-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JklZ+FV3GtsWqnlp7NHlAOwgLtiNkP9Dzy5Gb/pWa7SuC9Q0ENhsj+XMwuHz9YVG qXe2Fskj9vmMUcX2srIhrg== 0001005477-02-000978.txt : 20020414 0001005477-02-000978.hdr.sgml : 20020414 ACCESSION NUMBER: 0001005477-02-000978 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011130 FILED AS OF DATE: 20020227 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TLC LASER CENTER INC CENTRAL INDEX KEY: 0001010610 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SPECIALTY OUTPATIENT FACILITIES, NEC [8093] IRS NUMBER: 980151150 STATE OF INCORPORATION: A6 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-29302 FILM NUMBER: 02560705 BUSINESS ADDRESS: STREET 1: 5600 EXPLORER DRIVE STREET 2: SUITE 301 CITY: MISSISSAUGA ONTARIO STATE: A6 ZIP: 00000 BUSINESS PHONE: 3015712020 MAIL ADDRESS: STREET 1: 6701 DEMOCRACY BLVD STREET 2: SUITE 200, LEGAL DEPT. CITY: BETHESDA STATE: MA ZIP: 20817 10-Q/A 1 d02-36251.txt FORM 10-Q/A SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- FORM 10-Q/A AMENDMENT NO. 1 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 2001 COMMISSION FILE NUMBER: 0-29302 TLC LASER EYE CENTERS INC. -------------------------- (Exact name of registrant as specified in its charter) Ontario, Canada (State or jurisdiction of 980151150 incorporation or organization) (I.R.S. Employer Identification No.) 5280 Solar Drive, Suite 300 Mississauga, Ontario L4W 5M8 (Address of principal executive offices) (Zip Code) Registrant's telephone, including area code (905) 602-2020 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |X| Yes No |_| As of December 31, 2001, there were 38,089,898 of the registrant's Common Shares outstanding. 1 This Quarterly Report on Form 10-Q (herein, together with all amendments, exhibits and schedules hereto, referred to as the "Form 10-Q") contains certain forward-looking statements within the meaning of Section 27A of the 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", "intends" or "continue" or the negative thereof or other variations thereon or comparable terminology. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth elsewhere in this Form 10-Q in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in the Company's Annual Report on Form 10-K for the year ended May 31, 2001, as amended. Unless the context indicates or requires otherwise, references in this Form 10-Q to the "Company" or "TLC" shall mean TLC Laser Eye Centers Inc. and its subsidiaries. The Company's fiscal year ends on May 31. Therefore, references in this Form 10-Q to "fiscal 2001" shall mean the 12 months ended on May 31, 2001 and "fiscal 2002" shall mean the 12 months ending on May 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. INDEX PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements (unaudited) Consolidated Statements of Income for the Three Months ended November 30, 2001 and November 30, 2000 and the Six Months ended November 30, 2001 and November 30, 2000 Consolidated Balance Sheets at November 30, 2001 and May 31, 2001 Consolidated Statements of Cashflows for the Six Months ended November 30, 2001 and November 30, 2000 Consolidated Statements of Stockholders' Equity Notes to Interim Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk PART II. OTHER INFORMATION Item 6. Exhibits and Reports on 8-K 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS TLC LASER EYE CENTERS INC. CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Three months ended November 30 Six months ended November 30 (U.S. dollars, in thousands except share and per share amounts) 2001 2000 2001 2000 - --------------------------------------------------------------------------------------------------------------------------------- Revenues Refractive Owned $ 9,505 $ 18,946 $ 22,947 $ 41,625 Managed, facility and access fees 13,214 16,632 31,149 39,575 Other 3,939 2,832 7,586 5,155 - --------------------------------------------------------------------------------------------------------------------------------- Total revenues 26,658 38,410 61,682 86,355 - --------------------------------------------------------------------------------------------------------------------------------- Expenses Cost of revenues Refractive Owned 8,699 15,308 18,430 29,665 Managed, facility and access fees 10,647 10,768 22,041 22,056 Reduction in carrying value of capital assets 1,066 -- 1,066 -- Other 2,118 2,376 4,040 5,398 - --------------------------------------------------------------------------------------------------------------------------------- Total cost of revenues 22,530 28,452 45,577 57,119 - --------------------------------------------------------------------------------------------------------------------------------- Gross margin 4,128 9,958 16,105 29,236 - --------------------------------------------------------------------------------------------------------------------------------- Selling, general and administrative 12,743 19,729 27,357 41,038 Interest and other 178 (651) 154 (1,617) Depreciation of capital assets and assets under lease 603 570 1,150 1,105 Amortization of intangibles 2,536 3,301 5,100 6,459 Write down of investments 20,031 -- 20,031 -- Restructuring and other charges 934 14,635 934 14,635 - --------------------------------------------------------------------------------------------------------------------------------- 37,025 37,584 54,726 61,620 - --------------------------------------------------------------------------------------------------------------------------------- LOSS BEFORE INCOME TAXES AND NON-CONTROLLING INTEREST (32,897) (27,626) (38,621) (32,384) Income taxes (96) (666) (562) (840) Non-controlling interest (375) 263 (747) 23 - --------------------------------------------------------------------------------------------------------------------------------- LOSS FOR THE PERIOD $ (33,368) $ (28,029) $ (39,930) $ (33,201) ================================================================== BASIC LOSS PER SHARE $ (0.88) $ (0.74) $ (1.05) $ (0.88) Weighted average number of Common Shares Outstanding 38,064,879 37,932,216 38,052,190 37,564,602 Fully Diluted Loss per share $ (0.88) $ (0.74) $ (1.05) $ (0.88)
Prepared in accordance with U.S. Generally Accepted Accounting Principles See the accompanying notes to unaudited interim consolidated financial statements. 3 TLC LASER EYE CENTERS INC. CONSOLIDATED BALANCE SHEETS
(unaudited) November 30 May 31 (U.S. dollars, in thousands) 2001 2001 - ------------------------------------------------------------------------------------ ASSETS Current assets Cash and cash equivalents $ 43,686 $ 47,987 Marketable securities -- 6,063 Accounts receivable 7,975 9,950 Prepaids and sundry assets 4,162 4,501 - ------------------------------------------------------------------------------------ Total current assets 55,823 68,501 Restricted cash 4,889 1,619 Investments and other assets 14,089 23,171 Intangibles 54,973 60,050 Goodwill 32,740 32,752 Capital assets 40,048 44,963 Assets under capital lease 6,599 7,382 - ------------------------------------------------------------------------------------ Total assets $ 209,161 $ 238,438 ==================================================================================== LIABILITIES Current liabilities Accounts payable and accrued liabilities $ 14,991 $ 15,028 Accrued legal settlements 2,100 2,100 Accrued purchase obligations 3,000 3,000 Accrued restructuring costs 892 718 Accrued wage costs 3,254 3,652 Current portion of long term debt 3,818 3,826 Current portion of obligations under capital lease 2,226 2,943 Income taxes payable 565 397 - ------------------------------------------------------------------------------------ Total current liabilities 30,846 31,664 Long term debt 11,521 7,032 Obligations under capital lease 499 1,281 Deferred rent and compensation 515 617 - ------------------------------------------------------------------------------------ Total liabilities 43,381 40,594 - ------------------------------------------------------------------------------------ Non-controlling interest 8,905 10,738 - ------------------------------------------------------------------------------------ SHAREHOLDERS' EQUITY Capital stock 276,434 276,277 Warrants 532 532 Deficit (120,091) (80,161) Accumulated other comprehensive loss -- (9,542) - ------------------------------------------------------------------------------------ Total shareholders' equity 156,875 187,106 - ------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $ 209,161 $ 238,438 ====================================================================================
Prepared in accordance with U.S. Generally Accepted Accounting Principles See the accompanying notes to unaudited interim consolidated financial statements. 4 TLC LASER EYE CENTERS INC. CONSOLIDATED STATEMENTS OF CASHFLOWS (unaudited)
Six months ended November 30, 2001 (U.S. dollars, in thousands) 2001 2000 - ------------------------------------------------------------------------------------------------------------- Operating activities Net loss for the period $(39,930) $(33,201) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 11,028 13,988 Goodwill written off in the period -- 216 (Gain)/loss on sale of capital assets and assets under lease 81 1,173 Non-cash reduction in carrying values of capital assets and write down of investments 21,097 -- Non-cash restructuring and other costs 570 14,319 Non-controlling interest 747 (23) Other 205 21 Changes in non-cash operating items Accounts receivable 1,975 6,136 Prepaids and sundry assets 339 1,907 Accounts payable and accrued liabilities (1,203) (3,056) Income taxes payable (net) 376 4,421 Deferred rent and compensation 270 (164) - ------------------------------------------------------------------------------------------------------------- Cash provided by (used for) operating activities (4,445) 5,737 - ------------------------------------------------------------------------------------------------------------- Financing activities Restricted cash movement from financing activities (270) 32 Proceeds from debt financing 5,412 43 Principal payments of debt financing (928) (1,350) Principal payments of obligations under capital lease (1,516) (2,475) Payments of accrued purchase obligations -- (3,000) Contributions from non-controlling interests -- 30 Distributions to non-controlling interests (2,707) (3,172) Payments related to the purchase and cancellation of capital stock -- (485) Proceeds from the issuance of capital stock 157 373 - ------------------------------------------------------------------------------------------------------------- Cash provided by (used for) financing activities 148 (10,004) - ------------------------------------------------------------------------------------------------------------- Investing activities Restricted cash movement from investing activities (3,000) -- Purchase of capital assets and assets under lease (1,463) (9,070) Proceeds from sale of capital assets and assets under lease 23 1,088 Proceeds from the sale of investments 150 1,104 Acquisitions and investments and other assets (1,762) (5,816) Proceeds from sale of marketable securities 6,063 -- Other (15) (91) - ------------------------------------------------------------------------------------------------------------- Cash used for investing activities (4) (12,785) - ------------------------------------------------------------------------------------------------------------- Decrease in cash and cash equivalents (17,052) (4,301) Cash and cash equivalents, beginning of year 47,987 78,531 - ------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 43,686 $ 61,479 =============================================================================================================
Prepared in accordance with U.S. Generally Accepted Accounting Principles See the accompanying notes to unaudited interim consolidated financial statements. 5 TLC Laser Eye Centers Inc. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (U.S. dollars, in thousands) (unaudited)
Common stock Warrants ------------ -------- Other Accumulated Number Number Comprehensive of Shares Amount of Warrants Amount Deficit Income Total (000's) $ (000's) $ $ $ $ - --------------------------------------------------------------------------------------------------------------------------------- Balance, May 31, 1999 37,362 269,454 -- -- (31,267) 5,936 244,123 Warrants issued 100 532 532 Shares issued for acquisition 302 728 728 Value determined for shares issued contingent on meeting earnings criteria -- 1,397 1,397 Shares purchased for cancellation (710) (5,162) (5,203) (10,365) Exercise of stock options 87 1,314 1,314 Shares issued as remuneration 44 387 387 Shares issued as part of the employee share purchase plan 65 1,696 1,696 Reversal of IPO costs, over accrual -- 139 139 Comprehensive loss Net loss (5,918) Other comprehensive loss Unrealized losses on available-for-sale securities (10,387) Total comprehensive loss (16,305) - --------------------------------------------------------------------------------------------------------------------------------- Balance May 31, 2000 37,150 269,953 100 532 (42,388) (4,451) 223,646 Shares issued for acquisition 832 6,059 6,059 Shares purchased for cancellation (108) (481) (481) Exercise of stock options 40 125 125 Shares issued as remuneration 5 35 35 Shares issued as part of the employee share purchase plan 112 586 586 Comprehensive loss Net loss (37,773) Other comprehensive loss Unrealized losses on available- for-sale securities (5,091) Total comprehensive loss (42,864) - --------------------------------------------------------------------------------------------------------------------------------- Balance May 31, 2001 38,031 276,277 100 532 (80,161) (9,542) 187,106 Shares issued as part of the employee share purchase plan 34 157 157 Comprehensive income (loss) Net loss (39,930) Other comprehensive income (loss) Unrealized gains/losses on available- for-sale securities 9,542 Total comprehensive income (loss) (30,388) - --------------------------------------------------------------------------------------------------------------------------------- Balance November 30, 2001 38,065 276,434 100 532 (120,091) -- 156,875 =================================================================================================================================
Prepared in accordance with U.S. Generally Accepted Accounting Principles See the accompanying notes to unaudited interim consolidated financial statements. 6 TLC LASER EYE CENTERS INC. AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS November 30, 2001 (Unaudited) 1. Basis of Presentation and Accounting Policies The information contained in the unaudited interim consolidated financial statements and footnotes is condensed from what would appear in the annual consolidated financial statements. Accordingly, the unaudited interim consolidated financial statements included herein should be read in conjunction with the May 31, 2001, Annual Report on Form 10-K, as amended ("Form 10-K") filed by TLC Laser Eye Centers Inc. (the "Company" or "TLC") with the Securities and Exchange Commission. The unaudited interim consolidated financial statements as of November 30, 2001 and for the six months then ended include all normal recurring adjustments and estimates which management considers necessary for a fair presentation. The results of operations for the interim period are not necessarily indicative of the results that may be expected for the entire fiscal year. The unaudited interim consolidated financial statements include the accounts and transactions of the Company and its majority owned subsidiaries, partnerships and other entities in which the Company has more than a 50% ownership interest and exercises control. The ownership interests of other parties in less than wholly owned consolidated subsidiaries, partnerships and other entities are presented as non-controlling interests. For Company- owned laser centers, revenue represents the amount charged to patients at a standard rate for a laser vision correction procedure, net of discounts, contractual adjustments and amounts collected as an agent of co-managing doctors. Net revenue is recognized when the procedure is performed. Contractual adjustments arise due to the terms of certain reimbursement and managed care contracts. Such adjustments represent the difference between the charges at established rates and estimated recoverable amounts, and are recognized in the period services are rendered. Any differences between estimated contractual adjustments and actual final settlements under reimbursement contracts are recognized as contractual adjustments in the year final settlements are determined. For Company- managed laser centers, revenue represents a management fee charged to professional corporations (PCs) that provide laser vision correction procedures and are responsible for billing the patient directly. Under the terms of the practice management agreements, the Company provides management, marketing and administrative services to the PC in return for a per procedure management fee. Although TLC 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. The revenue from the Company's Other segment includes management fee revenue from secondary care practices, network marketing and management, asset management, professional healthcare facility management and revenue from hair removal procedures. Revenue is recognized as the service or treatment is provided. The company accumulates costs associated with the provision of laser correction services and reports them as cost of revenues. Included in this grouping are the laser fees payable to laser manufacturers for royalties, use and maintenance of the lasers, variable expenses for consumables, financing costs and facility fees as well as center costs associated with personnel, facilities and amortization of center assets. 7 In Company owned centers, the Company is responsible for arranging for and reimbursing the surgeons who provide laser vision correction services and the amounts paid to the surgeons is reported as a cost of revenue as well. The unaudited interim consolidated financial statements for the three month and six month period ended November 30, 2000 include certain reclassifications to conform with classifications for the three month and six month period ended November 30, 2001. The net loss per share was computed using the weighted average number of common shares outstanding during each period. 2. Intangible Assets Effective June 1, 2001, the Company early adopted SFAS No. 142, Goodwill and Intangible Assets ("SFAS No. 142"). 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 has completed a transitional impairment test to identify if there is potential impairment to the goodwill as at June 1, 2001. Step one of the transitional impairment test uses a fair value methodology, which differs from the undiscounted cash flow methodology that continues to be used for intangible assets with an identifiable life. Based on the results of step one of the transitional impairment test, the Company has identified certain reporting units for which the carrying value exceeded the fair value as at June 1, 2001, indicating a potential impairment of goodwill in those reporting units. Step two of the transitional impairment test, to determine the magnitude of any goodwill impairment, will be completed by the end of the fiscal 2002 year (May 31, 2002) and any resulting impairment loss will be recorded as a cumulative effect of a change in accounting principle. Initial quantification of the impairment test, which may vary from the final quantification, indicates a write down of approximately $7 million to $15 million. As the Company has decided to select a date other than June 1 as the date it will perform its annual impairment test, the Company will be performing another impairment test prior to May 31, 2002. In addition to the annual impairment test, the Company will perform an impairment test if an event occurs or circumstances change that would more likely than not to reduce the fair value of a reporting unit below its carrying amount. Such subsequent impairment losses, if any, will be reflected in operating income in the income statement. The Company has $32.7 million of goodwill on its balance sheet as at November 30, 2001 and expects to record material goodwill in connection with its acquisition of Laser Vision Centers, Inc. (see note 4). The calculation of any impairment is performed at the level of reporting units and requires a comprehensive analysis, which has not yet been completed. However, the difference between the book value of a company and its market value may indicate that an impairment in the company's goodwill exists. Based on the recent trading price of the Company's common shares, the book value of the Company exceeds its market capitalization. This is an indication that the impairment analysis to be conducted by the Company may result in some portion or all of the Company's goodwill and any additional goodwill resulting from the acquisition of Laser Vision Centers, Inc. being impaired and written off in the period in which the test occurs, the quarter ended May 31, 2002. Because the determination of whether there is an impairment of the Company's goodwill will be completed at a future date and will involve many aspects of analyses which have not yet been undertaken, the amount of any writedown cannot be reliably predicted at this time. On a fiscal year basis, with the adoption of SFAS No. 142, the Company anticipates approximately $2.8 million in goodwill amortization will not be charged to income. As required by SFAS No. 142, the results for the prior year's quarters have not been restated. A reconciliation of net income as if SFAS No. 142 has been adopted is presented below for the periods ended November 30, 2000.
------------------------------------------------------------------- Three months ended November 30 Six months ended November 30 ------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------ 2001 2000 2001 2000 ------------------------------------------------------------------------------------------------------ Reported net loss for the period $ (33,368) $ (28,029) $ (39,930) $ (33,201) ------------------------------------------------------------------------------------------------------ Add back goodwill amortization -- 1,069 -- 2,430 ------------------------------------------------------------------------------------------------------ Adjusted net loss for the period $ (33,368) $ (26,960) $ (39,930) $ (30,771) ------------------------------------------------------------------------------------------------------ Basic loss per share: ------------------------------------------------------------------------------------------------------ Reported net loss for the period $ (0.88) $ (0.74) $ (1.05) $ (0.88) ------------------------------------------------------------------------------------------------------ Goodwill amortization -- 0.03 -- 0.06 ------------------------------------------------------------------------------------------------------ Adjusted net loss for the period $ (0.88) $ (0.71) $ (1.05) $ (0.82) ------------------------------------------------------------------------------------------------------ Fully diluted loss per share: ------------------------------------------------------------------------------------------------------ Reported net loss for the period $ (0.88) $ (0.74) $ (1.05) $ (0.88) ------------------------------------------------------------------------------------------------------ Goodwill amortization -- 0.03 -- 0.06 ------------------------------------------------------------------------------------------------------ Adjusted net loss for the period $ (0.88) $ (0.71) $ (1.05) $ (0.82) ------------------------------------------------------------------------------------------------------
3. Comprehensive Loss and Write down of Investments
----------------------------------------------------------------- Three months ended November 30 Six months ended November 30 ----------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- 2001 2000 2001 2000 ----------------------------------------------------------------------------------------------------- Reported net loss for the period $ (33,368) $ (28,029) $ (39,930) $ (33,201) ----------------------------------------------------------------------------------------------------- Other comprehensive income (loss) 16,698 (5,780) 9,542 (7,293) ----------------------------------------------------------------------------------------------------- Total comprehensive loss $ (16,670) $ (33,809) $ (30,388) $ (40,494) -----------------------------------------------------------------------------------------------------
Total comprehensive income (loss) includes net income (loss) plus other comprehensive income (loss), which, primarily comprises net unrealized gains or losses on securities which are available-for-sale. For the quarter ended November 30, 2001, the Company reported a charge to net loss for the reduction in fair value of available-for-sale investments for which the decline is considered other than temporary. The charge 8 was comprised of the Company's investment in LaserSight Incorporated (LaserSight) ($17.5 million) and Laser Vision Centers Inc. (Laser Vision) ($1.5 million). In addition to the write down of the Company's investments in LaserSight for $17.5 million and Laser Vision for $1.5 million, the Company also wrote down another investment which totaled $1.0 million. The $20.0 million total of these write downs is presented as write down of investments in the consolidated statement of income. 4. Acquisition Related Activities 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 Laser Vision. Laser Vision 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. The merger will be effected as an all-stock combination at a fixed exchange rate of 0.95 of a common share of the Company for each share of Laser Vision common stock which is expected to result in the issuance of approximately 26.5 million shares of the Company's common stock. In addition, the Company will assume and convert existing outstanding options or warrants to acquire stock of Laser Vision based on the 0.95 exchange rate and expects to issue approximately 7.9 million options or warrants to acquire common shares of the Company. The merger will be accounted for under the purchase method. Completion of the transaction, expected to occur in the second half of fiscal 2002, is subject to shareholder and regulatory approval and other conditions usual and customary in such transactions. The Company has incurred $2.2 million in costs related to the merger, $1.4 million of which was incurred in the six months ended November 30, 2001 ($0.2 million - three months ended November 30, 2001). These costs have been categorized as non-current assets in the current quarter and will be included in the purchase price upon completion of the transaction. Once the transaction has been closed, the Company will review its operations, strategic investments and assets, which may result in restructuring provisions and/or write-offs. Additionally, as contemplated by the Merger Agreement, immediately prior to the effective time of the merger, Laser Vision will reduce the exercise price of approximately 2.1 million outstanding stock options and warrants of Laser Vision which would have an exercise price greater than $8.688 per share of TLC stock after the merger to a price equivalent to $8.688 per share of TLC common stock. In addition, subject to shareholder and regulatory approval, TLC will allow the holders of outstanding TLC stock options with an exercise price greater than $8.688 to elect to reduce the exercise price of their options to $8.688 by surrendering a number of the shares subject to each repriced option as follows: for every option with an exercise price of at least $40, the holder will surrender 75% of the share subject to such option; for every option with an exercise price of at least $30 but less than $40, the holder will surrender approximately 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 will surrender 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 will not surrender any of the shares subject to such option. 5. Capital Assets The Company has recorded a reduction of the carrying value of capital assets of $1.1 million reflecting a write down of certain of the Company's lasers produced by LaserSight to a value of $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. In the second quarter of fiscal 2002, the Company completed a sale-leaseback transaction for its corporate headquarters. Total consideration received for the sale was Cdn. $10.1 million of which, Cdn. $8.6 million was cash and Cdn. $1.5 million 8.0% note receivable (Note). The Note has a seven-year term with the first of four annual payments of Cdn. $100,000 due on the third anniversary of the sale and a final payment of Cdn. $1.1 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 has been reported. For purpose of financial reporting, the cash proceeds of Cdn. $8.6 million has been presented as additional debt. Subsequent 9 receipt of the Note will result in additional debt while lease payments will result in decreasing the debt and 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. 6. Divestitures and Restructuring Charges In the second quarter of fiscal 2002, the Company implemented a restructuring program to reduce employee costs in line with current revenue levels. This program resulted in the identification, notification and elimination of 49 full time equivalent positions and resulted in a severance provision of $934,000 being reported of which $364,000 was paid in the second quarter of fiscal 2002. In the second quarter of fiscal 2001, accrued liabilities for restructuring provisions were recorded as a result of the decision to cease material funding of the Company's e-commerce subsidiary eyeVantage.com, Inc. and the resulting decision by eyeVantage.com, Inc. to cease operations, the potential for losses in an equity investment in a secondary care operation and estimated costs associated with the Company's initiative to eliminate centers which have been targeted under current restructuring initiatives. At the end of fiscal 2001, the Company reflected outstanding accrued liabilities for restructuring activities of $718,000 and in the three months and six months ended November 30, 2001 the Company paid $81,000 and $396,000 of these provisions, respectively. 7. Segmented Information The Company has two reportable segments: refractive and other. The refractive segment is the core focus of the Company which reflects the provision of laser vision correction. The other segment includes an accumulation of non-core business activities, including the management of secondary care centers which provide advanced levels of eye care, and activities involving the development of eyeVantage.com as an e-commerce enterprise. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in the Form 10-K. The Company evaluates performance based on operational components including paid procedures, net revenue after doctors' fees, fixed costs and income (loss) before income taxes. Doctors' Compensation as presented in the financial statements represents the cost to the Company of arranging for 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(1), 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. As such, the costs associated with arranging for, these professionals to furnish professional services is reported as a cost of the professional corporation and not of the Company. Intersegment sales and transfers are minimal and are measured as if the sales or transfers were to third parties. The Company's reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. Most of the business units were acquired or developed as a unit and management at the time of acquisition was retained. - ---------- (1) Certain states restrict the Company from directly engaging medical doctors or optometrists pursuant to the corporate practice of medicine/optometry doctrine. Accordingly, in these states, the Company arranges for laser vision correction services for patients through medical doctors and/or professional corporations with whom TLC has entered into practice management agreements. 10 The following tables set forth information by segments:
- ----------------------------------------------------------------------------------------------------------------------------- Three months ended November 30th 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------- (U.S. dollars, in thousands) Refractive Other Total Refractive Other Total - ----------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------- NET REVENUES $ 22,719 $ 3,939 $ 26,658 $ 35,578 $ 2,832 $ 38,410 - ----------------------------------------------------------------------------------------------------------------------------- EXPENSES - ----------------------------------------------------------------------------------------------------------------------------- Doctor compensation 1,778 -- 1,778 3,681 -- 3,681 - ----------------------------------------------------------------------------------------------------------------------------- Operating expenses 27,318 2,745 30,063 37,745 3,529 41,274 - ----------------------------------------------------------------------------------------------------------------------------- Interest and other 34 144 178 (615) (36) (651) - ----------------------------------------------------------------------------------------------------------------------------- Depreciation of capital assets and assets under lease 2,822 147 2,969 3,611 185 3,796 - ----------------------------------------------------------------------------------------------------------------------------- Amortization of intangibles 2,429 107 2,536 2,729 572 3,301 - ----------------------------------------------------------------------------------------------------------------------------- Reduction in fair value of capital assets 1,066 -- 1,066 -- -- -- - ----------------------------------------------------------------------------------------------------------------------------- Write down of investments 20,031 -- 20,031 -- -- -- - ----------------------------------------------------------------------------------------------------------------------------- Restructuring and other charges 934 -- 934 985 13,650 14,635 - ----------------------------------------------------------------------------------------------------------------------------- 56,412 3,143 59,555 48,136 17,900 66,036 - ----------------------------------------------------------------------------------------------------------------------------- Income (loss) from operations (33,693) 796 (32,897) (12,558) (15,068) (27,626) - ----------------------------------------------------------------------------------------------------------------------------- Income taxes 187 (283) (96) (590) (76) (666) - ----------------------------------------------------------------------------------------------------------------------------- Non-controlling interest (175) (200) (375) 383 (120) 263 - ----------------------------------------------------------------------------------------------------------------------------- Net Income (loss) $(33,681) $ 313 $(33,368) $(12,765) $(15,264) $(28,029) - -----------------------------------------------------------------------------------------------------------------------------
Prepared in accordance with U.S. Generally Accepted Accounting Principles
- ----------------------------------------------------------------------------------------------------------------------------- Six months ended November 30th 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------- (U.S. dollars, in thousands) Refractive Other Total Refractive Other Total - ----------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------- NET REVENUES $ 54,096 $ 7,586 $ 61,682 $ 81,200 $ 5,155 $ 86,355 - ----------------------------------------------------------------------------------------------------------------------------- EXPENSES - ----------------------------------------------------------------------------------------------------------------------------- Doctor compensation 4,454 -- 4,454 8,531 -- 8,531 - ----------------------------------------------------------------------------------------------------------------------------- Operating expenses 57,374 5,263 62,637 74,775 8,427 83,202 - ----------------------------------------------------------------------------------------------------------------------------- Interest and other 17 137 154 (1,716) 99 (1,617) - ----------------------------------------------------------------------------------------------------------------------------- Depreciation of capital assets and assets under lease 5,630 297 5,927 7,107 422 7,529 - ----------------------------------------------------------------------------------------------------------------------------- Amortization of intangibles 4,881 219 5,100 5,127 1,332 6,459 - ----------------------------------------------------------------------------------------------------------------------------- Reduction in fair value of capital assets 1,066 -- 1,066 -- -- -- - ----------------------------------------------------------------------------------------------------------------------------- Write down of investments 20,031 -- 20,031 -- -- -- - ----------------------------------------------------------------------------------------------------------------------------- Restructuring and other charges 934 -- 934 985 13,650 14,635 - ----------------------------------------------------------------------------------------------------------------------------- 94,387 5,916 100,303 94,809 23,930 118,739 - ----------------------------------------------------------------------------------------------------------------------------- Income (loss) from operations (40,291) 1,670 (38,621) (13,609) (18,775) (32,384) - ----------------------------------------------------------------------------------------------------------------------------- Income taxes 98 (660) (562) (778) (62) (840) - ----------------------------------------------------------------------------------------------------------------------------- Non-controlling interest (500) (247) (747) 190 (167) 23 - ----------------------------------------------------------------------------------------------------------------------------- Net Income (loss) $(40,693) $ 763 $(39,930) $ (14,197) $(19,004) $ (33,201) - -----------------------------------------------------------------------------------------------------------------------------
Prepared in accordance with U.S. Generally Accepted Accounting Principles 11 8. Supplemental Cash Flow Information Non-cash transactions: Six months ended November 31, 2001 2000 ------- ------- Accrued purchase obligations -- (4,199) Capital stock issued for acquisitions -- 6,059 Cash paid for the following: Six months ended November 31, 2001 2000 ------- ------- Interest 1,086 946 Income taxes 379 541 During the second quarter of fiscal 2002, as a condition of an award issued against the Company in the fourth quarter of fiscal 2001 from an arbitration hearing involving TLC Network Services Inc., the Company was required to set aside $3.0 million while the Company explored all legal alternatives. The $3.0 million is being reported as restricted cash. 9. Subsequent Events Subsequent to November 30, 2001, the Company signed a restricted stock incentive plan and related agreements which will allow the management of The Vision Source, Inc. to be awarded up to 49% of the common shares of The Vision Source, Inc. provided certain performance requirements are achieved by May 31, 2005. Subsequent to November 30, 2001, the Company advanced $1.0 million to a third party to support the development of laser scanning technology. This advance will be expensed over the next six to nine months as the cash is expended by the entity in its research and development. 12 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Managements 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 the Company's annual report on the Form 10-K. The following discussion is based upon the Company's results under U.S. GAAP. Unless otherwise specified, all dollar amounts are U.S. dollars. Overview TLC Laser Eye Centers Inc. (the "Company" or "TLC") is one of the largest providers of laser vision correction services in North America. TLC owns and manages eye care centers which, together with TLC's network of over 12,500 eye care doctors, provide laser vision correction of common refractive disorders such as myopia (nearsightedness), hyperopia (farsightedness) and astigmatism. Laser vision correction is an outpatient procedure which is designed to change the curvature of the cornea to reduce or eliminate a patient's reliance on eyeglasses or contact lenses. TLC, which commenced operations in September 1993, currently has 60 eye care centers in 28 states and provinces throughout the United States and Canada. Surgeons performed over 122,800 procedures at the Company's centers during fiscal 2001 and over 41,900 procedures in the first two quarters of fiscal 2002. The Company is assessing patient, optometric and ophthalmic industry trends and developing strategies to improve laser vision correction procedure and revenue volumes. Cost reduction initiatives continue to target the effective use of funds and a growth initiative is focusing on the future development opportunities for the Company in the laser vision correction industry, which reduces the requirement for capital funding. The Company recognizes revenues at the time services are rendered. Net revenues include only those revenues pertaining to owned laser centers and management fees from managing refractive and secondary care practices. Under the terms of the practice management agreements, the Company provides management, marketing and administrative services to refractive and secondary care practices in return for management fees. Management services revenue is equal to the net revenue of the physician practice, less amounts retained by the physician groups. Management services revenue under the terms of the practice management agreements for laser vision correction procedures are recognized when the services are performed. Net revenue of the physician's practice represents amounts charged to patients for laser vision correction services net of the impact of applicable patient discounts and related contractual adjustments. Amounts retained by physician groups may include costs for uncollectible amounts from patients, professional contractual costs and miscellaneous administrative charges. Uncollectible amounts from patients are reviewed and provided for on a regular monthly basis for those amounts due from physicians or patients for which there is a permanent reduced likelihood of collection in whole or in part. 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 pre-defined company wide per procedure revenue threshold. Procedures may be invoiced under the threshold amounts primarily for promotional or marketing purposes and are not included in the procedure volume numbers reported. By not counting these promotional procedures the net revenue after doctor's compensation per procedure ratio is higher than if these procedures had been included in the procedure volumes. Doctors' compensation as presented in 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(2), 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. As such, the costs associated with arranging for these professionals to furnish professional services is reported as a cost of the professional corporation and not of the Company. - ---------- (2) Certain States restrict the Company from directly engaging medical doctors or optometrists pursuant to the corporate practice of medicine/optometry doctrine. Accordingly, in these States, the Company arranges for laser vision correction services for patients through medical doctors and/or professional corporations with whom TLC has entered into practice management agreements. 13 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 and facility fees as well as center costs associated with personnel, facilities and amortization of center assets. In Company owned centers, the Company is responsible for engaging and paying the surgeons who provide laser vision correction services and the amounts paid to the surgeons is reported as a cost of revenue as well. Selling, general and administrative expenses include expenses which are not directly related to the provision of laser vision correction services. In the six months ended November 30, 2001, the Company's procedure volume decreased by 31% from the first six months of fiscal 2001. In the quarter ended November 30, 2001, the Company's procedure volume decreased 27% from the previous quarter ended August 31, 2001 and decreased by 35% from the previous year quarter ended November 30, 2000. The Company, believes that the procedural volume decreases are indicative of the conditions in the laser vision correction industry, which has experienced uncertainty resulting from a number of issues, including but not limited to, 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 the Company. In addition, being an elective procedure, laser vision correction volumes may have been further depressed by economic conditions currently being experienced in North America. Despite the pricing pressures in the industry, the Company's net revenue after doctor compensation (defined by the Company as net revenue less doctors compensation) per procedure has only declined marginally (1%) in the first six months of fiscal 2002 compared to the first six months of fiscal 2001 and the second quarter of fiscal 2002 compared to the first quarter of fiscal 2002. The Company has developed and launched a pilot test of a new revenue model, the Company's Affiliate Center program. Under the Company's Affiliate Center program, the Company provides varying levels of resources, support and expertise to established eye care professionals ("ECP") in secondary markets in an effort to grow and develop their current laser vision correction practices. The services provided by the Company can vary from providing support only in building the ECP's network of affiliated optometrists to the Company providing facilities, medical equipment, professional staffing, marketing and administrative support. Revenues from the Company's Affiliate Centers program vary based on the level of services provided by the Company. The Company's Affiliate Center program is expected to enable the Company to expand its presence in secondary markets while significantly reducing the operational and capital funding normally required to support a typical corporate laser center. Effective June 1, 2001, the Company early adopted SFAS No. 142, Goodwill and Intangible Assets ("SFAS No. 142"). 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 has completed a transitional impairment test to identify if there is potential impairment to the goodwill as at June 1, 2001. Step one of the transitional impairment test uses a fair value methodology, which differs from the undiscounted cash flow methodology that continues to be used for intangible assets with an identifiable life. Based on the results of step one of the transitional impairment test, the Company has identified certain reporting units for which the carrying value exceeded the fair value as at June 1, 2001, indicating a potential impairment of goodwill in those reporting units. Step two of the transitional impairment test, to determine the magnitude of any goodwill impairment, will be completed by the end of the fiscal 2002 year (May 31, 2002) and any resulting impairment loss will be recorded as a cumulative effect of a change in accounting principle. Initial quantification of the impairment test, which may vary from the final quantification, indicates a write down of approximately $7 million to $15 million. As the Company has decided to select a date other than June 1 as the date it will perform its annual impairment test, the Company will be performing another impairment test prior to May 31, 2002. In addition to the annual impairment test, the Company will perform an impairment test if an event occurs or circumstances change that would more likely than not to reduce the fair value of a reporting unit below its carrying amount. Such subsequent impairment losses, if any, will be reflected in operating income in the income statement. The Company has $32.7 million of goodwill on its balance sheet as at November 30, 2001 and expects to record material goodwill in connection with its acquisition of Laser Vision Centers, Inc. (see note 4). The calculation of any impairment is performed at the level of reporting units and requires a comprehensive analysis, which has not yet been completed. However, the difference between the book value of a company and its market value may indicate that an impairment in the company's goodwill exists. Based on the recent trading price of the Company's common shares, the book value of the Company exceeds its market capitalization. This is an indication that the impairment analysis to be conducted by the Company may result in some portion or all of the Company's goodwill and any additional goodwill resulting from the acquisition of Laser Vision Centers, Inc. being impaired and written off in the period in which the test occurs, the quarter ended May 31, 2002. Because the determination of whether there is an impairment of the Company's goodwill will be completed at a future date and will involve many aspects of analyses which have not yet been undertaken, the amount of any writedown cannot be reliably predicted at this time. On a fiscal year basis, with the adoption of SFAS No. 142, the Company anticipates approximately $2.8 million in goodwill amortization will not be charged to income. 14 During the second quarter of fiscal 2002, the Company reported a charge to net income (loss) for the reduction in fair value of available-for-sale investments for which the decline is considered other than temporary. The change was comprised of the Company's investment in LaserSight Incorporated ("LaserSight") ($17.5 million) and Laser Vision Centers Inc. ("Laser Vision") ($1.5 million). In the second quarter of fiscal 2002, the Company reported a reduction in the carrying value of capital assets of $1.1 million reflecting a reduction of the Company's investment in LaserSight 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. During the second quarter of fiscal 2002, the Company implemented a restructuring program to reduce employee costs in line with current revenue levels. This program resulted in the identification, notification and elimination of 49 full-time equivalent positions and resulted in a severance provision of $934,000 being reported of which $364,000 was paid in the quarter. Laser Vision Centers, Inc. On August 27, 2001, the Company announced that it had entered into an Agreement and Plan of Merger with Laser Vision Centers, Inc. ("Laser Vision"). Laser Vision 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. The merger will be effected as an all-stock combination at a fixed exchange rate of 0.95 of a common share of the Company for each share of Laser Vision common stock which is expected to result in the issuance of approximately 26.5 million shares of the Company's common stock. In addition, the Company will assume and convert existing outstanding options or warrants to acquire stock of Laser Vision based on the 0.95 exchange rate and expects to be issuing options or warrants to acquire approximately 7.9 million common shares of the Company. The merger will be accounted for under the purchase method. Completion of the transaction, expected to occur in the second half of fiscal 2002, is subject to shareholder and regulatory approval and other conditions usual and customary in such transactions. The Company has incurred $2.2 million in costs related to the merger, $1.4 million of which was incurred in fiscal 2002. These costs have been categorized as non-current assets in the current year and will be included in the purchase accounting upon completion of the transaction. Once the transaction has been closed, the Company will review its operations, strategic investments and assets, which may result in restructuring provisions or write-offs. Additionally, as contemplated by the Merger Agreement, immediately prior to the effective time of the merger, Laser Vision will reduce the exercise price of approximately 2.1 million outstanding stock options and warrants of Laser Vision shares, which would have an exercise price greater than $8.688 per share of TLC stock after the merger, to a price equivalent to $8.688 per share of TLC common stock. In addition, subject to shareholder and regulatory approval, TLC will allow the holders of outstanding TLC stock options with an exercise price greater than $8.688 to elect to reduce the exercise price of their options to $8.688 by surrendering a number of the shares subject to each repriced option as follows: for every option with an exercise price of at least $40, the holder will surrender 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 will surrender approximately 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 will surrender 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 will not surrender any of the shares subject to such option. Subsequent to November 30, 2001, the Company signed a restricted stock incentive plan and related agreements which will allow the management of The Vision Source, Inc. to be awarded up to 49% of the common shares of The Vision Source, Inc. provided certain performance requirements are achieved by May 31, 2005. Subsequent to November 30, 2001, the Company advanced $1.0 million to a third party to support its laser scanning technology. This advance will be expensed over the next six to nine months as the cash is expended by the entity in its research and development. 15 Results of Operations TLC LASER EYE CENTERS INC. CONSOLIDATED STATEMENTS OF INCOME
Three months ended November 30 Six months ended November 30th (U.S. dollars, in thousands except per share amounts) 2001 2000 2001 2000 - --------------------------------------------------------------------------------------------------------------------------------- Revenues Refractive Owned $ 9,505 $ 18,946 $ 22,947 $ 41,625 Managed, facility and access fees 13,214 16,632 31,149 39,575 Other 3,939 2,832 7,586 5,155 - --------------------------------------------------------------------------------------------------------------------------------- Total revenues 26,658 38,410 61,682 86,355 - --------------------------------------------------------------------------------------------------------------------------------- Expenses Cost of revenues Refractive Owned 8,699 15,308 18,430 29,665 Managed, facility and access fees 10,647 10,768 22,041 22,056 Reduction in fair carrying of capital assets 1,066 -- 1,066 -- Other 2,118 2,376 4,040 5,398 - --------------------------------------------------------------------------------------------------------------------------------- Total cost of revenues 22,530 28,452 45,577 57,119 - --------------------------------------------------------------------------------------------------------------------------------- Gross Margin 4,128 9,958 16,105 29,236 - --------------------------------------------------------------------------------------------------------------------------------- Selling, general and administrative 12,743 19,729 27,357 41,038 Interest and other 178 (651) 154 (1,617) Depreciation of capital assets and assets under lease 603 570 1,150 1,105 Amortization of intangibles 2,536 3,301 5,100 6,459 Write-down investments 20,031 -- 20,031 -- Restructuring and other charges 934 14,635 934 14,635 - --------------------------------------------------------------------------------------------------------------------------------- 37,025 37,584 54,726 61,620 - --------------------------------------------------------------------------------------------------------------------------------- Loss Before Income Taxes and Non-Controlling Interest (32,897) (27,626) (38,621) (32,384) Income taxes (96) (666) (562) (840) Non-controlling interest (375) 263 (747) 23 - --------------------------------------------------------------------------------------------------------------------------------- LOSS FOR THE PERIOD $ (33,368) $ (28,029) $ (39,930) $ (33,201) ================================================================== BASIC LOSS PER SHARE $ (0.88) $ (0.74) $ (1.05) $ (0.88) Weighted average number of Common Shares Outstanding 38,064,879 37,932,216 38,052,190 37,564,602 Fully Diluted Loss per share $ (0.88) $ (0.74) $ (1.05) $ (0.88)
Prepared in accordance with U.S. Generally Accepted Accounting Principles 16 Results of Operations Revenues for the second quarter of fiscal 2002 were $26.7 million, a 30.6% decrease over revenues of $38.4 million in the second quarter of fiscal 2001. Approximately 85% of total revenues in the second quarter of fiscal 2002 were derived from refractive services as compared to 93% in the second quarter fiscal 2001. Revenues for the first two quarters of fiscal 2002 were $61.7 million, a 28.6% decrease from revenues of $86.4 million in the first two quarters of fiscal 2001. Approximately 88% of total revenues were derived from refractive services as compared to 94% in the first two quarters of fiscal 2001. Revenues from refractive activities in the second quarter of fiscal 2002 year were $22.7 million, 36.2% less than revenues of $35.6 million from refractive activities in the second quarter of fiscal 2001. Approximately 17,700 procedures were performed in the second quarter of fiscal 2002 compared to approximately 27,100 procedures in the second quarter of fiscal 2001. Revenues from refractive activities in the first two quarters of fiscal 2002 year were $54.1 million, which is 33.4% lower than revenues from refractive activities in the first two quarters of fiscal 2001 of $81.2 million. Approximately 41,900 procedures were performed in the first two quarters of fiscal 2002 compared to approximately 60,500 procedures in the first two quarters of fiscal 2001. The decrease in procedure volume and the associated reduction of revenue is indicative of the condition of the laser vision correction industry which 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 centers. In addition, being 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. In spite of pricing pressures in the industry, the Company's net revenue after doctor compensation per procedure, for the first two quarters of fiscal 2002 declined by only 1% in comparison to the first two quarters of fiscal 2001. The Company experienced an increase in managed centers and a decrease in owned centers in the comparison of fiscal 2002 versus 2001. In conjunction with the lower revenues period over period of 36.2% the result is that revenue of owned centers has decreased by 50% for the three months ended November 30, 2001, as compared to the three months ended November 30, 2000 (45% for six months ended November 30, 2001, as compared to the six months ended November 30, 2000) while revenue from managed centers has only decreased by 21% for the three months ended November 30, 2001, as compared to the three months ended November 30, 2000 (21% for six months ended November 30, 2001, as compared to the six months ended November 30, 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 collected by the applicable surgeons and a corresponding reduction in doctor compensation which substantially offset the increased amortization costs. These changes have resulted in an increase in the ratio of net revenue after doctor compensation per procedure. The cost of refractive revenues from eye care centers for the second quarter of fiscal 2002 was $20.4 million, 21.7% less than cost of refractive revenues of $26.1 million in the second quarter of fiscal 2001. The cost of refractive revenues from eye care centers for the first two quarters of fiscal 2002 was $41.5 million, 19.7% less than cost of refractive revenues of $51.7 million in the first two quarters of fiscal 2001. These reductions are 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 $1.1 million reflecting a reduction of the Company's investment in certain 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 (26% for the three months ended November 30, 2001, and 22% for the six months ended November 30, 2001, as compared to the same periods in fiscal 2001) then the decrease in the associated revenues. Cost of revenues of owned centers include the cost of doctor compensation which does vary in relation to revenues which when combined with the conversion in a number of owned centers to managed centers results in the cost of revenues of owned centers reflecting a much larger variance in the decrease in the costs of revenues in comparison to managed centers. 17 Selling, general and administrative expenses decreased to $12.7 million in the second quarter of fiscal 2002 from $19.7 million in the second quarter of fiscal 2001. Selling, general and administrative expenses decreased to $27.4 million in the first two quarters of fiscal 2002 from $41.0 million in the first two quarters of fiscal 2001. This reflected decreased marketing costs, decreased infrastructure costs and reductions associated with Corporate Advantage and Third Party Payor programs, each identified in conjunction with the Company's cost reduction initiatives. In the second quarter, the Company reported a write-down of available-for-sale investments for which the decline is considered other than temporary. The change was comprised of the Company's investment in LaserSight Incorporated ("LaserSight") ($17.5 million) and Laser Vision Centers Inc. ("Laser Vision") ($1.5 million). Revenues from non-refractive (other) activities were $3.9 million in the second quarter of fiscal 2002, an increase of 39% in comparison to $2.8 million in the second quarter of fiscal 2001. Revenues from non-refractive (other) activities were $7.6 million in the first two quarters of fiscal 2002, an increase of over 47% in comparison to $5.2 million in the first quarter of 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, hair removal and asset management subsidiaries reflected little or moderate growth. Net income from non-refractive activities was $0.3 million in the second quarter of fiscal 2002, in comparison to a net loss of $1.6 million before restructuring in the second quarter of fiscal 2001. The loss in the second quarter of fiscal 2001 included the activities of the Company's e-commerce subsidiary, eyeVantage.com, Inc., which generated a loss of $1.8 million before restructuring charges. Net income from non-refractive activities was $0.8 million in the first two quarters of fiscal 2002, in comparison to a net loss of $5.4 million in the first two quarters of fiscal 2001. The loss in the first two quarters of fiscal 2001 included the activities of eyeVantage.com, Inc., which generated losses of $4.7 million. Net income for the first two quarters of 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 non-refractive activities in the first two quarters of fiscal 2002 of $0.8 million reflects an increase from the loss of $0.7 million in the first two quarters of fiscal 2001 (excluding eyeVantage.com, Inc.). The improved profitability in the first two quarters of fiscal 2002 was due primarily to increased revenues. Interest (revenue)/expense and other expenses reflect interest revenue from the Company's cash position offset by debt from debt and lease obligations. The addition of the fourth quarter of fiscal 2001 to long-term debt as a result of the acquisition of a Maryland professional corporation has resulted in increasing interest costs on debt. Similarly, 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 which in conjunction with reduced cash and cash equivalent balances during fiscal 2001 and the first two quarters of fiscal 2002, combined with lower interest yields have resulted in lower interest revenues. The decrease in depreciation and amortization expense was largely a result of the reduction in the development of new centers and the reduction in depreciation and amortization associated with the Company's decision to cease material funding of eyeVantage.com, Inc. during fiscal 2001. Also the Company has elected to early adopt SFAS No. 142 effective June 1, 2001. The adoption of SFAS No. 142 eliminates the requirement for the Company to amortize goodwill. The adoption of SFAS No. 142 by the Company for fiscal 2002, has resulted in a decrease in amortization of approximately $708,000 ($0.02 per share) in the second quarter of fiscal 2002 and approximately $1,416,000 ($0.04 per share) for the six months ended November 30, 2002. Intangibles 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. 18 In the first six months of fiscal 2002 amortization of intangibles decreased by approximately $1.4 million (of which $0.8 million related to the second quarter of fiscal 2002) reflecting the elimination of goodwill amortization of $0.8 million (of which $0.3 million related to the second quarter of fiscal 2002) relating to the Company's exit from eye.Vantage.com, Inc. in the second quarter of fiscal 2001 and the elimination of goodwill amortization of $1.6 million (of which $0.8 million related to the second quarter of fiscal 2002) resulting from the early adoption of SFAS No. 142 offset by an increase in amortization of $1.0 million of Practice Management Agreements (of which $0.3 million related to the second quarter 2002) resulting from practices purchased during fiscal 2001. During the second quarter of fiscal 2002, the Company implemented a restructuring program to reduce employee costs in line with current revenue levels. This program resulted in the identification, notification and elimination of 49 full time equivalent positions and resulted in a severance provision of $934,000 being reported of which $364,000 was paid in the second quarter of fiscal 2002. In the second quarter of fiscal 2001, the Company recorded restructuring provisions of: i) $12.4 million relating to the Company's decision to cease materially funding eye.Vantage.com, Inc. $8.7 million attributed to goodwill, $3.3 million to asset write-offs, $1.7 million to employee services and $0.9 million in other closing costs. This was offset by a $2.2 million recovery of a purchase acquisition obligation. As of January 1, 2001, the eye.Vantage.com, Inc. corporate premises were vacated and virtually all employment relationships were severed. ii) $1.0 million to close three eye care centers. During the first six months of fiscal 2001, the Company had undertaken to restructure its operations to eliminate those centers which were identified as not capable of being profitable. iii) $1.3 million to reflect potential losses from an equity investment in secondary care activities. Income tax expense decreased to $0.6 million in the first two quarters of fiscal 2002 from $0.8 million in the first two quarters of fiscal 2001. This decrease reflected the reduction of tax liabilities associated with the Company's partners in profitable subsidiaries from decreased profitability in fiscal 2002 and minimal fluctuation in the requirement to reflect minimum tax liabilities relevant in Canada, United States and certain other jurisdictions. The loss for the second quarter of fiscal 2002 was $33.4 million or $0.88 per share ($39.9 million or $1.05 per share for the first two quarters of fiscal 2002) compared to a loss of $28.0 million or $0.74 per share for the second quarter of fiscal 2001 ($33.2 and $0.88 per share for the first two quarters of fiscal 2001). This increased loss primarily reflected the impact of reduced refractive revenues offset partially by reduced costs and decreased depreciation and amortization. 19 Results of Operations TLC LASER EYE CENTERS INC. CONSOLIDATED STATEMENT OF INCOME
Three months ended - ----------------------------------------------------- November 30, August 31, (U.S. dollars, in thousands except per share amounts) 2001 2001 - --------------------------------------------------------------------------- ------------ Revenues Refractive Owned centers $ 9,505 $ 13,442 Management, facility and access fees $ 13,214 $ 17,935 Other 3,939 3,647 - --------------------------------------------------------------------------- ------------ Total revenues 26,658 35,024 - --------------------------------------------------------------------------- ------------ Expenses Cost of revenues Refractive Owned centers 8,699 9,731 Management, facility and access fees 10,647 11,394 Reduction in fair carrying of capital assets 1,066 -- Other 2,118 1,922 - --------------------------------------------------------------------------- ------------ Total cost of revenues 22,530 23,047 - --------------------------------------------------------------------------- ------------ Gross margin 4,128 11,977 - --------------------------------------------------------------------------- ------------ Selling, general and administrative 12,743 14,614 Interest and other 178 (24) Depreciation of capital assets and assets under lease 603 547 Amortization of intangibles 2,536 2,564 Write-down investments 20,031 -- Restructuring and other charges 934 -- - --------------------------------------------------------------------------- ------------ 37,025 17,701 - --------------------------------------------------------------------------- ------------ LOSS BEFORE INCOME TAXES AND NON-CONTROLLING INTEREST (32,897) (5,724) Income taxes (96) (466) Non-controlling interest (375) (372) - --------------------------------------------------------------------------- ------------ NET LOSS FOR THE PERIOD $ (33,368) $ (6,562) ============ ============ BASIC LOSS PER SHARE $ (0.88) $ (0.17) Weighted average number of Common Shares Outstanding 38,064,879 38,039,639 Fully Diluted loss per share $ (0.88) $ (0.17)
Prepared in accordance with U.S. Generally Accepted Accounting Principles 20 Quarter ended November 30, 2001 compared to Quarter ended August 31, 2001 Revenues for the second quarter of fiscal 2002 were $26.7 million, which is a 23.9% decrease over net revenues in the first quarter of fiscal 2002 of $35.0 million. Approximately 85% of total net revenues were derived from refractive services as compared to 90% in first quarter of fiscal 2002. Revenues from refractive activities for the second quarter of fiscal 2002 were $22.7 million, which is 27.6% lower than the first quarter of fiscal 2002 of $31.4 million. Approximately 17,700 procedures were performed in the second quarter of fiscal 2002 compared to approximately 24,100 procedures in the first quarter of fiscal 2002. The cost of refractive revenues from eye care centers for the second quarter of fiscal 2002 were $20.4 million, which is 3.4% lower than the cost of refractive revenues of $21.1 million in the first quarter of fiscal 2002 which reflects reduced doctors compensation, royalty fees on laser usage and personnel costs resulting from lower procedure volumes. Selling, general and administrative expenses decreased to $12.7 million in the second quarter of fiscal 2002 from $14.6 million in the first quarter of fiscal 2002. This reduction in costs reflects reduced travel, consulting and employee costs associated with the Company's efforts to reduce costs in line with reduced revenues. Selling, general and administrative expenses decreased to $12.7 million in the second quarter of fiscal 2002 from $14.6 million in the first quarter of fiscal 2002. This reduction in costs reflects reduced travel, consulting and employee costs associated with the Company's efforts to reduce costs in line with reduced revenues. The loss for the second quarter of fiscal 2002 was $33.4 million or $0.88 per share, compared to a loss of $6.6 million or $0.17 cents per share for the first quarter of fiscal 2002. Liquidity and Capital Resources During the first two quarters of fiscal 2002 the Company continued to focus its activities on increasing procedure volumes and reducing costs. Cash, cash equivalents, short-term investments and restricted cash were $48.6 million at November 30, 2001 compared to $55.7 million at May 31, 2001. Net current assets at November 30, 2001, reflected a decrease to $25.0 million from $36.8 million at May 31, 2001. This decrease reflected primarily the reduction in cash and cash equivalents during the first two quarters of fiscal 2002. The Company's principal cash requirements included normal operating expenses, debt repayment, distributions to minority partners, capital expenditures and funding costs of the proposed merger with Laser Vision. 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 first two quarters of fiscal 2002, the Company invested $1.5 in capital assets. The Company has forecasted its capital expenditure requirements for fiscal 2002 will not exceed $5.0 million. The new corporate headquarters, which the Company agreed to sell as part of a sale/leaseback transaction, generated $5.4 million for the Company in the second quarter of fiscal 2002. Due to ongoing responsibility for tenant management and administration as well as restrictions in receipt of a portion of the proceeds, no sale has been reported under US GAAP. The net present value of the Company's net lease payments for the fifteen year term of the leaseback agreement have been reported as additional debt ($5.4 million). During the first two quarters of fiscal 2002, the Company incurred costs of $1.4 million, which has been deferred, relating to the announced merger with Laser Vision. This merger is anticipated to be completed in the second half of fiscal 2002. During the first two quarters of fiscal 2002, the Company incurred cash costs of $0.3 million for restructuring relating to the decision by the Company to cease material funding of eye.Vantage.com, Inc., representing primarily lease costs and closure costs. In the second quarter of fiscal 2002, the Company implemented a restructuring program to reduce employee costs in line with current revenue levels. This program resulted in the identification, notification and elimination of 49 full time equivalent positions and resulted in a severance provision of $934,000 being reported of which $364,000 of cash expenditures occurred in the quarter. The Company accrued a liability of $2.1 million resulting from an arbitration award against the Company in the fourth quarter of fiscal 2001. The Company has deferred payment of this liability until, exploration of all legal alternatives have been completed. Payment of this liability, if necessary, is not anticipated until the latter half of fiscal 2002. Under the terms of the arbitration settlement the Company was required to put $3.0 million in escrow until the legal review process is completed. The Company has access to vendor financing for laser purchases from a laser vendor at favorable rates. In addition, it has completed an agreement with a competing laser vendor which provides for payment on a per procedure fee basis for the laser, associated medical equipment and supplies, royalty fees and maintenance. The Company expects to continue to have access to these financing options for at least the next 18 months. In July 2001, two excimer laser manufacturers reported settling class action anti-trust case. It is anticipated that a portion of this settlement will be paid to the Company and as such the Company has filed its settlement claims with the court. While the amount to be received has not yet been determined, it is estimated that the Company will receive less than $5.5 million, which will be recorded as income when the amount and timing of receipt are known. It is expected that these payments will be received in the first half of calendar 2002. 21 The Company estimates that existing cash balances, together with funds expected to be generated from operations and available credit facilities, will be sufficient to fund the Company's anticipated level of operations, acquisition and expansion plans for the next 12 to 18 months. Cash provided by (used for) Operating Activities Net cash provided by (used for) operating activities decreased by $10.1 million to $(4.4) million of cash used for operating activities in the first two quarters of fiscal 2002 from $5.7 million of cash provided by operating activities in the first two quarters of fiscal 2001. Net cash used for operating activities of $(4.4) million in the first two quarters of fiscal 2002 primarily represents cash used for cash earnings (defined as net loss adding back amortization and depreciation, gain or loss on the sale of fixed assets, non-cash restructuring costs, income tax provision and minority interest included as part of net income) of $(5.8) million in the first two quarters of fiscal 2002 as compared to $(2.7) million in the first two quarters of fiscal 2001. Cash provided by a reduction in accounts receivable of $2.0 million in the first two quarters of fiscal 2002 as compared to a reduction of $6.1 million in the first two quarters of fiscal 2001, cash used for a reduction in accounts payable of $(1.2) million in the first two quarters of fiscal 2002 as compared to a reduction of $(3.1) million in the first two quarters of fiscal 2001. Cash used for net payments of tax of $(0.2) million in the first two quarters of fiscal 2002 as compared to cash provided by net refunds of tax of $3.6 million in the first two quarters of fiscal 2001 and cash provided by a decrease of prepaid expenses and other assets net of liabilities of $0.8 million in the first two quarters of fiscal 2002 as compared to a decrease of $1.8 million in the first two quarters of fiscal 2001. Cash provided by (used for) Financing Activities Net cash provided by (used for) financing activities changed by $10.2 million in the first two quarters of fiscal 2002 to cash provided by financing activities of $0.2 million from cash used for operating activities of $(10.0) million in the first two quarters of fiscal 2001. Net cash provided by financing activities in the first two quarters of fiscal 2002 primarily represents cash used for payments of debt financing and obligations under capital leases of $(2.4) million in the first two quarters of fiscal 2002 as compared to $(3.8) million in the first two quarters of fiscal 2001. Cash used for payments of accrued purchase obligations of $0.0 million in the first two quarters of fiscal 2002 as compared to payments of $(3.0) million in the first two quarters of fiscal 2001. Cash used for distributions to non-controlling interests of $(2.7) million in the first two quarters of fiscal 2002 as compared to $(3.2) million in the first two quarters of fiscal 2001. Cash used for an increase in the required amount of restricted cash of $(0.3) million in the first two quarters of fiscal 2002 as compared to $0.0 million in the first two quarters of fiscal 2001. Cash used for payments related to the purchase and cancellation of capital stock of $0.0 million in the first two quarters of fiscal 2002 as compared to $(0.5) million in the first two quarters of fiscal 2001. Cash use offset by cash provided by proceeds from debt financing of $5.4 million in the first two quarters of fiscal 2002 resulting from the sales-leaseback arrangement regarding the corporate headquarters as described below, compared to $0.0 million in the first two quarters of fiscal 2001, and cash provided by the issuance of common stock of $0.1 million in the first two quarters of fiscal 2002 as compared to $0.3 million in the first two quarters of fiscal 2001. Total consideration received for the sale-leaseback was Cdn. $10.1 million, Cdn. $8.6 million cash and Cdn. $1.5 million 8.0% note receivable. The term of the note is seven-years with the first of four payments of Cdn. $100,000 due on the third anniversary of the sale and a final payment of Cdn. $1.1 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 taking back the note as part of the consideration for the sale, no sale has been reported. For purpose of financial reporting the cash proceeds of Cdn. $8.6 million has been presented as additional debt. Subsequent receipt of the note will result in additional debt while lease payments will result in decreasing the debt and interest expense. Until the Company meets the accounting qualifications of recognizing the sale, the building associated with the sale-leaseback will continue to be depreciated over its initial term of 40 years. 22 Cash Provided by (Used for) Investing Activities Net cash used for investing activities decreased by $12.8 million in the first two quarters of fiscal 2002 to $(0.0) million from $(12.8) million in the first two quarters of fiscal 2001. Net cash provided by (used in) investing activities in the first two quarters of fiscal 2002 primarily represents cash used for a required increase of restricted cash of $(3.0) million in the first two quarters of fiscal 2002 resulting from an arbitration award requirement to put the cash in escrow awaiting completion of the exploration of all legal alternatives compared to $0.0 million in the first two quarters of fiscal 2001. Cash used for the purchase of fixed assets of $(1.5) million in the first two quarters of fiscal 2002 as compared to $(9.1) million in the first two quarters of fiscal 2001. Cash used for costs of acquisitions and investments and other assets of $(1.8) million in the first two quarters of fiscal 2002 as compared to $(5.8) million in the first two quarters of fiscal 2001, offset by cash provided by the sale of short term investments of $6.1 million in the first two quarters of fiscal 2002 as compared to $0.0 million in the first two quarters of fiscal 2001. Cash provided by proceeds from the sale of fixed assets, assets under capital lease and investments of $0.2 million in the first two quarters of 2002 as compared to $2.1 million in the first two quarters of fiscal 2001. Other Business Segments TLC made the decision during the second quarter of fiscal 2001 to shut down the activities of its e-commerce subsidiary eyeVantage.com, Inc. and sustained significant write-offs and cash costs as a result. As a result, the first quarter of fiscal 2002 does not include losses from operations similar to the $2.9 million reported in the first quarter of fiscal 2001 from eyeVantage.com, Inc. The Company's other investments in non-core activities are currently largely self-sustaining with minimal requirement for funding support. This segment includes activities in secondary care practice management, network management and marketing, asset management, healthcare facility management and hair removal facilities. The Company continues its efforts to maximize the value of its investments in non-core businesses. New Accounting Pronouncements Under SEC Staff Accounting Bulletin 74, the Company is required to disclose certain information related to new accounting standards, which have not yet been adopted due to delayed effective dates. While it is not necessary to discuss standards which have been adopted in the current period, the Company has decided to provide the following: The Financial Accounting Standards Board issued Statement No. 141, "Business Combinations", which requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method of accounting. The Financial Accounting Standards Board also issued Statement No. 142, "Goodwill and Other Intangible Assets", which eliminates the amortization of goodwill and indefinite life intangible assets and requires these assets to be tested annually for impairment. For goodwill and other intangible assets existing at June 30, 2001, the new Statement must be applied for fiscal years beginning after December 15, 2001, with earlier adoption permitted. For goodwill and other intangible assets resulting from business combinations completed after June 30, 2001, the Statement must be adopted immediately. The Company has decided to adopt SFAS Nos.141 and 142 for the fiscal 2002 year which began on June 1, 2001. The adoption has resulted in the elimination in the first two quarters of fiscal 2002 of approximately $1.4 million ($0.04 per share) of goodwill amortization that would have been charged to earnings had the Company not early adopted these new accounting policies (in the first quarter of fiscal 2001, $2.4 million ($0.06 per share) of goodwill amortization was reported). The Company has completed a transitional impairment test to identify if there is potential impairment to the goodwill as at June 1, 2001. Step one of the transitional impairment test uses a fair value methodology, which differs from the undiscounted cash flow methodology that continues to be used for intangible assets with an identifiable life. Based on the results of step one of the transitional impairment test, the Company has identified certain reporting units, for which the carrying value exceeds the fair value as at June 30, 2001. Step two of the transitional impairment test, will be completed by the end of the fiscal 2002 year (May 31, 2002) and any resulting impairment loss will be recorded as a cumulative effect of a change in accounting principle. Initial quantification of the impairment test, which may vary from the final quantification, indicates a write down of approximately $7 million to $15 million. As the Company has decided to select a date other than June 1 as the date it will perform its annual impairment test, the Company will be performing another impairment test prior to May 31, 2002. In addition to the annual impairment test, the Company would also be required to perform an impairment test if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Such subsequent impairment losses, if any will be reflected in operating income in the income statement. 23 ITEM 3. 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 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 a long-term commitment, and does not hedge any translation exposure. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not applicable. ITEM 2. CHANGES IN SECURITIES Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON 8-K a. Reports on 8-K: On December 10, 2001, the Company filed with the Commission a current report on Form 8-K reporting under Item 5 (Other Events), the Company announced its review of the carrying value of its long-term investment in LaserSight, Inc. under current accounting guidelines. On December 27, 2001, the Company filed with the Commission a current report on Form 8-K reporting under Item 5 (Other Events), the Company announced the extension of the deadline of the Merger Agreement from December 31, 2001, to March 31, 2002. 24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TLC LASER EYE CENTERS INC. By: /s/ Elias Vamvakas ----------------------------------- Elias Vamvakas Chief Executive Officer February 27, 2002 By: /s/ Brian Park ----------------------------------- Brian Park Interim Chief Financial Officer February 27, 2002 25 -----END PRIVACY-ENHANCED MESSAGE-----