10-KT/A 1 c81156e10vktza.txt AMENDMENT NO. 1 TO FORM 10-KT ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- AMENDMENT NO. 1 ON FORM 10-K/A TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM JUNE 1, 2002 TO DECEMBER 31, 2002 COMMISSION FILE NUMBER: 0-29302 ---------- TLC VISION CORPORATION (Exact name of registrant as specified in its charter) NEW BRUNSWICK, CANADA 980151150 (State or jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 5280 SOLAR DRIVE, SUITE 300 L4W 5M8 MISSISSAUGA, ONTARIO (Zip Code) (Address of principal executive offices) Registrant's telephone, including area code: (905) 602-2020
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Shares, No Par Value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). [X] Yes [ ] No As of June 30, 2002, the aggregate market value of the registrant's Common Shares held by non-affiliates of the registrant was approximately $152.4 million. As of March 31, 2003, there were 64,595,226 shares of the registrant's Common Shares outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Definitive Proxy Statement for the Company's 2003 annual shareholders meeting (incorporated in Part III to the extent provided in Items 10, 11, 12 and 13). ================================================================================ Explanatory Note This Amendment No. 1 on Form 10-K/A is being filed by the Registrant solely for the purpose of reflecting that a cumulative effect of accounting change in the amount of $15,174,000 recorded by the Registrant during the fiscal year ended May 31, 2002 was made effective as of June 1, 2001, and not in the calendar quarter ended June 30, 2002 as previously disclosed in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 8 Financial Statements and Supplementary Data, Footnote 3. Change in Fiscal Year-End, unaudited comparative financial information for the seven months ended December 31, 2002 and 2001. During the fiscal year ended May 31, 2002, the Company recorded a $15,174,000 "Cumulative effect of accounting change" related to the early adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Intangible Assets"("SFAS No. 142"). Although the final calculations of the effect of this accounting change were determined during the May 31, 2002 annual and quarterly closing, pursuant to the provisions of SFAS 142 the change was made effective as of June 1, 2001, the beginning of the fiscal year ended May 31, 2002. Effective June 1, 2002 the Company changed its fiscal year end to December 31 from May 31. The Registrant's Annual Report on Form 10-K for the transition period from June 1, 2002 to December 31, 2002 is being amended to reflect the occurrence of this "Cumulative effect of accounting change" in the calendar quarter ended June 30, 2001 and not in the calendar quarter ended June 30, 2002. The amendment does not affect the Consolidated Statements of Operations for the transition period ended December 31, 2002 or the fiscal year ended May 31, 2002 or any amounts reported in any Balance Sheet. Please see amended sections of Form 10-K/A for more detailed information. This Annual Report on Form 10-K (herein, together with all amendments, exhibits and schedules hereto, referred to as the "Form 10-K") contains certain forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which statements can be identified by the use of forward looking terminology, such as "may", "will", "expect", "anticipate", "estimate", "plans" or "continue" or the negative thereof or other variations thereon or comparable terminology referring to future events or results. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth elsewhere in this Form 10-K. See the "Item 1. Business - Risk Factors" for cautionary statements identifying important factors with respect to such forward looking statements, including certain risks and uncertainties, that could cause actual results to differ materially from results referred to in forward looking statements. Unless the context indicates or requires otherwise, references in this Form 10-K to the "Company" or "TLC Vision" shall mean TLC Vision Corporation and its subsidiaries. The Company has changed its fiscal year end from May 31 to December 31. Therefore, references in this Form 10-K to "fiscal 2002" shall mean the 12 months ended on May 31, 2002 and "transitional period 2002" shall mean the seven months ended on December 31, 2002. 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. 2 PART II ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (AS RESTATED) The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and the related notes thereto, which are included in Item 8 of this Form 10-K. The following discussion is based upon the Company's results under U.S. generally accepted accounting principles. Unless otherwise specified, all dollar amounts are U.S. dollars. See Note 1 to the Consolidated Financial Statements of the Company included in Item 8 of this Report. OVERVIEW TLC Vision Corporation (formerly TLC Laser Eye Centers Inc.) and its subsidiaries ("TLC Vision" or the "Company") is a diversified healthcare service company focused on working with physicians to provide high quality patient care primarily in the eye care segment. The Company's core business revolves around refractive surgery, which involves using an excimer laser to treat common refractive vision disorders such as myopia (nearsightedness), hyperopia (farsightedness) and astigmatism. The Company's business model includes arrangement ranging from owning and operating fixed site centers to providing access to lasers through fixed site and mobile service relationships. The Company also furnishes independent surgeons with mobile or fixed site access to cataract surgery equipment and services through its Midwest Surgical Services, Inc. ("MSS") subsidiary. In addition, the Company owns a 51% majority interest in Vision Source, which provides optometric franchise opportunities to independent optometrists. Through its OR Partners and Aspen Healthcare divisions, TLC Vision develops, manages and has equity participation in single-specialty eye care ambulatory surgery centers and multi-specialty ambulatory surgery centers. In 2002, the Company formed a joint venture with Vascular Sciences Corporation ("Vascular Sciences") to create OccuLogix, L.P., a partnership focused on the treatment of an eye disease, known as dry age-related macular degeneration, via rheopheresis, a process for filtering blood. Effective June 1, 2002, the Company changed its fiscal year-end from May 31 to December 31. In accordance with an Agreement and Plan of Merger with LaserVision, the Company completed a business combination with LaserVision on May 15, 2002, which resulted in LaserVision becoming a wholly-owned subsidiary of TLC Vision. Accordingly, LaserVision's results are included in the Company's statement of operations beginning on the date of acquisition. LaserVision is a leading access service provider of excimer lasers, microkeratomes and other equipment and value and support services to eye surgeons. The Company believes that the combined companies can provide a broader array of services to eye care professionals to ensure these individuals may provide superior quality of care and achieve outstanding clinical results. The Company believes this will be the long-term determinant of success in the eye surgery services industry. The Company serves surgeons who performed over 116,200 refractive and cataract procedures at the Company's centers or using the Company's laser access services during the seven months ended December 31, 2002. The Company is assessing patient, optometric and ophthalmic industry trends and developing strategies to improve laser vision correction procedure volumes and increased revenues. Cost reduction initiatives continue to target the effective use of funds and our growth initiative is focusing on future development opportunities for the Company in the eye care industry. The Company recognizes revenues at the time procedures are performed or services are rendered. Revenues include amounts charged patients for procedures performed at owned laser centers, amounts charged physicians for laser access and service fees, and management fees from managing refractive and secondary care practices. Under the terms of management service agreements, the Company provides non-clinical services, which include facilities, staffing, equipment lease and maintenance, marketing and administrative services to refractive and secondary care practices in return for management fees. The management fees are typically addressed as a per procedure fee. For third party payor programs and corporations with arrangements with TLC Vision, the Company's management fee and the fee charged by the surgeon are both discounted in proportion to the discount afforded to these organizations. While the Company does not direct the manner in which the surgeons practice medicine, the Company does direct the day-to-day non-clinical operations of the centers. The management service agreements typically are for an extended period of time, ranging from five to 15 years. Management fees are equal to the net revenue of the physician practice, less amounts retained by the physician groups. Procedure volumes represent the number of laser vision correction procedures completed for which the amount that the patient has been invoiced for the procedure exceeds a predefined company wide per procedure revenue threshold. Procedures may be invoiced less than the threshold amounts primarily for promotional or marketing purposes and are not included in the procedure volume numbers reported. Doctors' compensation as presented in the financial statements represents the cost to the Company of engaging ophthalmic professionals to perform laser vision correction services at the Company's owned laser centers and fees paid to optometrists for 3 pre- and post-operative care. Where the Company manages laser centers, the professional corporations or physicians performing the professional services at such centers engage ophthalmic professionals. As such, the costs associated with arranging for these professionals to furnish professional services are reported as a cost of the professional corporation and not of the Company. Included in costs of revenue are the laser fees payable to laser manufacturers for royalties, use and maintenance of the lasers, variable expenses for consumables, and facility fees, as well as center costs associated with personnel, facilities and depreciation of center assets. In Company owned centers, the Company engages doctors to provide laser vision correction services and the amounts paid to the doctors also are reported as a cost of revenue. Selling, general and administrative expenses include expenses that are not directly related to the provision of laser correction services or cataract services. In the transitional period ended December 31, 2002, the Company's procedure volume increased by 68,800 compared to the corresponding period of 2001. The seven-month contribution of LaserVision accounted for an increase of 76,700 while the TLC Vision procedures decreased by 7,900 to 39,500. The Company believes that the reduction in procedure volume is indicative of overall conditions in the laser vision correction industry. The laser vision correction industry has experienced uncertainty resulting from a number of issues. Being an elective procedure, laser vision correction volumes have been depressed by economic and stock market conditions, rising employment and the uncertainty associated with the war on terrorism currently being experienced in North America which is reflected in a weakening of the consumer confidence index. Also contributing to the decline in procedure volume is a wide range of consumer prices for laser vision correction procedures, the bankruptcies of a number of deep discount laser vision correction companies, the ongoing safety and effectiveness concerns arising from the lack of long-term follow-up data and negative news stories focusing on patients with unfavorable outcomes from procedures performed at centers competing with the Company. DEVELOPMENTS DURING TRANSITIONAL PERIOD GOODWILL IMPAIRMENT The Company adopted the accounting standard of Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets effective June 1, 2001. Under the new standard, TLC Vision is required to test of goodwill for impairment at least annually, but more frequently if indicators of impairment exist. An impairment analysis was conducted by TLC Vision as of November 30, 2002. To determine the amount of the impairment the Company used a fair value methodology based on present value of expected future cash flows. The Company determined that goodwill was impaired and recorded an impairment charge of $22.1 million in the seven-month period ended December 31, 2002. This charge was comprised of $21.8 million that relates to the goodwill attributable to reporting units acquired in the LaserVision acquisition and $0.3 million relating to goodwill attributable to reporting units acquired in prior years. MANUFACTURER SETTLEMENT In July 2001, two laser manufacturers reported settling a class action antitrust case. In August 2002, LaserVision received $8.0 million in cash as a result of the settlement and TLC Vision received $7.1 million in cash. The cash received by LaserVision reduced the receivable recorded in the LaserVision purchase price allocation. The cash received by TLC Vision was recorded as a gain of $6.8 million (net of $0.3 million for its obligations to be paid to the minority interests). ACQUISITIONS On August 1, 2002, the Company acquired a 55% ownership interest in an ambulatory surgery center (ASC) in Mississippi for $7.6 million in cash. The Company also has a contingent obligation to purchase an additional 5% ownership interest per year for $0.7 million in cash during each of the next four years. This ASC specializes in cataract surgery, and the acquisition was accounted for under the purchase method of accounting. Net assets acquired were $7.6 million, which included $7.4 million of goodwill and $0.2 million of other intangible assets. 4 RESTRUCTURING During the transitional period ended December 31, 2002, the Company recorded a $4.7 million restructuring charge for the closure of 13 centers and the elimination of 36 full-time equivalent positions primarily at the Company's Toronto headquarters. The total restructuring expense for the transitional period of $4.2 million consists of $4.7 million offset by the reversal into income of $0.5 million of restructuring charges related to prior year accruals that were no longer needed as of December 31, 2002. All restructuring costs will be financed through the Company's cash and cash equivalents. A total of $2.3 million of this provision related to non-cash costs of writing down fixed assets, $1.0 million related to severance, and $1.0 million related to the net future cash costs for lease commitments and costs to sublet available space offset by sub-lease income. The lease costs will be paid out over the remaining term of the lease. RESEARCH AND DEVELOPMENT The Company entered into a joint venture with Vascular Sciences for the purpose of pursuing commercial applications of technologies owned or licensed by Vascular Sciences applicable to the evaluation, diagnosis, monitoring and treatment of age related macular degeneration. According to the terms of the agreement, the Company purchased $3.0 million in preferred stock and has the obligation to purchase an additional $7.0 million of preferred stock in Vascular Sciences if Vascular Sciences attains certain milestones in the development and commercialization of the product. If Vascular Science fails to achieve a milestone, TLC Vision shall have no further obligations to purchase additional shares. The Company expensed a total of $1.0 million of the investment during the fiscal year ended May 31, 2002, and the remaining $2.0 million of the investment was expensed as research and development expense during the seven months ended December 31, 2002. DIVESTITURE In July 1997, TLC Vision acquired 100% interest in Vision Source, Inc. ("Vision Source") for share consideration. Vision Source is a franchiser of private optometric practitioners. In fiscal 2002, the Company signed a restricted stock incentive plan and related agreements which will allow the current management of Vision Source to be awarded up to 49% of the common shares of Vision Source provided certain performance requirements are achieved by May 31, 2005. As of May 31, 2002, 26% of the performance requirement was achieved, resulting in a charge to income of $0.8 million, which was reported as cost of revenues in the other healthcare services segment. In December 2002, the Company awarded the remaining 23% of common stock to the Vision Source management before all performance requirements were met resulting in a charge to income of $0.4 million. In return for the early award of the remaining 23% interest, Vision Source converted the Company's $7.0 million of preferred stock to a $7.0 million note payable accruing interest at 7% annually. INVESTMENTS In December 2002, the Company wrote down by $2.1 million its investment in a privately held company that develops an implantable product that corrects and maintains vision. That company is actively seeking additional funding at this time and has received a term sheet from a venture capital firm that indicates significant dilution to the existing shareholders. The Company wrote down the investment to $0.5 million to reflect the estimated market value of the investment. CRITICAL ACCOUNTING POLICIES IMPAIRMENT OF GOODWILL The Company accounts for its goodwill in accordance with SFAS 142, which requires the Company to test goodwill for impairment annually and whenever events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. SFAS No. 142 requires the Company to determine the fair value of its reporting units. Because quoted market prices do not exist for the Company's reporting units, the Company uses the present value of expected future cash flows to estimate fair value. Management must make significant judgments and estimates about future conditions to estimate future cash flows. Unforeseen events and changes in circumstances and market conditions including general economic and competitive conditions, could result in significant changes in those estimates and material charges to income. During the transitional period ended December 31, 2002 and the fiscal year ended May 31, 2002, the Company determined that significant impairments in the value of the goodwill had occurred and recorded a charge to earnings in both periods. 5 IMPAIRMENT OF LONG-LIVED ASSETS The Company accounts for its long-lived assets in accordance with SFAS 144, which requires the Company to assess the recoverability of these assets when events or changes in circumstances indicate that the carrying amount of the long-lived asset (group) might not be recoverable. If impairment indicators exist, the Company determines whether the projected undiscounted cash flows will be sufficient to cover the carrying value of such assets. This requires the Company to make significant judgements about the expected future cash flows of the asset group. The future cash flows are dependent on general and economic conditions and are subject to change. A change in these assumptions could result in material charges to income. During the fiscal year ended May 2002, the Company determined that a significant impairment in the value of its intangible assets and certain of its fixed assets had occurred and recorded a charge to earnings. INVESTMENTS Periodically the Company invests in marketable and non-marketable equity securities. The Company accounts for its marketable equity available for sale securities in accordance with SFAS 115, which requires the Company to record these investments at market value as of the end of each reporting period. Changes in market value are recorded as other comprehensive income except when declines in market value below cost are considered to be other than temporary. The Company accounts for its non-marketable equity securities under the cost method of accounting as the Company does not exercise significant influence over the investees. For these investments the Company assesses the value of the investment by using information acquired from industry trends, the management of these companies, and other external sources as well as recent stock transactions. Based on the information acquired, an impairment charge is recorded when management believes an investment has experienced a decline in value that is other than temporary. The determination of whether a decline in market value is considered other than temporary involves making significant judgments considering factors such as the length of duration of the decline and factors specific to each investment. During the fiscal year ended May 31, 2002 and the transitional period ended December 31, 2002, the Company determined an other than temporary decline had occurred in certain investments and recorded a significant charge to income. RISK FACTORS See "Item 1 - Business - Risk Factors." SEVEN MONTHS ENDED DECEMBER 31, 2002 COMPARED TO THE SEVEN MONTHS ENDED DECEMBER 31, 2001 As used herein, "existing TLC Vision" refers to TLC Vision locations in existence prior to the merger with LaserVision in May 2002. Revenues for the seven months ended December 31, 2002 were $100.2 million, a $29.9 million increase over revenues of $70.3 million for the seven months ended December 31, 2001. The contribution of LaserVision during the seven-month period ended December 31, 2002 added $44.9 million of revenues while the existing TLC Vision revenue decreased by $15.2 million or 22%. Approximately 76% of total revenues for the seven months ended December 2002 were derived from refractive services compared to 87% during the seven months ended December 31, 2001. Revenues from the refractive segment for the seven months ended December 31, 2002 were $76.2 million, an increase of $14.9 million or 24%, over revenues of $61.3 million from refractive activities for the seven months ended December 31, 2001. LaserVision added $30.7 million of refractive revenues, while the existing TLC Vision refractive revenue decreased by $15.8 million, or 26%. Revenues from owned centers for the seven months ended December 31, 2002 were $29.8 million, an increase of $3.1 million, or 11%, from the revenues of $26.7 million for the seven months ended December 31, 2001. LaserVision accounted for $5.9 million of such revenues, while the existing TLC Vision revenue decreased by $2.8 million, or 10%. Revenues from managed centers for the seven months ended December 31, 2002 were $25.0 million, a decrease of $9.6 million, or 28%, from the revenues of $34.6 million for the seven months ended December 31, 2001. As LaserVision does not have a managed service product, there was no contribution from LaserVision for the seven months ended December 2002. Revenues from access services for the seven months ended December 31, 2002 were $21.5 million. Because access revenues are a product offering of LaserVision only, the Company did not report any associated access revenue in the seven months ended December 31, 2001 for the existing TLC Vision business. 6 Approximately 92,900 refractive procedures were performed for the seven months ended December 31, 2002, compared to approximately 47,400 procedures for the seven months ended December 31, 2001. LaserVision accounted for 53,400 procedures while the TLC Vision procedures decreased by 7,900 to 39,500. The Company believes that the reduction in procedure volume was indicative of overall conditions in the laser vision correction industry. The laser vision correction industry has experienced uncertainty resulting from a number of issues. Being an elective procedure, laser vision correction volumes have been depressed by economic and stock market conditions, rising unemployment and the uncertainty associated with the war on terrorism currently being experienced in North America which is reflected in the consumer confidence index. Also contributing to the decline was a wide range in consumer prices for laser vision correction procedures, the bankruptcies of a number of deep discount laser vision correction companies, the ongoing safety and effectiveness concerns arising from the lack of long-term follow-up data and negative news stories focusing on patients with unfavorable outcomes from procedures performed at centers competing with the Company. The cost of refractive revenues from eye care centers for the seven months ended December 31, 2002 was $64.6 million, an increase of $17.0 million, or 36%, over the cost of refractive revenues of $47.6 million for the seven months ended December 31, 2001. LaserVision cost of revenue for 2002 was $24.0 million while the existing TLC Vision's cost of revenue decreased by $7.1 million, or 15%. The cost of revenues from owned centers for the seven months ended December 31, 2002 was $27.0 million, an increase of $4.8 million, or 22%, from the cost of revenues of $22.2 million from the seven months ended December 31, 2001. LaserVision cost of revenue for 2002 was $5.3 million while the existing TLC Vision cost of revenue decreased $0.5 million, or 2%. The cost of revenues from managed centers for the seven months ended December 31, 2002 was $22.2 million, a decrease of $3.2 million, or 13%, from the cost of revenues of $25.4 million from the seven months ended December 31, 2001. As LaserVision does not have a managed service product, the Company did not report any additional cost from LaserVision for the seven months ended December 31, 2002. The cost of revenues from access services for the seven months ended December 31, 2002 was $15.4 million. Access services are a product offering of LaserVision only, therefore, there was no associated access cost of revenue in the seven months ended December 31, 2001 from the existing TLC Vision business. Reductions in cost of revenue were consistent with reduced doctors compensation resulting from lower procedure volumes, reductions in royalty fees on laser usage and reduced personnel costs. The cost of revenues for refractive centers include a fixed cost component for infrastructure of personnel, facilities and minimum equipment usage fees which has resulted in cost of revenues decreasing at a slower rate than the decrease in the associated revenues. Revenues from other healthcare services for the seven months ended December 31, 2002, were $23.9 million, an increase of $14.9 million from revenues of $9.0 million for the seven months ended December 31, 2001. LaserVision accounted for $14.2 million of the increase while the existing TLC Vision revenue increased by $0.7 million, or 6%. Approximately 24% of the total revenues for the seven months ended December 31, 2002 were derived from other healthcare services compared to 13% during the seven months ended December 31, 2001. The cost of revenues from other healthcare services for the seven months ended December 31, 2002 was $16.2 million, an increase of $11.4 million, from cost of revenues of $4.8 million for the seven months ended December 31, 2001. LaserVision accounted for $9.2 million of the increase while the existing TLC Vision cost of revenues increased by $2.2 million. General and administrative expenses increased to $24.6 million for the seven months ended December 31, 2002 from $22.8 million for the seven months ended December 31, 2001. The seven months ended December 31, 2002 included a $1.3 million charge for potential medical malpractice claims. Although the Company has reduced overhead and infrastructure cost as part of the Company's cost reduction initiatives, the combined infrastructure cost of TLC Vision and LaserVision was higher than TLC Vision incurred by itself during the seven months ended December 31, 2001. Marketing expenses decreased to $8.3 million for the seven months ended December 31, 2002 from $9.2 million for the seven months ended December 31, 2001. This reflected decreased spending on marketing programs identified in conjunction with the Company's cost-reduction initiatives. 7 Amortization expenses decreased to $4.1 million for the seven months ended December 31, 2002 from $6.0 million for the seven months ended December 31, 2001. The decrease in amortization expense was largely a result of the significant impairment charge in May 2002, which reduced the fair value of PMA's and the related ongoing amortization. Research and development expenses reflected $2.0 million invested in Vascular Sciences. Since the technology was in the development stage and was not available commercially and had not received Food and Drug Administration approval, the Company accounted for this investment as a research and development arrangement whereby investments were expensed as Vascular Sciences expends amounts. If the product becomes commercially available, incremental investments may be recorded as long-term assets. The Company determined its goodwill was impaired and recorded a charge of $22.1 million for the seven months ended December 31, 2002. This charge was comprised of $21.8 million that relates to the goodwill attributable to reporting units acquired in the LaserVision acquisition and $0.3 million relating to goodwill attributable to reporting units acquired in prior years. In addition, the Company's adoption of SFAS 142 resulted in a transitional impairment loss of $15.2 million, which was recorded as a cumulative effect of a change in accounting principle during the seven months ended December 31, 2001. In December 2002, TLC Vision wrote down its investment in a privately held company by $2.1 million. That company, which develops an implantable product that corrects and maintains vision is actively seeking additional funding at this time and has received a term sheet from a venture capital firm that indicates significant dilution to the existing shareholders. TLC Vision wrote down the investment to $0.5 million to reflect the estimated market value of the investment. During the transitional period ended December 31, 2002, the Company recorded a $4.7 million restructuring charge for the closure of 13 centers and the elimination of 36 full time equivalent positions primarily at the Company's Toronto headquarters. The total restructuring expense for the transitional period was $4.2 million which consists of the $4.7 million offset by the reversal into income of $0.5 million of restructuring charges related to prior year accruals that were no longer needed as of December 31, 2002. All restructuring costs will be financed through the Company's cash and cash equivalents. A total of $2.3 million of this provision related to non-cash costs of writing down fixed assets, $1.0 million related to severance, and $1.0 million related to the net future cash costs for lease commitments and costs to sublet available space offset by sub-lease income. The lease costs will be paid out over the remaining term of the lease. The following table details restructuring charges recorded during the transitional period ended December 31, 2002:
ACCRUAL BALANCE AS OF RESTRUCTURING CASH NON-CASH DECEMBER 31, CHARGES PAYMENTS REDUCTIONS 2002 ------------ ------------ ------------ --------------- Severance $ 1,120 $ (466) $ -- $ 654 Lease commitments, net of sub-lease income 978 -- -- 978 Write-down of fixed assets 2,266 -- (2,266) -- Sale of center to third party 342 -- -- 342 ------------ ------------ ------------ ------------ Total restructuring charges $ 4,706 $ (466) $ (2,266) $ 1,974 ============ ============ ============ ============
The Company is currently reviewing its space for its international headquarters near Toronto. No restructuring charge has been made relating to this facility as no decision has been made with regard to the use or disposal of this facility and the Company continues to use this facility for certain functions. Any costs associated with exiting or renegotiating the lease on this facility, which could be material, would be charged against income in future periods. Other income and expense for the seven months ended December 31, 2002 consisted of $6.8 million of income from the settlement of an antitrust lawsuit. In August 2002, LaserVision received $8.0 million from its portion of the settlement and TLC Vision received $7.1 million from its portion of the settlement. The $8.0 million relating to the activities of LaserVision represented a contingent asset acquired by the Company and was included in the purchase price allocation at May 15, 2002 as an other asset. The $7.1 million settlement received related to TLC Vision has been recorded as a gain of $6.8 million (net of $0.3 million for its obligations to be paid to the minority interests) in other income and expense for the period. During the transitional period, the Company recorded $0.9 million of income from the termination of the Surgicare agreement to purchase Aspen Healthcare from the Company. On May 16, 2002, the Company agreed to sell the capital stock of its Aspen Healthcare ("Aspen") subsidiary to SurgiCare Inc. ("SurgiCare") for a purchase price of $5.0 million in cash and warrants for 8 103,957 shares of common stock of SurgiCare with an exercise price of $2.24 per share. On June 14, 2002, the purchase agreement for the transaction was amended due to the failure of Surgicare to meet its obligations under the agreement. The amendment established a new closing date of September 14, 2002 and required SurgiCare to issue 38,000 shares of SurgiCare common stock and to pay $0.8 million to the Company, prior to closing, all of which was non-refundable. SurgiCare failed to perform under the purchase agreement, as amended, and as a result, the purchase agreement was terminated and the Company recorded the gain in other income and expense for the period. During the transitional period, the Company recorded a reduction in the carrying value of capital assets of $1.0 million, within the refractive segment, reflecting the disposal of certain of the Company's lasers. The amount is included in other income and expense. These lasers do not represent the most current technology available and the Company has made the decision to dispose of them below their carrying cost. Interest (expense) income, net reflects interest revenue from the Company's cash position offset by interest expense from debt and lease obligations. An increase to debt in the second quarter of fiscal 2002 from the corporate headquarters sale-leaseback arrangement resulted in additional increases to interest costs. Interest revenues have decreased since the Company has reduced cash and cash equivalent balances during the seven months ended December 31, 2002 compared to the corresponding period in the prior year. In addition interest yields on cash balances have been lower, offset by a gain in foreign currency translation to U.S. dollars related to the Company's Canadian operations. Income tax expense increased to $0.9 million for the seven-month period ended December 31, 2002 from $0.5 million for the seven months ended December 31, 2001. The $0.9 million tax expense consisted of state taxes of $0.6 million for certain of the Company's subsidiaries where a consolidated state tax return cannot be filed and $0.3 million of foreign taxes for one of the Company's foreign subsidiaries. The loss before cumulative effect of change in accounting principle for the seven months ended December 31, 2002 was $43.4 million or $0.68 per share compared to a loss of $44.8 million or $1.19 per share for the seven months ended December 31, 2001. This decreased loss primarily reflected the positive impact of the antitrust settlement and cost-cutting initiatives partially offset by the reduction in refractive procedures and revenues. As a result of the LaserVision acquisition in May 2002, there were more common shares outstanding during the seven months ended December 31, 2002. FISCAL YEAR ENDED MAY 31, 2002 COMPARED TO FISCAL YEAR ENDED MAY 31, 2001 Revenues for fiscal 2002 were $134.8 million, which was a 23% decrease over $174.0 million for the prior fiscal year. Approximately 86% of total revenues were derived from refractive services in fiscal 2002 compared to 93% in fiscal 2001. Revenues from refractive activities for fiscal 2002 were $115.9 million, which is 28.1% lower than the prior fiscal year's $161.2 million. Approximately 95,000 procedures were performed in fiscal 2002 compared to approximately 122,800 procedures in fiscal 2001. Management believes that the decrease in procedure volume and the associated reduction of revenue was indicative of the overall condition of the laser vision correction industry. The laser vision correction industry has experienced uncertainty resulting from a wide range in consumer prices for laser vision correction procedures, the recent bankruptcies of a number of deep discount laser vision correction companies, the ongoing safety and effectiveness concerns arising from the lack of long-term follow-up data and negative news stories focusing on patients with unfavorable outcomes from procedures performed at centers competing with TLC Vision centers. In addition, as an elective procedure, laser vision correction volumes have been further depressed by economic conditions currently being experienced in North America. The Company maintains its stated objective of being a premium provider of laser vision correction services in an industry that has faced significant pricing pressures. Despite pricing pressures in the industry, the Company's net revenue after doctor compensation per procedure, for fiscal 2002 increased by 5% in comparison to fiscal 2001. The increase was largely a result of deep discount surgery providers filing for bankruptcy thus relieving some of the price pressures that have occurred in prior fiscal years. Revenues from other healthcare services was $18.8 million in fiscal 2002, an increase of over 47% in comparison to $12.8 million in fiscal 2001. Approximately 14% of total revenues were derived from other healthcare services in fiscal 2002 compared to 7% in fiscal 2001. The increase in revenues reflected revenue growth in the network marketing and management and the professional healthcare facility management subsidiaries, while revenues in the secondary care management, and asset management subsidiaries reflected little or moderate growth. 9 Cost of revenues from other healthcare services was $11.5 million in fiscal 2002, an increase of over 14% in comparison to $10.1 million in fiscal 2001. The increase in cost of revenue reflected the increase in revenue growth in the network marketing and management and the professional healthcare facility management subsidiaries. The cost of revenues for other healthcare services centers in fiscal 2001 included the cost of TLC Visions eyeVantange.com subsidiary. EyeVantage.com incurred a significant amount of cost without offsetting revenue, thereby resulting in cost of revenues increasing at a lesser rate than the increase in the associated revenues in fiscal 2002. Net loss from other healthcare services was $13.8 million in fiscal 2002, in comparison to a net loss of $18.6 million for 2001. The loss for fiscal 2002 included $12.0 million for the impairment of goodwill and $2.0 million for the write down of investments in other healthcare services. The loss for fiscal 2001 included the activities of eyeVantage.com, Inc., which generated losses of $5.6 million. Net loss for fiscal 2002 does not reflect the activities of eyeVantage.com, Inc. due to the decision by the Company in fiscal 2001 to cease material funding of this subsidiary and the resulting decision by eyeVantage.com, Inc. to abandon its e-commerce enterprise. The profit from other healthcare services for fiscal 2002 of $0.2 million excluding the impairment and investment write downs, reflected an increase from the loss of $1.3 million for fiscal 2001 (excluding eyeVantage.com, Inc. and restructuring costs). The improved profitability for 2002 was due primarily to increased revenues while managing the cost structure thus increasing gross margins. In the final quarter of fiscal 2000 and during fiscal 2001, the Company entered into practice management agreements with a number of surgeons resulting in an increase in intangible assets to reflect the value assigned to these agreements. These intangible assets are amortized over the term of the applicable agreements. These agreements have resulted, either directly or indirectly, in lower per procedure fees being paid to the applicable surgeons and a corresponding reduction in doctors' compensation to offset the increased amortization costs. The result was an increase to the net revenue after doctors' compensation per procedure ratio. The Company's operating results for fiscal 2002 included a non-cash pre-tax charge of $31.0 million to record the impairment in the carrying value of certain practice management agreements on which the carrying value exceeded the fair value as of May 31, 2002. The cost of refractive revenues from eye care centers for fiscal 2002 was $86.3 million, 13.6% less than cost of refractive revenues of $99.9 million in fiscal 2001. These reductions were in-line with reduced doctors compensation resulting from lower procedure volumes, reductions in royalty fees on laser usage and reduced personnel costs. These reductions were offset by a reduction in the carrying value of capital assets of $2.6 million reflecting a reduction of the Company's LaserSight lasers to $0 and two VISX lasers to $75,000 each. These lasers do not represent the most current technology available and the Company has made the decision to write the lasers down to current market value and will evaluate the best option for utilization or upgrade of these lasers. The cost of revenues for refractive centers include a fixed cost component for infrastructure of personnel, facilities and minimum equipment usage fees which has resulted in cost of revenues decreasing at a lesser rate (13.6% for fiscal 2002, as compared to fiscal 2001) than the decrease in the associated revenues. Cost of revenues of owned centers include the cost of doctor compensation. Cost of doctor compensation varies in relation to revenues. Accordingly, when combined with the conversion of a number of owned centers to managed centers, the cost of revenues of owned centers reflect a much larger variance in the decrease in the costs of revenues in comparison to managed centers. Selling, general and administrative expenses decreased to $52.5 million in fiscal 2002 from $67.8 million in fiscal 2001, a decrease of $15.3 million or 22.6%. This decrease was primarily attributable to decreased marketing costs, decreased infrastructure costs and reductions associated with Corporate Advantage and Third Party Payer programs, each identified in conjunction with the Company's cost reduction initiatives. Interest (income)/expense reflects interest revenue from the Company's net cash and cash equivalent position. Interest revenue has been consistently decreasing throughout the year as a result of the Company's declining cash position and a decrease on the interest yields throughout the year. This decrease also includes an increase in interest expense resulting from additional long-term debt and as a result of the sale-leaseback transaction of the corporate international headquarters in Canada in the second quarter. Depreciation and amortization expense decreased to $11.4 million in the current fiscal year from $14.8 million in fiscal 2001, primarily as the result of the Company's early adoption of SFAS No. 142, thus eliminating the requirement for the goodwill amortization. The adoption of this statement resulted in decreased amortization expense of approximately $2.8 million for fiscal 2002. Depreciation and amortization expense has also decreased due to fewer capital additions resulting from limited development of new centers and the closure of certain existing centers. 10 The Company's adoption of SFAS 142 resulted in a transitional impairment loss of $15.2 million, which was recorded as a cumulative effect of a change in accounting principle in the first quarter of fiscal 2002. In addition, the Company's operating results for fiscal 2002 included a non-cash pretax charge of $50.7 million to reduce the carrying value of goodwill for which the carrying value exceeded the fair value as of May 31, 2002, including $45.9 million related to the impairment of goodwill from the acquisition of LaserVision and $4.8 million for the impairment of goodwill from prior acquisitions. Intangible assets whose useful lives are not indefinite are amortized on a straight-line basis over the term of the applicable agreement to a maximum of 15 years. Current amortization periods range from 5 to 15 years. In establishing these long-term contractual relationships with the Company, key surgeons in many cases have agreed to receive reduced fees for laser vision correction procedures performed. The reduction in doctors' compensation offsets in part the increased amortization of the intangible practice management agreements. Statement of Financial Accounting Standard No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, requires long-lived assets included within the scope of the Statement be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of those long-lived assets might not be recoverable - that is, information indicates that an impairment might exist. Given the significant decrease in the trading price of the Company's common stock, current period operating or cash flow loss combined with its history of operating or cash flow losses, the Company identified certain practice management agreements where the recoverability was impaired. As a result, the Company recorded an impairment charge of $31 million in 2002. TLC Vision made its first investment in Lasersight Incorporated ("Lasersight") prior to the beginning of fiscal 2000. Lasersight is a company involved in the research and development of new laser technology. From the time of purchase through the third quarter of fiscal 2000, the market value of the investment exceeded the carrying value at each quarter end. However, by November 31, 2001, the Company believed that the impairment should be considered other than temporary for a number of reasons including: the impairment is very substantial relative to the original purchase price, the impairment has persisted for more than nine months; sufficient time has passed to determine that the market place has not reacted well to FDA approval of Lasersight's new technology. As a result, the Company recorded a total impairment charge of $20.1 million during fiscal 2002. With respect to its investment in LaserVision TLC Vision wrote down its investment in LaserVision by $1.8 million in the period prior to the merger, due to an other than temporary decline in its value. Finally, the Company has recorded impairment charges of $2.0 million on its investment in Britton Vision Associates and of $2.2 million on other investments. During fiscal 2002, the Company implemented a restructuring program to reduce employee costs in line with current revenue levels, close certain under performing centers and eliminating duplicate functions caused by the merger with LaserVision. By May 31, 2002, this program resulted in total cost for severance and office closures of $8.8 million of which $2.3 million was paid out in cash prior to May 31, 2002. All restructuring costs will be financed through the Company's cash and cash equivalents. (a) The Company continued its objective of reducing employee costs in line with revenues. This activity occurred in two stages with total charges of $2.8 million. The first stage of reductions were identified in the second and third quarters of fiscal 2002 and resulted in restructuring charges of $2.2 million, all of which had been paid out in cash or options by the end of the fiscal year. This reduction impacted 89 employees of whom 35 were working in laser centers with the remaining 54 working within various corporate functions. The second stage of the cost reduction required the Company to identify the impact of its acquisition of LaserVision on May 15, 2002 and eliminate surplus positions resulting from the acquisition. The majority of these costs were paid by the end of December 2002. (b) As part of the Company restructuring subsequent to its acquisition of LaserVision in May 2002, six centers were identified for closure: such centers were identified based on managements earning criteria, earnings before interest, taxes, depreciation and amortization. These closures resulted in restructuring charges of $4.9 million reflecting a write-down of fixed assets of $1.9 million and cash costs of $3.0 million which include net lease commitments (net of costs to sublet and sub-lease income) of $2.7 million, ongoing laser commitments of $0.7 million, termination costs of a doctor's contract of $0.1 million and severance costs impacting 21 center employees of $0.1 million. The lease costs will be paid out over the remaining term of the lease. 11 (c) The Company also identified seven centers where management determined that given the current and future expected procedures, the centers had excess leased capacity or the lease arrangements were not economical. The Company assessed these seven centers to determine whether the excess space should be subleased or whether the centers should be relocated. The Company provided $1.0 million related to the costs associated with sub-leasing the excess or unoccupied facilities. A total of $0.3 million of this provision related to non-cash costs of writing down fixed assets and $0.7 million represented net future cash costs for lease commitments and costs to sublet available space offset by sub-lease income that is projected to be generated. The lease costs will be paid out over the remaining term of the lease. The following table details restructuring charges incurred for the year ended May 31, 2002:
ACCRUAL ACCRUAL BALANCE BALANCE AT AT RESTRUCTURING CASH NON-CASH MAY 31, CASH NON-CASH DECEMBER 31, CHARGES PAYMENTS REDUCTIONS 2002 PAYMENTS REDUCTIONS 2002 ------------- --------- ---------- ---------- ---------- ---------- ------------ Severance......................... $ 2,907 $ (2,219) $ (222) $ 466 $ (235) $ (212) $ 19 Lease commitments, net of sublease income................... 2,765 -- -- 2,765 (897) 85 1,953 Termination costs of doctors contracts....................... 146 (80) -- 66 (66) -- -- Laser commitments................. 652 -- -- 652 -- (352) 300 Write-down of fixed assets........ 2,280 -- (2,280) -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total restructuring and other charges........................... $ 8,750 $ (2,299) $ (2,502) $ 3,949 $ (1,198) $ (564) $ 2,272 ========== ========== ========== ========== ========== ========== ==========
Income tax expense decreased to $1.8 million in fiscal 2002 from $2.2 million in fiscal 2001. This decrease reflected the Company's losses incurred in fiscal 2002 offset by the impact of the tax liabilities associated with the Company's investments in profitable subsidiaries that are less than 80% owned and the requirement to reflect minimum tax liabilities relevant in Canada, United States and certain other jurisdictions. As of May 31, 2002, the Company had net operating losses available for carry forward for income tax purposes of approximately $81.2 million, which were 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 $23.9 million expire as follows: May 31, 2003.................................. $ 2,290 2004.................................. 1,509 2005.................................. 831 2006.................................. 315 2007.................................. 580 2008.................................. 9,724 2009.................................. 8,647
The United States losses of $58.0 million expire between 2012 and 2022. The Canadian and United States losses include amounts of $3.2 million and $14.7 million respectively relating to the acquisitions of 20/20 and BeaconEye, the availability and timing of utilization of which may be restricted. The loss for fiscal 2002 was $161.8 million, or $4.13 per share, compared to a loss of $37.8 million or $1.00 per share for fiscal 2001. This increased loss primarily reflected the impact of reduced refractive revenues, the reduction in carrying values of capital and intangible assets, the reduction in the carrying value of goodwill and the write down of investments offset partially by reduced costs and decreased depreciation and amortization. The Company has undertaken initiatives intended to address patient, optometric and ophthalmic industry trends and expectations to improve laser vision correction procedure and revenue volumes. Cost initiatives are targeting effective use of funds and a growth initiative is focusing on the future development opportunities for the Company in the laser vision eye care service industry. 12 FISCAL YEAR ENDED MAY 31, 2001 COMPARED TO FISCAL YEAR ENDED MAY 31, 2000 Revenues for fiscal 2001 were $174.0 million, which was a 13.5% decrease compared to revenues of $201.2 million for fiscal 2000. Approximately 93% of total revenues were derived from refractive services as compared to 95% in fiscal 2000. Revenues from eye care centers for fiscal 2001 were $161.2 million, which was 15.2% lower than revenues of $190.2 million for fiscal 2000. Approximately 122,800 procedures were performed in fiscal 2001 compared to 134,200 procedures in fiscal 2000. The decrease in procedure volume and the associated reduction of revenue reflects the condition of the laser vision correction industry, which had experienced uncertainty due to a wide range in consumer prices for laser vision correction procedures, the bankruptcies of a number of deep discount laser vision correction companies and the ongoing safety and effectiveness concerns arising from the lack of long-term follow-up data and negative news stories focusing on patients with unfavorable outcomes from procedures performed at competing centers. Due to the pricing pressures in the industry and the lower procedure prices offered pursuant to discounts associated with the Company's Corporate Advantage Program, the Company's net revenue after doctor compensation, per procedure, for fiscal 2001 declined by 8% in comparison to fiscal 2000. In the final quarter of fiscal 2000 and during fiscal 2001, the Company completed practice management agreements with a number of surgeons resulting in an increase in intangible assets to reflect the value assigned to these agreements. These intangible assets are being amortized over the term of the applicable agreements. These agreements have resulted, either directly or indirectly, in lower per procedure fees being paid to the applicable surgeons and a corresponding reduction in doctors' compensation to offset the increased amortization costs. The result was an increase to the net revenue after doctors' compensation per procedure ratio. The cost of refractive revenues from eye care centers for fiscal 2001 was $99.9 million, which was 16.8% lower than fiscal 2000's cost of refractive revenues of $120.0 million. This reduction was primarily due to reduced doctors compensation resulting from lower procedure volumes, lower royalty fees on laser usage and lower personnel costs. Selling, general and administrative expenses increased to $67.8 million in fiscal 2001 from $66.6 million in fiscal 2000. This reflected increased marketing costs aimed at raising consumer awareness of TLC Vision's brand. In addition, the increased expense was due to increased consulting costs, legal costs and infrastructure costs incurred to support our growth strategy. These costs were partially offset by reductions associated with Corporate Advantage and Third Party Payer programs identified in conjunction with the Company's cost reduction initiatives. Interest (income)/expense and other expenses reflected interest revenue from the Company's cash position which resulted from positive cash flow from operations and the result of a public offering in the fourth quarter of fiscal 1999. The lack of any material additions to long-term debt and capital leases on equipment resulted in reducing interest costs on debt, as the various debt instruments approach maturity. Reduced cash and cash equivalent balances during the year combined with lower interest yields resulted in lower interest revenues. The increase in depreciation expense was largely a result of new centers and the additional depreciation and amortization associated with the Company's acquisitions during fiscal 2000 and 2001. The significant increase in the amortization of intangibles was the result of successfully establishing long-term contractual relationships with a number of surgeons during the final quarter of fiscal 2000 and during fiscal 2001. Goodwill and intangibles are amortized on a straight-line basis over the term of the applicable agreement to a maximum of fifteen years. Amortization periods used during fiscal 2001 range from five to fifteen years. In establishing the long-term contractual relationships with these key surgeons, the surgeon in many cases had agreed to receive reduced fees for laser vision correction procedures performed. The reduction in doctors' compensation partially offsets the increased amortization of the intangible practice management agreements. Restructuring and other charges (see "Note 20 - Restructuring and Other Charges") in fiscal 2001, reflect decisions that were made to: a) Ease support of the Company's e-commerce enterprise eyeVantage.com, Inc. ("eyeVantage"). The decision to close activities at eyeVantage was the result of a number of factors including: (i) Increased difficulty by dotcom enterprises to obtain funding due to concerns within the investment community regarding perceived value; (ii) eyeVantage was not able to obtain required financing to continue operations; 13 (iii) eyeVantage was not able to meet expectations on the development of its products and services; (iv) eyeVantage had not established a revenue base sufficient to meet operating requirements or to attract outside investment; and (v) The operating costs on a monthly basis were in excess of $1.0 million and the Company did not feel there was sufficient future value to continue to support eyeVantage operations. The decision to close activities resulted in a restructuring charge of $11.7 million which reflected the estimated impact of the write-down of goodwill of $8.7 million, the write-down of fixed assets of $2.1 million, employee termination costs of $1.7 million representing the termination costs of 29 employees, accounts receivable losses of $0.4 million and $1.1 million of costs incurred in the closing process which included legal, administrative and lease commitment costs. These losses were offset by a gain of $2.3 million resulting from the reduction in the purchase obligation associated with the Optical Options, Inc. acquisition (see "Note 2- Acquisitions - 2001 Transactions - iii"). a) Reflect potential losses from an equity investment in secondary care activities of $1.0 million. Due to a deteriorating relationship with the operations management team and the Company's strategic decision to withdraw from the management of secondary care practices where possible, the Company transferred its investment to an equity investment in return for a future earnings percentage. The equity investment has not acknowledged a liability to the Company for this investment, and the Company had not received any funds from the equity investment's earnings from the transferred investment. As a result the Company deemed it prudent to provide against the potential loss resulting from the inability to recover value of the investment transferred to the equity investment. b) Close three eye care centers for which the Company recorded costs of $1.4 million, sell its ownership in another eye care center, which created a loss of $0.3 million and incurred a cost of $0.1 million to terminate plans to open another eye care center. During fiscal 2001, the Company had undertaken to restructure its operations to eliminate those centers, which were identified as not capable of being profitable. These centers had been impacted by a number of challenges such as: (i) proximity to existing centers managed by the Company; (ii) local marketplace heavily impacted by discount laser vision correction providers which impaired the ability to compete as a premium laser vision correction provider; (iii) expectations of optometric network to generate sufficient interest in laser vision correction were not met; and (iv) the occupancy costs of a center (acquired as part of a multi-center acquisition) impacting the ability to lower costs in line with revenues. c) Undertake an extensive review of its internal structures, its marketplace, its resources and its strategies for the future. The review resulted in the restructuring of the Company's goals and structures to meet its future needs. The Company utilized the services of a national consulting firm to facilitate this internal restructuring process, whose participation was completed in the third quarter of fiscal 2001 with an associated cost of $1.6 million. d) Fully provide for its $0.9 million portfolio investment in Vision America. This investment was deemed to be permanently impaired during fiscal 2001. Subsequent to this decision Vision America filed for bankruptcy and is currently in the process of liquidating its assets. The Company will reflect any amounts recovered from this investment if and when the amount and timing of any amounts to be recovered becomes determinable. e) Accrue for, in the fourth quarter, an award from an arbitration hearing involving TLC Vision Network Services Inc. that was issued against the Company. The cumulative liability arising from the award was $2.1 million, which was fully provided for, in the fourth quarter of fiscal 2001. Payment of this liability was deferred until explorations of all legal alternatives have been completed. 14 The $19.1 million for losses from restructuring and other charges consisted of $4.7 million of cash payments for severance, lease costs, consulting services and closure costs and $14.4 million of non-cash charges. Income tax expense decreased to $2.2 million in fiscal 2001 from $3.5 million in fiscal 2000. This decrease reflected the Company's losses incurred in fiscal 2001 while including the impact of the tax liabilities associated with the Company's partners in profitable subsidiaries and the requirement to reflect minimum tax liabilities relevant in Canada, United States and certain other jurisdictions. Revenues from Other healthcare services activities were $12.8 million in fiscal 2001, an increase of more than 16% in comparison to $11.0 million in fiscal 2000. Approximately 7% of total revenues were derived from other healthcare services in fiscal 2001 compared to 5% in fiscal 2000. The increase in revenues reflected revenue growth of greater then 25% in the network marketing and management, professional healthcare facility management and hair removal subsidiaries, while revenues in the secondary care management and asset management subsidiaries reflected moderate growth. The net loss from other healthcare services was $18.6 million in fiscal 2001, an increase of over 280% in comparison to a net loss of $4.9 million in fiscal 2000. The loss in fiscal 2001 included a restructuring charge of $11.7 million resulting from the decision made by the Company to no longer support the activities of its e-commerce subsidiary eyeVantage.com, Inc. Excluding the impact of the restructuring charge, eyeVantage.com, Inc., generated losses of $5.6 million (2000 - $3.8 million). The loss from the remaining non-refractive activities was $1.3 million, an increase from the loss in fiscal 2000 of $1.1 million. The increased loss in fiscal 2001 was due primarily to increased amortization of intangibles of $0.4 million at the Company's network marketing and management subsidiary resulting from increased goodwill arising from the finalization of the earn-out calculations arising from the Company's 1997 acquisition of this entity (see "Note 14 - Capital Stock - a) Common Stock" and "Note 2 - Acquisition - 2001 Transactions - ii and 2000 Transactions v."). The loss for fiscal 2001 was $37.8 million or $1.00 per share, compared to a loss of $5.9 million or $0.16 cents per share for fiscal 2000. This increased loss reflected the impact of extensive losses from the activities in the eye care e-commerce subsidiary, restructuring and other charges, reduced revenues, increased amortization in intangibles and the continuing investment in staff, information systems and marketing. LIQUIDITY AND CAPITAL RESOURCES During the seven months ended December 31, 2002, the Company continued to focus its activities primarily on seeking to increase procedure volumes at its centers and reducing operating costs. Cash and cash equivalents, short-term investments and restricted cash were $41.6 million at December 31, 2002 compared to $52.2 million at May 31, 2002. Working capital at December 31, 2002 decreased to $12.5 million from $23.4 million at May 31, 2002. The Company's principal cash requirements have included normal operating expenses, debt repayment, distributions to minority partners, capital expenditures, investment in Vascular Sciences and the purchase of an ambulatory surgery center. Normal operating expenses include doctor compensation, procedure royalty fees, procedure medical supply expenses, travel and entertainment, professional fees, insurance, rent, equipment maintenance, wages, utilities and marketing. During the seven months ended December 31, 2002, the Company invested $3.7 million in fixed assets. The Company does not expect to purchase additional lasers during the next 12 to 18 months, however existing lasers may need to be upgraded. The Company has access to vendor financing at fixed interest rates or on a per procedure fee basis and expects to continue to have access to these financing options for at least the next 12 months. As of December 31, 2002, the Company had employment contracts with 11 officers of TLC Vision or its subsidiaries to provide for base salaries, the potential to pay certain bonuses, medical benefits and severance payments. Nine officers have agreements providing for severance payments ranging from 12 to 24 months of base or total compensation under certain circumstances. Two officers have agreements providing for severance payments equal to 36 months of total compensation and future medical benefits (totaling about $2.0 million) at their option until November 2003, and 24-month agreements thereafter. 15 As of December 31, 2002 the Company has commitments relating to operating leases for rental of office space and equipment and long-term marketing contracts, which require future minimum payments aggregating to approximately $34.7 million. Future minimum payments over the next five years and thereafter are as follows: 2003......................................... $ 9,690 2004......................................... 8,824 2005......................................... 7,731 2006......................................... 3,651 2007......................................... 2,761 Thereafter................................... 2,025
As of December 31, 2002 the Company had a commitment with a major laser manufacturer ending November 30, 2004 for the use of that manufacturer's lasers which require future minimum lease payments aggregating $5.1 million. Future minimum lease payments in aggregate and over the remaining two years are as follows: 2003.............................. $ 2,040 2004.............................. 3,060
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 $2.1 million at December 31, 2002. In July 2001, two excimer laser manufacturers reported settling a class action antitrust case. In August 2002, LaserVision received approximately $8.0 million from their portion of the settlement which reduced other current assets and TLC Vision received approximately $7.1 million of which $6.8 million was recorded in other income and expense. On August 1, 2002, the Company acquired a 55% ownership interest in an ambulatory surgery center (ASC) in Mississippi for $7.6 million in cash. The Company also has a contingent obligation to purchase an additional 5% ownership interest per year for $0.7 million in cash during each of the next four years. This ASC specializes in cataract surgery, and the acquisition was accounted for under the purchase method of accounting. Net assets acquired were $7.6 million, which included $7.4 million of goodwill and $0.2 million of other intangible assets. On July 25, 2002, the Company entered into a joint venture with Vascular Sciences for the purpose of pursuing commercial applications of technologies owned or licensed by Vascular Sciences applicable to the evaluation, diagnosis, monitoring and treatment of age-related macular degeneration. According to the terms of the agreement, the Company purchased $2.0 million in preferred stock in August 2002, which was subsequently recorded as research and development expense. The Company estimates that existing cash balances and short-term investments, together with funds expected to be generated from operations and credit facilities, will be sufficient to fund the Company's anticipated level of operations and expansion plans for the next 12 to 18 months. CASH PROVIDED BY OPERATING ACTIVITIES Net cash provided by operating activities was $8.8 million for the seven months ended December 31, 2002. The cash flows provided by operating activities during the seven months ended December 31, 2002 are primarily due to the reductions in net operating assets of $6.4 million as the net loss of $43.3 million in the period was offset by non-cash items including depreciation and amortization of $13.8 million, impairment of goodwill of $22.1 million, loss on sale of fixed assets of $1.8 million, the non-cash write off of investments and research and development arrangements of $4.1 million, and $2.2 million of non-cash write-offs related to restructuring charges. The reduction in net operating assets related to a $7.2 million decrease in prepaid expenses as the cash received from the LaserVision portion of the antitrust settlement was partially offset by higher prepaid insurance balances and a $3.8 million decrease in accounts receivable due primarily to lower procedure volume and timing differences related to collection of accounts receivable from professional corporations, offset by a $4.6 million decrease in accounts payable and accrued liabilities due to timing differences of paying certain obligations, lower business volume from May 31, 2002 and a settlement of disputed invoices with a major vendor. 16 CASH USED FOR INVESTING ACTIVITIES Net cash used for investing activities was $13.8 million for the seven months ended December 31, 2002. Cash used in investing during the seven-month period ended December 31, 2002 included $9.7 million for business acquisitions, $3.6 million for the acquisition of equipment and $2.0 million for an investment in a research and development arrangement, offset by $0.7 million from the sale of capital assets, $0.5 million from the sale of short-term investments, and $0.3 million from the sale of investments and subsidiaries. CASH USED FOR FINANCING ACTIVITIES Net cash used for financing activities was $4.0 million for the seven months ended December 31, 2002. Net cash used for financing activities during the seven months ended December 31, 2002 was primarily utilized during the period for repayment of certain notes payable and capitalized lease obligations of $5.1 million, distribution to minority interests of $1.6 million, offset by restrictions removed from cash balances of $1.0 million, and proceeds from equipment lease financing of $1.8 million. NEW ACCOUNTING PRONOUNCEMENTS For a discussion on recent pronouncements, see Note 1, "Summary of Significant Accounting Policies" in the accompanying audited consolidated financial statements and notes thereto set forth in Item 8 of this Report. SUBSEQUENT EVENTS On March 3, 2003, Midwest Surgical Services, Inc. a subsidiary of TLC Vision, entered into a purchase agreement to acquire 100% of American Eye Instruments, Inc., which provides access to surgical and diagnostic equipment to perform cataract surgery in hospitals and ambulatory surgery centers. The Company paid $2.0 million in cash and 100,000 common shares of TLC Vision. The Company also agreed to make additional cash payments over a three-year period up to $1.9 million, if certain financial targets are achieved. QUARTERLY FINANCIAL DATA (UNAUDITED) (Thousands of U.S. dollars except per share amounts)
THREE MONTHS ENDED THREE MONTHS ENDED MARCH 31, JUNE 30, (AS RESTATED)(4) -------------------------- -------------------------- 2002 2001 2002(3) 2001 ---------- ---------- ---------- ---------- Revenues $ 36,942 $ 49,099 $ 43,107 $ 38,361 Gross Margin 12,256 20,896 12,080 13,959 Income (loss) before cumulative effect of accounting change (3,689) 4,254 (98,783) (8,448) Cumulative effect of accounting change -- -- -- (15,174) Net income (loss) (3,689) 4,254 (98,783) (23,622) Basic and diluted income (loss) per share before cumulative effect of accounting change (0.10) 0.11 (1.93) (0.22) Basic and diluted income (loss) per share cumulative effect of accounting change -- -- -- (0.40) Basic and diluted income (loss) per share (0.10) 0.11 (1.93) (0.62) THREE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, DECEMBER 31, -------------------------- -------------------------- 2002 2001 2002(2) 2001(1) ---------- ---------- ---------- ---------- Revenues $ 43,802 $ 30,575 $ 44,754 $ 27,064 Gross Margin 9,307 8,159 6,151 3,998 Income (loss) before cumulative effect of accounting change (2,532) (8,394) (39,727) (35,321) Cumulative effect of accounting change -- -- -- -- Net income (loss) (2,532) (8,394) (39,727) (35,321) Basic and diluted loss per share before cumulative effect of accounting change (0.04) (0.22) (0.63) (0.93) Basic and diluted loss per share cumulative effect of accounting change -- -- -- -- Basic and diluted loss per common share (0.04) (0.22) (0.63) (0.93)
(1) In the three months ended December 31, 2001, the selected financial data of the Company included: (a) a write down in the fair value of investments and long-term receivables of $21.1 million; and (b) a restructuring charge of $1.8 million. (2) In the three months ended December 31, 2002, the selected financial data of the Company included: (a) an impairment of intangibles charge of $22.1 million; (b) a write down in the fair value of investments and long-term receivables of $2.1 million; and 17 (c) a restructuring charge of $3.6 million. (3) In the three months ended June 2002, the selected financial data of the Company included: (a) an impairment of intangibles charge of $81.7 million; (b) a write down in the fair value of investments and long-term receivables of $4.5 million; (c) a restructuring charge of $8.8 million; and (d) a reduction in the carrying value of fixed assets of $2.6 million. (4) On June 1, 2001, the Company early adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Intangible Assets," (SFAS No. 142). SFAS No. 142 required step 1 of the transitional impairment test be completed within six months of the date of adoption and step 2 of the transitional impairment test, if necessary, be completed by the end of the year of adoption. The Company completed step 1 of the transitional impairment test by the end of the second quarter and determined that step 2 was required. The Company completed step 2 of the transitional impairment test in the fourth quarter and determined that its goodwill was impaired by $15.2 million at June 1, 2001. The Company recorded the transitional goodwill impairment in the fourth quarter of the year ended May 31, 2002. However, SFAS No. 142 required the transitional goodwill impairment be recorded as a cumulative effect of a change in accounting in the Company's first interim period financial statements after adoption, regardless of the interim period in which the measurement of the loss is completed. We restated the previously reported three-month earnings as June 30, 2002 and three-month earnings as of June 30, 2001 to recognize the $15.2 million cumulative effect of a change in accounting in the quarter ended June 30, 2001. This restatement had no impact on the Company's previously reported audited statement of financial position as of December 31, 2002 or May 31, 2002 or its results of operations or cash flows for the seven-month period ended December 31, 2002 or the year ended May 31, 2002. The restatement had the following financial statement impact:
Three months ended Three months ended June 30, 2002 June 30, 2001 ----------------------------- ----------------------------- As previously As previously reported As restated reported As restated ------------- ------------ ------------- ------------ Loss before cumulative effect of accounting change $ (98,783) $ (98,783) $ (8,448) $ (8,448) Cumulative effect of accounting change (15,174) -- -- (15,174) ------------ ------------ ------------ ------------ Net loss $ (113,957) $ (98,783) $ (8,448) $ (23,622) ============ ============ ============ ============ Loss before cumulative effect of accounting change per share - basic and diluted $ (1.93) $ (1.93) $ (0.22) $ (0.22) Cumulative effect of accounting change per share - basic and diluted (0.29) -- -- (0.40) ------------ ------------ ------------ ------------ Net loss per share - basic and diluted $ (2.22) $ (1.93) $ (0.22) $ (0.62) ============ ============ ============ ============
18 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the ordinary course of business, the Company is exposed to interest rate risks and foreign currency risks, which the Company does not currently consider to be material. These interest rate exposures primarily relate to having short-term investments earning short-term interest rates and to having fixed rate debt. The Company views its investment in foreign subsidiaries as long-term commitments, and does not hedge any translation exposure. 19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA RESPONSIBILITY FOR FINANCIAL STATEMENTS The accompanying consolidated financial statements of TLC Vision Corporation have been prepared by management in conformity with accounting principles generally accepted in the United States. The significant accounting policies have been set out in Note 1 to the financial statements. These statements are presented on the accrual basis of accounting. Accordingly, a precise determination of many assets and liabilities is dependent upon future events. Therefore, estimates and approximations have been made using careful judgment. Recognizing that the Company is responsible for both the integrity and objectivity of the financial statements, management is satisfied that these financial statements have been prepared within reasonable limits of materiality under United States generally accepted accounting principles. During the transitional period ended December 31, 2002, the Board of Directors had an Audit Committee consisting of four non-management directors. The committee met with management and the auditors to review any significant accounting, internal control and auditing matters, to review and finalize the annual financial statements of the Company along with the independent auditors' report prior to the submission of the financial statements to the Board of Directors for final approval. The financial information throughout the text of this annual report is consistent with the information presented in the financial statements. The Company's accounting procedures and related systems of internal control are designed to provide reasonable assurance that its assets are safeguarded and its financial records are reliable. 20 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders of TLC Vision Corporation We have audited the consolidated balance sheets of TLC Vision Corporation (formerly TLC Laser Eye Centers Inc.) as of December 31, 2002, May 31, 2002, and May 31, 2001 and the consolidated statements of operations, cash flows, and stockholders' equity for the seven-month period ended December 31, 2002 and for each of the years in the three-year period ended May 31, 2002. Our audits also included the financial statement schedule listed in the index at Item 15. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform an 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. We believe our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of TLC Vision Corporation as of December 31, 2002, May 31, 2002, and May 31, 2001 and the results of its operations and its cash flows for the seven-month period ended December 31, 2002 and for each of the years in the three-year period ended May 31, 2002 in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 2 to the consolidated financial statements, on June 1, 2001, the Company changed its method of accounting for goodwill. St. Louis Missouri /s/ ERNST & YOUNG LLP March 25, 2003 ---------------------- 21 TLC VISION CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands except per share amounts)
SEVEN-MONTH PERIOD ENDED YEAR ENDED MAY 31, DECEMBER 31, ------------------------------------------------ 2002 2002 2001 2000 ------------ ------------ ------------ ------------ Revenues: Refractive: Owned centers .................................... $ 29,834 $ 50,252 $ 78,470 $ 97,608 Managed centers .................................. 24,959 62,657 82,749 92,625 Access fees ...................................... 21,495 2,999 -- -- Other healthcare services ............................. 23,866 18,843 12,787 10,990 ------------ ------------ ------------ ------------ Total revenues (Note 16) ................................... 100,154 134,751 174,006 201,223 ------------ ------------ ------------ ------------ Cost of revenues: Refractive: Owned centers .................................... 27,001 38,877 55,226 68,439 Managed centers .................................. 22,223 43,034 44,684 51,549 Access fees ...................................... 15,356 1,826 -- -- Impairment of fixed assets (Note 10) ............. -- 2,553 -- -- Other healthcare services ............................. 16,245 11,499 10,106 9,246 ------------ ------------ ------------ ------------ Total cost of revenues ..................................... 80,825 97,789 110,016 129,234 ------------ ------------ ------------ ------------ Gross margin .......................................... 19,329 36,962 63,990 71,989 ------------ ------------ ------------ ------------ General and administrative ................................. 24,567 36,382 44,464 44,341 Marketing .................................................. 8,321 15,296 25,600 24.202 Amortization of intangibles ................................ 4,074 10,227 12,543 7,396 Impairment of goodwill and other intangible assets (Note 8 and 9) .......................................... 22,138 81,720 -- -- Research and development (Note 7) .......................... 2,000 2,000 -- -- Write-down in the fair value of investments and long-term receivables (Note 7) .......................... 2,095 26,082 -- -- Restructuring and other charges (Note 18) .................. 4,227 8,750 19,075 -- ------------ ------------ ------------ ------------ 67,422 180,457 101,682 75,939 ------------ ------------ ------------ ------------ Operating loss ............................................. (48,093) (143,495) (37,692) (3,950) Other income and (expense): Other income, net (Note 12) ............................. 6,996 -- -- -- Interest (expense) income and other ..................... (243) (761) 2,543 4,492 Minority interest ....................................... (1,152) (635) (385) (3,006) ------------ ------------ ------------ ------------ Loss before income taxes and cumulative effect of accounting change ............................. (42,492) (144,891) (35,534) (2,464) Income tax expense (Note 14) ............................... (851) (1,784) (2,239) (3,454) ------------ ------------ ------------ ------------ Loss before cumulative effect of accounting change ....................................... (43,343) (146,675) (37,773) (5,918) Cumulative effect of accounting change (Note 2) ............ -- (15,174) -- -- ------------ ------------ ------------ ------------ Net loss ................................................... $ (43,343) $ (161,849) $ (37,773) $ (5,918) ============ ============ ============ ============ Loss before cumulative effect of accounting change per share - basic and diluted ................... $ (0.68) $ (3.74) $ (1.00) $ (0.16) Cumulative effect of accounting change per share - basic and diluted ....................................... -- (0.39) -- -- ------------ ------------ ------------ ------------ Net loss per share - basic and diluted .................... $ (0.68) $ (4.13) $ (1.00) $ (0.16) ============ ============ ============ ============ Weighted-average number of common shares outstanding - basic and diluted ....................................... 63,407 39,215 37,779 37,778 ============ ============ ============ ============
See notes to consolidated financial statements. 22 TLC VISION CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands)
MAY 31, DECEMBER 31, ------------------------------ 2002 2002 2001 ------------ ------------ ------------ ASSETS Current assets: Cash and cash equivalents ............................. $ 36,081 $ 45,074 $ 47,987 Short-term investments ................................ 1,557 2,113 6,063 Accounts receivable (Note 6) .......................... 14,155 17,991 9,950 Prepaid expenses and other current assets ............. 9,820 17,006 4,501 ------------ ------------ ------------ Total current assets .................................. 61,613 82,184 68,501 Restricted cash (Notes 5) .................................. 3,975 4,988 1,619 Investments and other assets (Note 7) ...................... 2,442 4,505 23,171 Goodwill (Note 8) .......................................... 40,697 53,192 32,752 Other intangible assets (Note 9) .......................... 29,326 32,513 60,050 Fixed assets (Note 10) ..................................... 58,003 68,133 52,345 ------------ ------------ ------------ Total assets ............................................... $ 196,056 $ 245,515 $ 238,438 ============ ============ ============ LIABILITIES Current liabilities: Accounts payable ...................................... $ 13,857 $ 17,625 $ 3,849 Accrued liabilities ................................... 28,911 31,748 15,517 Current portion of long-term debt (Note 11) ........... 6,322 9,433 6,769 ------------ ------------ ------------ Total current liabilities ............................. 49,090 58,806 26,135 Other long-term liabilities ................................ 9,630 7,401 6,146 Long-term debt, less current maturities (Note 11) .......... 15,760 14,643 8,313 Minority interests ......................................... 9,748 9,651 10,738 STOCKHOLDERS' EQUITY Common stock, no par value; unlimited number authorized .... 388,769 387,701 276,277 Option and warrant equity .................................. 11,035 11,755 532 Treasury stock ............................................. (2,623) (2,432) -- Accumulated deficit ........................................ (285,353) (242,010) (80,161) Accumulated other comprehensive loss ....................... -- -- (9,542) ------------ ------------ ------------ Total stockholders' equity ................................. 111,828 155,014 187,106 ------------ ------------ ------------ Total liabilities and stockholders' equity ................. $ 196,056 $ 245,515 $ 238,438 ============ ============ ============
See notes to consolidated financial statements. Approved on behalf of the Board: /s/ ELIAS VAMVAKAS /s/ WARREN S. RUSTAND ------------------------------- ------------------------------ Elias Vamvakas, Director Warren S. Rustand, Director 23 TLC VISION CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
SEVEN-MONTH PERIOD ENDED YEAR ENDED MAY 31, DECEMBER 31, ------------------------------------------ 2002 2002 2001 2000 ------------ ---------- ---------- ---------- OPERATING ACTIVITIES Net loss ....................................................... $ (43,343) $ (161,849) $ (37,773) $ (5,918) Adjustment to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization ............................. 13,862 21,352 27,593 21,688 Cumulative effect of accounting change .................... -- 15,174 -- -- Impairment of goodwill and other intangibles assets ....... 22,138 81,720 -- 489 Loss on sale of fixed assets .............................. 1,770 1,136 1,946 1,099 Write-off of investment in research and development arrangement ................................. 2,000 2,000 -- -- Deferred income taxes ..................................... -- -- -- 1,320 Impairment of fixed assets and write down of investments .. 2,095 28,635 -- -- Non-cash restructuring and other costs .................... 2,266 2,503 14,395 -- Compensation expense ...................................... 445 866 -- -- Minority interest and other ............................... 1,152 107 677 3,786 CHANGES IN OPERATING ASSETS AND LIABILITIES Accounts receivable .................................. 3,836 1,592 5,232 (15) Prepaid expenses and current other assets ............ 7,168 417 1,891 1,047 Accounts payable and accrued liabilities ............. (4,574) 6,321 1,042 (465) ------------ ---------- ---------- ---------- Cash provided by (used in) operating activities ................ 8,815 (26) 15,003 23,031 ------------ ---------- ---------- ---------- INVESTING ACTIVITIES Restricted cash movement ....................................... -- (3,000) -- -- Purchase of fixed assets ....................................... (3,668) (2,297) (10,656) (26,153) Proceeds from sale of fixed assets ............................. 751 89 2,491 185 Proceeds from the sale of investments and subsidiaries ......... 259 777 1,117 227 Investment in research and development arrangement ............. (2,000) (2,000) -- -- Acquisitions and investments ................................... (9,695) (5,424) (17,345) (56,496) Cash acquired in Laser Vision Centers, Inc. acquisition ........ -- 7,319 -- -- Short-term investments ......................................... 556 6,058 (6,063) 26,212 Other .......................................................... (32) 56 (68) (24) ------------ ---------- ---------- ---------- Cash (used in) provided by investing activities ................ (13,829) 1,578 (30,524) (56,049) ------------ ---------- ---------- ---------- FINANCING ACTIVITIES Restricted cash movement ....................................... 1,013 (369) 103 8 Proceeds from debt financing ................................... 1,750 5,788 226 826 Principal payments of debt financing and capital leases ....... (5,140) (7,098) (7,097) (7,698) Payments of accrued purchase obligations ....................... -- -- (3,620) -- Contributions from minority interest ........................... -- -- -- 2,365 Distributions to minority interests ............................ (1,532) (3,092) (4,865) (1,569) Purchase of treasury stock ..................................... (191) -- (481) (10,365) Proceeds from issuance of common stock ......................... 121 306 711 2,384 ------------ ---------- ---------- ---------- Cash used in financing activities .............................. (3,979) (4,465) (15,023) (14,049) ------------ ---------- ---------- ---------- Net decrease in cash and cash equivalents during the period .... (8,993) (2,913) (30,544) (47,067) Cash and cash equivalents, beginning of period ................. 45,074 47,987 78,531 125,598 ------------ ---------- ---------- ---------- Cash and cash equivalents, end of period ....................... $ 36,081 $ 45,074 $ 47,987 $ 78,531 ============ ========== ========== ==========
See notes to consolidated financial statements. 24 TLC VISION CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands)
COMMON STOCK TREASURY STOCK -------------------------- -------------------------- OPTION AND WARRANT SHARES AMOUNT EQUITY SHARES AMOUNT ----------- ----------- ----------- ----------- ----------- Balance, May 31, 1999 ................... 37,362 $ 269,454 $ -- -- $ -- Warrants issued ......................... 532 Shares issued for acquisition ........... 302 728 Value determined for shares issued contingent on meeting earnings criteria .................. -- 1,397 Shares purchased for cancellation ....... (710) (5,162) Exercise of stock options ............... 87 1,314 Shares issued as remuneration ........... 44 387 Shares issued as part of the employee share purchase plan ....... 65 1,696 Reversal of IPO costs, over accrual ..... -- 139 Comprehensive loss Net loss ........................... Other comprehensive loss Unrealized gains/losses on available for-sale securities ... Total comprehensive loss ................ ----------- ----------- ----------- ----------- ----------- Balance May 31, 2000 .................... 37,150 269,953 532 -- -- ----------- ----------- ----------- ----------- ----------- Shares issued for acquisition ........... 832 6,059 Shares purchased for cancellation ....... (108) (481) Exercise of stock options ............... 40 125 Shares issued as remuneration ........... 5 35 Shares issued as part of the employee share purchase plan ....... 112 586 Comprehensive loss Net loss ........................... Unrealized gains/losses on available for-sale securities .... Total comprehensive loss ................ Balance May 31, 2001 .................... 38,031 276,277 532 -- -- Shares issued on acquisition of LaserVision ........................ 26,617 111,058 Value determined for shares issued contingent on meeting earnings criteria .................. 60 Options issued on acquisition ........... 11,001 Treasury stock arising from acquisition ........................ (583) (2,432) Exercise of stock options ............... 10 26 Options issued on termination ........... 222 Shares issued as part of the employee share purchase plan ....... 85 280 Comprehensive loss Net loss ........................... Unrealized gains/losses on available for-sale securities .... Total comprehensive loss ................ ----------- ----------- ----------- ----------- ----------- Balance May 31, 2002 .................... 64,743 387,701 11,755 (583) (2,432) Purchase of treasury stock ............. (196) (191) Shares issued as part of the employee share purchase plan ....... 46 111 Exercise of stock options ............... 5 10 Options expired ......................... 720 (720) Dilution gain on stock of subsidiary .... 227 Net loss and comprehensive loss ......... -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- Balance December 31, 2002 ............... 64,794 $ 388,769 $ 11,035 (779) $ (2,623) =========== =========== =========== =========== =========== OTHER ACCUMULATED ACCUMULATED COMPREHENSIVE DEFICIT INCOME (LOSS) TOTAL ----------- -------------- ----------- Balance, May 31, 1999 ................... $ (31,267) $ 5,936 $ 244,123 Warrants issued ......................... 532 Shares issued for acquisition ........... 728 Value determined for shares issued contingent on meeting earnings criteria .................. 1,397 Shares purchased for cancellation ....... (5,203) (10,365) Exercise of stock options ............... 1,314 Shares issued as remuneration ........... 387 Shares issued as part of the employee share purchase plan ....... 1,696 Reversal of IPO costs, over accrual ..... 139 Comprehensive loss Net loss ........................... (5,918) (5,918) Other comprehensive loss Unrealized gains/losses on available for-sale securities .... (10,387) (10,387) ----------- Total comprehensive loss ................ (16,305) ----------- ----------- ----------- Balance May 31, 2000 .................... (42,388) (4,451) 223,646 ----------- ----------- ----------- Shares issued for acquisition ........... 6,059 Shares purchased for cancellation ....... (481) Exercise of stock options ............... 125 Shares issued as remuneration ........... 35 Shares issued as part of the employee share purchase plan ....... 586 Comprehensive loss Net loss ........................... (37,773) (37,773) Unrealized gains/losses on available for-sale securities .... (5,091) (5,091) ----------- Total comprehensive loss ................ (42,864) ----------- ----------- ----------- Balance May 31, 2001 .................... (80,161) (9,542) 187,106 Shares issued on acquisition of LaserVision ........................ 111,058 Value determined for shares issued contingent on meeting earnings criteria .................. 60 Options issued on acquisition ........... 11,001 Treasury stock arising from acquisition ........................ (2,432) Exercise of stock options ............... 26 Options issued on termination ........... 222 Shares issued as part of the employee share purchase plan ....... 280 Comprehensive income Net loss ........................... (161,849) (161,849) Unrealized gains/losses on available for-sale securities .... 9,542 9,542 ----------- Total comprehensive loss ................ (152,307) ----------- ----------- ----------- Balance May 31, 2002 .................... (242,010) -- 155,014 Purchase of treasury stock ............. (191) Shares issued as part of the employee share purchase plan ....... 111 Exercise of stock options ............... 10 Options expired ......................... -- Dilution gain on stock of subsidiary .... 227 Net loss and comprehensive loss ......... (43,343) -- (43,343) ----------- ----------- ----------- Balance December 31, 2002 ............... $ (285,353) $ -- $ 111,828 =========== =========== ===========
See notes to consolidated financial statements. 25 TLC VISION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (tabular amounts in thousands, except per share amounts) 1. NATURE OF OPERATIONS TLC Vision Corporation (formerly TLC Laser Eye Centers Inc.) and its subsidiaries (collectively "TLC Vision" or the "Company") is a diversified healthcare service company focused on working with physicians to provide high quality patient care primarily in the eye care segment. The Company's core business revolves around refractive surgery, which involves using an excimer laser to treat common refractive vision disorders such as myopia (nearsightedness), hyperopia (farsightedness) and astigmatism. The Company's business models include arrangements ranging from owning and operating fixed site centers to providing access to lasers through fixed site and mobile service relationships. The Company also furnishes independent surgeons with mobile or fixed site access to cataract surgery equipment and services through its Midwest Surgical Services, Inc. ("MSS") subsidiary. In addition, the Company owns a 51% majority interest in Vision Source, which provides optometric franchise opportunities to independent optometrists. Through its OR Partners and Aspen Healthcare divisions, TLC Vision develops, manages and has equity participation in single-specialty eye care ambulatory surgery centers and multi-specialty ambulatory surgery centers. In 2002, the Company formed a joint venture with Vascular Science to create OccuLogix, L.P., a partnership focused on the treatment of a specific eye disease, known as dry age-related macular degeneration, via rheopheresis, a process for filtering blood. In 2002, the Company changed its fiscal year end from May 31 to December 31. References in the consolidated financial statements and notes to the consolidated financial statements to "transitional period 2002" shall mean the seven-month period ended December 31, 2002, "fiscal 2002" shall mean the 12 months ended on May 31, 2002, "fiscal 2001" shall mean the 12 months ended May 31, 2001, and "fiscal 2000" shall mean the 12 months ended May 31, 2000. And On May 15, 2002, the Company merged with Laser Vision Centers, Inc. ("LaserVision"), and the results of LaserVision's operations have been included in the consolidated financial statements since that date. LaserVision provides access to excimer lasers, microkeratomes, other equipment and value added support services to eye surgeons for laser vision correction and the treatment of cataracts. 26 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Principles of Consolidation These consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in 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. Cash and Cash Equivalents Cash and cash equivalents include highly liquid short-term investments with original maturities of 90 days or less. Short-Term Investments Short-term investments, which consist of corporate bonds and a bank certificate of deposit, are classified as held-to-maturity securities and carried at amortized cost. Investments The Company has certain investments in equity securities. Investments are accounted for using the equity method if the Company has significant influence, but not control, over an investee. All other equity investments, in which the Company does not have the ability to exercise significant influence, are accounted for under the cost method. Under the cost method of accounting, investments that do not have a quoted market price (non-marketable equity securities) are carried at cost and are adjusted only for other than temporary declines in fair value and additional investment activity. For investments in public companies (marketable equity securities), the Company classifies its investments as available-for-sale and, accordingly, records these investments at fair value with unrealized gain and losses included in accumulated other comprehensive loss, unless a decline in fair value is determined to be other than temporary in which case the unrealized loss is recognized in earnings. Fixed Assets Fixed assets are recorded at cost or the initial present value of future minimum lease payments for assets under capital lease. Major renewals or betterments are capitalized. Maintenance and repairs are expensed as incurred. Depreciation is provided at rates intended to amortize the assets over their productive lives as follows: Buildings - straight-line over 40 years Computer equipment and software - straight-line over three years Furniture, fixtures and equipment - 25% declining balance Laser equipment - 25% declining balance Leasehold improvements - straight-line over the initial term of the lease Medical equipment - 25% declining balance Vehicles and other - 25% declining balance
The Company's MSS subsidiary records depreciation on its equipment and vehicles (with a net book value of $5.9 million at December 31, 2002) on a straight-line basis over the estimated useful lives (three to ten years) of the equipment. On June 1, 2002, the Company changed its depreciation policy for furniture, fixtures and equipment, laser equipment and medical equipment to 25% declining balance from 20% declining balance. The Company believes this method better reflects the depreciation over the productive life of the asset. As this is a change in an accounting estimate it will be reflected 27 prospectively in the Company's financial statements. This change increased the net loss by approximately $1.0 million in the transitional period. Goodwill Effective June 1, 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," ("SFAS No. 142") which requires that goodwill not be amortized but instead be tested for impairment at least annually and more frequently if circumstances indicate possible impairment. In conjunction with its change in year-end, the Company changed its annual impairment test date from May 31 to November 30. Other Intangible Assets Other intangible assets consist primarily of practice management agreements ("PMAs") and deferred contract rights. PMAs represent the cost of obtaining the exclusive right to manage eye care centers and secondary care centers in affiliation with the related physician group during the term of the respective agreements. Deferred contract rights represent the value of contracts with affiliated doctors to provide basic access and service. PMAs and deferred contract rights are amortized using the straight-line method over the term of the related contract. Long-Lived Assets Effective June 1, 2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." In accordance with SFAS No. 144, the Company reviews long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of the asset group may not be recoverable. The adoption had no material impact on the Company's financial statements. Revenue Recognition The Company recognizes refractive revenues when the procedure is performed. Revenue from owned laser centers represents the amount charged to patients for a laser vision correction procedure, net of discounts, contractual adjustments in certain regions and amounts collected as an agent of co-managing doctors. Revenue from access services represents the amount charged to the customer/surgeon for access to equipment and technical support based on use. Revenue from managed laser centers represents management fees for services provided under management services agreements with professional corporations ("PCs") that provide laser vision correction procedures. The PCs are responsible for billing the patient directly. Under the terms of the management service agreements, the Company provides facilities, equipment, technical support and management, marketing and administrative services to the PCs in return for a per procedure management fee. Although TLC Vision is entitled to receive the full per procedure management fee, the Company has made it a business practice to reduce the management fee for a portion of any discount or contractual allowance related to the underlying procedure. Net revenue is recognized when the PC performs the procedure. Contractual adjustments arise due to the terms of reimbursement and managed care contracts in certain regions. Such adjustments represent the difference between the charges at established rates and estimated recoverable amounts and are recognized as a reduction of revenue in the period services are rendered. Any differences between estimated contractual adjustments and actual final settlements under reimbursement contracts are recognized as contractual adjustments in the period final settlements are determined. Approximately 24% of the Company's net revenue is from the Company's other healthcare services and includes cataract equipment access and service fees on a per procedure basis, management fees from cataract and secondary care practices and network marketing and management services and fees for professional healthcare facility management. Revenues from other healthcare services are recognized as the service is rendered or procedure performed. Cost of Revenues Included in cost of revenues are the laser fees payable to laser manufacturers for royalties, use and maintenance of the lasers, variable expenses for consumables, financing costs, facility fees as well as center costs associated with personnel, facilities amortization and impairment of center assets. 28 In Company-owned centers, the Company is responsible for engaging and paying the surgeons who provide laser vision correction services, and such amounts also are reported as a cost of revenue. Income Taxes The Company uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recorded based on the difference between the income tax basis of assets and liabilities and their carrying amounts for financial reporting purposes at the applicable enacted statutory tax rates. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Accounting for Stock-Based Compensation The Company accounts for stock-based compensation under the provisions of Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and its related interpretations. Accordingly, the Company records expense over the vesting period in an amount equal to the intrinsic value of the award on the grant date. The Company recorded $0.4 million and $0.8 million of compensation expense during the transitional period 2002 and fiscal 2002, respectively. The following table illustrates the pro forma net loss and net loss per share as if the fair value-based method as set forth under SFAS No. 123 "Accounting for Stock Based Compensation," applied to all awards:
SEVEN-MONTH YEAR ENDED MAY 31, PERIOD ENDED ------------------------------------------------ DECEMBER 31, 2002 2002 2001 2000 ----------------- ------------ ------------ ------------ Net loss, as reported ............................ $ (43,343) $ (161,849) $ (37,773) $ (5,918) Adjustments for SFAS No. 123 ..................... (628) (1,564) (1,847) (2,806) ------------ ------------ ------------ ------------ Pro forma net loss ............................... $ (43,971) $ (163,413) $ (39,620) $ (8,724) ============ ============ ============ ============ Pro forma loss per share - basic and diluted ..... $ (0.69) $ (4.17) $ (1.05) $ (0.23) ============ ============ ============ ============
Foreign Currency Exchange The unit of measure of the Company is the U.S. dollar. The assets and liabilities of the Company's Canadian operations are maintained in Canadian dollars and 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 nonmonetary items. Revenue 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 included in net loss are not material in any period presented. Net Loss Per Share The net loss per share was computed by dividing net loss by the weighted-average number of common shares outstanding during the period. The calculations exclude the dilutive effect of stock options and warrants since their inclusion in such calculation is antidilutive. Average shares outstanding during the transitional period were reduced by 712,500 shares to exclude the weighted-average effect of outstanding shares in escrow related to a previous LaserVision acquisition. Contingent Consideration When the Company enters into agreements that provide for contingent consideration based on the certain predefined targets being met, an analysis is made to determine whether the contingent consideration will be reflected as an additional purchase price obligation or deemed to be compensation expense. The accounting treatment if the consideration is deemed to be an additional purchase price payment is to increase the value assigned to PMAs and deferred contract rights and amortize this additional amount over the remaining period of the relevant agreement. Where the contingent consideration is deemed to be compensation, the expense is reflected as an operating expense in the periods that the service is rendered. 29 Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. These estimates are reviewed periodically, and as adjustments become necessary, they are reported in income in the period in which they become known. Reclassifications Certain amounts in prior periods have been reclassified to conform with the report classifications of the transitional period. Recent Pronouncements In July 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" was issued. SFAS 146 nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in Restructuring)." SFAS No. 146 requires that costs associated with an exit or disposal activity be recognized when the liability is incurred, whereas EITF No. 94-3 required recognition of a liability when an entity committed to an exit plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. 3. CHANGE IN FISCAL YEAR-END The Company changed its fiscal year-end from May 31 to December 31 effective June 1, 2002. Accordingly, the accompanying financial statements include the results of operation and cash flows for the seven-month period ended December 31, 2002, the transitional period. The following unaudited financial information for the seven-month period ended December 31, 2001 is presented for comparative purposes only:
SEVEN-MONTH PERIOD ENDED ------------------------------ DECEMBER 31, DECEMBER 31, 2002 2001 ------------ ------------ (UNAUDITED) (Restated) Revenues: Refractive: Owned centers .......................................... $ 29,834 $ 26,669 Managed centers ........................................ 24,959 34,636 Access fees ............................................ 21,495 -- Other healthcare services ................................... 23,866 8,995 ------------ ------------ Total revenues ................................................... 100,154 70,300 ------------ ------------ Cost of revenues: Refractive: Owned centers ........................................ 27,001 22,213 Management, facility and access fees ................. 22,223 25,396 Access fees .......................................... 15,356 -- Impairment of fixed assets ........................... -- 1,066 Other healthcare services ................................. 16,245 4,776 ------------ ------------ Total cost of revenues ........................................... 80,825 53,451 ------------ ------------ Gross margin ............................................... 19,329 16,849 ------------ ------------ General and administrative ....................................... 24,567 22,791 Marketing ........................................................ 8,321 9,215 Amortization of other intangibles ................................ 4,074 5,950 Impairment of goodwill and other intangible assets ............... 22,138 -- Research and development ......................................... 2,000 -- Write-down in the fair value of investments and long-term receivables ................................................... 2,095 21,079
30 Restructuring and other charges .................................. 4,227 1,759 ------------ ------------ 67,422 60,794 ------------ ------------ Operating loss ................................................... (48,093) (43,945) Other income and (expense): Other income, net .............................................. 6,996 -- Interest expense ............................................... (243) (252) Minority interest .............................................. (1,152) (586) ------------ ------------ Loss before cumulative effect of accounting change and income taxes ............................................... (42,492) (44,783) Income tax expense ............................................... (851) (504) ------------ ------------ Loss before cumulative effect of accounting change ............... (43,343) (45,287) Cumulative effect of accounting change ........................... -- (15,174) ------------ ------------ Net loss ......................................................... $ (43,343) $ (60,461) ============ ============ Loss before cumulative effect of accounting change per share - basic and diluted ........................... $ (0.68) $ (1.19) Cumulative effect of accounting change per share - basic and diluted ...................................... -- (0.40) ------------ ------------ Net loss per share - basic and diluted ........................... $ (0.68) $ (1.59) ============ ============ Weighted-average number of common shares outstanding - basic and diluted (in thousands)- .................................... 63,407 38,064 ============ ============
On June 1, 2001, the Company early adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Intangible Assets," (SFAS No. 142). SFAS No. 142 required step 1 of the transitional impairment test be completed within six months of the date of adoption and step 2 of the transitional impairment test, if necessary, be completed by the end of the year of adoption. The Company completed step 1 of the transitional impairment test by the end of the second quarter and determined that step 2 was required. The Company completed step 2 of the transitional impairment test in the fourth quarter and determined that its goodwill was impaired by $15.2 million at June 1, 2001. The Company recorded the transitional goodwill impairment in the fourth quarter of the year ended May 31, 2002. However, SFAS No. 142 required the transitional goodwill impairment be recorded as a cumulative effect of a change in accounting in the Company's first interim period financial statements after adoption, regardless of the interim period in which the measurement of the loss is completed. We restated the previously reported three-month unaudited earnings for the seven months ended December 31, 2001 to recognize the $15.2 million cumulative effect of a change in accounting in the month ended June 30, 2001. This restatement had no impact on the Company's previously reported audited statement of financial position as of December 31, 2002 or May 31, 2002 or its results of operations or cash flows for the seven-month period ended December 31, 2002 or the year ended May 31, 2002. The restatement had the following financial statement impact:
Seven months ended December 31, 2001 (Unaudited) ----------------------------- As previously reported As restated ------------- ------------ Loss before cumulative effect of accounting change $ (45,287) $ (45,287) Cumulative effect of accounting change -- (15,174) ---------- ---------- Net loss $ (45,287) $ (60,461) ========== ========== Loss before cumulative effect of accounting change per share - basic and diluted $ (1.19) $ (1.19) Cumulative effect of accounting change per share - basic and diluted -- (0.40) ---------- ---------- Net loss per share - basic and diluted $ (1.19) $ (1.59) ========== ==========
4. ACQUISITIONS On August 1, 2002, the Company acquired for $7.6 million in cash a 55% ownership interest in an ambulatory surgery center (ASC) in Mississippi which specializes in cataract surgery. The Company also has a contingent obligation to purchase an additional 5% ownership interest per year for $0.7 million in cash during each of the next four years. Net assets acquired were $7.6 million, which included $7.4 million of goodwill and $0.2 million of other intangible assets. The results of operations have been included in the consolidated statements of operations of the Company since the acquisition date. Laser Vision Centers, Inc. On August 27, 2001, the Company announced that it had entered into an Agreement and Plan of Merger ("Merger Agreement") with LaserVision. On May 15, 2002, stockholder and regulatory approvals had been obtained, and the Company completed the acquisition of 100% of the outstanding common shares of LaserVision. The merger was effected as an all-stock combination at a fixed exchange rate of 0.95 of a common share of the Company for each issued and outstanding share of LaserVision common stock, which resulted in the issuance of 26.6 million common shares of the Company's common stock. The stock consideration was valued using the average trading price of a TLC Vision share for the two days prior and subsequent to the announcement date. In addition, the Company assumed all the options and warrants to acquire stock of LaserVision outstanding at May 15, 2002 and exchanged them for approximately 8.0 million options to purchase common shares of the Company. The results of operations of LaserVision have been included in the consolidated statement of operations of the Company after May 15, 2002. The total purchase price of the acquisition was $130.6 million consisting of $108.6 million of TLC Vision shares issued to LaserVision shareholders; $9.8 million of costs incurred related to the merger; $1.2 million in LaserVision shares (575,000 shares) already owned by TLC Vision; and $11.0 million representing the fair value of TLC Vision options to purchase common shares in exchange for all the outstanding LaserVision options and warrants as of the effective date of the acquisition. The purchase price allocation resulted in $87.2 million of acquired goodwill, of which $65.8 million was assigned to the refractive segment and $21.4 million was assigned to the cataract surgery segment. The entire $87.2 million of goodwill is not deductible for tax purposes. In July 2001, two excimer laser manufacturers reported settling class action antitrust cases. In August 2002, LaserVision received approximately $8.0 million in cash from the settlement. The Company included the LaserVision settlement, net of $0.2 million paid to the minority interests in the former LaserVision subsidiaries, in the purchase price allocation as an other asset. 31 The Company finalized the allocation of the purchase price on December 31, 2002 as follows: Current assets (includes cash of $7,319)....................................... $ 33,061 Fixed assets .................................................................. 30,697 Other non-current assets....................................................... 462 Intangible assets subject to amortization Deferred contract rights (6.2-year weighted average useful life)...... 13,658 Trade name and service marks (20-year weighted average useful life)... 400 14,058 -------- Goodwill Refractive............................................................ 65,770 Other................................................................. 21,440 87,210 -------- ----------- Total assets acquired.......................................................... 165,488 Current liabilities............................................................ 29,311 Long-term debt................................................................. 2,916 Capitalized lease obligation................................................... 1,603 Minority interest.............................................................. 1,008 ----------- Total liabilities assumed...................................................... 34,838 ----------- Net assets acquired............................................................ $ 130,650 ===========
If the merger agreement with LaserVision had been completed on June 1, 2000, the unaudited pro forma effects on the consolidated statements of operations for the years ended May 31, 2002 and 2001, would have been to increase revenues by $99.7 million and $122.7 million, respectively, and to increase the net loss for the year, before and after the cumulative effect of an accounting change, by $27.9 million and decrease the net loss of $3.8 million, respectively. As a result, the impact of the above changes to net loss, combined with the dilutive effect by the increased number of shares, the loss per share for the years ended May 31, 2002 and 2001, would have been reduced by $1.02 and $0.45 per share, respectively. The above unaudited pro forma information is presented for information purposes only and may not be indicative of the results of operations as they would have been if the merger had occurred on June 1, 2000, nor is it necessarily indicative of the results of operations which may occur in the future. Anticipated efficiencies from the combination have been excluded from the amounts included in the pro forma information. On August 21, 2000, the Company purchased 100% of the membership interests in Eye Care Management Associates, LLC ("Eye Care Mgmt. Assoc., LLC") in exchange for $4.0 million in cash, 295,165 common shares of the Company with a value of $1.9 million and amounts contingent upon future events. Contingent amounts are determined based on fees received by the Company pursuant to the Membership Purchase Agreement. Contingent amounts have been deemed to be compensation of the physicians associated with Eye Care Mgmt. Assoc., LLC. In fiscal 2001 and 2002, no expense for contingent amounts has been reflected as the applicable predetermined targets had not been achieved. During fiscal 2001, an additional 536,764 common shares of the Company, valued at $4.2 million, were issued to the sellers of The Vision Source, Inc. to reflect the final payment of contingent consideration which was determined to be payable during fiscal 2000 and which had been accrued for at May 31, 2000. On March 2, 2001, the Company acquired certain assets and liabilities of a Maryland Professional Corporation ("Maryland PC") for $10.0 million in cash and notes payable of a further $10.0 million to be paid in four equal installments of $2.5 million on the first four anniversary dates of the transaction. These notes payable do not carry an interest rate and as such have been 32 discounted at a rate of 9% with the resulting $8.1 million being reported as long-term debt for financial reporting purposes. The first installment was paid in 2002. The total consideration on acquisitions was allocated to net assets acquired on the basis of their fair values as follows:
EYE CARE MARYLAND MGMT. PC ASSOC., LLC OTHER TOTAL ---------- ----------- ---------- ---------- Current assets ............................. $ 50 $ -- $ 501 $ 551 Fixed assets ............................... 150 -- -- 150 Goodwill ................................... -- -- 77 77 Practice management agreements ............. 18,149 5,964 1,440 25,553 Minority interest .......................... -- -- (1,314) (1,314) ---------- ---------- ---------- ---------- $ 18,349 $ 5,964 $ 704 $ 25,017 ========== ========== ========== ========== Funded by: Issuance of common shares .................. $ -- $ 1,860 $ -- $ 1,860 Contribution of cash ....................... 10,000 4,000 587 14,587 Notes payable .............................. 8,099 -- -- 8,099 Acquisition costs .......................... 250 104 117 471 ---------- ---------- ---------- ---------- $ 18,349 $ 5,964 $ 704 $ 25,017 ========== ========== ========== ==========
On June 30, 1999, the Company made a capital contribution of $1.0 million 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 the intention to initially own and operate three eye care centers in California and to eventually develop additional centers in markets in the United States where Kaiser Permanente has a significant presence. 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 $11.2 million in cash and certain operating assets and liabilities of the Company's two California eye care 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 $6.0 million was made to complete the transaction. 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 $1.0 million cash and 30,000 common shares with a value of $0.7 million. On December 17, 1999, eyeVantage.com, Inc., acquired the operating assets and liabilities of Eye Care Consultants, Inc. in exchange for $0.7 million in cash, the assumption of $0.3 million of liabilities and a commitment to issue shares with a value of $3.0 million in eyeVantage.com, Inc. in the course of a public offering of eyeVantage.com, Inc. shares. The value of $3.0 million of shares was converted to non-interest-bearing payable as a result of the public offering not being completed within the guidelines set by the acquisition agreement. On December 31, 1999, the earn-out period relating to the 1997 acquisition of 100% of The Vision Source, Inc. was completed, and 210,902 shares of the Company with a value of $1.4 million as determined by the acquisition agreement were released from escrow to the sellers of The Vision Source, Inc. On January 11, 2000, eyeVantage.com, Inc., an 83% subsidiary of the Company, acquired the operating assets and liabilities of Optical Options, Inc. in exchange for shares with a value of $6.0 million 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 was required to issue two notes payable to the sellers for $3.0 million each. During 2001, these amounts were renegotiated. On February 15, 2000, the Company acquired the membership interests of New Jersey Practice Management LLC for $2.8 million in cash and amounts contingent upon future events. $0.6 million was 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. In fiscal 2002, approximately $0.3 million in cash was paid in settlement of this obligation, relinquishing the Company from any further commitments. 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 $11.9 million in cash and common shares with a 33 value of up to $3.0 million contingent upon future events. Contingent amounts are determined based on fees received by the Company pursuant to an Administrative Services Agreement. In fiscal 2001, contingent amounts of $0.3 million have been reported as operating expenses, based on pre-determined targets being achieved pursuant to the Administrative Services Agreement, and are payable at a future date. On May 8, 2000, the Company acquired an 80% membership interest in Laser Eye Care of Torrance, LLC in exchange for $3.2 million in cash through Laser Eye Care of California, LLC, a 50.1% subsidiary of the Company. The total consideration on acquisitions was allocated to net assets acquired on the basis of their fair values as follows:
LASER EYE CARE OF NEW YORK CALIFORNIA PRACTICE OTHER TOTAL ----------- ----------- ----------- ----------- Current assets (including cash of $1,137) .. $ 153 $ -- $ 1,102 $ 1,255 Fixed 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 =========== =========== =========== ===========
5. RESTRICTED CASH The Company has a banking facility of approximately $3.9 million available for posting letters of guarantee, under terms whereby the Company must maintain a similar minimum amount in its bank account as a collateral deposit. As of December 31, 2002, $3.4 million of this facility has been utilized. The Company has $4.0 million, $5.0 million and $1.6 million of restricted cash as of December 31, 2002, May 31, 2002 and May 31, 2001, respectively. 6. ACCOUNTS RECEIVABLE Accounts receivable, net of allowances, consist of the following:
DECEMBER 31, MAY 31, MAY 31, 2002 2002 2001 ------------ ------------ ------------ Refractive Due from physician-owned companies and physicians .... $ 8,186 $ 11,535 $ 5,225 Due from patients and third parties ................... 952 197 557 Non-refractive ............................................. 4,884 5,540 2,230 Other ...................................................... 133 719 1,938 ------------ ------------ ------------ $ 14,155 $ 17,991 $ 9,950 ============ ============ ============
Non-refractive accounts receivable primarily represent amounts due from a professional corporation for secondary care management services, amounts due from healthcare facilities for professional healthcare facility management fees and outstanding fees for network marketing and management services. 34 Other accounts receivable include interest receivable, technical fees receivable, and other receivables not directly applicable to the provision of laser vision correction services at TLC Vision owned or managed centers. 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 regular review of credit limits. As of December 31, 2002, the Company had recorded an allowance for doubtful accounts of $2.4 million (May 31, 2002 - $2.5 million, May 31, 2001 - $1.1 million). 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. 7. INVESTMENTS AND OTHER ASSETS Investments and other assets consist of the following:
DECEMBER 31, MAY 31, MAY 31, 2002 2002 2001 ------------ ------------ ------------ Equity method investments ............... $ 730 $ 560 $ 334 Marketable equity securities ............ 555 608 13,965 Non-marketable equity securities ........ 534 2,629 3,500 Long-term receivables and other ......... 623 708 5,372 ------------ ------------ ------------ $ 2,442 $ 4,505 $ 23,171 ============ ============ ============
At May 31, 2001, the carrying value of the Company's marketable equity securities was reduced by $9.5 million reflecting the reduced fair value of these investments. The unrealized loss on these investments was included in accumulated other comprehensive income (loss). During fiscal 2002, the fair value of these investments declined an additional $12.4 million. The Company determined that the decline in fair value was other than temporary and as a result recorded a charge to income of $21.9 million. Included in the $21.9 million write-down of marketable equity securities was $1.8 million related to the Company's investment in LaserVision's common shares prior to the merger. The carrying value of these shares of $1.2 million on May 15, 2002 was included as a component of the cost of the acquisition. During fiscal 2002, the Company determined that the decline in its non-marketable equity securities was other than temporary and recorded a charge of $0.9 million to reduce the investments to fair value. The Company estimates fair value of non-marketable equity securities using available market and financial information including recent stock transactions. During the transitional period 2002, these investments were written down an additional $2.1 million due to additional other than temporary declines in fair value. Long-term receivables and other include notes from and advances to service providers and other companies and deposits. During fiscal 2002, the Company recorded a $2.0 million reserve against a $2.3 million long-term receivable from a secondary care service provider of which the Company owns approximately 25% of the outstanding common shares. The Company determined that the ability of this secondary care service provider to repay this note was in doubt due to the deteriorating financial condition of the investee. The remaining balance of $0.3 million reflects the approximate amount due over the next 12 months. The Company does not provide management services to this entity. During fiscal 2002, the Company recorded a reserve of $0.3 million for amounts due from investees and unrelated doctors groups. These receivables are past due. These amounts bear interest at rates ranging from prime to 8.75%. During fiscal 2000, the Company advanced $1.0 million to a refractive care service provider, in which one of the Company's minority interest partners is a significant shareholder, in exchange for a convertible subordinated term note bearing interest at the current LIBOR rate and maturing on July 1, 2002. The note is convertible into 37,500 membership units, which represents approximately 38% of the company. The Company does not provide management services to this entity. The Company determined that the ability of this refractive service provider to repay the note was in doubt and therefore recorded a provision during fiscal 2002 for the full amount of the note of $1.0 million. During the transitional period, the Company initiated litigation in an effort to receive payment. The Company entered into an agreement with Vascular Sciences Corporation ("Vascular Sciences") for the purpose of pursuing commercial applications of technologies owned or licensed by Vascular Sciences applicable to the evaluation, diagnosis, monitoring and treatment of age-related macular degeneration. According to the terms of the agreement, the Company purchased $3.0 million in preferred stock and has the obligation to purchase an additional $7.0 million in preferred stock in Vascular Sciences if Vascular Sciences attains certain milestones in the development and commercialization of the product. If Vascular Science fails to achieve a milestone, TLC Vision shall have no further obligations to purchase additional 35 shares. The consideration for the purchase of the $3.0 million in preferred shares included the conversion of a $1 million promissory note owed to TLC Vision by Vascular Sciences which was issued in April 2002. Since the technology is in the development stage and has not received Food and Drug Administration (FDA) approval, the Company will account for this investment as a research and development arrangement whereby cost will be expensed as amounts are expended by Vascular Sciences. If commercialization of the product occurrs or FDA approval is obtained, the Company will reevaluate the accounting treatment of the investment. The first $1.0 million of the investment was expensed during the fiscal year ended May 31, 2002, and the remaining $2.0 million of the investment has been expensed as research and development expense during the transitional period ended December 31, 2002. In fiscal 2002, the Company advanced $1.0 million to Tracey Technologies, LLC to support the development of laser scanning technology. This advance will be used to further develop this technology and accordingly was accounted for as research and development costs and was expensed in fiscal 2002. 8. GOODWILL Effective June 1, 2001, the Company early adopted SFAS No. 142, "Goodwill and Intangible Assets." Under SFAS No. 142, goodwill and intangible assets of indefinite life are no longer amortized but are subject to an annual impairment review (or more frequently if deemed appropriate). On adoption, the Company determined that it has no intangible assets of indefinite life. The Company's net goodwill amount by reported segment is as follows:
REFRACTIVE CATARACT OTHER TOTAL ---------- ---------- ---------- ---------- Goodwill, June 1, 2000 ................................ $ 25,945 $ -- $ 19,366 $ 45,311 Goodwill acquired during the period ................... 97 20 117 Amortization expense .................................. (2,351) (1,433) (3,784) Aggregate amount of impairment losses recognized ...... -- -- (8,892) (8,892) ---------- ---------- ---------- ---------- Goodwill, May 31, 2001 ................................ 23,691 -- 9,061 32,752 Goodwill acquired during the period ................... 65,184 10,328 11,112 86,624 Other ................................................. -- -- (330) (330) Aggregate amount of impairment losses recognized ...... (53,333) -- (12,521) (65,854) ---------- ---------- ---------- ---------- Goodwill, May 31, 2002 ................................ 35,542 10,328 7,322 53,192 Goodwill acquired during the period ................... 586 8,763 294 9,643 Aggregate amount of impairment losses recognized ...... (22,138) -- -- (22,138) ---------- ---------- ---------- ---------- Goodwill, December 31, 2002 ........................... $ 13,990 $ 19,091 $ 7,616 $ 40,697 ========== ========== ========== ==========
The Company tests goodwill for impairment in the fourth quarter after the annual forecasting process. Based on the trend of lower procedure volumes and increasing pricing pressures in the refractive segment, the earning forecast for the next five years was revised. The fair value of each reporting unit was estimated using the present value of expected future cash flows. A goodwill impairment charge of $22.1 million was recognized in the refractive segment during transitional period 2002. The charge includes $21.8 million related to the goodwill attributable to the reporting unit acquired in the LaserVison acquisition. The Company completed a transitional impairment test to identify if goodwill was impaired as of June 1, 2001. The Company utilized the assistance of an independent outside appraiser to determine the fair value of the Company's reporting units. The independent appraiser used a fair value methodology based on budget information to generate representative values of the future cash flows attributable to each reporting unit. The Company determined that goodwill was impaired at June 1, 2001 and recorded an impairment charge of $15.2 million, which was recorded as a cumulative effect of a change in accounting principle. The Company performed its annual impairment test in the fourth quarter of fiscal 2002 and determined that there was a further impairment of goodwill during 2002 of $50.7 million, which was recorded as a charge to income during the year. This 36 charge was comprised of $45.9 million which relates to the goodwill attributable to reporting units acquired in the LaserVision acquisition and $4.8 million relating to goodwill attributable to reporting units acquired in prior years. A reconciliation of net income as if SFAS No. 142 has been adopted at the beginning of the fiscal year is presented below for the year ended May 31, 2001. Reported net loss ...................... $ (37,773) Add back goodwill amortization ......... 3,784 ------------ Adjusted net loss ...................... $ (33,989) ============ Basic and diluted loss per share: Reported net loss ...................... $ (1.00) Add back goodwill amortization ......... 0.10 ------------ Adjusted net loss ...................... $ (0.90) ============
9. OTHER INTANGIBLE ASSETS The Company's other intangible assets consist of practice management agreements (PMAs), deferred contract rights and other intangibles. The Company has no indefinite lived intangible assets. Amortization expense was $3.8 million, $10.3 million, $8.8 million, and $7.4 million in the seven-month period ended December 31, 2002, year ended May 31, 2002, year ended May 31, 2001, and year ended May 31, 2000, respectively. The weighted average amortization period for PMAs is 9.6 years, deferred contract rights are 7.7 years, and other intangibles are 15.45 years as of December 31, 2002. Amortized intangible assets as of December 31, 2002 consist of:
Gross Carrying Accumulated Cost Amortization -------------- ------------ Practice management agreements $ 43,407 $ 27,151 Deferred contract rights 13,983 1,487 Other 600 26 ----------- ----------- Total $ 57,990 $ 28,664 =========== ===========
The approximate estimated aggregate amortization expense for the next five years as of December 31, 2002 is as follows: 2003........................................ $6,500 2004........................................ 5,300 2005........................................ 3,500 2006........................................ 2,800 2007........................................ 2,800 Thereafter in total......................... 8,400
Intangible assets arising from PMAs were reviewed for impairment in fiscal 2002, using an undiscounted cash flow methodology based on budgets prepared for future periods. The refractive industry had experienced reduced procedure volumes over the last two years as a result of increased competition, customer confusion and a weakening in the North American economy. This reduction in procedures has occurred at practices the Company had purchased, and as a result revenues were lower than anticipated when initial purchase prices and resulting intangible values were determined. The result of an initial review indicated that on an undiscounted basis, all of the refractive PMAs were impaired, and a further fair value analysis based on the present value of future cash flows was completed to determine the extent of the impairment. This further 37 review resulted in an impairment charge of $31.0 million, which was reported in operating loss for the year ended May 31, 2002. 10. FIXED ASSETS Fixed assets, including capital leased assets, consist of the following:
DECEMBER 31, 2002 MAY 31, 2002 MAY 31, 2001 ----------------- ------------ ------------ Land and buildings ..................... $ 9,589 $ 9,459 $ 10,809 Computer equipment and software ........ 14,112 14,109 13,492 Furniture, fixtures and equipment ...... 9,321 10,902 8,379 Laser equipment ........................ 40,132 41,398 26,310 Leasehold improvements ................. 20,873 23,252 25,637 Medical equipment ...................... 22,746 22,742 17,563 Vehicles and other ..................... 6,565 5,980 828 ----------------- ------------ ------------ 123,338 127,842 103,018 Less accumulated depreciation .......... 65,335 59,709 50,673 ----------------- ------------ ------------ Net book value ......................... $ 58,003 $ 68,133 $ 52,345 ================= ============ ============
Certain fixed assets are pledged as collateral for certain long-term debt and capital lease obligations. In the transitional period 2002, the Company recorded a reduction in the carrying value of fixed assets of $1.0 million, within the refractive segment, reflecting the disposal of certain of the Company's lasers. The amount is included in other income and expense. These lasers were not needed after the LaserVision acquisition, and the Company disposed of them below their carrying cost. During fiscal 2002, the Company determined that events and circumstances indicated that the carrying value of certain of the Company's lasers may not be recoverable. As a result, the Company evaluated the assets and concluded they were impaired. In accordance with SFAS No. 121 "Accounting for Impairment of Long-Lived Assets and Assets to be Disposed Of," the Company recorded an impairment charge of $2.6 million within the refractive segment, to write the assets down to their fair value. In fiscal 2002, the Company completed a sale-leaseback transaction for its Canadian corporate headquarters. Total consideration received for the sale was $6.4 million, which was comprised of $5.4 million cash and a $1.0 million 8.0% note receivable ("Note"). The Note has a seven-year term with the first of four annual payments of $63,000 starting on the third anniversary of the sale and a final payment of $0.7 million due on the seventh anniversary of the sale. The lease term related to the leaseback covers a period of 15 years. For accounting purposes, due to ongoing responsibility for tenant management and administration, as well as receiving the Note as part of the consideration for the sale, no sale was recognized. For purpose of financial reporting, the cash proceeds of $5.4 million have been presented as additional debt. The four annual payments and the final payment, upon receipt, will result in additional debt, while lease payments will result in decreasing the debt and recognizing interest expense. Until the Company meets the accounting qualifications for recognizing the sale, the building associated with the sale-leaseback will continue to be depreciated over its initial term of 40 years. The Company is currently reviewing its space requirements with regard to this facility. No restructuring charge has been made relating to this facility, as no decision has been made with regard to the use or disposal of this facility. The Company continues to use this facility for certain functions. Any costs associated with exiting or renegotiating the lease on this facility, which could be material, will be reflected in income in future periods. 38 11. LONG-TERM DEBT Long-term debt consists of:
DECEMBER 31, MAY 31, MAY 31, 2002 2002 2001 ------------ ------------ ------------ Term loans Interest at 8%, due September 2001, payable to affiliated Physicians ........................................................ $ -- $ -- $ 32 Interest at 3.11%, due through June 2004, payable to vendor ......... 4,587 6,061 Interest imputed at 9.00%, due in three payments from March 2003 through 2005, payable to affiliated doctor relating to practice acquisition .............................................. 6,328 5,806 8,099 Interest imputed at 6.25%, due through October 2016, collateralized by building and payable in Canadian dollars of $8.6 million ................................................... 5,201 5,447 -- Interest ranging from prime to 12%, due through March 2007, collateralized by equipment ....................................... 2,441 1,119 2,727 Other ............................................................... -- 62 -- Capital lease obligations, payable through 2006, interest ranging from 4.8% to 14% .................................................. 3,525 5,581 4,224 ------------ ------------ ------------ 22,082 24,076 15,082 Less current portion ................................................ 6,322 9,433 6,769 ------------ ------------ ------------ $ 15,760 $ 14,643 $ 8,313 ============ ============ ============
Aggregate debt repayments of principal for each of the next five years and thereafter as of December 31, 2002 are as follows:
Long-term debt ------------ 2003 ......................... $ 4,509 2004 ......................... 4,705 2005 ......................... 4,327 2006 ......................... 393 2007 ......................... 296 Thereafter ................... 4,327 ------------ Total ........................ $ 18,557 ============
Aggregate repayments for capital lease obligations for each of the next five years and thereafter are as follows: 2003 $1,892 2004 1,169 2005 660 2006 48 2007 -- Thereafter -- ------ Total 3,769 Less interest portion 244 ------ $3,525 ======
12. OTHER INCOME AND EXPENSE Other income and expense for the seven months ended December 31, 2002 consists of $6.8 million of income from the settlement of an antitrust lawsuit. In August 2002, LaserVision received $8.0 million in cash from the settlement, and TLC Vision received $7.1 million in cash from the settlement. The cash received for the LaserVision portion reduced the receivable recorded in the purchase price allocation. The cash received for the TLC Vision portion was recorded as a gain of $6.8 million (net of $0.3 million for its obligations to be paid to the minority interests). During the transitional period, the Company recorded $0.9 million of income from the termination of the Surgicare Inc. ("Surgicare") agreement to purchase Aspen Healthcare ("Aspen") from the Company. On May 16, 2002, the Company agreed to sell the capital stock of its Aspen subsidiary to SurgiCare for a purchase price of $5.0 million in cash and warrants for 103,957 shares of common stock of SurgiCare with an exercise price of $2.24 per share. On June 14, 2002, the purchase agreement for the transaction was amended due to the failure of Surgicare to meet its obligations under the agreement. The amendment established a new closing date of September 14, 2002 and required SurgiCare to issue 38,000 shares of SurgiCare common stock and to pay $760,000 to the Company, prior to closing, all of which was non-refundable. SurgiCare failed to perform under the purchase agreement, and as a result, the purchase agreement was terminated and the Company recorded the gain in other income and expense for the period. During the transitional period 2002, the Company disposed of six excess lasers, resulting in a loss of $1.0 million, which amount is included in other income and expense (See Note 10). 39 13. STOCKHOLDERS' EQUITY AND OPTIONS Option and Warrants In January 2000, the Company issued 100,000 warrants with an exercise price of $13.063 per share to an employee benefits company as consideration. These warrants are not transferable, vest over periods up to three years and expire after five years. Using the Black-Scholes option-pricing model (assumptions - five year life, volatility of .35, risk free rate of return 6.35%, no dividends), a $0.5 million fair value was assigned to these warrants, which was amortized over the vesting periods. The 8,018,711 options issued in connection with the LaserVision merger had a fair value of $11.0 million using the Black-Scholes options pricing model (assumptions - 2 years to 5 year estimated lives, volatility of .74, risk free rates of returns 3.34% to 3.72%, no dividends, market price of $4.1725 on the date the merger was announced in August 2001, exercise prices ranging from $1.713 to $8.688 per share). During fiscal 2002, the Board of Directors voted to fully vest all outstanding unexercised options of a consultant who was a former executive officer. As required by SFAS No. 123, "Accounting for Stock-based Compensation," the $0.2 million fair value of these options was charged to earnings in fiscal 2002, the year the options vested, and an equivalent amount was credited to option equity. These options were granted during the period from December 1997 through December 2001 at exercise prices ranging from Cdn$4.04 to Cdn$29.90. OPTIONS OUTSTANDING As of December 31, 2002, the Company has issued stock options to employees, directors and certain other individuals. Options granted have terms ranging from five to ten years. Vesting provisions on options granted to date include options that vest 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 of the grant date. As of December 31, 2002, the issued and outstanding options denominated in Canadian dollars were at the following prices and terms:
OUTSTANDING EXERCISABLE ----------------------------------------------------------------------- ----------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE PRICE RANGE NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE (CDN $) OPTIONS LIFE PRICE OPTIONS PRICE -------------------- ------------ ------------ ------------ ------------ ------------ $1.43 - $3.87 ...... 184,000 3.5 years $ 1.43 250 $ -- $4.04 - $5.54 ...... 523,376 3.0 years 4.05 299,226 4.09 $7.25 - $10.50 ..... 52,812 3.3 years 8.61 16,406 8.43 $10.87 - $19.73 .... 310,592 0.8 years 12.53 295,172 13.70 $20.75 - $30.66 .... 13,261 1.5 years 26.18 11,623 28.91 $49.30 - $64.79 .... 669 2.0 years 47.06 669 56.11 ------------ ------------ 1,084,710 2.4 years 10.76 623,346 9.28 ============ ============
As of December 31, 2002, the issued and outstanding options denominated in U.S. dollars were at the following prices and terms:
OUTSTANDING EXERCISABLE ----------------------------------------------------------------------- ----------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE PRICE RANGE NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE (U.S.$) OPTIONS LIFE PRICE OPTIONS PRICE -------------------- ------------ ------------ ------------ ------------ ------------ $0.90 - $2.81 ...... 1,949,747 5.2 years $ 2.26 1,585,943 $ 2.19 $3.02 - $3.86 ...... 1,009,864 7.4 years 3.23 1,006,489 3.23 $4.25 - $4.88 ...... 1,739,284 2.5 years 4.65 1,596,990 4.63 $5.00 - $7.81 ...... 692,899 1.8 years 5.70 549,144 5.55 $8.50 - $8.69 ...... 2,181,121 1.6 years 8.68 2,145,568 8.68 $10.06 - $19.50 .... 22,761 1.5 years 18.02 18,635 18.40 ------------ ------------ 7,595,676 3.5 years 5.14 6,902,769 5.24 ============ ============
A total of 1,159,000 options have been authorized for issuance in the future but were not issued and outstanding as of December 31, 2002. A summary of option activity during the last three fiscal years and the transitional period follows: 40
WEIGHTED WEIGHTED AVERAGE AVERAGE OPTIONS EXERCISE PRICE EXERCISE PRICE (000'S) PER SHARE PER SHARE ------------ -------------- -------------- May 31, 1999 ........................... 2,692 Cdn$ 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 Granted ............................. 1,338 5.63 3.74 Exercised ........................... (40) 4.73 3.24 Forfeited ........................... (1,502) 9.48 6.51 ------------ ------------ ------------ May 31, 2001 ........................... 2,853 Cdn$ 12.65 US$ 8.46 Granted ............................. 1,221 4.45 2.81 Exercised ........................... (10) 4.06 2.67 Forfeited ........................... (610) 10.52 7.06 Granted, LaserVision merger ......... 7,519 7.79 5.08 ------------ ------------ ------------ May 31, 2002 ........................... 10,973 Cdn$ 8.50 US$ 5.59 Granted ............................. 11 2.17 1.42 Exercised ........................... (5) 2.47 1.61 Surrendered ......................... (618) 27.05 17.68 Reissued ............................ 610 13.69 8.69 Forfeited ........................... (824) 9.66 6.95 Expired ............................. (1,467) 6.12 4.00 ------------ ------------ ------------ December 31, 2002 ...................... 8,680 Cdn$ 7.80 US$ 5.10 ============ ============ ============ Exercisable at December 31, 2002 ....... 7,526 Cdn$ 8.12 US$ 5.30 ============ ============ ============
Immediately prior to the effective time of the merger, LaserVision reduced the exercise price of approximately 2.1 million outstanding stock options and warrants of Laser Vision with an exercise price greater than $8.688 per share to $8.688 per share. This reduction was part of the merger agreement approved by LaserVision stockholders in April 2002. The vesting and expiration dates did not change. Post-merger, these former LaserVision options became approximately 2.0 million options of the Company with an exercise price of $8.688. These options are part of the 7,519,000 options granted in connection with the LaserVision merger. Pursuant to a plan approved by the Company's stockholders in April 2002, most employees and officers with options at exercise prices greater than $8.688 elected to exchange them for options with an exercise price of $8.69 (Cdn$13.69). A total of 618,000 shares with an average exercise price of $17.68 (Cdn$27.05) were exchanged for 610,000 shares with exercise prices of $8.69 (Cdn$13.69). For every option with an exercise price of at least $40, the holder surrendered 75% of the shares subject to such option; for every option with an exercise price of at least $30 but less than $40, the holder surrendered 66.6% of the shares subject to such option; for every option with an exercise price of at least $20 but less than $30, the holder surrendered 50% of the shares subject to such option; and for every option with an exercise price of at least $8.688 but less than $20, the holder did not surrender any of the shares subject to such option. These repriced options will be subject to variable option accounting and compensation expense will be necessary whenever these options are outstanding and the market price of the Company's stock is $8.69 or higher. Pro forma information regarding net loss and loss per share is required by SFAS No. 123 and has been included in Note 2 to the financial statements. The fair value of the options granted was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: risk free interest rate of 2.5% for the transitional period 2002, 4.25% for fiscal 2002, 6.5% for fiscal 2001 and 7.5% for fiscal 2000; no dividends; volatility factors of the expected market price of the Company's common shares of 0.70 for the transitional period, 0.88 for fiscal 2002, 0.83 for fiscal 2001 and 0.71 for fiscal 2000; and a weighted average expected option life of 2.5 years for the transitional period, 4.0 years for fiscal 2002, 4.0 years for fiscal 2001, and 3.5 years for fiscal 2000. The estimated value of the options issued in connection with the LaserVision acquisition were recorded as part of the cost of the acquisition. The fair market value of the options granted during the transitional period ended December 31, 2002 was approximately $12,000 (fiscal 2002 - $1.3 million; fiscal 2001 - $3.1 million; fiscal 2000 - $5.8 million). The Black-Scholes option-pricing model was developed for use in estimating fair value of traded options that have no vesting restrictions and are fully transferable. Because the Company's employee stock options have characteristics significantly different from those of traded options (deferred/partial vesting and no trading during four "black-out" periods each year) and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the above pro forma adjustments for SFAS No. 123 are not necessarily a reliable single measure of the fair value of the Company's employee stock options. 41 14. INCOME TAXES Significant components of the Company's deferred tax assets and liabilities are as follows:
DECEMBER 31, MAY 31, MAY 31, 2002 2002 2001 ------------ ------------ ------------ Deferred tax asset: Net operating loss carryforwards ...... $ 55,293 $ 49,408 $ 20,947 Fixed assets .......................... 3,693 3,399 1,362 Intangibles ........................... 17,418 16,638 2,444 Investments ........................... 12,343 15,806 5,580 Other ................................. 15,859 4,197 1,607 ------------ ------------ ------------ Total ...................................... 104,606 89,448 32,322 Valuation allowance ................... (99,603) (85,052) (30,429) ------------ ------------ ------------ $ 5,003 $ 4,396 $ 1,702 ============ ============ ============ Deferred tax liabilities: Practice management agreements ........ $ 1,495 $ 1,571 $ 1,702 Intangibles ........................... 2,825 2,825 -- Fixed assets .......................... 683 -- -- ------------ ------------ ------------ $ 5,003 $ 4,396 $ 1,702 ============ ============ ============
As of December 31, 2002, the Company has net operating losses available for carryforward for income tax purposes of approximately $169.2 million, 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 $24.3 million as of December 31, 2002 expire as follows:
2003................................... $ 1,481 2004................................... 821 2005................................... 315 2006................................... 580 2007................................... 9,237 2008................................... 8,206 2009................................... 3,657
The United States losses of $145.6 million expire between 2011 and 2022. The Canadian and United States losses include amounts of $3.2 million and $67.8 million, respectively, relating to the acquisitions of 20/20, Beacon Eye and LaserVision. The availability and timing of utilization of these losses 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 minority interest were as follows:
SEVEN-MONTH PERIOD ENDED YEAR ENDED MAY 31, DECEMBER 31, -------------------------------------------- 2002 2002 2001 2000 ------------ ------------ ------------ ------------ Income tax recovery based on the Canadian statutory income tax 40.3% (2001 - 43.2%; 2000 - 44.6%) ............... $ (16,731) $ (46,963) $ (15,529) $ 241 Current year's losses not utilized ................................ 5,824 10,025 8,474 1,950 Expenses not deductible for income tax purposes ................... 10,907 37,733 7,764 1,675 Adjustments of cash vs. accrual tax deductions for U.S. income tax purposes .................................... -- (516) 117 363 Utilization of prior year's losses ................................ -- -- (118) (1,675) Corporate minimum tax, large corporations tax and foreign tax ..... 851 1,221 1,255 879 Other ............................................................. -- 284 276 21 ------------ ------------ ------------ ------------ Provision for income taxes ........................................ $ 851 $ 1,784 $ 2,239 $ 3,454 ============ ============ ============ ============
42 The provision for income taxes is as follows:
DECEMBER 31, MAY 31, MAY 31, 2002 2002 2001 ----------- ---------- ---------- Current: Canada ............................ $ 67 $ 112 $ 111 United States - federal ........... 325 924 929 United States - state ............. 135 280 645 Other ............................. 324 468 554 ---------- ---------- ---------- $ 851 $ 1,784 $ 2,239 ========== ========== ==========
15. COMMITMENTS AND CONTINGENCIES Operating Commitments As of December 31, 2002 the Company has commitments relating to non-cancellable operating leases for rental of office space and equipment and long term marketing contracts, which require future minimum payments aggregating to approximately $34.7 million. Future minimum payments over the next five years and thereafter are as follows: 2003......................................... $ 9,690 2004......................................... 8,824 2005......................................... 7,731 2006......................................... 3,651 2007......................................... 2,761 Thereafter................................... 2,025
As of December 31, 2002 the Company had a commitment with a major laser manufacturer ending November 30, 2004 for the use of that manufacturer's lasers which require future minimum lease payments aggregating $5.1 million. Future minimum lease payments in aggregate and over the remaining two years are as follows: 2003.............................. $ 2,040 2004.............................. 3,060
Guarantees 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 are approximately $2.1 million at December 31, 2002. Legal Contingencies On February 9, 2001, Joseph Dello Russo, M.D., filed a lawsuit against the Company and certain physicians associated with the Company in the United States District Court, Eastern District of New York, alleging false description, false advertising and deceptive trade practices based upon certain advertisements of a doctor with substantially the same name as the plaintiff. The complaint alleged compensatory damages to be no less than $30 million plus punitive damages. This lawsuit was settled on October 31, 2002, and no payment was made by any party to any of the other parties. In the fourth quarter fiscal 2001, an arbitration award was issued against TLC Network Service Inc. for $2.1 million that has been fully accrued for in fiscal 2002. The arbitration award was extended to the Company. The Company has filed an appeal but no hearing date has been set at this time. Payment of this liability has been deferred until final resolution of the appeal and all other legal alternatives have been explored. In April 2002, Lesa K. Melchor, Richard D. and Lee Ann Dubois and Major Gary D. Liebowitz filed a lawsuit in the U.S. District Court, Southern District of Texas, Houston Division against LaserVision. This is a securities claim seeking damages for losses incurred in trading in LaserVision stock and options in the period from November 1999 to December 2001. In their Complaint, the plaintiffs allege that LaserVision's director of investor relations gave them false and misleading information. This lawsuit was settled on January 14, 2002; and while admitting no liability, the Company paid $25,000 to the plaintiffs in full settlement of all claims. On October 21, 2002 the Company was served with a lawsuit filed by Thomas S. Tooma, M.D. and TST Acquisitions, LLC in the Superior Court of the State of California in Orange County, California. Dr. Tooma and certain entities controlled 43 by him have entered into a joint business venture with TLC Vision in the State of California since July 1999. The lawsuit seeks damages and injunctive relief based on the plaintiffs' allegation that the Company's merger with Laser Vision Centers, Inc. violated certain exclusivity provisions of its agreements with the plaintiffs, thereby giving plaintiffs the right to exercise a call option to purchase TLC Vision's interest in the joint venture. Since the lawsuit has only recently been served, the Company is still evaluating its position. In March 2003, the Company and its subsidiary OR Providers, Inc. were served with subpoenas issued by the U.S. Attorney's Office in Cleveland, Ohio. The subpoenas appear to relate to business practices of OR Providers prior to its acquisition by LaserVision in December 2001. OR Providers is a provider of mobile cataract services in the eastern part of the U.S. The Company is aware that other entities and individuals have also been served with similar subpoenas. The subpoenas seek documents related to certain business activities and practices of OR Providers. The Company will cooperate fully to comply with the subpoenas. Pursuant to the purchase agreement for the Company's purchase of OR Providers, the selling shareholders of OR Providers agreed to indemnify the Company with respect to the liability and accordingly the Company does not believe this matter will have a material adverse effect on the Company. The Company is subject to various claims and legal actions in the ordinary course of its business, which may or may not be covered by insurance. These matters include, without limitation, professional liability, employee-related matters and inquiries and investigations by governmental agencies. While the ultimate results of such matters can not be predicted with certainty, the Company believes that the resolution of these matters will not have a material adverse effect on its consolidated financial position or results of operations. Regulatory Tax Contingencies TLC Vision operates in 48 states and two Canadian provinces and is subject to various federal, state and local income, payroll, unemployment, property, franchise, capital, sales and use tax on its operations, payroll, assets and services. TLC Vision endeavors to comply with all such applicable tax regulations, many of which are subject to different interpretations, and has hired outside tax advisors to assist in the process. Many states and other taxing authorities are experiencing financial difficulties and have been interpreting laws and regulations more aggressively to the detriment of taxpayers such as TLC Vision and its customers. Although TLC Vision cannot predict the outcome of all past and future tax assessments, it believes that it has adequate provisions and accruals in its financial statements for tax liabilities. Tax authorities in four states have contacted TLC Vision and issued proposed sales tax adjustments in the aggregate amount of approximately $2.2 million for various periods through 2002 on the basis that certain of TLC Vision's laser access arrangements constitute a taxable lease or rental rather than an exempt service. If it is determined that any sales tax is owed, TLC Vision believes that, under applicable laws and TLC Vision's contracts with its eye surgeon customers, each customer is ultimately responsible for the payment of any applicable sales and use taxes in respect of TLC Vision's services. However, TLC Vision may be unable to collect any such amounts from its customer, and in such event would remain responsible for payment. TLC Vision cannot yet predict the outcome of these assessments, or any other assessments or similar actions which may be undertaken by other state tax authorities. The Company is currently conducting an evaluation of its sales tax reporting in various other states. The Company believes that it has adequate provisions in its financial statements with regard to these matters. Employment Contingencies As of December 31, 2002, the Company had employment contracts with 11 officers of TLC Vision or its subsidiaries to provide for base salaries, the potential to pay certain bonuses, medical benefits and severance payments. Nine officers have agreements providing for severance payments ranging from 12 to 24 months of base or total compensation under certain circumstances. Two officers have agreements providing for severance payments equal to 36 months of total compensation and future medical benefits (totaling approximately $2.0 million) at their option until November 2003 and 24-month agreements thereafter. 16. SEGMENT INFORMATION The Company has two reportable segments: refractive and cataract. The refractive segment is the core focus of the Company and is in the business of providing corrective laser surgery specifically related to refractive disorders, such as myopia (nearsightedness), hyperopia (farsightedness) and astigmatism. This segment is comprised of Company-owned laser centers and Company-managed laser centers. The refractive segment also includes the access and mobile refractive business of 44 LaserVision. The cataract segment provides surgery specifically for the treatment of cataracts. The Company acquired the cataract segment in the LaserVision acquisition, therefore no amounts are shown for that segment in periods prior to June 1, 2002. Other includes an accumulation of other healthcare business activities including the management of cataract and secondary care centers that provide advanced levels of eye care, network marketing and management and professional healthcare facility management. None of these activities meet the quantitative criteria to be disclosed separately as a reportable segment. 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 recorded as if the sales or transfers were to third parties. Doctors' compensation as presented in the segment information of the financial statements represents the cost to the Company of engaging experienced and knowledgeable ophthalmic professionals to perform laser vision correction services at the Company's owned laser centers. Where the Company manages laser centers due to certain state requirements it is the responsibility of the professional corporations or physicians to whom the Company furnishes management services to provide the required professional services and engage ophthalmic professionals. In such cases, the costs associated with arranging for these professionals to furnish professional services are reported as a cost of the professional corporation and not of the Company. 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. The Company's business units were acquired or developed as a unit, and management at the time of acquisition was retained. The Company's business segments were as follows:
SEVEN-MONTH PERIOD ENDED DECEMBER 31, 2002 REFRACTIVE CATARACT OTHER TOTAL -------------------------------------------------- ------------ ------------ ------------ ------------ Revenues ........................................... $ 76,199 $ 12,944 $ 11,011 $ 100,154 Expenses: Doctor compensation ................................ 6,523 -- -- 6,523 Operating .......................................... 79,869 10,040 9,223 99,132 Depreciation expense ............................... 8,361 1,172 525 10,058 Amortization of intangibles ........................ 3,592 482 -- 4,074 Impairment of intangibles .......................... 22,138 -- -- 22,138 Write down in the fair value of investments ........ 2,095 -- -- 2,095 Restructuring and other charges .................... 4,227 -- -- 4,227 ------------ ------------ ------------ ------------ 126,805 11,694 9,748 148,247 ------------ ------------ ------------ ------------ Income (loss) from operations ...................... (50,606) 1,250 1,263 (48,093) Other income and (expense) net ..................... 6,996 -- -- 6,996 Interest expense, net and other .................... 136 (73) (306) (243) Minority interest .................................. (238) -- (914) (1,152) Income taxes ....................................... (1,041) (1) 191 (851) ------------ ------------ ------------ ------------ Net income (loss) ................................. $ (44,753) $ 1,176 $ 234 $ (43,343) ============ ============ ============ ============ Total assets ....................................... $ 161,855 $ 13,323 $ 20,878 $ 196,056 ============ ============ ============ ============ Purchase of long-lived assets ...................... $ 3,652 $ 1,390 $ 9,492 $ 14,534 ============ ============ ============ ============
YEAR ENDED MAY 31, 2002 REFRACTIVE OTHER TOTAL ---------------------------------------------------- ------------ ------------ ------------ Revenues ........................................... $ 115,908 $ 18,843 $ 134,751 Expenses: Doctor compensation ................................ 10,225 -- 10,225 Operating .......................................... 111,708 15,856 127,564 Depreciation expense ............................... 10,143 860 11,003 Amortization of intangibles ........................ 9,897 452 10,349 Impairment of Intangibles including transitional ... 84,879 12,015 96,894 Write down in the fair value of investments ........ 24,066 2,016 26,082 Reduction in the carrying value of fixed assets .... 2,553 -- 2,553 Restructuring and other charges .................... 8,750 -- 8,750 ------------ ------------ ------------ 262,221 31,199 293,420 ------------ ------------ ------------ Loss from operations ............................... (146,313) (12,356) (158,669) Interest expense, net and other .................... (735) (26) (761) Minority interest .................................. (225) (410) (635) Income taxes ....................................... (745) (1,039) (1,784) ------------ ------------ ------------ Net loss ........................................... $ (148,018) $ (13,831) $ (161,849) ============ ============ ============ Total assets ....................................... $ 223,472 $ 22,043 $ 245,515 ============ ============ ============ Purchase long-lived assets ......................... $ 2,707 $ 620 $ 3,320 ============ ============ ============
45
YEAR ENDED MAY 31, 2001 ---------------------------------------------------- Revenues ........................................... $ 161,219 $ 12,787 $ 174,006 Expenses: Doctor compensation ................................ 15,538 -- 15,538 Operating .......................................... 134,324 15,168 149,492 Depreciation expense ............................... 13,675 1,375 15,050 Amortization of intangibles ........................ 10,703 1,840 12,543 Restructuring and other charges .................... 6,433 12,642 19,075 ------------ ------------ ------------ 180,673 31,025 211,698 ------------ ------------ ------------ Loss from operations ............................... (19,454) (18,238) (37,692) Interest income, net and other ..................... 2,385 158 2,543 Minority interest .................................. (370) (15) (385) Income taxes ....................................... (1,779) (460) (2,239) ------------ ------------ ------------ Net loss ........................................... $ (19,218) $ (18,555) $ (37,773) ============ ============ ============ Total assets ....................................... $ 216,494 $ 21,944 $ 238,438 ============ ============ ============ Purchase of long lived assets ...................... $ 36,296 $ 140 $ 36,436 ============ ============ ============
YEAR ENDED MAY 31, 2000 REFRACTIVE OTHER TOTAL ---------------------------------------------------- ------------ ------------ ------------ Net revenues ....................................... $ 190,233 $ 10,990 $ 201,223 Expenses: Doctor compensation ................................ 17,333 2 17,335 Operating .......................................... 153,673 12,477 166,150 Depreciation expense ............................... 12,886 1,406 14,292 Amortization of intangibles ........................ 6,363 1,033 7,396 ------------ ------------ ------------ 190,255 14,918 205,173 ------------ ------------ ------------ Loss from operations ............................... (22) (3,928) (3,950) Interest income (expense), net and other ........... 4,574 (82) 4,492 Minority interest .................................. (2,443) (563) (3,006) Income taxes ....................................... (3,141) (313) (3,454) ------------ ------------ ------------ Net loss .......................................... $ (1,032) $ (4,886) $ (5,918) ============ ============ ============ Total assets ....................................... $ 250,279 $ 39,085 $ 289,364 ============ ============ ============ Purchase of long-lived assets ...................... $ 65,941 $ 8,477 $ 74,418 ============ ============ ============
The Company's geographic segments are as follows:
SEVEN-MONTH PERIOD ENDED DECEMBER 31, 2002 CANADA UNITED STATES TOTAL ---------------------------------------------------- ------------ ------------- ------------ Revenues ........................................... $ 5,588 $ 94,566 $ 100,154 Doctor compensation ................................ 1,424 5,099 6,523 ------------ ------------ ------------ Net revenue after doctor compensation .............. $ 4,164 $ 89,467 $ 93,631 ============ ============ ============ Total fixed assets and intangibles ................. $ 11,258 $ 116,768 $ 128,026 ============ ============ ============
YEAR ENDED MAY 31, 2002 ---------------------------------------------------- Revenues ........................................... $ 13,208 $ 121,543 $ 134,751 Doctor compensation ................................ 1,260 8,965 10,225 ------------ ------------ ------------ Net revenue after doctor compensation .............. $ 11,948 $ 112,578 $ 124,526 ============ ============ ============ Total fixed assets and intangibles ................. $ 12,156 $ 141,682 $ 153,838 ============ ============ ============
46
YEAR ENDED MAY 31, 2001 ---------------------------------------------------- Revenues ........................................... $ 18,114 $ 155,892 $ 174,006 Doctor compensation ................................ 1,698 13,840 15,538 ------------ ------------ ------------ Net revenue after doctor compensation .............. $ 16,416 $ 142,052 $ 158,468 ============ ============ ============ Total fixed assets and intangibles ................. $ 22,039 $ 123,108 $ 145,147 ============ ============ ============
YEAR ENDED MAY 31, 2000 ---------------------------------------------------- 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 $ 131,255 $ 153,450 ============ ============ ============
17. FINANCIAL INSTRUMENTS The carrying values of cash equivalents, accounts receivable, and accounts payable and accrued liabilities, approximate their fair values because of the short-term maturities of these instruments. The Company's short-term investments are recorded at cost, which approximates fair market value. In the seven months ended December 31, 2002, the Company's short-term investment portfolio consisted of bank certificates of deposit that have remaining terms to maturity not exceeding 12 months. Given the large number of individual long-term debt instruments and capital lease obligations held by the Company, it is not practicable to determine fair value. 18. RESTRUCTURING AND OTHER CHARGES The following table details restructuring charges recorded during the transitional period ended December 31, 2002:
ACCRUAL BALANCE RESTRUCTURING CASH NON-CASH AS OF CHARGES PAYMENTS REDUCTIONS DECEMBER 31, 2002 ------------- ------------ ------------ ----------------- Severance ......................... $ 1,120 $ (466) $ -- $ 654 Lease commitments, net of sub-lease income ............... 978 -- -- 978 Write-down of fixed assets ........ 2,266 -- (2,266) -- Sale of center to third party ..... 342 -- -- 342 ------------ ------------ ------------ ------------ Total restructuring charges .......... $ 4,706 $ (466) $ (2,266) $ 1,974 ============ ============ ============ ============
During the transitional period 2002, the Company recorded a $4.7 million restructuring charge for the closure of 13 centers and the elimination of 36 full time equivalent positions primarily at the Company's Toronto headquarters. 47 The total restructuring charge for the transitional period 2002 is $4.2 million which consists of the $4.7 million offset by the reversal into income of $0.5 million of restructuring charges related to prior year accruals that were no longer needed as of December 31, 2002. All restructuring costs will be financed through the Company's cash and cash equivalents. A total of $2.3 million of this provision related to non-cash costs of writing down fixed assets. The severance and center balances will be paid out in 2003 while the lease costs will be paid out over the remaining term of the lease. The following table details restructuring and other charges incurred for the year ended May 31, 2002:
ACCRUAL ACCRUAL BALANCE AS BALANCE AS AT AT RESTRUCTURING CASH NON-CASH MAY 31, CASH NON-CASH DECEMBER CHARGES PAYMENTS REDUCTIONS 2002 PAYMENTS REDUCTIONS 31, 2002 ------------- -------- ---------- ---------- -------- ---------- ---------- Severance ........................... $ 2,907 $ (2,219) $ (222) $ 466 $ (235) $ (212) $ 19 Lease commitments, net of sublease income ................... 2,765 -- -- 2,765 (897) 85 1,953 Termination costs of doctors contracts ......................... 146 (80) -- 66 (66) -- -- Laser commitments ................... 652 -- -- 652 -- (352) 300 Write-down of fixed assets .......... 2,280 -- (2,280) -- -- -- -- ---------- -------- ---------- ------- -------- ---------- ---------- Total restructuring and other charges ........................... $ 8,750 $ (2,299) $ (2,502) $ 3,949 $ (1,198) $ (564) $ 2,272 ========== ======== ========== ======= ======== ========== ==========
During fiscal 2002, the Company implemented a restructuring program to reduce employee costs in line with current revenue levels, close certain under performing centers and eliminate duplicate functions caused by the merger with LaserVision. This program resulted in total cost for severance and office closures of $8.8 million of which $3.5 million has been paid out in cash as of December 31, 2002. All restructuring costs will be financed through the Company's cash and cash equivalents. The components of this fiscal 2002 restructuring charges are as follows: (a) The Company continued its objective of reducing employee costs in line with revenues. This activity occurred in two stages with total charges of $2.9 million. The first stage of reductions were identified in the second and third quarters of fiscal 2002 and resulted in restructuring charges of $2.2 million all of which had been paid out in cash or options by the end of the fiscal year. This reduction impacted 89 employees of whom 35 were working in laser centers with the remaining 54 working within various corporate functions. The second stage of the cost reduction required the Company to identify the impact of its acquisition of LaserVision on May 15, 2002 and eliminate surplus positions resulting from the acquisition. The majority of these costs were paid out by December 31, 2002. (b) As part of the Company restructuring subsequent to its acquisition of LaserVision in May 2002, six centers were identified for closure based on management's earnings criteria. These closures resulted in restructuring charges of $4.9 million, reflecting a write-down of fixed assets of $1.9 million and cash costs of $3.0 million, which include net lease commitments (net of costs to sublet and sub-lease income) of $2.0 million, ongoing laser commitments of $0.7 million, termination costs of a doctor's contract of $0.1 million, and severance costs impacting 21 center employees of $0.1 million. The lease costs will be paid out over the remaining term of the lease. The majority of the severance and termination costs were paid out by December 31, 2002. (c) The Company also identified four centers where management determined, that given the current and future expected procedures, the centers had excess leased capacity or the lease arrangements were not economical. The Company assessed these four centers to determine whether the excess space should be subleased or whether the centers should be relocated. The Company provided $1.0 million related to the costs associated with sub-leasing the excess or unoccupied facilities. A total of $0.3 million of this provision related to non-cash costs of writing down fixed assets and $0.7 million represented net future cash costs for lease commitments and costs to sublet available space offset by sub-lease income that is projected to be generated. The lease costs will be paid out over the remaining term of the lease. In the year ended May 31, 2001, the Company recorded a restructuring and other charge of $19.1 million. These charges consisted of cash payments of $4.7 million primarily for severance, lease costs, consulting services, and closure costs, and $14.4 million in non-cash costs. Non-cash costs were primarily for write-off of goodwill, fixed assets and current assets 48 resulting from the decision to exit from its e-commerce enterprise, eyeVantage.com, Inc., the accrual for an arbitration award and provision for portfolio investments. 19. SUPPLEMENTAL CASH FLOW INFORMATION Non-cash transactions:
SEVEN-MONTH YEAR ENDED MAY 31, PERIOD ENDED ------------------------------------- DECEMBER 31, 2002 2002 2001 2000 ----------------- ---------- ---------- ---------- Issue of warrants to be expensed over three years .......... $ -- $ -- $ -- $ 532 Issue of options as severance remuneration ................. -- 222 -- -- Capital stock issued as remuneration ....................... -- -- 35 387 Capital stock issued for acquisitions ...................... -- 111,058 6,059 2,125 Treasury stock arising from acquisition .................... -- (2,432) -- -- Issue of options arising from acquisition .................. -- 11,001 -- -- Reversal of accrual for costs of IPO ....................... -- -- -- 139 Accrued purchase obligations ............................... -- -- 3,899 13,200 Capital lease obligations relating to equipment purchases .. 901 -- -- 1,366 Long-term debt cancellation ................................ -- -- 450 --
Cash paid for the following:
SEVEN-MONTH YEAR ENDED MAY 31, PERIOD ENDED ------------------------------------- DECEMBER 31, 2002 2002 2001 2000 ----------------- ---------- ---------- ---------- Interest ................ $ 830 $ 1,693 $ 1,668 $ 2,671 ========== ========== ========== ========== Income taxes ............ $ 595 $ 1,382 $ 148 $ 5,647 ========== ========== ========== ==========
20. RELATED PARTY TRANSACTIONS During the fiscal 2002, J.L. Investments, Inc., of which Mr. Warren Rustand, a director of TLC Vision, is a shareholder, and Mr. Warren Rustand entered into a consulting agreement with the Company to oversee the development of the Company's international business development project. J.L. Investments and Mr. Rustand received $125,000 under this agreement. On March 1, 2001, a limited liability company indirectly wholly owned by TLC Vision acquired all of the non-medical assets relating to the refractive practice of Dr. Mark Whitten prior to Dr. Whitten becoming a director of TLC Vision. The cost of this acquisition was $20.0 million, with $10.0 million paid in cash on March 1, 2001 and the remaining $10.0 million payable in four equal non-interest bearing installments on each of the first four anniversary dates of closing. Dr. Whitten became a director of TLC Vision in May 2002. At December 31, 2002 the remaining discounted amounts payable to Dr. Whitten of $6.3 million is included in long-term debt. (See Note 12, Long-term debt). In addition, TLC Vision has entered into service agreements with companies that own Dr. Whitten's refractive satellite operations located in Frederick, Maryland, and Charlottesville, Virginia, under which TLC Vision will provide such companies with services in return for a fee. During fiscal 2002, TLC Vision received a total of $761,000 in revenue as a result of the service agreements. During the transitional period ended December 31, 2002, the law firm Gourwitz and Barr, P.C., of which Mr. Gourwitz, a director of the Company, provided legal services to TLC Vision and was paid $0.1 million. LaserVision, a subsidiary of TLC Vision, has a limited partnership agreement with Minnesota Eye Consultants for the operation of one of its roll-on/roll-off mobile systems. Dr. Richard Lindstrom, a director of TLC Vision, is president of Minnesota Eye Consultants. LaserVision is the general partner and owns 60% of the partnership. Minnesota Eye Consultants, P.A. is a limited partner and owns 40% of the partnership. Under the terms of the partnership agreement, LaserVision receives a revenue-based management fee from the partnership. During the transitional period, LaserVision received a management fee in the amount of $21,000 from the partnership. Dr. Lindstrom also receives compensation from TLC Vision in his capacity as medical director of both TLC Vision and LaserVision. In September 2000, LaserVision entered into a five-year agreement with Minnesota Eye Consultants to provide laser access. LaserVision paid $6.2 million to acquire five lasers and the exclusive right to provide laser access to Minnesota Eye 49 Consultants. LaserVision also assumed leases on three of the five lasers acquired. The transaction resulted in a $5.0 million intangible asset recorded as deferred contract rights which will be amortized over the life of the agreement. During the transitional period, LaserVision received a total of $0.5 million in revenue as a result of the agreement. In May 2002, John J. Klobnak, a director of the Company and the former Chief Executive Officer of LaserVision, was paid $2.9 million and received 500,000 TLC Vision stock options in a severance arrangement in connection with the LaserVision acquisition. 21. SUBSEQUENT EVENTS On March 3, 2003, Midwest Surgical Services, Inc. a subsidiary of TLC Vision, entered into a purchase agreement to acquire 100% of American Eye Instruments, Inc., which provides access to surgical and diagnostic equipment to perform cataract surgery in hospitals and ambulatory surgery centers. The Company paid $2.0 million in cash and 100,000 common shares of TLC Vision. The Company also agreed to make additional cash payments over a three-year period up to $1.9 million if certain financial targets are achieved. 50 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of the report: (1) Financial statements: Report of Independent Auditors. Consolidated Statements of Operations - Transitional period ended December 31, 2002 and Years Ended May 31, 2002, 2001, and 2000. Consolidated Balance Sheets as of December 31, 2002, May 31, 2002, and 2001. Consolidated Statements of Cash Flows - Transitional period ended December 31, 2002, and Years Ended May 31, 2002, 2001, and 2000. Consolidated Statements of Changes in Stockholders' Equity - Transitional period ended December 31, 2002, and Years Ended May 31, 2002, 2001, and 2000. Notes to Consolidated Financial Statements (2) Financial statement schedules required to be filed by Item 8 and Item 15(d) of Form 10-K. Schedule II - Valuation and Qualifying Accounts and Reserves Except as provided below, all schedules for which provision is made in the applicable accounting regulations of the Commission either have been included in the Consolidated Financial Statements or are not required under the related instructions, or are inapplicable and therefore have been omitted. (3) Exhibits required by Item 601 of Regulation S-K and by Item 14(c). See Exhibit Index. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the last quarter of the transition period ended December 31, 2002. (c) Exhibits required by Item 601 of Regulation S-K. See Exhibit Index. (d) None 51 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this amendment to be signed on its behalf by the undersigned, thereunto duly authorized. TLC VISION CORPORATION By /s/ ELIAS VAMVAKAS ----------------------------------------- Elias Vamvakas, Chief Executive Officer November 17, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATED ------------------------------------ ------------------------------------- ----------------- /s/ ELIAS VAMVAKAS Chief Executive Officer and November 17, 2003 ------------------------------------ Chairman of the Board of Directors Elias Vamvakas /s/ B. CHARLES BONO III Chief Financial Officer, Treasurer November 17, 2003 ------------------------------------ and Principal Accounting Officer B. Charles Bono III
52 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
BALANCE AT DEDUCTIONS- BALANCE AT BEGINNING EXPENSE UNCOLLECTABLE END OF PERIOD PROVISION OTHER(1) A MOUNTS OF PERIOD ------------ ------------ ------------ ------------ ------------ (IN THOUSANDS) Fiscal 2000 ----------- Doubtful accounts receivable $ 2,527 $ 2,553 $ -- $ (1,183) $ 3,897 Provision against investments and other assets -- -- -- -- Deferred tax asset valuation allowance 17,345 (999) 16,346 Fiscal 2001 ----------- Doubtful accounts receivable $ 2,849 $ 646 $ -- $ (2,335) $ 1,160 Provision against investments and other assets -- 1,913 -- -- 1,913 Deferred tax asset valuation allowance 16,346 14,083 30,429 Fiscal 2002 ----------- Doubtful accounts receivable $ 1,160 $ 521 $ 1,742 $ (896) $ 2,527 Provision against investments and other assets 1,913 2,016 -- -- 3,929 Deferred tax asset valuation allowance 30,429 31,360 23,263 -- 85,052 Transitional Period 2002 ------------------------ Doubtful accounts receivable $ 2,527 $ 213 $ -- $ 312 $ 2,428 Provisions against investments and other assets 3,929 194 -- -- 4,123 Deferred tax asset valuation allowance 85,052 14,551 -- -- 99,603
Note (1): additional provision for doubtful accounts and the deferred tax asset valuation allowance were acquired in the merger transaction with LaserVision 53 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION -------- ----------------------------------------------------------------- 3.1 * Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company's 10-K filed with the Commission on August 28, 1998) 3.2 * Articles of Amendment (incorporated by reference to Exhibit 3.2 to the Company's 10-K filed with the Commission on August 29, 2000) 3.3 * Articles of Continuance (incorporated by reference to Exhibit 3.6 to the Company's Registration Statement on Form S-4/A filed with the Commission on March 1, 2002 (file no. 333-71532)) 3.4 * Articles of Amendment (incorporated by reference to Exhibit 4.2 to the Company's Post Effective Amendment No. 1 on Form S-8 to the Company's Registration Statement on Form S-4 filed with the Commission on May 14, 2002 (file no. 333-71532)) 3.5 * By-Laws of the Company (incorporated by reference to Exhibit 3.6 to the Company's Registration Statement on Form S-4/A filed with the Commission on March 1, 2002 (file no. 333-71532)) 4.1 * Shareholder Rights Plan Agreement dated as of September 21, 1999 between the Company and CIBC Mellon Company (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-4 filed with the Commission on October 12, 2001) 10.1 * TLC Vision Amended and Restated Share Option Plan (incorporated by reference to Exhibit 4(a) to the Company's Registration Statement on Form S-8 filed with the Commission on December 31, 1997 (file no. 333-8162)) 10.2 * TLC Vision Share Purchase Plan (incorporated by reference to Exhibit 4(b) to the Company's Registration Statement on Form S-8 filed with the Commission on December 31, 1997 (file no. 333-8162)) 10.3 * Employment Agreement with Elias Vamvakas (incorporated by reference to Exhibit 10.1(e) to the Company's 10-K filed with the Commission on August 28, 1998) 10.4 * Escrow Agreement with Elias Vamvakas and Jeffery J. Machat (incorporated by reference to Exhibit 10.1(f) to the Company's 10-K filed with the Commission on August 28, 1998) 10.5 * Consulting Agreement with Excimer Management Corporation (incorporated by reference to Exhibit 10.1(g) to the Company's 10-K filed with the Commission on August 28, 1998) 10.6 * Shareholder Agreement for Vision Corporation (incorporated by reference to Exhibit 10.1(l) to the Company's 10-K filed with the Commission on August 28, 1998) 10.7 * Employment Agreement with David Eldridge (incorporated by reference to Exhibit 10.1(m) to the Company's 10-K filed with the Commission on August 29, 2000) 10.8 * Employment Agreement with William Leonard (incorporated by reference to Exhibit 10.1(n) to the Company's 10-K filed with the Commission on August 29, 2000) 10.9 * Consulting Agreement with Warren Rustand (incorporated by Reference to Exhibit 10.10 to the Company's Amendment No. 2 registration Statement on Form S-4/A filed with the Commission on January 18, 2002 (file no. 333-71532)) 10.10 * Employment Agreement with Paul Frederick (incorporated by reference to Exhibit 10.10 to the Company's 10-K for the year ended May 31, 2002)
54
EXHIBIT NO. DESCRIPTION -------- ----------------------------------------------------------------- 10.11 * Employment Agreement with Lloyd Fiorini (incorporated by reference to Exhibit 10.11 to the Company's 10-K for the year ended May 31, 2002) 10.12 * Separation Agreement with Lloyd Fiorini (incorporated by reference to Exhibit 10.12 to the Company's 10-K for the year ended May 31, 2002) 10.13 * Employment Agreement with James C. Wachtman dated May 15, 2002 (incorporated by reference to Exhibit 10.13 to the Company's 10-K for the year ended May 31, 2002) 10.14 * Employment Agreement with Robert W. May dated May 15, 2002 (incorporated by reference to Exhibit 10.14 to the Company's 10-K for the year ended May 31, 2002) 10.15 * Employment Agreement with B. Charles Bono dated May 15, 2002 (incorporated by reference to Exhibit 10.15 to the Company's 10-K for the year ended May 31, 2002) 10.16 * Supplemental Employment Agreement with John J. Klobnak dated May 15, 2002 (incorporated by reference to Exhibit 10.16 to the Company's 10-K for the year ended May 31, 2002) 21 * List of the Company's Subsidiaries (incorporated by reference to Exhibit 21.1 to the Company's 10-K for the year ended May 31, 2002) 23 * Consent of Independent Auditors 31.1 CEO's Certification required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended 31.2 CFO's Certification required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended 32.1 CEO's Certification of periodic financial report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, U.S.C. Section 1350 32.2 CFO's Certification of periodic financial report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, U.S.C. Section 1350
* Previously filed 55