EXHIBIT 99(b)
CANADIAN GAAP FINANCIAL STATEMENTS
AUDITORS' REPORT
To the Stockholders of TLC Laser Eye Centers Inc.
We have audited the consolidated balance sheets of TLC Laser Eye Centers Inc.
(formerly TLC The Laser Center Inc.) as at May 31, 2000 and 1999 and the
consolidated statements of loss, stockholders' equity and cash flows for the
years ended May 31, 2000, 1999 and 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in Canada. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at May 31, 2000 and
1999 and the results of its operations and its cash flows for the years ended
May 31, 2000, 1999 and 1998 in accordance with accounting principles generally
accepted in Canada.
On July 7, 2000, we reported separately to the Board of Directors and
Shareholders of TLC Laser Eye Centers Inc. on financial statements for the same
periods, prepared in accordance with accounting principles generally accepted in
the United States.
Toronto, Canada, ERNST & YOUNG LLP
-----------------
July 7, 2000. Chartered Accountants
<PAGE>
2
TLC LASER EYE CENTERS INC.
(formerly TLC The Laser Center Inc.)
CONSOLIDATED STATEMENTS OF LOSS
(U.S. dollars, in thousands except per share amounts)
<TABLE>
<CAPTION>
Years Ended May 31,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net revenues
Refractive $ 190,233 $ 132,428 $ 51,079
Other 10,990 14,482 8,043
------------ ------------ ------------
Net revenues (Note 15) 201,223 146,910 59,122
------------ ------------ ------------
Expenses
Doctor compensation
Refractive 17,335 12,824 5,242
Operating 166,206 102,775 49,521
Interest and other (Note 12) (4,492) 2,245 692
Depreciation of fixed assets and assets under capital
lease (Note 12) 14,292 11,052 6,103
Amortization of intangibles (Note 12) 7,396 3,882 3,357
Start-up and development expenses -- 3,606 3,267
Restructuring charges (Note 18) -- 12,924 --
------------ ------------ ------------
200,737 149,308 68,182
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES AND NON-CONTROLLING INTEREST 486 (2,398) (9,060)
Income taxes (Note 13) (2,134) (816) (1,071)
Non-controlling interest (3,006) (448) 593
------------ ------------ ------------
NET LOSS FOR THE YEAR $ (4,654) $ (3,662) $ (9,538)
============ ============ ============
LOSS PER SHARE $ (0.13) $ (0.11) $ (0.34)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 37,178,253 34,090,316 28,034,741
============ ============ ============
</TABLE>
<PAGE>
3
TLC LASER EYE CENTERS INC.
(formerly TLC The Laser Center Inc.)
CONSOLIDATED BALANCE SHEETS
(U.S. dollars, in thousands)
<TABLE>
<CAPTION>
As at May 31,
----------------------
2000 1999
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Notes 2 and 3) $ 78,531 $ 125,598
Short-term investments (Note 3) -- 26,212
Accounts receivable (Note 16) 15,527 15,359
Income taxes recoverable 4,734 --
Prepaid expenses and sundry assets 5,922 6,602
--------- ---------
Total current assets 104,714 173,771
Restricted cash (Notes 2 and 3) 1,722 1,730
Investments and other assets (Note 4) 34,305 14,359
Intangibles (Note 5) 91,821 47,441
Fixed assets (Note 6) 53,431 38,993
Assets under capital lease (Note 7) 10,722 10,556
--------- ---------
Total assets $ 296,715 $ 286,850
========= =========
LIABILITIES
Current liabilities:
Accounts payable and accrued liabilities $ 37,641 $ 19,512
Income taxes payable -- 477
Current portion of long-term debt (Note 8) 2,332 2,181
Current portion of obligations under capital lease (Note 9) 5,260 4,717
--------- ---------
Total current liabilities 45,233 26,887
Long-term debt (Note 8) 2,922 4,620
Obligations under capital leases (Note 9) 3,806 6,410
Deferred rent (Note 10) 915 959
--------- ---------
Total liabilities 52,876 38,876
--------- ---------
Non-controlling interest 12,842 8,151
--------- ---------
Commitments and contingencies (Note 14)
STOCKHOLDERS' EQUITY
Capital stock:
Common stock, no par value; unlimited number authorized;
37,150 issued and outstanding (1999 - 37,362) (Note 11) 269,953 269,454
Warrants 532 --
Deficit (39,488) (29,631)
--------- ---------
Total stockholders' equity 230,997 239,823
--------- ---------
Total liabilities and stockholders' equity $ 296,715 $ 286,850
========= =========
</TABLE>
Approved on behalf of the Board:
(Signed) ELIAS VAMVAKAS (Signed) HOWARD J. GOURWITZ
Elias Vamvakas, Director Howard J. Gourwitz, Director
<PAGE>
4
TLC LASER EYE CENTERS INC.
(formerly TLC The Laser Center Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars, in thousands)
<TABLE>
<CAPTION>
Years Ended May 31,
------------------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Operating activities
Net loss for the year $ (4,654) $ (3,662) $ (9,538)
Items not affecting cash
Depreciation and amortization 21,688 14,934 9,460
Write-off of goodwill 489 -- --
Loss (gain) on sale of fixed assets and assets under lease 1,099 229 (287)
Non-cash restructuring costs -- 11,167 --
Non-controlling interest 3,006 448 (593)
Other 780 252 22
Changes in non-cash operating items
Accounts receivable (15) (9,247) (6,964)
Prepaid expenses and sundry assets 1,047 (2,208) (2,129)
Accounts payable and accrued liabilities 4,153 10,350 (2,480)
Income taxes payable, net (4,574) (162) 647
Deferred rent and compensation (44) (275) (234)
--------- --------- ---------
Cash provided by (used in) operating activities 22,975 21,826 (12,096)
--------- --------- ---------
Financing activities
Restricted cash 8 356 463
Proceeds from debt financing 826 25 2,555
Principal payments of debt financing (2,635) (6,668) (1,242)
Term bank loan -- -- (43)
Principal payments of obligations under capital leases (5,063) (3,302) (706)
Contributions from non-controlling interests 2,365 1,305 513
Distributions to non-controlling interests (1,569) (1,233) (101)
Payments related to the purchase and cancellation of capital stock (10,365) (5,387) --
Proceeds from issuance of capital stock 2,384 129,607 63,615
--------- --------- ---------
Cash provided by (used in) financing activities (14,049) 114,703 65,054
--------- --------- ---------
Investing activities
Purchase of fixed assets and assets under lease (26,153) (17,843) (5,498)
Proceeds from sale of fixed assets and assets under lease 185 -- 1,325
Proceeds from the sale of investments 227 -- --
Acquisitions and investments (56,496) (22,316) (6,075)
Short-term investments 26,212 (26,212) --
Other 32 242 (742)
--------- --------- ---------
Cash used in investing activities (55,993) (66,129) (10,990)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents during the year (47,067) 70,400 41,968
Cash and cash equivalents , beginning of year 125,598 55,198 13,230
--------- --------- ---------
Cash and cash equivalents, end of year $ 78,531 $ 125,598 $ 55,198
========= ========= =========
</TABLE>
(Note 20 - discusses non-cash transactions, which are not included in the
consolidated statements of cash flows)
<PAGE>
5
TLC Laser Eye Centers Inc.
(formerly TLC The Laser Center Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(U.S. dollars, in thousands)
<TABLE>
<CAPTION>
Common stock Warrants
------------ --------
Number Number
of Shares Amount of Warrants Amount Deficit Total
(000's) $ (000's) $ $ $
===================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Balance, May 31, 1997 25,189 53,858 1,818 9,664 (12,141) 51,381
Conversion of special warrants 1,818 9,664 (1,818) (9,664) 0
Additional special warrant issue costs (40) (40)
Shares issued for acquisition 1,604 16,417 16,417
Exercise of agent's compensation warrants
related to the IPO 138 447 447
Exercise of stock options 179 786 786
Public offering, net of issue costs 4,740 62,422 62,422
Net income (9,538) (9,538)
-------------------------------------------------------------------------------------------------------------------
Balance, May 31, 1998 33,668 143,554 -- -- (21,679) 121,875
Shares issued for acquisitions 50 837 837
Shares issued to acquire other assets 50 728 728
Shares purchased for cancellation (256) (1,095) (4,290) (5,385)
Exercise of stock options 773 3,073 3,073
Shares issued as remuneration 40 600 600
Shares issued as part of the employee share
purchase plan 47 750 750
Public offering, net of issue costs 2,990 121,007 121,007
Net income (3,662) (3,662)
-------------------------------------------------------------------------------------------------------------------
Balance, May 31, 1999 37,362 269,454 -- -- (29,631) 239,823
Warrants issued 100 532 532
Shares issued for acquisition 302 728 728
Value determined for shares
issued contingent on meeting
earnings criteria -- 1,397 1,397
Shares purchased for cancellation (710) (5,162) (5,203) (10,365)
Exercise of stock options 87 1,314 1,314
Shares issued as remuneration 44 387 387
Shares issued as part of the employee share
purchase plan 65 1,696 1,696
Reversal of IPO costs, over accrual -- 139 139
Net income (4,654) (4,654)
-------------------------------------------------------------------------------------------------------------------
Balance May 31, 2000 37,150 269,953 100 532 (39,488) 230,997
===================================================================================================================
</TABLE>
<PAGE>
6
TLC LASER EYE CENTERS INC.
(formerly TLC The Laser Center Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in U.S. dollars, except where noted and all tabular amounts in
thousands)
Nature of Operations
TLC Laser Eye Centers Inc. (formerly TLC The Laser Center Inc.) and its
subsidiaries (the "Company") develop and manage laser vision correction centers
in the United States and Canada. Each center provides excimer laser and other
clinical equipment and all related management and support services to physicians
and physician practices performing excimer laser procedures in the Company's
centers.
The Company currently owns and manages a secondary eye care business with
multiple centers in the state of Michigan. These centers provide all necessary
clinical equipment and infrastructure and provide all related management and
support services to physician practices treating a wide range of vision
disorders.
The Company faces a number of risks and uncertainties given the nature of
the industry in which it operates.
The Company's profitability is dependent upon broad acceptance in the
United States and Canada of laser vision correction as an alternative to
existing methods of treating refractive disorders. Broad market acceptance is
dependent on many factors including cost, the lack of long-term follow-up data
and the resulting concerns relating to safety and effectiveness, and future
regulatory developments.
The industry in which the Company operates is subject to extensive
federal, state and local laws, rules and regulations. Many of these laws and
regulations are ambiguous in nature and have not been definitively interpreted
by courts and regulatory authorities. Moreover, they vary from jurisdiction to
jurisdiction.
Accordingly, the Company may not always be able to predict clearly how
such laws and regulations will be interpreted or applied and some of the
Company's activities could be challenged. In addition, there can be no assurance
that the regulatory environment in which the Company operates will not change
significantly in the future.
Many states in the United States prohibit the Company from practicing
medicine or employing physicians to practice medicine on the Company's behalf.
Because the Company does not practice medicine, its activities are limited to
owning and managing refractive centers and secondary care centers and
affiliating with health care providers to render medical services at the
Company's centers. As a result, the Company is highly dependent on its
affiliated doctors.
The provision of medical services entails an inherent risk of potential
malpractice and other similar claims. Although the Company does not engage in
the practice of medicine, there can be no assurance that claims relating to
services provided at the Company's centers will not be asserted against the
Company. The Company currently maintains malpractice insurance that it believes
to be adequate both as to risks and amounts. In addition, the doctors providing
medical services at the Company's centers are required to maintain insurance.
The Company's revenues from managing secondary care centers are derived
from fees paid by or on behalf of patients to the practices affiliated with the
Company. The Company's profitability could be affected by government and private
third-party payors seeking to contain healthcare costs by reducing reimbursement
rates, lowering utilization rates and negotiating reduced payment schedules with
providers of vision care. The Company has restructured certain of its secondary
care investments, which has reduced the exposure of profits being affected by
government and private third-party payors.
<PAGE>
7
1. Summary of Significant Accounting Policies
Basis of Presentation
These consolidated financial statements include the accounts 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. All significant intercompany transactions and balances have been
eliminated on consolidation.
The Company does not have an ownership interest in, nor does it exercise
control over, the physician practices under its management. Accordingly, the
Company does not consolidate physician practices under its management.
Fixed Assets and Assets Under Capital Lease
Fixed assets and assets under capital lease are recorded at cost less
accumulated depreciation. Depreciation is provided at rates intended to write
off the assets over their productive lives as follows:
Computer equipment and software - straight-line over three years
Buildings - straight-line over forty years
Furniture, fixtures and equipment - 20% diminishing balance
Laser equipment - 20% diminishing balance
Leasehold improvements - straight-line over the initial term
of the lease
Medical equipment - 20% diminishing balance
Vehicles and other - 30% diminishing balance
Intangible Assets
Goodwill represents the excess of the purchase price over the fair value
of the identifiable net assets acquired, and is being amortized on a
straight-line basis over the term of the purchase agreement to a maximum of
fifteen years.
The practice management agreements represent the cost of obtaining the
exclusive right to manage refractive centers and secondary care centers in
affiliation with the related physician group during the term of the agreements.
Practice management agreements are amortized using the straight-line method over
the term of the related employment agreement, to a maximum of fifteen years.
Impairment of Long-lived Assets
For fixed assets and certain intangibles, the Company assesses the
recoverability by determining whether the carrying value of such assets can be
recovered through projected undiscounted cash flows. If the sum of expected
future cash flows, undiscounted and without interest charges, is less than net
book value, the excess of the net book value over the estimated fair value is
charged to operations in the period in which such impairment is determined by
management.
Start-up and Development Expenses
Start-up and development expenses represent costs incurred to research and
develop potential businesses in North America, including salaries and benefits,
professional fees, advertising, promotion and travel, and costs incurred by
businesses during the period prior to commencement of commercial operations.
Start-up and development expenses are expensed as incurred. Technology and
web-site costs incurred for the development of commercial business to business
internet products have been capitalized and will be amortized when the products
are available to be offered for sale.
Revenues
The Company includes in income only those operating revenues pertaining to
owned laser centers and management fees earned from managing refractive and
secondary care practices. Under the terms of the practice management
<PAGE>
8
agreements, the Company provides management, marketing and administrative
services to refractive and secondary care practices in return for management
fees. Revenues on laser refractive surgeries are recognized as services are
performed.
Management service revenue is equal to the net revenue of the physician
practices, less amounts retained by the physician groups. Net revenue of the
physician practices is recorded by the physician groups at established rates
reduced by provision for doubtful accounts, contractual adjustments and amounts
retained by physician groups. Contractual adjustments arise due to the terms of
certain reimbursement and managed care contracts. Such adjustments represent the
difference between the charges at established rates and estimated recoverable
amounts and are recognized in the period the services are rendered. Any
differences between estimated contractual adjustments and actual final
settlements under reimbursement contracts are recognized as contractual
adjustments in the year final settlements are determined.
Deferred Income Taxes
The Company follows the tax allocation method of providing for income
taxes. Under this method, deferred income taxes result from the recording of
certain income or expenses for accounting purposes in periods other than those
in which they are reported for income tax purposes.
Cash equivalents
Cash equivalents include highly liquid short-term investments with
original maturities of 90 days or less. Cash equivalents, which consist
principally of corporate bonds, are carried at amortized cost.
Short-term investments
Short-term investments, which consist principally of corporate bonds, are
carried at amortized cost.
Stock-Based Compensation Plans
The Company has two stock-based compensation plans, a stock option plan
and an employee share purchase plan which are described in Note 11. No
compensation expense is recognized for the stock option plan when options are
issued to employees. Compensation expense is recognized for the employee share
purchase plan for the amount by which employee purchases are supplemented
annually by an additional 25% contribution by the company. Any consideration
paid by employees on exercise of stock options or purchase of stock is credited
to share capital.
Marketing Costs
The Company expenses the marketing costs as incurred. Marketing expense
for the year ended May 31, 2000 was approximately $24,202,000 (1999 -
$8,911,000). Marketing expenses consist primarily of print, radio and television
media costs plus the associated production costs required to create the
marketing product.
Foreign Exchange
The unit of measure of the parent holding company is the U.S. dollar. The
Company's Canadian operations are considered integrated and are translated into
U.S. dollars using the temporal method. Accordingly, the assets and liabilities
of the Company's Canadian operations are translated into U.S. dollars at
exchange rates prevailing at the consolidated balance sheet date for monetary
items and at exchange rates prevailing at the transaction dates for non-monetary
items. Income and expenses are translated into U.S. dollars at average exchange
rates prevailing during the year with the exception of depreciation and
amortization, which are translated at historical exchange rates. Exchange gains
and losses are included in net loss for the year.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in Canada requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from these estimates.
<PAGE>
9
These estimates are reviewed periodically and, as adjustments become necessary,
they are reported in income in the period in which they become known.
2. Cash and Cash Equivalents
2000 1999
-------- --------
Cash and cash equivalents $ 78,531 $125,598
======== ========
The Company has a banking facility of approximately $845,000 (1999 -
$927,000) available for posting letters of guarantee, under terms whereby the
Company must maintain a similar minimum amount in its bank account. At May 31,
2000, $773,000 of this facility has been utilized (1999 - $678,000). In
addition, the Company has posted cash collateral deposits in respect of certain
lease commitments, which amount to $949,000 at May 31, 2000 (1999 - $1,052,000).
These restricted cash amounts have been excluded from cash and cash equivalents.
3. Marketable Securities
The Company's marketable securities by type of security, contractual maturity
and classification in the consolidated balance sheets are as follows:
2000 1999
$ $
--------------------------------------------------------------------------------
Type of security
U.S. dollar corporate debt 60,653 141,994
U.S. dollar fixed deposit 14,460 2,619
Cdn. dollar fixed deposit 773 678
--------------------------------------------------------------------------------
75,886 145,291
================================================================================
--------------------------------------------------------------------------------
Contractual maturity
Maturing in one year or less 74,164 143,561
Maturing after one year through three years 1,722 1,730
--------------------------------------------------------------------------------
75,886 145,291
================================================================================
Classification in the consolidated balance sheets
Cash equivalents 74,164 117,440
Short-term investments -- 26,121
Restricted cash 1,722 1,730
--------------------------------------------------------------------------------
75,886 145,291
================================================================================
<PAGE>
10
4. Investments and Other Assets
2000 1999
------- -------
Portfolio investments (1) $27,895 $10,907
Deferred foreign exchange gain 376 432
Long-term receivables (2) 4,904 1,115
Other 1,130 1,905
------- -------
$34,305 $14,359
======= =======
(1) On June 8, 1998 the Company made a portfolio investment of $8,000,000 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 per share. On March 24, 1999, the
Company made an additional $2,000,000 investment to purchase 500,000
common shares in LaserSight Incorporated. On January 28, 2000, the Company
made an additional $10,000,000 investment to purchase 1,015,873 common
shares of LaserSight Incorporated. LaserSight Incorporated is a publicly
traded United States manufacturer of excimer lasers, microkeratomes and
microkeratome blades with limited approval for its excimer laser. The
Company's fully diluted ownership interest in LaserSight Incorporated is
16.1%.
During fiscal 2000, the Company made a number of portfolio investments in
the amount of $7,188,000 1n various companies related to the laser vision
correction industry to support the development of laser vision correction
technology.
(2) Long-term receivables include an amount from a related secondary care
practice. In fiscal 1999, a long-term receivable arose which was
non-interest bearing, unsecured and is to be repaid based on an escalating
percentage of the practice's revenue collected over the next five (5)
years.
During fiscal 2000, the Company advanced $1,435,000 to a related secondary
care practice in exchange for a five (5) year promissory note bearing a
fixed interest rate of 8%.
During fiscal 2000, the Company advanced $1,000,000 to an unrelated
refractive care services provider in exchange for a convertible
subordinated term note bearing interest at current LIBOR rates to mature
by July 1, 2002.
During fiscal 2000, the Company provided financing of $900,000 at 10% to
an unrelated refractive care service provider for lasers, payable over a
five (5) year period.
5. Intangibles
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
Goodwill (net of amortization of $8,121,000 (1999 - $5,013,000)) $45,311 $35,810
Practice management agreements (net of amortization of $5,969,000
(1999 - $1,626,000)) 46,510 11,631
------- -------
$91,821 $47,441
======= =======
</TABLE>
<PAGE>
11
6. Fixed Assets
<TABLE>
<CAPTION>
2000 1999
---------------------- ----------------------
Accumulated Accumulated
Cost Depreciation Cost Depreciation
------- ------------ ------- ------------
<S> <C> <C> <C> <C>
Land and buildings $ 4,042 $ 619 $ 1,634 $ 492
Computer equipment and software 15,838 8,034 9,403 4,911
Furniture, fixtures and equipment 8,230 3,310 6,278 2,522
Laser equipment 17,073 5,968 13,615 4,208
Leasehold improvements 26,078 9,510 18,117 5,952
Medical equipment 14,315 5,261 10,458 3,305
Vehicles and other 890 333 1,193 315
------- ------- ------- -------
Less accumulated depreciation 86,466 $33,035 60,698 $21,705
33,035 21,705
------- -------
Net book value $53,431 $38,993
======= =======
</TABLE>
7. Assets under Capital Lease
2000 1999
Computer equipment and software $ 164 $ 116
Furniture, fixtures and equipment 629 392
Laser equipment 15,507 13,691
Leasehold improvements -- 60
Medical equipment 2,616 2,398
------- -------
18,916 16,657
Less accumulated depreciation 8,194 6,101
------- -------
$10,722 $10,556
======= =======
<PAGE>
12
8. Long-Term Debt
2000 1999
Term loans
Interest at 8%, due July 2000 to September 2001, payable
to affiliated physicians $ 155 $ 716
Interest ranging from 5.75% to 12% (1999 - 5.75% to 12%),
due April 2001 to March 2007, collateralized by equipment 5,099 6,085
------ ------
5,254 6,801
Less current portion 2,332 2,181
------ ------
2,922 $4,620
====== ======
During fiscal 1999, the Company maintained participating loan agreements
providing for additional monthly payments on principal based on a percentage of
net revenues in excess of the minimum monthly payments. Such additional monthly
payments ceased once the lender received a specified implicit rate of return.
During fiscal 1999, the participating loan terms were amended to increase the
minimum monthly payments to a level based on the original specified implicit
rate of return and to eliminate the additional monthly payments based on a
percentage of revenue. In March 1999, the participating loans were fully repaid
in cash.
Aggregate minimum repayments of principal for each of the next five years
and thereafter are as follows:
2001 $ 2,332
2002 2,003
2003 472
2004 172
2005 85
Thereafter 190
9. Obligations under Capital Leases
The leases expire between 2000 and 2004 and include imputed interest at
rates ranging from 6% to 14%. The majority of capital leases are denominated in
U.S. dollars and represent leases for lasers and medical equipment. The
capitalized lease obligations represent the present value of future minimum
annual lease payments as follows:
2000 1999
2000 $ -- $ 5,141
2001 5,472 4,429
2002 3,589 2,890
2003 1,316 816
2004 326 --
------- -------
10,703 13,276
Less interest portion 1,637 2,149
------- -------
9,066 11,127
Less current portion 5,260 4,717
------- -------
$ 3,806 $ 6,410
======= =======
10. Deferred Compensation and Rent
Deferred compensation represents a plan to compensate certain key
managerial executives and was included as part of the acquisition of 20/20 Laser
Centers, Inc. ("20/20"). The plan vested 100% on the earlier of February 15,
1999 or termination of employment, as defined. On May 31, 1998, $320,000 was
accrued on potential deferred compensation of $320,000. During fiscal 1999,
outstanding options were exercised resulting in the elimination of the
outstanding liability.
Deferred rent represents the benefit of operating lease inducements which
are being amortized on a straight-line basis over the related term of the lease.
<PAGE>
13
11. Capital Stock
At May 31, 2000 the Company's capital stock position included Common
Stock and Warrants as reflected in the Consolidated Statements of
Stockholders' Equity and also offered options for corporate employees and
certain other individuals.
a) Common Stock
i) In the 1997 acquisition of The Vision Source, Inc., the Company issued
421,804 common shares which were placed in escrow. 210,902 shares were
released from escrow within 15 months from the date of issue (see Note
18). Release of 210,902 of the remaining shares was subject to an earn-out
formula. These shares represent contingent purchase consideration and,
with the completion of the earn out period these shares were released from
escrow and assigned a value of $6.645/share as per the contract resulting
in an increase to capital stock of $1,397,000. A final tranche of shares
valued at $4,056,000 representing 536,764 shares as per the terms of the
purchase agreement will be issued subsequent to fiscal 2000.
ii) On November 4, 1999, the Company announced that it intended to purchase up
to 1,870,000 of its common shares, representing approximately 5% of
37,453,188 common shares outstanding at that time. The purchases are to
take place from time to time, depending on market conditions, through the
facilities of the Nasdaq National Market and The Toronto Stock Exchange.
The Company commenced purchasing shares on November 8, 1999 and will
terminate purchasing by November 4, 2000, or by such earlier date as the
Company may determine. The prices which the Company will pay for any
common shares will be the market price of the shares at the time of
acquisition. Any common shares acquired by the Company will be cancelled.
At May 31, 2000, the Company had purchased and cancelled 710,000 common
shares at an average market price of U.S. $14.60 per share.
iii) During fiscal 1999, the Company introduced an employee share purchase plan
to facilitate the ownership of the Company's common shares by its
employees. Employee purchases are supplemented annually by an additional
25% contribution by the Company.
iv) On September 24, 1998, the Company exercised a contractual option to
purchase 116,771 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 Cdn.$6.20 per share. The remaining allocation of the cash paid
for the shares was reflected as a reduction in deficit. In addition,
shares were retired in connection with a divestiture (Note 19).
b) Warrants
Effective January 1, 2000, the Company granted warrants to purchase
100,000 of the Company's common shares at an exercise price of $13.063 per
share, representing the average market price for the common shares during
the twenty trading days prior to the effective date of the grant of the
warrants. These warrants were granted to an employee benefits company in
consideration for establishing a business relationship. The warrants are
non-transferable, have a five (5) year term and vest over a period of
three years. This transaction was exempt from registration under the
Securities Act pursuant to Section 4(2) as a transaction not involving a
public offering. The fair value of the options granted was estimated at
the date of grant using the Black-Scholes option pricing model with the
following assumptions: risk free interest of 6.35%; dividend yield of 0%;
volatility factor of the expected market price of the Company's common
shares of .35 and an expected life of five (5) years.
<PAGE>
14
c) Options
At May 31, 2000, the Company has reserved 4,116,000 common shares for
issuance under its stock option plan for corporate employees and certain
other individuals. Options granted have terms ranging from five (5) to
eight (8) years. Vesting provisions on options granted to date include
options that vested immediately, options that vest in equal amounts
annually over the first four years of the option term and options that
vest entirely on the first anniversary from the grant date. Those exercise
prices, which are denominated in Canadian dollars, for options outstanding
as of May 31, 2000 range as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
-------------------------------- ----------------------------
Price Range Number of Weighted-Average Number of Weighted-
Options Price Options Average Price
<S> <C> <C> <C> <C>
CDN$2.50 - CDN$7.25 1,573,458 CDN$3.35 1,573,458 CDN$3.35
CDN$10.70 - CDN$19.73 277,726 CDN$11.51 262,450 CDN$12.22
CDN$20.75 - CDN$30.66 626,231 CDN$26.39 249,545 CDN$22.98
CDN$32.18 - CDN$74.50 48,844 CDN$50.16 2,013 CDN$43.35
</TABLE>
During the year, options denominated in U.S. dollars were issued and
outstanding with prices ranging as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
-------------------------------- ----------------------------
Price Range Number of Weighted-Average Number of Weighted-
(in US$) Options Price Options Average Price
<S> <C> <C> <C> <C>
$ 6.73 - $18.37 47,147 US$10.91 -- --
$18.63 - $23.50 455,601 US$19.04 60,806 US$19.55
$23.62 - $24.53 9,250 US$23.92 -- --
$27.38 - $38.62 10,875 US$30.54 1,781 US$30.82
$41.50 - $50.94 8,300 US$43.63 -- --
</TABLE>
Weighted Weighted
Average Average
Options Strike Price Strike Price
(000's) Per Share Per Share
--------- ------------ ------------
May 31, 1997 1,969 CDN$3.73 US$2.56
Granted 518 11.79 8.09
Exercised (71) 6.12 4.20
-------- --------- --------
May 31, 1998 2,416 CDN$5.39 US$3.70
Granted 783 26.71 17.65
Exercised (507) 7.21 4.77
-------- --------- --------
May 31, 1999 2,692 CDN$11.12 US$7.54
-------- --------- --------
Granted 453 $30.14 $20.62
Exercised (88) 10.71 7.26
-------- --------- --------
May 31, 2000 3,057 CDN$13.95 US$9.49
======== ========= ========
Exercisable at May 31, 2000 2,150 CDN$7.53 US$5.08
======== ========= ========
During 1999, the Company issued 74,668 common shares with a weighted
average strike price of U.S. $4.87 pursuant to option agreements assumed in
connection with the 20/20 acquisition. At May 31, 1999, no further options
relating to these agreements are outstanding.
During 1999, the Company issued 191,337 common shares at U.S. $0.02665 per
share in connection with options granted to third parties for services rendered
to 20/20 that were assumed in connection with the 20/20 acquisition. At May 31,
1999, no further options relating to these agreements are outstanding.
<PAGE>
15
12. Interest and Other and Depreciation and Amortization
2000 1999 1998
Interest and other
Interest on long-term debt $ 498 $ 810 $ 1,200
Interest on obligations under capital lease 1,720 1,540 1,177
Interest and bank charges, net 453 1,992 586
Interest income (7,163) (2,097) (937)
Foreign exchange gains -- -- (592)
-------- -------- --------
$ (4,492) $ 2,245 $ 1,434
======== ======== ========
Depreciation and amortization
Fixed assets $ 11,880 $ 8,643 $ 4,394
Assets under capital lease 2,412 2,409 1,709
Goodwill 3,053 3,060 1,694
Practice management agreements 4,343 822 1,663
-------- -------- --------
$ 21,688 $ 14,934 $ 9,460
======== ======== ========
13. Income Taxes
As at May 31, 2000, the Company has non-capital losses available for
carryforward for income tax purposes of approximately $40,362,000, which are
available to reduce taxable income of future years.
The Canadian losses can only be utilized by the source company whereas the
United States losses are utilized on a United States consolidated basis. The
Canadian losses of $10,895,000 expire as follows:
2001 $ 3,520
2002 2,980
2003 2,332
2004 1,506
2005 557
The United States losses of $29,467,000 expire between 2011 and 2013.
Included in the Canadian losses are $9,210,000 of losses and in the United
States losses are $14,437,000 losses from the acquisitions of 20/20 and
BeaconEye, of which the availability and timing of utilization may be
restricted.
The differences between the provision for income taxes and the amount
computed by applying the statutory Canadian income tax rate to loss before
income taxes and non-controlling interest were as follows:
<PAGE>
16
<TABLE>
<CAPTION>
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Income tax recovery based on the Canadian statutory income tax
44.6% rate of 44.6% (1999 - 44.6%) $ 241 $(1,070) $(3,896)
o Current year's losses not utilized 1,950 263 2,196
o Expenses not deductible for income tax purposes 1,675 4,203 2,339
o Adjustments of cash vs. accrual tax deductions for U.S. income tax 363 223 1,545
purposes
o Utilization of prior year's losses (2,995) (3,559) (1,225)
o Corporate Minimum Tax, Large Corporations Tax and foreign tax 879 1,129 200
o LLC's taxable income allocated to non-TLC members (192) (312) --
o Other 213 (61) (88)
------- ------- -------
Provision for income taxes $ 2,134 $ 816 $ 1,071
======= ======= =======
</TABLE>
The provision for income taxes is as follows:
2000 1999 1998
------- ------- -------
Current:
Canada $ 322 $ 34 $ 940
United States - federal 1,221 237 --
United States - state 502 545 131
Other 89 -- --
-----------------------------
$ 2,134 $ 816 $ 1,071
======= ======= =======
14. Commitments and Contingencies
As of May 31, 2000, the Company has entered into operating leases for
rental of office space and equipment, which require future minimum lease
payments aggregating $34,194,000. Future minimum lease payments in aggregate and
over the next five years are as follows:
2001 $8,537
2002 7,962
2003 7,403
2004 6,387
2005 3,905
As of May 31, 2000, the Company has entered into a one year maintenance
agreement with a major laser manufacturer for all of that manufacturer's lasers
which are currently in use by the Company, which require future minimum lease
payments aggregating $1,645,000. Future minimum maintenance payments do not
extend past the next 12 months.
As of May 31, 2000, the Company has entered into contracts for the
completion of freehold facilities and furnishings for center and office
facilities. Future minimum contracts valued at $5,900,000 will be payable within
the next 12 months.
One of the Company's subsidiaries, together with other investors, has
jointly and severally guaranteed the obligations of an equity investee. Total
liabilities of the equity investee under guarantee amount to approximately
$2,395,000 at May 31, 2000.
15. Segmented Information
The Company has two reportable segments: refractive, and other. The
refractive segment is the core focus of the Company which reflects the provision
of laser vision correction. The other segment includes an accumulation of
non-core business activities including the management of secondary care centers
which provide advanced levels of eyecare, activities involving the development
of eyeVantage.com as an internet based company and managed care (applicable only
in 1999 and prior). In prior periods, activity in the secondary care reflected a
larger portion of the business activity and was presented as a separate segment.
The disposal of the management of certain secondary care
<PAGE>
17
sites in 1999 has reduced the magnitude of activities from secondary care such
that a separate segment for secondary care is no longer meaningful.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on operational components including paid procedures, net
revenue after doctors' fees, fixed costs and income (loss) before income taxes.
Intersegment sales and transfers are minimal and are measured as if the
sales or transfers were to third parties.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies. Most of the
business units were acquired or developed as a unit and management at the time
of acquisition was retained.
The Company's business segments are as follows:
<TABLE>
<CAPTION>
2000 Refractive Other Total
-----------------------------------
<S> <C> <C> <C>
Revenues and physician costs:
Net revenues $ 190,233 $ 10,990 $ 201,223
Doctor compensation 17,333 2 17,335
-----------------------------------
Net revenue after doctor compensation 172,900 10,988 183,888
-----------------------------------
Expenses:
Operating 153,729 12,477 166,206
Interest and other (4,574) 82 (4,492)
Depreciation of fixed assets and assets under capital lease 12,886 1,406 14,292
Amortization of intangibles 6,363 1,033 7,396
-----------------------------------
168,404 14,998 183,402
-----------------------------------
Income (loss) from operations 4,496 (4,010) 486
Income taxes (1,778) (356) (2,134)
Non-controlling interest (2,486) (520) (3,006)
-----------------------------------
Net loss $ 232 $ (4,886) $ (4,654)
===================================
Total assets $ 257,630 $ 39,085 $ 296,715
===================================
Total fixed and intangible expenditures $ 65,941 $ 8,477 $ 74,418
===================================
<CAPTION>
1999 Secondary
Refractive Care Other Total
------------------------------------------------
Revenues and physician costs:
Net revenues $ 132,428 $ 11,389 $ 3,093 $ 146,910
Doctor compensation 12,824 -- -- 12,824
------------------------------------------------
Net revenues after doctor compensation 119,604 11,389 3,093 134,086
------------------------------------------------
Expenses:
Operating 90,185 8,972 3,618 102,775
Interest and other 2,343 (125) 27 2,245
Depreciation of fixed assets and assets under capital lease 9,804 986 262 11,052
Amortization of intangibles 2,546 1,201 135 3,882
Start-up and development expenses -- -- 3,606 3,606
Restructuring charges (non-cash portion - $11,167) -- 10,298 2,626 12,924
------------------------------------------------
104,878 21,332 10,274 136,484
------------------------------------------------
Income (loss) from operations 14,726 (9,943) (7,181) (2,398)
Income taxes (616) -- (200) (816)
Non-controlling interest (800) (376) 728 (448)
------------------------------------------------
Net income (loss) $ 13,310 $ (10,319) $ (6,653) $ (3,662)
================================================
Total assets $ 266,021 $ 16,678 $ 4,151 $ 286,850
================================================
Total fixed and intangible expenditures $ 25,803 $ 7,707 $ 2,026 $ 35,536
================================================
</TABLE>
<PAGE>
18
<TABLE>
<CAPTION>
1998 Secondary
Refractive Care Other Total
------------------------------------------------
<S> <C> <C> <C> <C>
Revenues and physician costs:
Net revenues $ 51,079 $ 6,641 $ 1,402 $ 59,122
Doctor compensation 5,242 -- -- 5,242
------------------------------------------------
Net revenues after doctor compensation $ 45,837 $ 6,641 $ 1,402 $ 53,880
------------------------------------------------
Expenses:
Operating 41,620 6,294 1,607 49,521
Interest and other 416 87 189 692
Depreciation of fixed assets and assets under capital lease 4,367 1,607 129 6,103
Amortization of intangibles 2,740 578 39 3,357
Start-up and development expenses -- -- 3,267 3,267
------------------------------------------------
49,143 8,566 5,231 62,940
------------------------------------------------
Income (loss) from operations (3,306) (1,925) (3,829) (9,060)
Income taxes (994) (71) (6) (1,071)
Non-controlling interest 78 (116) 631 593
------------------------------------------------
Net loss $ (4,222) $ (2,112) $ (3,204) $ (9,538)
================================================
Total assets $ 137,726 $ 23,887 $ 2,599 $ 164,212
================================================
Total fixed and intangible expenditures $ 30,542 $ 12,626 $ 1,750 $ 44,918
================================================
</TABLE>
The Company's geographic segments are as follows:
2000 United
Canada States Total
--------------------------------
Revenues and physician costs:
Net revenues $ 17,275 $183,948 $201,223
Doctor compensation 2,876 14,459 17,335
--------------------------------
Net revenue after doctor compensation $ 14,399 $169,489 $183,888
================================
Total fixed assets and intangibles $ 22,195 $133,779 $155,974
================================
1999 United
Canada States Total
--------------------------------
Revenues and physician costs:
Net revenues $ 16,247 $130,663 $146,910
Doctor compensation 2,583 10,241 12,824
--------------------------------
Net revenue after doctor compensation $ 13,664 $120,422 $134,086
================================
Total fixed assets and intangibles $ 18,895 $ 78,095 $ 96,990
================================
1998 United
Canada States Total
--------------------------------
Revenues and physician costs:
Net revenues $ 11,175 $ 47,947 $ 59,122
Doctor compensation 1,475 3,767 5,242
--------------------------------
Net revenue after doctor compensation $ 9,700 $ 44,180 $ 53,880
================================
Total fixed assets and intangibles $ 15,111 $ 74,309 $ 89,420
================================
<PAGE>
19
16. Financial Instruments
Fair Value
The carrying values of cash equivalents, accounts receivable, accounts and
accrued liabilities and income taxes payable approximates their fair values
because of the short-term maturities of these instruments.
Given the large number of individual long-term debt instruments and
capital lease obligations held by the Company, it is not practicable within
constraints of timeliness and cost to determine fair value. However, the Company
expects that if it were able to renegotiate such instruments at the current
market rates available to the Company, it would obtain more favorable terms
given the Company's growth and current financial position.
The fair values of the Company's short-term investments are based on
quotes from brokers. In fiscal 1999, the Company's short-term investment
portfolio consisted substantially of corporate bonds. The bonds were purchased
with the proceeds from the Company's May 1999 share offering. The bonds had
remaining terms to maturity not exceeding six months with a substantial majority
of the bonds having remaining terms to maturity of less than one month.
Portfolio investments consist of the Company's investment in the common
and preferred shares of LaserSight Incorporated and the common shares of three
other publicly traded companies (1999 - one). These investments are accounted
for at the lower of cost or market. The fair value of the Company's portfolio
investments, excluding the LaserSight Incorporated preferred shares, are based
on quotes from brokers. Fair value information for the LaserSight Incorporated
preferred shares is not readily determinable and therefore the preferred shares
have been included at their cost in the fair value information presented below:
2000 1999
------- -------
Short-term investments $ -- $26,212
Portfolio investments (cost: 2000 - $27,895 ; 1999 - $10,907) $23,444 21,470
Risk Management
The Company is exposed to credit risk on accounts receivable from its
customers. In order to reduce its credit risk, the Company has adopted credit
policies which include the analysis of the financial position of its customers
and the regular review of credit limits. At May 31, 2000, the Company had
recorded an allowance for doubtful accounts of $2,849,000 (1999 - $1,479,000).
The Company does not have a significant exposure to any individual customer,
except for amounts due from those refractive and secondary eye practices which
it manages and which are collateralized by the practice's patient receivables.
Cash accounts at the Canadian banks are insured by the the Canadian
Depositary Insurance Corporation for up to Cdn.$60,000. In the United States,
the Federal Depositary Insurance Corporation insures cash balances up to
$100,000. As of May 31, 2000, bank deposits exceeded insured limits by
$6,030,492 (1999 - $6,572,530).
The Company operates in Canada and the United States and is therefore
exposed to market risks related to foreign currency fluctuations between these
currencies. As well, there is cash flow exposure to interest rate fluctuations
on debt carrying floating rates of interest.
17. Acquisitions
2000 Transactions
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 30, 1999, the Company made a capital contribution of $1,002,000
representing a 50.1% interest in TLC USA LLC, the operating company, for
activities of a strategic alliance with a subsidiary of Kaiser Permanente
with
<PAGE>
20
the intention to initially own and operate three refractive centers in
California and to eventually develop additional centers in markets in the
United States where Kaiser Permanente has a significant presence.
ii. On July 8, 1999, the Company acquired 50.1% of the operating assets and
liabilities of Laser Eye Care of California LLC with an investment of
$11,200,000 in cash and certain operating assets and liabilities of the
Company's two California refractive centers. Additional amounts were
payable contingent upon achieving certain levels of profit. At December
31, 1999 at the completion of the earn out period, the required levels of
profit were met and an additional payment of $6,000,000 was made to
complete the transaction.
iii. On August 18, 1999, the Company acquired the laser vision correction
assets of Laser Vision Consultants of Albany, P.L.L.C. in exchange for
$1,000,000 cash and 30,000 common shares with a value of $728,000 which
will be released equally over (3) three years.
iv. On December 17, 1999, eyeVantage.com, Inc., an 83% owned subsidiary of the
Company, acquired the operating assets and liabilities of Eye Care
Consultants, Inc. in exchange for $750,000 in cash, the assumption of
$250,000 of liabilities and shares with a value of $3,000,000 in
eyeVantage.com, Inc. in the course of a public offering of eyeVantage.com
shares. The value of $3,000,000 is payable in cash as a result of the
public offering not being completed within the guidelines set by the
acquisition agreement. EyeVantage.com is currently in negotiations
regarding the payments of this obligation, which is non-interest bearing
and is payable in (8) eight equal quarterly installments, the first of
which is due on June 30, 2000.
v. On December 31, 1999, the earn out period relating to the 1997 acquisition
of 100% of Vision Source, Inc. was completed. 210,902 shares of the
Company with a value of $1,397,000 as determined by the acquisition
agreement were released from escrow to the sellers of Vision Source, Inc.
An additional 536,764 shares valued at $4,056,000 will be issued to the
sellers of Vision Source, Inc. to reflect the final calculation of
contingent amounts as determined by the earn-out formula.
vi. On January 11, 2000, eyeVantage.com, Inc., an 83% subsidiary of the
Company acquired certain of the operating assets and liabilities of
Optical Options, Inc. in exchange for shares with a value of $6,000,000 in
eyeVantage.com, Inc. in the course of a public offering of eyeVantage.com,
Inc. shares. Since the public offering was not completed within the
guidelines set by the acquisition agreement, the Company is required to
issue two notes payable to the sellers for $3,000,000 each, the first of
which bears an interest rate of 8% and is due on July 10, 2000 and the
second of the notes which bears an interest rate of 8% and is payable in
(8) eight equal quarterly installments, the first of which is due on
August 1, 2000.
vii. On February 15, 2000, the Company acquired the membership interests of New
Jersey Practice Management LLC for $2,828,000 in cash and amounts
contingent upon future events. $600,000 is being held in escrow for a
period of one year subject to an adjustment of the purchase price
determined by completion of the earn out period and calculation of a
contingent amount. Contingent amounts are determined based on fees
received by the Company pursuant to an Administrative Services Agreement.
viii. On March 31, 2000, the Company acquired certain assets of a physician's
practice located in the state of New York ("New York Practice") in
exchange for $11,860,000 in cash and common shares with a value of up to
$3,000,000 contingent upon future events. Contingent amounts are
determined based on fees received by the Company pursuant to an
Administrative Services Agreement.
ix. On May 8, 2000, the Company acquired an 80% membership interest in Laser
Eye Care of Torrance, LLC in exchange for $3,222,000 in cash through Laser
Eye Care of California, LLC, a 50.1% subsidiary of the Company.
<PAGE>
21
The total consideration on acquisitions was allocated to net assets
acquired on the basis of their fair values as follows:
<TABLE>
<CAPTION>
Laser Eye
Care of New York
California Practice Other Total
----------------------------------------------
<S> <C> <C> <C> <C>
Current assets (including cash of $1,137) $ 153 $ -- $ 1,102 $ 1,255
Capital assets 284 -- 564 848
Assets under lease 1,807 -- -- 1,807
Goodwill -- -- 15,588 15,588
Practice management agreements 16,852 12,006 7,802 36,660
Current liabilities (146) -- (913) (1,059)
Long-term debt -- -- (280) (280)
Obligations under capital leases (1,607) -- -- (1,607)
Non-controlling interest (868) -- (1,078) (1,946)
---------------------------------------------
$ 16,475 $ 12,006 $ 22,785 $ 51,266
---------------------------------------------
Funded by:
Issuance of common shares $ -- $ -- $ 2,125 $ 2,125
Contribution of cash 16,000 11,860 7,445 35,305
Notes payable -- -- 9,000 9,000
Common shares to be issued -- -- 4,056 4,056
Acquisition costs 475 146 159 780
---------------------------------------------
$ 16,475 $ 12,006 $ 22,785 $ 51,266
=============================================
</TABLE>
1999 Transactions
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 Robert C. Bockoven with three locations in Washington, in exchange for
cash and debt. Consideration was $750,000 for the Figgs Eye Clinic assets
and liabilities and $725,000 for the practice of Robert C. Bockoven.
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. Contingent amounts are
calculated based on a percentage of excess income over a target amount for
the next (3) three years.
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. Contingent amounts are calculated
based on meeting certain annual net income targets over (5) five years.
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
an ownership interest in certain future refractive surgery centers. No
value will be assigned to the ownership interest; however, the
non-controlling interest percentage on future earnings attributable to
these new refractive surgery centers will be reflected accordingly upon
consolidation in the future.
vii. On March 1, 1999, the Company made a 51% capital contribution of $205,000
in cash in TLC The Laser Center (Green Bay/Milwaukee) LLC, which operates
a laser center in the Green Bay, Wisconsin area.
<PAGE>
22
During the year, the Company completed transactions with doctor groups to
enhance the network of optometrists and ophthalmologists in exchange for common
shares with a value of $505,000. Miscellaneous acquisitions were completed in
exchange for cash of $1,407,000.
The total consideration on acquisitions was allocated to net assets
acquired on the basis of their fair values as follows:
Current assets (including cash of $2,428) $ 2,261
Capital assets 1,674
Goodwill 7,648
Practice management agreements 6,060
Current liabilities (621)
Long-term debt (1,221)
Non-controlling interest (476)
--------
$ 15,325
========
Funded by:
Issuance of common shares $ 837
Issuance of debt 738
Contribution of cash 13,465
Acquisition costs 285
--------
$ 15,325
========
1998 Transactions
BeaconEye Inc.
On April 16, 1998, the Company, through a take-over bid circular, acquired
97% of the common shares of BeaconEye Inc. ("BeaconEye") and the remaining 3%
was acquired by April 24, 1998. The acquisition was financed through the
issuance of 872,293 common shares.
The Company's investment in BeaconEye has been accounted for by the
purchase method and the results of operations have been consolidated from April
16, 1998.
The total cost of the acquisition was allocated to the net assets acquired
on the basis of their fair values as follows:
Current assets $ 1,200
Restricted cash 1,380
Capital assets and assets under capital lease 15,844
Goodwill 9,011
Current liabilities assumed (6,141)
Long-term debt and obligations under capital leases (5,037)
--------
$ 16,257
========
Funded by:
Issuance of common shares $ 11,692
Funding of BeaconEye obligations and restructuring costs
through April 16, 1998 4,483
Acquisition costs 82
--------
$ 16,257
========
Wisconsin
In the fourth quarter of 1998, the Company formed a new wholly-owned
subsidiary in the State of Wisconsin (the "subsidiary"). The subsidiary entered
into a practice management agreement with a local doctor group, and intends to
jointly develop a medical practice to be owned by the local doctor group and
managed by the subsidiary. In consideration for entering into the practice
management agreement, the Company issued the consideration described below which
was allocated to the net assets acquired as follows:
<PAGE>
23
Practice management agreement $2,881
======
Funded by:
Issuance of common shares $2,581
Cash 300
------
$2,881
======
Michigan
On February 1, 1998, the Company entered into an agreement (the "Venture")
in the State of Michigan. The Venture, called TLC Michigan, LLC, is owned 50.1%
by the Company and 49.9% by a group of ophthalmologists. The Venture owns
secondary care centers throughout Michigan, and, through subsidiaries, a
refractive laser center and an 80% interest in a cosmetic laser center in the
Detroit area.
The Company's investment in the Venture has been accounted for by the
purchase method and the results of operations have been consolidated from
February 1, 1998.
The total cost of the acquisition was allocated to the net assets acquired
on the basis of their fair values as follows:
Current assets (including cash of $500,000) $ 552
Capital assets 567
Practice management agreement 6,403
Investments in subsidiaries 754
Note receivable 4,682
Other assets 146
Current liabilities including current portion of long-term debt (298)
Long-term debt (332)
Non-controlling interest (5,912)
-------
$ 6,562
=======
Funded by :
Issuance of common shares $ 626
Contribution of cash 500
Contribution of assets 754
Note payable to the Venture 4,682
-------
$ 6,562
=======
18. Divestitures and Restructuring Charges
In the last quarter of fiscal 1999, management made a decision to
restructure operations in connection with its managed care and secondary care
businesses. The following divestitures were completed in connection with this
restructuring:
(a) On May 31, 1999, the Company sold certain assets of NorthWest Eye Inc. in
exchange for the assumption of certain liabilities by the purchaser. In
connection with the sale, the Company recorded a restructuring charge of
$10,300,000 relating to the write-off of intangibles and amounts due from
affiliated physician groups and decided not to continue with secondary
care at this location.
(b) On April 27, 1999, the Company sold the capital assets and intangibles of
TLC The Laser Center (Wisconsin Management) Inc. and TLC Wisconsin Eye
Surgery Center Inc. in exchange for 139,266 common shares of the Company.
These assets had a net book value of $4,047,000 and no gain or loss was
recorded in connection with the transaction. The shares received by the
Company upon disposition of these subsidiaries were cancelled, with
capital stock being reduced using the average value of common shares as at
April 27, 1999 of Cdn.$ 6.26.
(c) On May 19, 1999, the Company sold all of the assets of its managed care
subsidiary to the former management of the subsidiary. The Company
incurred a loss on the sale of $2.6 million.
<PAGE>
24
19. Supplemental Cash Flow Information
Non-cash transactions:
<TABLE>
<CAPTION>
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Issue of warrants to be expensed over three years $ 532 $ -- $ --
Capital stock issued as remuneration 387 600 --
Capital stock issued for acquisitions 2,125 837 16,417
Reversal of accrual for costs of IPO 139 -- --
Accrued purchase obligations 13,200 738 4,682
Capital lease obligations relating to equipment purchases 1,366 645 2,196
</TABLE>
Cash paid for the following:
<TABLE>
<CAPTION>
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Interest $2,671 $4,342 $2,963
====== ====== ======
Income taxes $5,647 $ 978 $ 458
====== ====== ======
</TABLE>
