SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 1999
COMMISSION FILE NUMBER: 0-29302
TLC THE LASER CENTER INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ontario, Canada
(State or jurisdiction of 980151150
incorporation or organization) (I.R.S. Employer Identification No.)
5600 Explorer Drive, Suite 301
Mississauga, Ontario L4W 4Y2
(Address of principal executive offices) (Zip Code)
Registrant's telephone, including area code (905) 602-2020
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 |_|
As of April 9, 1999, there were 34,248,956 of the registrant's Common
Shares outstanding.
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This Quarterly Report on Form 10-Q (herein, together with all amendments,
exhibits and schedules hereto, referred to as the "Form 10-Q") 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", "intends" 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 but not
limited to those set forth elsewhere in this Form 10-Q in the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and in the Company's Annual Report on Form 10-K for the year ended
May 31, 1998. Unless the context indicates or requires otherwise, references in
this Form 10-Q 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-Q 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.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of February 28, 1999 and
May 31, 1998.
Consolidated Statement of Income for the Three Months Ended
February 28, 1999 and February 28, 1998 and the Nine Months
Ended February 28, 1999 and February 28, 1998.
Consolidated Statement of Changes in Financial Position for
the Nine Months Ended February 28, 1999 and February 28, 1998
Notes to Interim Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
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PART I. FINANCIAL INFORMATION
TLC THE LASER CENTER INC.
CONSOLIDATED BALANCE SHEETS
(U.S. dollars, in thousands)
At May 31, At February 28,
1998 1999
---------- ---------------
(unaudited)
ASSETS
Current assets:
Cash and short-term deposits .................. $ 1,895 $ 6,591
Marketable securities ......................... 54,234 25,010
Accounts receivable ........................... 10,282 16,714
Prepaids and sundry assets .................... 4,632 6,086
--------- ---------
Total current assets .......................... 71,043 54,401
Restricted cash .................................. 2,086 1,713
Investment and other assets ...................... 1,663 12,325
Intangibles ...................................... 47,189 57,191
Capital assets ................................... 31,049 36,398
Assets under capital lease ....................... 11,182 10,569
--------- ---------
Total assets ..................................... $ 164,212 $ 172,597
========= =========
LIABILITIES
Current liabilities:
Accounts payable and accrued
liabilities ................................ $ 9,096 $ 14,320
Current portion of long-term debt ............. 2,861 3,238
Current portion of obligations under
capital lease .............................. 3,951 4,207
Income taxes payable .......................... 613 (67)
Deferred compensation ......................... 320 320
Deferred income taxes ......................... 118 117
--------- ---------
Total current liabilities ..................... 16,959 22,135
Long-term debt ................................... 8,378 7,248
Obligations under capital lease .................. 9,533 7,596
Deferred rent and compensation ................... 1,110 1,149
--------- ---------
Total liabilities ............................. 35,980 38,128
Non-controlling interest ......................... 6,357 7,201
SHAREHOLDERS' EQUITY
Capital stock .................................... 143,554 145,134
Deficit .......................................... (21,679) (17,866)
--------- ---------
Total shareholders' equity .................... 121,875 127,268
--------- ---------
Total liabilities and shareholders' equity ....... $ 164,212 $ 172,597
========= =========
See accompanying notes.
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TLC THE LASER CENTER INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
3 months ended February 28th 9 months ended February 28th
---------------------------- ----------------------------
(U.S. dollars, in thousands except per share amounts) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues
Refractive $37,564 $13,073 $90,784 $32,441
Secondary care 2,939 1,477 7,936 5,016
Other 802 337 1,618 1,097
- --------------------------------------------------------------------------------------------------------------------
Net revenues 41,305 14,887 100,338 38,554
- --------------------------------------------------------------------------------------------------------------------
Expenses
Doctor Compensation
Refractive 3,636 1,321 8,876 3,030
Operating 28,636 11,894 70,421 31,467
Interest and other 788 424 1,628 1,317
Depreciation and amortization 3,775 2,110 10,935 5,923
- --------------------------------------------------------------------------------------------------------------------
36,835 15,749 91,860 41,737
- --------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS
BEFORE MANAGED CARE EXPENSES 4,470 (862) 8,478 (3,183)
Managed Care Expenses 868 953 3,000 3,110
- --------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES
AND NON-CONTROLLING INTEREST 3,602 (1,815) 5,478 (6,293)
- --------------------------------------------------------------------------------------------------------------------
Income taxes
Current -- 449 619 509
- --------------------------------------------------------------------------------------------------------------------
-- 449 619 509
- --------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE
NON-CONTROLLING INTEREST 3,602 (2,264) 4,859 (6,802)
Non-controlling interest (10) 14 (205) 97
- --------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) FOR THE PERIOD $ 3,592 $(2,250) $ 4,654 $(6,705)
- --------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) PER SHARE $ 0.11 $ (0.08) $ 0.14 $ (0.25)
Weighted average number of
Common Shares Outstanding 34,014,142 27,459,333 33,886,448 27,192,930
</TABLE>
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TLC THE LASER CENTER INC.
CONSOLIDATED STATEMENT OF INCOME
(U.S. dollars, in thousands, except per share amounts)
Nine Months Ended
February 28,
----------------------------
(unaudited)
1998 1999
---- ----
Net revenues
Refractive .................................. $ 32,441 $ 90,784
Secondary care .............................. 5,016 7,936
Other ....................................... 1,097 1,618
------------ ------------
Net revenues ................................... 38,554 100,338
------------ ------------
Expenses
Doctor compensation
Refractive .................................. 3,030 8,876
Operating ................................... 31,467 70,421
Interest and other .......................... 1,317 1,628
Depreciation and amortization ............... 5,923 10,935
------------ ------------
41,737 91,860
------------ ------------
INCOME (LOSS) FROM OPERATIONS BEFORE START-UP
AND DEVELOPMENT EXPENSES ....................... (3,183) 8,478
Start-up and development expenses ........... 3,110 3,000
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES AND
NON-CONTROLLING INTEREST ....................... (6,293) 5,478
Income taxes ................................... 509 619
------------ ------------
INCOME (LOSS) BEFORE NON-CONTROLLING INTEREST .. (6,802) 4,859
Non-controlling interest .................... 97 (205)
------------ ------------
NET INCOME (LOSS) FOR THE PERIOD ............... $ (6,705) $ 4,654
INCOME (LOSS) PER SHARE ........................ $ (0.25) $ 0.14
FULLY DILUTED INCOME (LOSS) PER SHARE .......... -- 0.13
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING ................... 27,192,930 33,886,448
============ ============
FULLY DILUTED NUMBER OF COMMON SHARES
OUTSTANDING ................................... -- 36,389,217
============
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TLC THE LASER CENTER INC.
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
(U.S. dollars, in thousands)
Nine Months Ended February 28,
------------------------------
1998 1999
-------- --------
(unaudited)
Operating activities
Net income (loss) for the period ............... $ (6,705) $ 4,654
Items not affecting cash
Depreciation and amortization ............... 5,923 10,935
Non-controlling interest .................... (97) 205
Other ....................................... 20 (579)
Changes in non-cash operating items
Accounts receivable ............................ (2,359) (6,047)
Prepaids and sundry assets ..................... (2,316) (1,398)
Accounts payable and accrued liabilities ....... (2,356) 4,542
Income taxes payable (net) ..................... 146 (656)
Deferred rent and compensation ................. 377 39
-------- --------
Cash provided by (used for)
operating activities ........................ (7,367) 11,695
-------- --------
Financing activities
Restricted cash ................................ -- 373
Long-term debt ................................. 404 (1,866)
Term bank loan ................................. (43) --
Obligations under capital lease ................ 1,280 (1,977)
Non-controlling interest ....................... -- (57)
Capital stock issued (purchased for
cancellation) ............................... 2,475 738
-------- --------
Cash provided by (used for)
financing activities ........................ 4,116 (2,789)
-------- --------
Investing activities
Capital assets ................................. (3,465) (10,762)
Assets under capital lease ..................... (1,423) (808)
Acquisitions and investments ................... (2,489) (21,883)
Marketable securities .......................... -- 29,224
Other .......................................... 30 19
-------- --------
Cash used for investing activities ............. (7,347) (4,210)
-------- --------
Increase (decrease) in cash .................... (10,598) 4,696
Cash and short-term deposits,
beginning of period ......................... 14,397 1,895
-------- --------
Cash and short-term deposits,
end of period ............................... $ 3,799 $ 6,591
======== ========
See accompanying notes.
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TLC THE LASER CENTER INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
February 28, 1999
(unaudited)
(all amounts in U.S. dollars, except where noted and all tabular amounts in
thousands)
1. The information contained in the interim consolidated financial statements
and footnotes is condensed from that which would appear in the annual
consolidated financial statements. Accordingly, the interim consolidated
financial statements included herein should be read in conjunction with the May
31, 1998 Annual Report on Form 10-K filed by TLC The Laser Center Inc. (the
"Company") with the Securities and Exchange Commission and Canadian securities
regulators. The unaudited interim consolidated financial statements as of
February 28, 1999 and February 28, 1998, and for the nine month period then
ended, include all normal recurring adjustments which management considers
necessary for a fair presentation. The results of operations for the interim
periods are not necessarily indicative of the results that may be expected for
the entire fiscal year. The interim consolidated financial statements include
the accounts and transactions of the Company and its majority owned
subsidiaries, partnerships and other entities in which the company has more than
a 50% ownership interest and exercises control. The ownership interests of other
parties in less than wholly-owned consolidated subsidiaries, partnerships and
other entities are presented as non-controlling interests. The February 28, 1998
nine month consolidated financial statements include certain reclassifications
to conform with classifications for the nine month period ended February 28,
1999.
The net income (loss) per share was computed using the weighted average number
of common shares outstanding during each period. Fully diluted income per share
is calculated based on the weighted average number of shares that would have
been outstanding had all of the stock options been converted into common shares
on the latter of the date of issuance or beginning of the period.
Historically, the Company's consolidated financial statements have been
expressed in Canadian dollars. As a result of increased business activity in the
United States ("U.S.") resulting principally from recent U.S. acquisitions and
the opening of new centers in the U.S., the U.S. dollar has become the unit of
measure of the large majority of the Company's operations. Accordingly, the U.S.
dollar has been adopted as the Company's reporting currency effective May
31,1998. The financial information as of and for the nine months ended February
28, 1998 has been restated in U.S. dollars, in accordance with Canadian
generally accepted accounting principles, using the closing exchange rate as of
May 31, 1998 of Canadian $1.4570 per US$1.00.
2. Acquisitions
(a) On June 8, 1998 the Company made a portfolio investment of $8.0 million in
cash through the purchase of 2,000,000 preference shares in LaserSight
Incorporated. These preference shares are convertible to LaserSight Incorporated
common shares at $4.00. LaserSight Incorporated is a publicly traded United
States manufacturer of excimer lasers, microkeratomes and microkeratome blades
with an approval for its excimer laser pending from the United States Food and
Drug Administration.
(b) The following acquisitions have been accounted for by the purchase method
and the results of operations have been consolidated from the respective
purchase dates :
(i) On June 19, 1998 the Company made a 51% equity investment of
$204,000 in cash in AllSight, Inc., a refractive laser center in the
Pittsburgh, PA area.
(ii) On July 1, 1998 TLC NorthWest Eye, Inc. a wholly owned subsidiary of
the Company acquired in two separate transactions the operating
assets and liabilities of the Figgs Eye Clinic in Yakima, Washington
and the practice of
7
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Robert C. Bockoven with three locations in Washington state, in
exchange for cash and debt. Consideration for the Figgs Eye Clinic
purchase was $750,000 and for the practice of Robert C. Bockoven was
$725,000.
(iii) On September 1, 1998, the Company acquired the 10% minority interest
of Vision Institute of Canada in one of the Company's laser centers
in Toronto in exchange for $332,000 in cash and common shares with a
value of $332,000.
(iv) On October 13, 1998, the Company acquired 90% of the operating
assets and liabilities of WaterTower Acquisition, Inc. in exchange
for cash of $625,000 and amounts contingent upon future events. No
value will be assigned to these contingent amounts until completion
of the earn-out period and the outcome of the contingency is known.
(v) On November 30, 1998, the Company acquired 85% of the operating
assets and liabilities of Aspen HealthCare, Inc. for cash
consideration of $3,800,000 and amounts contingent upon future
events. No value will be assigned to these contingent amounts until
completion of the earn-out period and the outcome of the contingency
is known.
(vi) On January 5, 1999, the Company acquired 100% of the outstanding
shares of Baltimore Practice Management, LLC in exchange for cash of
$6,060,000 and the amounts contingent upon future events. No value
will be assigned to these contingent amounts until the future events
have occurred and the outcome of the contingency is known.
The total consideration on acquisitions was allocated to net assets
acquired on the basis of their fair value as follows:
Curent assets (including cash of $2,428) $ 2,491
Capital assets 1,160
Goodwill 4,751
Practice managmenet agreement 6,140
Curent liabilities (482)
Long-term debt (382)
Minority interest (700)
-------
$12,978
=======
Funded by:
Issuance of common shares $ 332
Issuance of debt 738
Contribution of cash 11,759
Acquisition costs 149
-------
$12,978
=======
3. Restructuring
It is TLC's intention to restructure its investments in secondary care
centers and not to make any future investments in, or provide additional
management services to, secondary care centers. This restructuring is a result
of the growth in TLC's network of affiliated optometrists and ophthalmologists
and the increasing acceptance of laser vision correction procedures. The Company
plans to record a one-time non-cash charge in the fourth quarter of fiscal 1999
to reflect the restructuring.
Partners Provider Health Care Inc. ("PPH"), TLC's managed care subsidiary
for eye care services, was developed to negotiate and administer vision care
contracts. TLC is currently exploring strategic opportunities and expects to
sell or restructure its ownership in PPH during the fourth quarter of fiscal
1999, and to record a one-time gain or loss on the transaction.
8
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4. Capital Stock
Since May 31, 1998, the following changes in capital stock occurred:
Common Shares
# of $ Value
Shares
May 31, 1998 33,668 $ 143,554
Shares issued for acquisitions 23 332
Exercise of stock options 591 1,670
Shares cancelled (117) (422)
------ ---------
34,165 $ 145,134
====== =========
On September 24, 1998, the Company exercised a contractual option to purchase
116,771 Company common shares from the Goldstein Family Trust for $1,264,411 in
cash. The common shares were then cancelled and capital stock was reduced using
the average value of common shares as of November 30, 1998 of C$6.20 per share.
The remaining allocation of the cash paid for the shares was reflected as a
reduction in retained earnings.
5. Differences between Canadian and United States generally accepted
accounting principles.
These consolidated financial statements are prepared in accordance with
accounting principles generally accepted ("GAAP") in Canada. The most
significant differences between Canadian and United States GAAP, insofar as they
affect the Company's consolidated financial statements, are described below.
The following table reconciles results as reported under Canadian GAAP with
those that would have been reported under United States GAAP:
Nine months Nine months
(US$ dollars in thousands, except ended ended
per share amounts) February 28, February 28,
------------ ------------
1998 1999
---- ----
(unaudited) (unaudited)
Net income (loss) for the period
based on Canadian GAAP $(6,705) $ 4,654
Deferred foreign exchange gains
(losses) (i) -- 278
Income tax expense adjustment under the
liability method (ii) -- (944)
------- -------
Net income (loss) based on U.S. GAAP $(6,705) $ 3,988
Unrealized gains on securities
available for sale(iii) -- 248
------- -------
Comprehensive income (loss) based on
U.S. GAAP $(6,705) $ 4,236
------- -------
Income per share--U.S. GAAP $ (0.25) $ 0.13
------- -------
(i) The gain or loss on translation of foreign currency denominated long-term
monetary items is deferred and amortized over the remaining life of the item
under Canadian GAAP. Under U.S. GAAP, the gain or loss on translation is
included in income when it arises.
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(ii) Under U.S GAAP, deferred taxes are recorded based on the difference between
the values assigned for accounting purposes and the tax values of individual
assets acquired in business combinations, except for nondeductible goodwill. The
only such significant differences with respect to the Company are the practice
management agreement assets acquired during the nine month period ended February
28, 1999 as disclosed in note 2. Under U.S. GAAP, this deferred tax liability of
$2,140,000 is matched by an equal increase in the value assigned to the practice
management agreement assets. In the statement of income, the resulting increased
annual asset amortization is offset by an equal deferred tax recovery with no
effect on the net income (loss). In addition, the recognition of $944,000 of
operating loss carry-forwards which existed at the acquisition date has been
recorded as a reduction of goodwill related to the acquisition.
(iii) For the purposes of reconciliation to U.S. GAAP, the Company has presented
the new disclosure requirements of Financial Accounting Standard No. 130 ("SFAS
130") in these interim financial statements. SFAS 130 requires the presentation
of comprehensive income and its components. Comprehensive income includes
unrealized gains on securities available for sale. Securities available for sale
are carried at market value.
As a result of the above differences, as at February 28, 1999 under U.S. GAAP,
current assets would increase by $850,000, long-term assets would increase by
$741,000, deferred income tax liabilities would increase by $2,524,000, other
comprehensive income would decrease by $469,000 with a corresponding increase in
the deficit, and total shareholders equity would decrease by $464,000.
Statement of Changes in Financial Position
Certain of the Company's acquisitions for the period ended February 28, 1999
were financed in part through the issuance of common shares and debt. These
would be considered non-cash transactions under U.S. GAAP resulting in a
reduction in cash provided by financing activities of $1,070,000 (nine months
ended February 28, 1998 - $1,303,000) and a reduction in cash used in investing
of $1,070,000 (nine months ended February 28, 1998 - $1,303,000).
Marketable securities held at February 28, 1999 would be considered cash
equivalents under U.S. GAAP resulting in a decrease in cash used for investing
activities of $25,010,000 and increase in cash and short-term deposits at the
end of the period by the same amount.
The Company acquired capital assets financed through capital lease obligations
which would be considered non-cash transactions under U.S. GAAP resulting in a
reduction in cash provided by financing activities of and a corresponding
reduction in cash used in investing activities of $808,000 for the nine month
period ended February 28, 1999 (nine months ended February 28, 1998 -
$1,423,000).
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Three and Nine Months Period Ended February 28, 1999 Compared to
Three and Nine Months Period Ended February 28, 1998
TLC THE LASER CENTER INC.
SEGMENTED INFORMATION
(U.S. dollars, in thousands)
<TABLE>
<CAPTION>
Nine months ended February 28, 1999
-------------------------------------------------------
(unaudited)
Secondary
Refractive Care Other Total
-------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues and physician costs:
Gross revenues of all owned and Managed clinics $ 111,243 $ 29,633 $ 1,666 $ 142,542
Amounts retained by physician group (15,907) (6,521) (43) (22,471)
Contractual allowances and adjustments (4,552) (15,176) (5) (19,733)
--------- --------- --------- ---------
Net revenues 90,784 7,936 1,618 100,338
Doctor compensation 8,875 -- 1 8,876
--------- --------- --------- ---------
Net revenues after doctor compensation 81,909 7,936 1,617 91,462
--------- --------- --------- ---------
Expenses
Operating 62,305 6,113 2,003 70,421
Interest and other 1,685 (84) 27 1,628
Depreciation and amortization 9,014 1,633 288 10,935
--------- --------- --------- ---------
73,004 7,662 2,318 82,984
--------- --------- --------- ---------
Income (loss) from operations $ 8,905 $ 274 $ (701) $ 8,478
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Nine months ended February 28, 1998
-------------------------------------------------------
(unaudited)
Secondary
Refractive Care Other Total
-------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues and physician costs:
Gross revenues of all owned and Managed clinics $ 41,691 $ 15,450 $ 1,097 $ 58,238
Amounts retained by physician group (6,554) (3,561) -- (10,115)
Contractual allowances and adjustments (2,696) (6,873) -- (9,569)
-------- -------- -------- --------
Net revenues 32,441 5,016 1,097 38,554
Doctor compensation 3,030 -- -- 3,030
-------- -------- -------- --------
Net revenues after doctor
compensation $ 29,411 5,016 1,097 35,524
-------- -------- -------- --------
Expenses
Operating 26,704 3,864 899 31,467
Interest and other 1,314 2 1 1,317
Depreciation and amortization 4,846 970 107 5,923
-------- -------- -------- --------
32,864 4,836 1,007 38,707
-------- -------- -------- --------
Income (loss) from operations $ (3,453) $ 180 $ 90 $ (3,183)
======== ======== ======== ========
</TABLE>
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Total net revenues in the third quarter of the 1999 fiscal year increased
to $41.3 million from $14.9 million the previous year, an increase of 177%.
Total net revenues for the nine months ended February 28, 1999 increased by
$61.8 million to $100.3 million from $38.6 million, an increase of 160%. More
than 90% of total net revenues were derived from refractive centers in the first
nine months of fiscal 1999 as compared to 84% in the same period in fiscal 1998.
Net revenues from refractive centers for the nine months ended February
28, 1999 increased by $58.3 million to $90.8 million from $32.4 million for the
nine months ended February 28, 1998. For the nine months ended February 28,
1999, procedures increased to approximately 61,400 from approximately 21,900 in
the same period in the prior year. The majority of the increase in revenues for
the three month and nine month period is a result of improved total procedure
volume at refractive centers that were open throughout the two periods, with the
remainder of the increase a result of additional total procedure volume from the
development of new centers and the acquisition of BeaconEye.
Total operating expenses and doctor compensation for the three month
period ended February 28 1999 increased to $32.3 million from $13.2 million or
145 %. Total operating expenses and doctor compensation for the nine months
ended February 28, 1999 increased by $44.8 million to $79.3 million from $34.5
million in the previous year, or 130%. These increases are a result of (i)
increased fixed and variable costs attributed to the addition of new refractive
centers, including the acquisition of eleven BeaconEye centers in April 1998,
(ii) higher marketing costs and (iii) increases in the variable cost component
resulting from the higher number of total procedures performed at centers that
have been open for more than a year. Operating expenses and doctor compensation
as a percentage of net revenues were approximately 79% for the nine months ended
February 28, 1999 as compared to approximately 89% for the nine months ended
February 28, 1998. This reduction reflects the impact of having reached
contribution margin levels which exceed the fixed costs at most of its
refractive centers.
In the third quarter, interest expense and other of $0.8 million compares
to $0.4 million expense from the previous year. The increase in the three month
period is a result of higher interest costs associated with the Beacon
acquisition. For the nine months ended February 28, 1999, interest expense and
other increased by $0.3 million to $1.6 million from $1.3 million for the nine
months ended February 28, 1998. Net interest is relatively unchanged as higher
interest income on higher cash balances was partially offset by higher interest
expense from the BeaconEye acquisition.
Depreciation and amortization in the third quarter increased to $3.8
million from $2.1 million in the previous year. Depreciation and amortization
expense for the nine months ended February 28, 1999 increased by $5.0 million to
$10.9 million from $5.9 million for the nine months ended February 28, 1998.
This increase is largely a result of the depreciation from new refractive
centers and the additional depreciation and amortization charges associated with
the BeaconEye acquisition. For the nine months ended February 28, 1999, the
BeaconEye acquisition resulted in a charge of $0.5 million from amortization of
goodwill of $9.0 million.
Start up and development expenses, which were incurred by PPH for the
development of a managed care business specializing in eye care, decreased
slightly for the nine months ended February 28, 1999 to $3.0 million from $3.1
million for the nine months ended February 28, 1998 (three months expenses
remained unchanged). TLC is currently exploring strategic opportunities for PPH
and expects to sell or restructure its ownership in PPH during the fourth
quarter of fiscal 1999, and to record a one-time gain or loss on the transaction
(depending on the structure). Income tax expense for the third quarter has been
eliminated.
Income tax expense for the nine months ended February 28, 1999 increased
slightly to $0.6 from $0.5 for the nine months ended February 28, 1998. The
Company's Canadian refractive centers have been amalgamated with the former
BeaconEye refractive centers, thereby allowing the BeaconEye tax losses to be
applied against the profits from the other Canadian refractive centers. In the
United States, the Company files consolidated tax returns and therefore tax
losses have been available to partially offset taxable income in the United
States. The Company expects to have used all unrestricted tax losses by, and to
be fully taxable after, May 31, 2000.
Net income for the three months ended February 28, 1999 was $3.6 million
or 11 cents a share compared to a loss of $2.3 million or eight cents a share
for the three months ended February 28, 1999. Net income for the nine months
ended February 28, 1999 was $4.7 million or $0.14 per share as compared to a
loss of $6.7 million or $0.25 per share for the nine months ended February 28,
1998. This net income was generated by operating profits from the laser vision
correction surgery business, which was partially offset by losses in other
business including PPH.
12
<PAGE>
Liquidity and Capital Resources
The Company has financed its operations to date through cash flow from
operations, the issuance of Common Shares, borrowings, and capital lease
financing. The Company has filed a registration statement with respect to a
proposed public offering in Canada and the United States of 2.6 million shares.
The Company estimates that the net proceeds of this proposed offering, together
with existing cash balances and funds expected to be generated from operations,
will be sufficient to fund the Company's anticipated level of operations and its
current acquisition and expansion plans for at least the next 12 to 18 months.
Working capital at February 28, 1999 decreased to $32.3 million from $54.1
million at May 31, 1998. Cash and marketable securities at February 28, 1999
were $31.6 million, a decrease from $56.1 million at May 31, 1998. Cash provided
from operating activities was $11.7 million for the nine months ended February
28, 1999 as compared to the use of cash for operating activities of $7.4 million
for the nine months ended February 28, 1998. This is primarily due to the
Company generating net income for the first time during the nine months ended
February 28, 1999.
Accounts receivable increased by $6.4 million to $16.7 million at February
28, 1999 from $10.3 million at May 31, 1998. This increase is principally
attributable to accounts receivables from doctors in connection with performing
refractive procedures. These amounts are commensurate with the revenue increase
during the nine months ended February 28, 1999.
Prepaids and sundry assets increased to $6.1 million at February 28, 1999
from $4.6 million at May 31, 1998. This amount includes prepaid insurance and
prepaid key cards, which are used to operate the VISX and Summit excimer lasers
in the United States.
The Company continued to develop or acquire new refractive centers and
therefore increased its investment in capital assets and assets under capital
lease to $47 million at February 28, 1999 from $42.2 million at May 31, 1998.
Accounts payable and accrued liabilities increased to $14.3 million at
February 28, 1999 from $9.1 million at May 31, 1998. This increase is
attributable to an increase in the number of new centers operating in fiscal
1999.
Total long-term debt and obligations under capital lease decreased to
$22.3 million at February 28, 1999 from $24.7 million at May 31, 1998. Interest
rates on this long-term debt and obligations under capital lease from 5.5% to
18%, and the facilities generally have terms no greater than five years. After
February 28, 1999, the Company retired approximately $5 million of long-term
debt or capital leases with interest rates above 12%.
The Company has an additional 19 centers currently under various stages of
development which are expected to be open in the next 12 to 18 months.
Recent Developments and Outlook
On June 8, 1998, the Company made a portfolio investment of $8 million in
cash to purchase 2,000,000 preference shares in LaserSight, which are
convertible into common shares, at $4.00 per share. In March 1999, the Company
made an additional $2 million investment in common shares and warrants of
LaserSight, to maintain its interest of approximately 15% in LaserSight.
LaserSight is a publicly traded United States manufacturer of excimer lasers,
microkeratomes and microkeratome blades.
TLC has entered into an agreement with a subsidiary of Kaiser Permanente,
one of the largest health management organizations ("HMOs") elsewhere in the
United States, providing for a national strategic alliance, with the intention
to initially own and operate three refractive centers in California, with an
intention to eventually develop additional centers in United States market when
Kaiser Permanente has a significant presence. The agreement also grants the
Kaiser Permanente subsidiary the right to negotiate an ownership interest in
additional TLC refractive centers in the United States.
TLC has entered into a non-binding letter of intent with Dr. Thomas S.
Tooma, a noted California ophthalmologist, providing for the formation of a
limited liability company ("California LLC") to own and operate a
13
<PAGE>
minimum of five refractive centers - three of TLC's existing centers in
California and two centers in California owned by Dr. Tooma. The California LLC
would be owned 50.1% by TLC. As consideration for the contribution of his
centers, Dr. Tooma would receive a 49.9% interest in the California LLC, a
significant cash payment, an earn-out the five years after closing and a five
year surgeon contract with customary non-compete restrictions. The California
LLC would be operated under the TLC brand name and would operate or have a
participating interest in all of TLC's future California refractive centers
including the refractive centers operated through the United States. Although
definitive agreements are being negotiated, there can be no assurance that this
transaction will be completed including the refractive centers operated through
the United States.
TLC has investments in two secondary care practices in the United States.
It is TLC's intention to restructure its investments in secondary care centers,
including its management service contracts, and not to make any future
investments in secondary care centers. This restructuring is a result of the
growth in TLC's network of affiliated optometrists and ophthalmologists and the
increasing acceptance of laser vision correction procedures.
PPH, TLC's managed care subsidiary for eye care services, was developed to
negotiate and administer vision care contracts. TLC is currently exploring
strategic opportunities and expects to sell or restructure its investment in PPH
in the last quarter of fiscal 1999, which may result in a one-time gain or loss
on the transaction.
Year 2000 Compliance
The Company is aware of the issues associated with the programming code in
existing computer systems as the Year 2000 approaches. The "Year 2000 problem"
is pervasive and complex. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail. The Company
has completed a comprehensive study of the possible effects of the Year 2000
issue on its systems and results of operations and a detailed plan of action,
including projected costs and contingency plans. To date, no significant
concerns have been identified as far as the Company's internal operations.
However, there can be no assurance that Year 2000-related issues with the
providers of goods and services will not have a material ^ adverse affect on the
financial condition or results of operations of the Company.
The Company believes that it has prepared, or will prepare by mid-calendar
year 1999, its computer systems and related applications to accommodate
date-sensitive information relating to the Year 2000. The Company's systems
constitute primarily desktop computers, most of which are linked by a local area
network server at individual site locations. The Company has determined that its
software applications for all essential functions, such as accounting and
communications, are already Year 2000 compliant and that the cost of any
hardware upgrades, mostly replacing some older desktop computers, will not be
material to the financial condition or results of operations of the Company.
Such costs will be expensed as incurred. In addition, the Company is discussing
with its vendors the possibility of any interface difficulties or other
difficulties which may affect the Company. To date, no significant concerns have
been identified. While the Company has not identified any significant Year 2000
concerns in its internal operations or vendor relationships, there can be no
assurance that no Year 2000-related operating problems or expenses will arise
with the Company's computer systems and software or in their interface with the
computer systems and software of, or the goods and services provided by, the
Company's vendors.
The Company's core business is operating refractive centers that are
equipped with a computer-controlled excimer laser as the primary essential piece
of equipment. In the United States, most of the Company's excimer lasers are
manufactured by VISX. Representatives from VISX have informed the Company that
it has tested its lasers for Year 2000 compliance and that the lasers will
function without any effect on safety or efficacy upon a change of date to the
Year 2000. However, without any upgrade, some VISX lasers might print out
patient reports with an incorrect date on them. VISX has developed a software
upgrade to correct this problem and has stated that it will install the upgrade
in the Company's VISX lasers by mid-1999 at no cost to the Company. The
Company's refractive centers are equipped with other computer-controlled
ophthalmic equipment, but none are essential to the laser vision correction
procedure. While the Company does not expect that the cost of any replacements
or upgrades required for ophthalmic equipment in its refractive centers for the
Year 2000 will be material to the financial condition or results of operations
of the Company, there can be no assurance that no material ophthalmic equipment
upgrades will be required.
Laser vision correction is an elective procedure which is not covered by
Medicare, Medicaid or other governmental reimbursement programs. There are some
private insurance companies that provide partial or full
14
<PAGE>
coverage for the procedure, which the Company estimate accounts for
approximately 8% of its revenues from refractive centers for the first nine
months ended February 28, 1999. In the event private insurance companies that
cover the laser vision procedure have difficulty processing and paying claims
because of Year 2000 issues, this could cause accounts receivable for refractive
procedures performed at the Company's refractive centers to increase, or the
patient volume in the refractive centers operated by the Company to decrease,
which could have a material adverse effect on the financial condition or results
or operations of the Company until such Year 2000 problems are corrected. Most
secondary care procedures are covered by governmental reimbursement programs,
such as Medicare or Medicaid, and by private insurance companies. In the event
such third party payors have difficulty processing and paying claims because of
Year 2000 issues, this could cause delays in such payments and an increase in
accounts receivable for procedures performed in secondary care centers in which
the Company has an investment.
Further, the Company cannot predict the impact that the Year 2000 issue
will have on its potential patients or the economy generally. If the Year 2000
issue were to have a significant adverse impact on the economy or potential
patients perception of the economy, this could have a material adverse impact on
the number of procedures performed, particularly with respect to elective
procedures such as laser vision correction, and on the Company's financial
results until the economy and consumer confidence recover.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 1, 1999, CPC of America, Inc. filed a lawsuit in the Superior
Court of California, Orange County, against the Company, Partner Provider Health
Inc. and HeartMed LLC alleging breach of contract, breach of the implied
covenant of good faith and fair dealing, intentional misrepresentation,
negligent misrepresentation, fraud and deceit, intentional and negligent
interference with prospective economic advantage, breach of fiduciary duty, and
fraudulent inducement to enter into contract. The complaint alleges damages to
CPC in the amount of $25 million. The complaint also alleges, as a shareholder
derivative claim, damages to HeartMed in the amount of $25 million. HeartMed is
a cardiology managed care joint venture between Partner Provider Health and CPC.
This lawsuit is in the very early stage and the Company intends to vigorously
defend it. Although there can be no assurance, the Company does not expect this
lawsuit to have a material adverse effect on its business, financial condition
or results of operations.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
15
<PAGE>
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON 8-K
a. Exhibit 27
Financial Data Schedules
b. Reports on 8-K
None.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TLC THE LASER CENTER INC.
By: /s/ Elias Vamvakas
-----------------------------------
Elias Vamvakas
Chief Executive Officer
April 13, 1999
By: /s/ Peter Kastelic
-----------------------------------
Peter Kastelic
Chief Financial Officer
April 13, 1999
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the interim
consolidated financial statements of TLC The Laser Center Inc. for the three
month period ending February 28, 1999 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> DEC-01-1998
<PERIOD-END> FEB-28-1999
<CASH> 6,591,000
<SECURITIES> 25,010,000
<RECEIVABLES> 16,714,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 54,401,000
<PP&E> 72,383,000
<DEPRECIATION> (25,415,000)
<TOTAL-ASSETS> 172,597,000
<CURRENT-LIABILITIES> 22,135,000
<BONDS> 0
0
0
<COMMON> 145,134,000
<OTHER-SE> (17,866,000)
<TOTAL-LIABILITY-AND-EQUITY> 172,597,000
<SALES> 0
<TOTAL-REVENUES> 41,305,000
<CGS> 0
<TOTAL-COSTS> (32,272,000)
<OTHER-EXPENSES> (4,643,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (788,000)
<INCOME-PRETAX> 3,602,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (10,000)
<CHANGES> 0
<NET-INCOME> 3,592,000
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule also contains summary financial information extracted from the
interim consolidated financial statements of TLC The Laser Center Inc. for the
nine month period ending February 28, 1999 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1998
<PERIOD-END> FEB-28-1999
<CASH> 6,591,000
<SECURITIES> 25,010,000
<RECEIVABLES> 16,714,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 54,401,000
<PP&E> 72,383,000
<DEPRECIATION> (25,415,000)
<TOTAL-ASSETS> 172,597,000
<CURRENT-LIABILITIES> 22,135,000
<BONDS> 0
0
0
<COMMON> 145,134,000
<OTHER-SE> (17,866,000)
<TOTAL-LIABILITY-AND-EQUITY> 172,597,000
<SALES> 0
<TOTAL-REVENUES> 100,338,000
<CGS> 0
<TOTAL-COSTS> (79,297,000)
<OTHER-EXPENSES> (13,935,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,628,000)
<INCOME-PRETAX> 5,478,000
<INCOME-TAX> (619,000)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (205,000)
<CHANGES> 0
<NET-INCOME> 4,654,000
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
</TABLE>
