-----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, G+ZgpxL8QGxX6F4vnPdls0jfH1WeaO9n3XRWtegxGSOan9AYHBzPFSrnpGTAz0iY XX6Tg6yfEpyQF7/KivlcJw== 0001005477-99-001777.txt : 19990414 0001005477-99-001777.hdr.sgml : 19990414 ACCESSION NUMBER: 0001005477-99-001777 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990228 FILED AS OF DATE: 19990413 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: 000000000 STATE OF INCORPORATION: A6 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-29302 FILM NUMBER: 99592852 BUSINESS ADDRESS: STREET 1: 5600 EXPLORER DRIVE STREET 2: SUITE 301 CITY: MISSISSAUGA 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 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 1999 COMMISSION FILE NUMBER: 0-29302 TLC THE LASER CENTER INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Ontario, Canada (State or jurisdiction of 980151150 incorporation or organization) (I.R.S. Employer Identification No.) 5600 Explorer Drive, Suite 301 Mississauga, Ontario L4W 4Y2 (Address of principal executive offices) (Zip Code) Registrant's telephone, including area code (905) 602-2020 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |X| Yes No |_| As of April 9, 1999, there were 34,248,956 of the registrant's Common Shares outstanding. 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 U.S. Securities and Exchange Act of 1934, which statements can be identified by the use of forward looking terminology, such as "may", "will", "expect", "anticipate", "estimate", "plans", "intends" or "continue" or the negative thereof or other variations thereon or comparable terminology. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth elsewhere in this Form 10-Q in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in the Company's Annual Report on Form 10-K for the year ended May 31, 1998. Unless the context indicates or requires otherwise, references in this Form 10-Q to the "Company" or "TLC" shall mean TLC The Laser Center Inc. and its subsidiaries. The Company's fiscal year ends on May 31. Therefore, references in this Form 10-Q to a particular fiscal year shall mean the 12 months ended on May 31 in that year. References to "$" or "dollars" shall mean U.S. dollars unless otherwise indicated. References to "C$" shall mean Canadian dollars. References to the "Commission" shall mean the U.S. Securities and Exchange Commission. INDEX PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets as of February 28, 1999 and May 31, 1998. Consolidated Statement of Income for the Three Months Ended February 28, 1999 and February 28, 1998 and the Nine Months Ended February 28, 1999 and February 28, 1998. Consolidated Statement of Changes in Financial Position for the Nine Months Ended February 28, 1999 and February 28, 1998 Notes to Interim Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 6. Exhibits and Reports on Form 8-K 2 PART I. FINANCIAL INFORMATION TLC THE LASER CENTER INC. CONSOLIDATED BALANCE SHEETS (U.S. dollars, in thousands) At May 31, At February 28, 1998 1999 ---------- --------------- (unaudited) ASSETS Current assets: Cash and short-term deposits .................. $ 1,895 $ 6,591 Marketable securities ......................... 54,234 25,010 Accounts receivable ........................... 10,282 16,714 Prepaids and sundry assets .................... 4,632 6,086 --------- --------- Total current assets .......................... 71,043 54,401 Restricted cash .................................. 2,086 1,713 Investment and other assets ...................... 1,663 12,325 Intangibles ...................................... 47,189 57,191 Capital assets ................................... 31,049 36,398 Assets under capital lease ....................... 11,182 10,569 --------- --------- Total assets ..................................... $ 164,212 $ 172,597 ========= ========= LIABILITIES Current liabilities: Accounts payable and accrued liabilities ................................ $ 9,096 $ 14,320 Current portion of long-term debt ............. 2,861 3,238 Current portion of obligations under capital lease .............................. 3,951 4,207 Income taxes payable .......................... 613 (67) Deferred compensation ......................... 320 320 Deferred income taxes ......................... 118 117 --------- --------- Total current liabilities ..................... 16,959 22,135 Long-term debt ................................... 8,378 7,248 Obligations under capital lease .................. 9,533 7,596 Deferred rent and compensation ................... 1,110 1,149 --------- --------- Total liabilities ............................. 35,980 38,128 Non-controlling interest ......................... 6,357 7,201 SHAREHOLDERS' EQUITY Capital stock .................................... 143,554 145,134 Deficit .......................................... (21,679) (17,866) --------- --------- Total shareholders' equity .................... 121,875 127,268 --------- --------- Total liabilities and shareholders' equity ....... $ 164,212 $ 172,597 ========= ========= See accompanying notes. 3 TLC THE LASER CENTER INC. CONSOLIDATED STATEMENT OF INCOME
3 months ended February 28th 9 months ended February 28th ---------------------------- ---------------------------- (U.S. dollars, in thousands except per share amounts) 1999 1998 1999 1998 - -------------------------------------------------------------------------------------------------------------------- Net revenues Refractive $37,564 $13,073 $90,784 $32,441 Secondary care 2,939 1,477 7,936 5,016 Other 802 337 1,618 1,097 - -------------------------------------------------------------------------------------------------------------------- Net revenues 41,305 14,887 100,338 38,554 - -------------------------------------------------------------------------------------------------------------------- Expenses Doctor Compensation Refractive 3,636 1,321 8,876 3,030 Operating 28,636 11,894 70,421 31,467 Interest and other 788 424 1,628 1,317 Depreciation and amortization 3,775 2,110 10,935 5,923 - -------------------------------------------------------------------------------------------------------------------- 36,835 15,749 91,860 41,737 - -------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM OPERATIONS BEFORE MANAGED CARE EXPENSES 4,470 (862) 8,478 (3,183) Managed Care Expenses 868 953 3,000 3,110 - -------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES AND NON-CONTROLLING INTEREST 3,602 (1,815) 5,478 (6,293) - -------------------------------------------------------------------------------------------------------------------- Income taxes Current -- 449 619 509 - -------------------------------------------------------------------------------------------------------------------- -- 449 619 509 - -------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE NON-CONTROLLING INTEREST 3,602 (2,264) 4,859 (6,802) Non-controlling interest (10) 14 (205) 97 - -------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) FOR THE PERIOD $ 3,592 $(2,250) $ 4,654 $(6,705) - -------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) PER SHARE $ 0.11 $ (0.08) $ 0.14 $ (0.25) Weighted average number of Common Shares Outstanding 34,014,142 27,459,333 33,886,448 27,192,930
4 TLC THE LASER CENTER INC. CONSOLIDATED STATEMENT OF INCOME (U.S. dollars, in thousands, except per share amounts) Nine Months Ended February 28, ---------------------------- (unaudited) 1998 1999 ---- ---- Net revenues Refractive .................................. $ 32,441 $ 90,784 Secondary care .............................. 5,016 7,936 Other ....................................... 1,097 1,618 ------------ ------------ Net revenues ................................... 38,554 100,338 ------------ ------------ Expenses Doctor compensation Refractive .................................. 3,030 8,876 Operating ................................... 31,467 70,421 Interest and other .......................... 1,317 1,628 Depreciation and amortization ............... 5,923 10,935 ------------ ------------ 41,737 91,860 ------------ ------------ INCOME (LOSS) FROM OPERATIONS BEFORE START-UP AND DEVELOPMENT EXPENSES ....................... (3,183) 8,478 Start-up and development expenses ........... 3,110 3,000 ------------ ------------ INCOME (LOSS) BEFORE INCOME TAXES AND NON-CONTROLLING INTEREST ....................... (6,293) 5,478 Income taxes ................................... 509 619 ------------ ------------ INCOME (LOSS) BEFORE NON-CONTROLLING INTEREST .. (6,802) 4,859 Non-controlling interest .................... 97 (205) ------------ ------------ NET INCOME (LOSS) FOR THE PERIOD ............... $ (6,705) $ 4,654 INCOME (LOSS) PER SHARE ........................ $ (0.25) $ 0.14 FULLY DILUTED INCOME (LOSS) PER SHARE .......... -- 0.13 WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING ................... 27,192,930 33,886,448 ============ ============ FULLY DILUTED NUMBER OF COMMON SHARES OUTSTANDING ................................... -- 36,389,217 ============ 5 TLC THE LASER CENTER INC. CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION (U.S. dollars, in thousands) Nine Months Ended February 28, ------------------------------ 1998 1999 -------- -------- (unaudited) Operating activities Net income (loss) for the period ............... $ (6,705) $ 4,654 Items not affecting cash Depreciation and amortization ............... 5,923 10,935 Non-controlling interest .................... (97) 205 Other ....................................... 20 (579) Changes in non-cash operating items Accounts receivable ............................ (2,359) (6,047) Prepaids and sundry assets ..................... (2,316) (1,398) Accounts payable and accrued liabilities ....... (2,356) 4,542 Income taxes payable (net) ..................... 146 (656) Deferred rent and compensation ................. 377 39 -------- -------- Cash provided by (used for) operating activities ........................ (7,367) 11,695 -------- -------- Financing activities Restricted cash ................................ -- 373 Long-term debt ................................. 404 (1,866) Term bank loan ................................. (43) -- Obligations under capital lease ................ 1,280 (1,977) Non-controlling interest ....................... -- (57) Capital stock issued (purchased for cancellation) ............................... 2,475 738 -------- -------- Cash provided by (used for) financing activities ........................ 4,116 (2,789) -------- -------- Investing activities Capital assets ................................. (3,465) (10,762) Assets under capital lease ..................... (1,423) (808) Acquisitions and investments ................... (2,489) (21,883) Marketable securities .......................... -- 29,224 Other .......................................... 30 19 -------- -------- Cash used for investing activities ............. (7,347) (4,210) -------- -------- Increase (decrease) in cash .................... (10,598) 4,696 Cash and short-term deposits, beginning of period ......................... 14,397 1,895 -------- -------- Cash and short-term deposits, end of period ............................... $ 3,799 $ 6,591 ======== ======== See accompanying notes. 6 TLC THE LASER CENTER INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS February 28, 1999 (unaudited) (all amounts in U.S. dollars, except where noted and all tabular amounts in thousands) 1. The information contained in the interim consolidated financial statements and footnotes is condensed from that which would appear in the annual consolidated financial statements. Accordingly, the interim consolidated financial statements included herein should be read in conjunction with the May 31, 1998 Annual Report on Form 10-K filed by TLC The Laser Center Inc. (the "Company") with the Securities and Exchange Commission and Canadian securities regulators. The unaudited interim consolidated financial statements as of February 28, 1999 and February 28, 1998, and for the nine month period then ended, include all normal recurring adjustments which management considers necessary for a fair presentation. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the entire fiscal year. The interim consolidated financial statements include the accounts and transactions of the Company and its majority owned subsidiaries, partnerships and other entities in which the company has more than a 50% ownership interest and exercises control. The ownership interests of other parties in less than wholly-owned consolidated subsidiaries, partnerships and other entities are presented as non-controlling interests. The February 28, 1998 nine month consolidated financial statements include certain reclassifications to conform with classifications for the nine month period ended February 28, 1999. The net income (loss) per share was computed using the weighted average number of common shares outstanding during each period. Fully diluted income per share is calculated based on the weighted average number of shares that would have been outstanding had all of the stock options been converted into common shares on the latter of the date of issuance or beginning of the period. Historically, the Company's consolidated financial statements have been expressed in Canadian dollars. As a result of increased business activity in the United States ("U.S.") resulting principally from recent U.S. acquisitions and the opening of new centers in the U.S., the U.S. dollar has become the unit of measure of the large majority of the Company's operations. Accordingly, the U.S. dollar has been adopted as the Company's reporting currency effective May 31,1998. The financial information as of and for the nine months ended February 28, 1998 has been restated in U.S. dollars, in accordance with Canadian generally accepted accounting principles, using the closing exchange rate as of May 31, 1998 of Canadian $1.4570 per US$1.00. 2. Acquisitions (a) On June 8, 1998 the Company made a portfolio investment of $8.0 million in cash through the purchase of 2,000,000 preference shares in LaserSight Incorporated. These preference shares are convertible to LaserSight Incorporated common shares at $4.00. LaserSight Incorporated is a publicly traded United States manufacturer of excimer lasers, microkeratomes and microkeratome blades with an approval for its excimer laser pending from the United States Food and Drug Administration. (b) The following acquisitions have been accounted for by the purchase method and the results of operations have been consolidated from the respective purchase dates : (i) On June 19, 1998 the Company made a 51% equity investment of $204,000 in cash in AllSight, Inc., a refractive laser center in the Pittsburgh, PA area. (ii) On July 1, 1998 TLC NorthWest Eye, Inc. a wholly owned subsidiary of the Company acquired in two separate transactions the operating assets and liabilities of the Figgs Eye Clinic in Yakima, Washington and the practice of 7 Robert C. Bockoven with three locations in Washington state, in exchange for cash and debt. Consideration for the Figgs Eye Clinic purchase was $750,000 and for the practice of Robert C. Bockoven was $725,000. (iii) On September 1, 1998, the Company acquired the 10% minority interest of Vision Institute of Canada in one of the Company's laser centers in Toronto in exchange for $332,000 in cash and common shares with a value of $332,000. (iv) On October 13, 1998, the Company acquired 90% of the operating assets and liabilities of WaterTower Acquisition, Inc. in exchange for cash of $625,000 and amounts contingent upon future events. No value will be assigned to these contingent amounts until completion of the earn-out period and the outcome of the contingency is known. (v) On November 30, 1998, the Company acquired 85% of the operating assets and liabilities of Aspen HealthCare, Inc. for cash consideration of $3,800,000 and amounts contingent upon future events. No value will be assigned to these contingent amounts until completion of the earn-out period and the outcome of the contingency is known. (vi) On January 5, 1999, the Company acquired 100% of the outstanding shares of Baltimore Practice Management, LLC in exchange for cash of $6,060,000 and the amounts contingent upon future events. No value will be assigned to these contingent amounts until the future events have occurred and the outcome of the contingency is known. The total consideration on acquisitions was allocated to net assets acquired on the basis of their fair value as follows: Curent assets (including cash of $2,428) $ 2,491 Capital assets 1,160 Goodwill 4,751 Practice managmenet agreement 6,140 Curent liabilities (482) Long-term debt (382) Minority interest (700) ------- $12,978 ======= Funded by: Issuance of common shares $ 332 Issuance of debt 738 Contribution of cash 11,759 Acquisition costs 149 ------- $12,978 ======= 3. Restructuring It is TLC's intention to restructure its investments in secondary care centers and not to make any future investments in, or provide additional management services to, secondary care centers. This restructuring is a result of the growth in TLC's network of affiliated optometrists and ophthalmologists and the increasing acceptance of laser vision correction procedures. The Company plans to record a one-time non-cash charge in the fourth quarter of fiscal 1999 to reflect the restructuring. Partners Provider Health Care Inc. ("PPH"), TLC's managed care subsidiary for eye care services, was developed to negotiate and administer vision care contracts. TLC is currently exploring strategic opportunities and expects to sell or restructure its ownership in PPH during the fourth quarter of fiscal 1999, and to record a one-time gain or loss on the transaction. 8 4. Capital Stock Since May 31, 1998, the following changes in capital stock occurred: Common Shares # of $ Value Shares May 31, 1998 33,668 $ 143,554 Shares issued for acquisitions 23 332 Exercise of stock options 591 1,670 Shares cancelled (117) (422) ------ --------- 34,165 $ 145,134 ====== ========= On September 24, 1998, the Company exercised a contractual option to purchase 116,771 Company common shares from the Goldstein Family Trust for $1,264,411 in cash. The common shares were then cancelled and capital stock was reduced using the average value of common shares as of November 30, 1998 of C$6.20 per share. The remaining allocation of the cash paid for the shares was reflected as a reduction in retained earnings. 5. Differences between Canadian and United States generally accepted accounting principles. These consolidated financial statements are prepared in accordance with accounting principles generally accepted ("GAAP") in Canada. The most significant differences between Canadian and United States GAAP, insofar as they affect the Company's consolidated financial statements, are described below. The following table reconciles results as reported under Canadian GAAP with those that would have been reported under United States GAAP: Nine months Nine months (US$ dollars in thousands, except ended ended per share amounts) February 28, February 28, ------------ ------------ 1998 1999 ---- ---- (unaudited) (unaudited) Net income (loss) for the period based on Canadian GAAP $(6,705) $ 4,654 Deferred foreign exchange gains (losses) (i) -- 278 Income tax expense adjustment under the liability method (ii) -- (944) ------- ------- Net income (loss) based on U.S. GAAP $(6,705) $ 3,988 Unrealized gains on securities available for sale(iii) -- 248 ------- ------- Comprehensive income (loss) based on U.S. GAAP $(6,705) $ 4,236 ------- ------- Income per share--U.S. GAAP $ (0.25) $ 0.13 ------- ------- (i) The gain or loss on translation of foreign currency denominated long-term monetary items is deferred and amortized over the remaining life of the item under Canadian GAAP. Under U.S. GAAP, the gain or loss on translation is included in income when it arises. 9 (ii) Under U.S GAAP, deferred taxes are recorded based on the difference between the values assigned for accounting purposes and the tax values of individual assets acquired in business combinations, except for nondeductible goodwill. The only such significant differences with respect to the Company are the practice management agreement assets acquired during the nine month period ended February 28, 1999 as disclosed in note 2. Under U.S. GAAP, this deferred tax liability of $2,140,000 is matched by an equal increase in the value assigned to the practice management agreement assets. In the statement of income, the resulting increased annual asset amortization is offset by an equal deferred tax recovery with no effect on the net income (loss). In addition, the recognition of $944,000 of operating loss carry-forwards which existed at the acquisition date has been recorded as a reduction of goodwill related to the acquisition. (iii) For the purposes of reconciliation to U.S. GAAP, the Company has presented the new disclosure requirements of Financial Accounting Standard No. 130 ("SFAS 130") in these interim financial statements. SFAS 130 requires the presentation of comprehensive income and its components. Comprehensive income includes unrealized gains on securities available for sale. Securities available for sale are carried at market value. As a result of the above differences, as at February 28, 1999 under U.S. GAAP, current assets would increase by $850,000, long-term assets would increase by $741,000, deferred income tax liabilities would increase by $2,524,000, other comprehensive income would decrease by $469,000 with a corresponding increase in the deficit, and total shareholders equity would decrease by $464,000. Statement of Changes in Financial Position Certain of the Company's acquisitions for the period ended February 28, 1999 were financed in part through the issuance of common shares and debt. These would be considered non-cash transactions under U.S. GAAP resulting in a reduction in cash provided by financing activities of $1,070,000 (nine months ended February 28, 1998 - $1,303,000) and a reduction in cash used in investing of $1,070,000 (nine months ended February 28, 1998 - $1,303,000). Marketable securities held at February 28, 1999 would be considered cash equivalents under U.S. GAAP resulting in a decrease in cash used for investing activities of $25,010,000 and increase in cash and short-term deposits at the end of the period by the same amount. The Company acquired capital assets financed through capital lease obligations which would be considered non-cash transactions under U.S. GAAP resulting in a reduction in cash provided by financing activities of and a corresponding reduction in cash used in investing activities of $808,000 for the nine month period ended February 28, 1999 (nine months ended February 28, 1998 - $1,423,000). 10 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Three and Nine Months Period Ended February 28, 1999 Compared to Three and Nine Months Period Ended February 28, 1998 TLC THE LASER CENTER INC. SEGMENTED INFORMATION (U.S. dollars, in thousands)
Nine months ended February 28, 1999 ------------------------------------------------------- (unaudited) Secondary Refractive Care Other Total ------------------------------------------------------- Revenues and physician costs: Gross revenues of all owned and Managed clinics $ 111,243 $ 29,633 $ 1,666 $ 142,542 Amounts retained by physician group (15,907) (6,521) (43) (22,471) Contractual allowances and adjustments (4,552) (15,176) (5) (19,733) --------- --------- --------- --------- Net revenues 90,784 7,936 1,618 100,338 Doctor compensation 8,875 -- 1 8,876 --------- --------- --------- --------- Net revenues after doctor compensation 81,909 7,936 1,617 91,462 --------- --------- --------- --------- Expenses Operating 62,305 6,113 2,003 70,421 Interest and other 1,685 (84) 27 1,628 Depreciation and amortization 9,014 1,633 288 10,935 --------- --------- --------- --------- 73,004 7,662 2,318 82,984 --------- --------- --------- --------- Income (loss) from operations $ 8,905 $ 274 $ (701) $ 8,478 ========= ========= ========= =========
Nine months ended February 28, 1998 ------------------------------------------------------- (unaudited) Secondary Refractive Care Other Total ------------------------------------------------------- Revenues and physician costs: Gross revenues of all owned and Managed clinics $ 41,691 $ 15,450 $ 1,097 $ 58,238 Amounts retained by physician group (6,554) (3,561) -- (10,115) Contractual allowances and adjustments (2,696) (6,873) -- (9,569) -------- -------- -------- -------- Net revenues 32,441 5,016 1,097 38,554 Doctor compensation 3,030 -- -- 3,030 -------- -------- -------- -------- Net revenues after doctor compensation $ 29,411 5,016 1,097 35,524 -------- -------- -------- -------- Expenses Operating 26,704 3,864 899 31,467 Interest and other 1,314 2 1 1,317 Depreciation and amortization 4,846 970 107 5,923 -------- -------- -------- -------- 32,864 4,836 1,007 38,707 -------- -------- -------- -------- Income (loss) from operations $ (3,453) $ 180 $ 90 $ (3,183) ======== ======== ======== ========
11 Total net revenues in the third quarter of the 1999 fiscal year increased to $41.3 million from $14.9 million the previous year, an increase of 177%. Total net revenues for the nine months ended February 28, 1999 increased by $61.8 million to $100.3 million from $38.6 million, an increase of 160%. More than 90% of total net revenues were derived from refractive centers in the first nine months of fiscal 1999 as compared to 84% in the same period in fiscal 1998. Net revenues from refractive centers for the nine months ended February 28, 1999 increased by $58.3 million to $90.8 million from $32.4 million for the nine months ended February 28, 1998. For the nine months ended February 28, 1999, procedures increased to approximately 61,400 from approximately 21,900 in the same period in the prior year. The majority of the increase in revenues for the three month and nine month period is a result of improved total procedure volume at refractive centers that were open throughout the two periods, with the remainder of the increase a result of additional total procedure volume from the development of new centers and the acquisition of BeaconEye. Total operating expenses and doctor compensation for the three month period ended February 28 1999 increased to $32.3 million from $13.2 million or 145 %. Total operating expenses and doctor compensation for the nine months ended February 28, 1999 increased by $44.8 million to $79.3 million from $34.5 million in the previous year, or 130%. These increases are a result of (i) increased fixed and variable costs attributed to the addition of new refractive centers, including the acquisition of eleven BeaconEye centers in April 1998, (ii) higher marketing costs and (iii) increases in the variable cost component resulting from the higher number of total procedures performed at centers that have been open for more than a year. Operating expenses and doctor compensation as a percentage of net revenues were approximately 79% for the nine months ended February 28, 1999 as compared to approximately 89% for the nine months ended February 28, 1998. This reduction reflects the impact of having reached contribution margin levels which exceed the fixed costs at most of its refractive centers. In the third quarter, interest expense and other of $0.8 million compares to $0.4 million expense from the previous year. The increase in the three month period is a result of higher interest costs associated with the Beacon acquisition. For the nine months ended February 28, 1999, interest expense and other increased by $0.3 million to $1.6 million from $1.3 million for the nine months ended February 28, 1998. Net interest is relatively unchanged as higher interest income on higher cash balances was partially offset by higher interest expense from the BeaconEye acquisition. Depreciation and amortization in the third quarter increased to $3.8 million from $2.1 million in the previous year. Depreciation and amortization expense for the nine months ended February 28, 1999 increased by $5.0 million to $10.9 million from $5.9 million for the nine months ended February 28, 1998. This increase is largely a result of the depreciation from new refractive centers and the additional depreciation and amortization charges associated with the BeaconEye acquisition. For the nine months ended February 28, 1999, the BeaconEye acquisition resulted in a charge of $0.5 million from amortization of goodwill of $9.0 million. Start up and development expenses, which were incurred by PPH for the development of a managed care business specializing in eye care, decreased slightly for the nine months ended February 28, 1999 to $3.0 million from $3.1 million for the nine months ended February 28, 1998 (three months expenses remained unchanged). TLC is currently exploring strategic opportunities for PPH and expects to sell or restructure its ownership in PPH during the fourth quarter of fiscal 1999, and to record a one-time gain or loss on the transaction (depending on the structure). Income tax expense for the third quarter has been eliminated. Income tax expense for the nine months ended February 28, 1999 increased slightly to $0.6 from $0.5 for the nine months ended February 28, 1998. The Company's Canadian refractive centers have been amalgamated with the former BeaconEye refractive centers, thereby allowing the BeaconEye tax losses to be applied against the profits from the other Canadian refractive centers. In the United States, the Company files consolidated tax returns and therefore tax losses have been available to partially offset taxable income in the United States. The Company expects to have used all unrestricted tax losses by, and to be fully taxable after, May 31, 2000. Net income for the three months ended February 28, 1999 was $3.6 million or 11 cents a share compared to a loss of $2.3 million or eight cents a share for the three months ended February 28, 1999. Net income for the nine months ended February 28, 1999 was $4.7 million or $0.14 per share as compared to a loss of $6.7 million or $0.25 per share for the nine months ended February 28, 1998. This net income was generated by operating profits from the laser vision correction surgery business, which was partially offset by losses in other business including PPH. 12 Liquidity and Capital Resources The Company has financed its operations to date through cash flow from operations, the issuance of Common Shares, borrowings, and capital lease financing. The Company has filed a registration statement with respect to a proposed public offering in Canada and the United States of 2.6 million shares. The Company estimates that the net proceeds of this proposed offering, together with existing cash balances and funds expected to be generated from operations, will be sufficient to fund the Company's anticipated level of operations and its current acquisition and expansion plans for at least the next 12 to 18 months. Working capital at February 28, 1999 decreased to $32.3 million from $54.1 million at May 31, 1998. Cash and marketable securities at February 28, 1999 were $31.6 million, a decrease from $56.1 million at May 31, 1998. Cash provided from operating activities was $11.7 million for the nine months ended February 28, 1999 as compared to the use of cash for operating activities of $7.4 million for the nine months ended February 28, 1998. This is primarily due to the Company generating net income for the first time during the nine months ended February 28, 1999. Accounts receivable increased by $6.4 million to $16.7 million at February 28, 1999 from $10.3 million at May 31, 1998. This increase is principally attributable to accounts receivables from doctors in connection with performing refractive procedures. These amounts are commensurate with the revenue increase during the nine months ended February 28, 1999. Prepaids and sundry assets increased to $6.1 million at February 28, 1999 from $4.6 million at May 31, 1998. This amount includes prepaid insurance and prepaid key cards, which are used to operate the VISX and Summit excimer lasers in the United States. The Company continued to develop or acquire new refractive centers and therefore increased its investment in capital assets and assets under capital lease to $47 million at February 28, 1999 from $42.2 million at May 31, 1998. Accounts payable and accrued liabilities increased to $14.3 million at February 28, 1999 from $9.1 million at May 31, 1998. This increase is attributable to an increase in the number of new centers operating in fiscal 1999. Total long-term debt and obligations under capital lease decreased to $22.3 million at February 28, 1999 from $24.7 million at May 31, 1998. Interest rates on this long-term debt and obligations under capital lease from 5.5% to 18%, and the facilities generally have terms no greater than five years. After February 28, 1999, the Company retired approximately $5 million of long-term debt or capital leases with interest rates above 12%. The Company has an additional 19 centers currently under various stages of development which are expected to be open in the next 12 to 18 months. Recent Developments and Outlook On June 8, 1998, the Company made a portfolio investment of $8 million in cash to purchase 2,000,000 preference shares in LaserSight, which are convertible into common shares, at $4.00 per share. In March 1999, the Company made an additional $2 million investment in common shares and warrants of LaserSight, to maintain its interest of approximately 15% in LaserSight. LaserSight is a publicly traded United States manufacturer of excimer lasers, microkeratomes and microkeratome blades. TLC has entered into an agreement with a subsidiary of Kaiser Permanente, one of the largest health management organizations ("HMOs") elsewhere in the United States, providing for a national strategic alliance, with the intention to initially own and operate three refractive centers in California, with an intention to eventually develop additional centers in United States market when Kaiser Permanente has a significant presence. The agreement also grants the Kaiser Permanente subsidiary the right to negotiate an ownership interest in additional TLC refractive centers in the United States. TLC has entered into a non-binding letter of intent with Dr. Thomas S. Tooma, a noted California ophthalmologist, providing for the formation of a limited liability company ("California LLC") to own and operate a 13 minimum of five refractive centers - three of TLC's existing centers in California and two centers in California owned by Dr. Tooma. The California LLC would be owned 50.1% by TLC. As consideration for the contribution of his centers, Dr. Tooma would receive a 49.9% interest in the California LLC, a significant cash payment, an earn-out the five years after closing and a five year surgeon contract with customary non-compete restrictions. The California LLC would be operated under the TLC brand name and would operate or have a participating interest in all of TLC's future California refractive centers including the refractive centers operated through the United States. Although definitive agreements are being negotiated, there can be no assurance that this transaction will be completed including the refractive centers operated through the United States. TLC has investments in two secondary care practices in the United States. It is TLC's intention to restructure its investments in secondary care centers, including its management service contracts, and not to make any future investments in secondary care centers. This restructuring is a result of the growth in TLC's network of affiliated optometrists and ophthalmologists and the increasing acceptance of laser vision correction procedures. PPH, TLC's managed care subsidiary for eye care services, was developed to negotiate and administer vision care contracts. TLC is currently exploring strategic opportunities and expects to sell or restructure its investment in PPH in the last quarter of fiscal 1999, which may result in a one-time gain or loss on the transaction. Year 2000 Compliance The Company is aware of the issues associated with the programming code in existing computer systems as the Year 2000 approaches. The "Year 2000 problem" is pervasive and complex. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The Company has completed a comprehensive study of the possible effects of the Year 2000 issue on its systems and results of operations and a detailed plan of action, including projected costs and contingency plans. To date, no significant concerns have been identified as far as the Company's internal operations. However, there can be no assurance that Year 2000-related issues with the providers of goods and services will not have a material ^ adverse affect on the financial condition or results of operations of the Company. The Company believes that it has prepared, or will prepare by mid-calendar year 1999, its computer systems and related applications to accommodate date-sensitive information relating to the Year 2000. The Company's systems constitute primarily desktop computers, most of which are linked by a local area network server at individual site locations. The Company has determined that its software applications for all essential functions, such as accounting and communications, are already Year 2000 compliant and that the cost of any hardware upgrades, mostly replacing some older desktop computers, will not be material to the financial condition or results of operations of the Company. Such costs will be expensed as incurred. In addition, the Company is discussing with its vendors the possibility of any interface difficulties or other difficulties which may affect the Company. To date, no significant concerns have been identified. While the Company has not identified any significant Year 2000 concerns in its internal operations or vendor relationships, there can be no assurance that no Year 2000-related operating problems or expenses will arise with the Company's computer systems and software or in their interface with the computer systems and software of, or the goods and services provided by, the Company's vendors. The Company's core business is operating refractive centers that are equipped with a computer-controlled excimer laser as the primary essential piece of equipment. In the United States, most of the Company's excimer lasers are manufactured by VISX. Representatives from VISX have informed the Company that it has tested its lasers for Year 2000 compliance and that the lasers will function without any effect on safety or efficacy upon a change of date to the Year 2000. However, without any upgrade, some VISX lasers might print out patient reports with an incorrect date on them. VISX has developed a software upgrade to correct this problem and has stated that it will install the upgrade in the Company's VISX lasers by mid-1999 at no cost to the Company. The Company's refractive centers are equipped with other computer-controlled ophthalmic equipment, but none are essential to the laser vision correction procedure. While the Company does not expect that the cost of any replacements or upgrades required for ophthalmic equipment in its refractive centers for the Year 2000 will be material to the financial condition or results of operations of the Company, there can be no assurance that no material ophthalmic equipment upgrades will be required. Laser vision correction is an elective procedure which is not covered by Medicare, Medicaid or other governmental reimbursement programs. There are some private insurance companies that provide partial or full 14 coverage for the procedure, which the Company estimate accounts for approximately 8% of its revenues from refractive centers for the first nine months ended February 28, 1999. In the event private insurance companies that cover the laser vision procedure have difficulty processing and paying claims because of Year 2000 issues, this could cause accounts receivable for refractive procedures performed at the Company's refractive centers to increase, or the patient volume in the refractive centers operated by the Company to decrease, which could have a material adverse effect on the financial condition or results or operations of the Company until such Year 2000 problems are corrected. Most secondary care procedures are covered by governmental reimbursement programs, such as Medicare or Medicaid, and by private insurance companies. In the event such third party payors have difficulty processing and paying claims because of Year 2000 issues, this could cause delays in such payments and an increase in accounts receivable for procedures performed in secondary care centers in which the Company has an investment. Further, the Company cannot predict the impact that the Year 2000 issue will have on its potential patients or the economy generally. If the Year 2000 issue were to have a significant adverse impact on the economy or potential patients perception of the economy, this could have a material adverse impact on the number of procedures performed, particularly with respect to elective procedures such as laser vision correction, and on the Company's financial results until the economy and consumer confidence recover. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On February 1, 1999, CPC of America, Inc. filed a lawsuit in the Superior Court of California, Orange County, against the Company, Partner Provider Health Inc. and HeartMed LLC alleging breach of contract, breach of the implied covenant of good faith and fair dealing, intentional misrepresentation, negligent misrepresentation, fraud and deceit, intentional and negligent interference with prospective economic advantage, breach of fiduciary duty, and fraudulent inducement to enter into contract. The complaint alleges damages to CPC in the amount of $25 million. The complaint also alleges, as a shareholder derivative claim, damages to HeartMed in the amount of $25 million. HeartMed is a cardiology managed care joint venture between Partner Provider Health and CPC. This lawsuit is in the very early stage and the Company intends to vigorously defend it. Although there can be no assurance, the Company does not expect this lawsuit to have a material adverse effect on its business, financial condition or results of operations. ITEM 2. CHANGES IN SECURITIES Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. 15 ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON 8-K a. Exhibit 27 Financial Data Schedules b. Reports on 8-K None. 16 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TLC THE LASER CENTER INC. By: /s/ Elias Vamvakas ----------------------------------- Elias Vamvakas Chief Executive Officer April 13, 1999 By: /s/ Peter Kastelic ----------------------------------- Peter Kastelic Chief Financial Officer April 13, 1999 17 EX-27 2 FDS
5 This Schedule contains summary financial information extracted from the interim consolidated financial statements of TLC The Laser Center Inc. for the three month period ending February 28, 1999 and is qualified in its entirety by reference to such financial statements. 3-MOS MAY-31-1998 DEC-01-1998 FEB-28-1999 6,591,000 25,010,000 16,714,000 0 0 54,401,000 72,383,000 (25,415,000) 172,597,000 22,135,000 0 0 0 145,134,000 (17,866,000) 172,597,000 0 41,305,000 0 (32,272,000) (4,643,000) 0 (788,000) 3,602,000 0 0 0 (10,000) 0 3,592,000 0.11 0.11
EX-27 3 FDS
5 This Schedule also contains summary financial information extracted from the interim consolidated financial statements of TLC The Laser Center Inc. for the nine month period ending February 28, 1999 and is qualified in its entirety by reference to such financial statements. 9-MOS MAY-31-1998 JUN-01-1998 FEB-28-1999 6,591,000 25,010,000 16,714,000 0 0 54,401,000 72,383,000 (25,415,000) 172,597,000 22,135,000 0 0 0 145,134,000 (17,866,000) 172,597,000 0 100,338,000 0 (79,297,000) (13,935,000) 0 (1,628,000) 5,478,000 (619,000) 0 0 (205,000) 0 4,654,000 0.14 0.14
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