principal holders of the Company's shares, options
to purchase shares and the interests of insiders in material transactions, where
applicable, is contained the Company's Management Information Circular dated
September 26, 1997 for the annual and special meeting of shareholders to be held
on October 30, 1997, which is incorporated herein by reference. Additional
financial information with respect to the Company is provided in the
Consolidated Financial Statements for the year ended May 31, 1997 contained in
the Company's Annual Report for the year ended May 31, 1997 ("1997 Annual
Report"). The 1997 Annual Report also contains management's discussion and
analysis of the Company's financial condition and results of operations for the
year ended May 31, 1997. The information contained in the Company's
Consolidated Financial Statements for the year ended May 31, 1997 and in the
management's discussion and analysis is hereby incorporated by reference.
Additional information relating to the Company will be provided to any
person upon request to the Secretary of the Company as follows:
(a) when securities of the Company are in the course of a distribution pursuant
to a short form prospectus, or when a preliminary short form prospectus has
been filed in respect of a distribution of the Company's securities,
(i) one copy of this AIF, together with one copy of any document, or
the pertinent pages of any document, incorporated by reference in
the AIF,
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(ii) one copy of the Company's Consolidated Financial Statements for
the year ended May 31, 1997, together with the accompanying
report of the auditor and one copy of any interim financial
statements of the Company subsequent to the financial statements
for the year ended May 31, 1997,
(iii) one copy of the Company's Management Information Circular dated
September 26, 1997, and
(iv) one copy of any other documents that are incorporated by
reference into the preliminary short form prospectus or the short
form prospectus and are not required to be provided under (i) or
(iii) above; or
(b) at any other time, one copy of any document referred to in (a)(i), (ii) and
(iii) above, providing that the Company may require the payment of
reasonable charge if the request is made by a person who is not a security
holder of the Company.
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GLOSSARY
AS USED IN THIS AIF, THE FOLLOWING TERMS HAVE THE FOLLOWING MEANINGS:
1997, 1996, 1995 AND 1994 mean the Company's fiscal years ended May 31,
1997, 1996, 1995 and 1994, respectively, unless otherwise indicated.
ASTIGMATISM is an irregularity in the curvature of the cornea causing a
blurring of vision because of the inability of the eye to focus an image to a
single point.
COMPANY has the same meaning as TLC, unless the context otherwise requires.
CORNEA is the outermost surface of the eye and serves as a "window" through
which light can pass.
DIOPTER is a unit of measurement of the refractive (i.e. focusing) power of
the eye.
DOCTOR refers to an optometrist or an ophthalmologist.
EXCIMER LASER is a particular type of computer-controlled laser whose
active medium is a high pressure mixture of noble gases and halogens. The output
of this laser typically has high peak powers (between 100 and 250 millejoules
per cm) and short pulses (10-100 nanoseconds) with a wavelength in the
ultraviolet region of the spectrum (193 nm - 308 nm).
FDA is the Food and Drug Administration of the United States Department of
Health and Human Services.
FTC is the Federal Trade Commission of the United States Department of
Commerce.
HMO means a health maintenance organization, being an organization of
health care personnel and facilities that provides a comprehensive range of
health services to an enrolled population for a fixed sum of money paid in
advance for a specified period of time. These health services include a wide
variety of medical treatments and consults, inpatient and outpatient
hospitalization, home health service, ambulance service, and sometimes dental
and pharmacy services. The HMO may be organized as a group model, an individual
practice association, a network model or a staff model.
HPB means the Health Protection Branch of Health Canada.
LASIK is Laser-Assisted Intrastromal Keratomileusis, a procedure using a
manual procedure and an excimer laser, generally for the correction of higher
levels of nearsightedness and farsightedness.
MANAGED CARE refers to arrangements typically involving a third party, such
as an HMO, insurance company or employer group, which is frequently the payor,
assuming responsibility for ensuring that health care is provided through a
designated group of providers in a high quality, cost-effective manner.
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MEDICAID AND MEDICARE are U.S. government subsidized health programs for
eligible beneficiaries.
NETWORK CENTER refers to a facility which provides management services
including clinical training, patient education, marketing and network
development but does not perform excimer laser procedures. The laser procedure
itself is performed in a clinic affiliated with TLC which compensates the
network center for its management services.
PRK is Photorefractive Keratectomy, a technique involving the use of
ultraviolet light such as that emitted by excimer lasers to treat refractive
disorders which affect vision. This technique can be considered to be "optical
reshaping" of the cornea in which submicron layers of tissue are removed with
each laser pulse.
RK is Radial Keratotomy, a refractive surgical procedure utilizing diamond
knives in which "relaxation" incisions are cut through approximately 90% of the
thickness of the periphery of the cornea resulting in a reshaping of the eye due
to the stresses caused by intra-ocular pressure.
REFRACTION refers to the passage of light through a medium, such as the
cornea, which bends its rays.
REFRACTIVE CLINIC refers to a clinic performing refractive procedures which
may include excimer laser and manual surgical procedures.
SECONDARY CARE CLINIC refers to a clinic which is equipped to enable
physicians to provide advanced levels of care, including eye surgery, for the
treatment of disorders such as glaucoma, cataracts and retinal disorders.
Generally, a secondary care clinic does not dispense eyewear or contact lenses,
perform refractions, or provide eye examinations or general diagnostic services.
TLC means the TLC The Laser Center Inc., its subsidiaries and its 50% owned
affiliated companies, unless the context otherwise requires.
TLC U.S. means TLC The Laser Center (Delaware) Inc., a wholly-owned
subsidiary of the Company.
20/20 means 20/20 Laser Centers, Inc. and its subsidiaries, which were
acquired by the Company on February 10, 1997, unless the context otherwise
requires.
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