EXHIBIT 99
RECONCILIATION BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
TLC Vision Corporation (the "Company") prepares its consolidated financial
statements in accordance with United States (U.S.) Generally Accepted Accounting
Principles ("GAAP"), which differ in certain respects from Canadian GAAP. This
reconciliation between Canadian and U.S. GAAP should be read in conjunction with
the consolidated interim financial statements as of June 30, 2004 and for the
three and six months ended June 30, 2004 and 2003 and related management's
discussion and analysis prepared in accordance with U.S. GAAP and filed with the
Securities Exchange Commission and the Ontario Securities Commission.
a) Reconciliation from U.S. GAAP to Canadian GAAP
Following is a reconciliation of net income from U.S. GAAP to Canadian GAAP:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, JUNE 30
-------- -------
2004 2003 2004 2003
---- ---- ---- ----
Net income (loss) per U.S. GAAP ................................ $ 6,239 $(3,453) $14,291 $(2,383)
Amortization of Practice Management Agreements (1) ............. (378) (378) (756) (756)
Depreciation of fixed assets (2) ............................... (70) (70) (140) (140)
Interest income on note receivable related to the
sale-leaseback of building (3) ................................ 19 20 39 39
Variable accounting for stock options (4) ...................... 15 -- 334 --
Fair value accounting of stock options (4) ..................... (278) -- (554) --
------- ------- ------- -------
Net income (loss) per Canadian GAAP ............................ $ 5,547 $(3,881) $13,214 $(3,240)
======= ======= ======= =======
Net income (loss) per share for Canadian GAAP - basic ........ $ 0.08 $ (0.06) $ 0.20 $ (0.05)
======= ======= ======= =======
Net income (loss) per share for Canadian GAAP - diluted ........ $ 0.08 $ (0.06) $ 0.19 $ (0.05)
======= ======= ======= =======
The most significant balance sheet differences between U.S. GAAP and Canadian
GAAP are as follows:
JUNE 30, DECEMBER 31,
2004 2003
-------- ------------
Investments and Other Assets
Balance per U.S. GAAP ..................................... $ 7,858 $ 3,102
Note receivable related to the sale-leaseback
of building (2) .......................................... 976 976
-------- --------
Balance per Canadian GAAP ................................. $ 8,834 $ 4,078
======== ========
Intangibles, Net
Balance per U.S. GAAP ..................................... $ 20,327 $ 22,959
Difference in impairment write-off of intangibles (1) ..... 6,334 6,334
Amortization of Practice Management Agreements (1) ........ (3,150) (2,394)
-------- --------
Balance per Canadian GAAP ................................. $ 23,511 $ 26,899
======== ========
Fixed Assets, Net
Balance per U.S. GAAP ..................................... $ 50,780 $ 56,891
Adjustment for the sale-leaseback of building (2) ......... (829) (829)
Depreciation of fixed assets (2) .......................... (838) (698)
-------- --------
Balance per Canadian GAAP ................................. $ 49,113 $ 55,364
======== ========
28
JUNE 30, DECEMBER 31,
2004 2003
--------- ------------
Long-Term Debt, Less Current Maturities
Balance per U.S. GAAP ................................................................ $ 12,341 $ 19,242
Adjustment for note payable related to the sale-leaseback of
building (2) ......................................................................... 913 913
--------- ---------
Balance per Canadian GAAP ............................................................ $ 13,254 $ 20,155
========= =========
Contributed Surplus
Balance per U.S. GAAP ................................................................ $ -- $ --
Adjustment for change in accounting policy related to the fair
value accounting of stock options (4) ................................................ 13,607 --
Adjustment for fair value accounting of stock options (4) ............................ 554 --
--------- ---------
Balance per Canadian GAAP ............................................................ $ 14,161 $ --
========= =========
Option and Warrant Equity
Balance per U.S. GAAP ................................................................ $ 4,877 $ 8,143
Adjustment to compensation expense for warrants and stock
options (4) .......................................................................... (556) (222)
--------- ---------
Balance per Canadian GAAP ............................................................ $ 4,321 $ 7,921
========= =========
Accumulated Deficit
Balance per U.S. GAAP ................................................................ $(280,461) $(294,752)
Adjustment to the value of intangible Practice Management
Agreements (1) ....................................................................... 3,184 3,940
Adjustment for the sale-leaseback of building (2) .................................... (1,667) (1,527)
Interest on note receivable related to the sale-leaseback of
building (3) ......................................................................... 205 166
Adjustment to compensation expense for warrants and stock options
(4) .................................................................................. 2 222
Adjustment for change in accounting policy related to the fair
value of stock options (4) ........................................................... (13,607) --
--------- ---------
Balance per Canadian GAAP ............................................................ $(292,344) $(291,951)
========= =========
(1) During the year ended May 31, 2002, the Company reviewed its Practice
Management Agreements ("PMA's") for impairment based on budgets prepared
for future periods. The refractive industry had experienced reduced
procedure volumes over the prior two years as a result of increased
competition, customer confusion and a weakening North American economy.
This reduction in procedures had occurred at practices the Company had
purchased, and as a result revenues were lower than anticipated when
initial purchase prices and resulting intangible values were determined.
For U.S. GAAP purposes, the Company accounts for its intangible assets
subject to amortization in accordance with Statement of Financial
Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS 142 requires the impairment analysis first
consider undiscounted cash flows in determining if an impairment exists. If
an impairment is evident, a second calculation using a discounted cash flow
method is utilized to determine the actual amount of the impairment. For
U.S. GAAP purposes, the Company recorded an impairment charge of $31.0
million for the year ended May 31, 2002 related to its PMA's.
For Canadian GAAP purposes, the Company measured the initial impairment
charge in accordance with the Canadian Institute of Chartered Accountant's
("CICA") Handbook Section 3060, "Capital Assets", the Canadian GAAP rules
in existence during the year ended May 31, 2002 ("CICA 3060"). CICA 3060
required an impairment charge to be recognized when the expected future
undiscounted cash flows do not exceed the carrying value of such assets.
29
As at May 31, 2002, this resulted in a $6.3 million difference in the
write-down of the PMA's between U.S. and Canadian GAAP ($24.7 million).
This difference in the initial measurement of the impairment further
resulted in a difference to the amortization expense in subsequent periods,
resulting in an additional $3.2 million of amortization expense for
Canadian GAAP compared to U.S. GAAP.
During 2003, the CICA issued CICA 3061, Property, Plant and Equipment which
is consistent with U.S. GAAP, however retroactive adoption of this change
was not required.
(2) During the year ended May 31, 2002, the Company completed a sale-leaseback
transaction. Total consideration received for the sale of the building and
related land was $6.4 million, which was comprised of $5.4 million in cash
and a $1.0 million 8.0% note receivable ("Note"). The Note has a seven-year
term with the first of four annual payments of $63,000 starting on the
third anniversary of the sale and a final payment of $0.7 million due on
the seventh anniversary of the sale.
For U.S. GAAP purposes, this transaction was accounted for in accordance
with SFAS 98, "Accounting for Leases" ("SFAS 98"). SFAS 98 prohibits sale
recognition on a sale-leaseback transaction when the sublease is considered
to be minor and the only recourse to any future amounts owing from the
other party is the leased asset. A sublease is considered to be minor when
the present value of the sublease rent is less than 10% of the total fair
market value. The Company accounted for the transaction as a financing
transaction which requires sale proceeds to be recorded as a liability and
for the Note to not be recognized. In addition, since the sale recognition
is not accounted for, the carrying value of the asset is not adjusted for
and the asset continues to be depreciated over the original depreciation
period of 40 years. Lease payments, exclusive of an interest portion,
decrease the liability while payments received on the Note increase the
liability.
For Canadian GAAP purposes, the sale-leaseback transaction was accounted
for in accordance with Emerging Issues Committee No. 25, "Accounting for
Sales with Leasebacks", which resulted in the Company recognizing a loss on
the sale with a corresponding lease asset and lease obligation. The terms
of the lease are considered capital in nature and accordingly the land and
building are reflected as assets under capital lease with the discounted
value of the lease payments recorded as an obligation under capital lease.
The fair value of the assets under capital lease was less than its previous
carrying value and accordingly a write down of approximately $0.8 million
was reflected in the consolidated statement of operations for the year
ended May 31, 2002.
For U.S. GAAP purposes, depreciation expense reflects the higher net book
value of the building depreciated over a 40-year expected life. For
Canadian GAAP purposes, the building is depreciated over the 15-year life
of the lease and the $1.0 million Note is included in investments and other
assets.
As of June 30, 2004, as a result of the difference in the initial
accounting treatment of the sale-leaseback transaction and subsequent
differences in depreciation expense recorded, the net book value of the
building is $1.7 million higher for U.S. GAAP. Investments and other assets
is $1.0 million higher and notes payable is $1.0 million higher (of which
$0.9 million is classified as long-term) for Canadian GAAP. For the three
and six months ended June 30, 2004 and 2003, depreciation expense is higher
for U.S. GAAP by $70,000 and $140,000, respectively.
(3) For the three months ended June 30, 2004 and 2003, the Company reported
$20,000 and $19,000 of interest income respectively related to the Note on
the sale-leaseback of the building as described above.
For the six months ended June 30, 2004 and 2003, the Company reported
$39,000 of interest income, respectively, related to the Note on the
sale-leaseback of the building.
The cumulative interest earned as at June 30, 2004 of $205,000 was
classified as prepaids and other current assets for Canadian GAAP purposes.
(4) For U.S. GAAP purposes, the Company has adopted the disclosure requirements
of SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123") and
as permitted under SFAS 123, applies Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees ("APB 25") and related
interpretations in accounting for its stock option plans. SFAS 123 requires
disclosure of pro forma amounts to reflect the impact if the Company had
elected to adopt the optional recognition provisions of SFAS 123 for its
stock option plans and employee stock purchase plans.
30
For Canadian GAAP purposes, the Company accounts for its stock options in
accordance with the provisions of CICA Section 3870, Stock-Based
Compensation and Other Stock-Based Payments, ("CICA 3870").
CICA 3870, issued in December 2001, established standards for the
recognition, measurement and disclosure of stock-based compensation, and
other stock-based payments. Under the provisions of CICA 3870, prior to
January 1, 2004, companies could either measure the compensation cost of
equity instruments issued under employee compensation plans using a fair
value-based method or could recognize compensation cost using another
method, such as the intrinsic value-based method. However, if another
method was applied, pro forma disclosure of net income or loss and earnings
or loss per share was required in the financial statements as if the fair
value-based method had been applied. Effective January 1, 2004, CICA 3870
requires that all stock-based compensation be measured and expensed using a
fair value-based methodology.
Prior to January 1, 2004, the Company recognized employee stock-based
compensation under the intrinsic value-based method and provided pro forma
disclosure of net income or loss and earnings or loss per share as if the
fair value-based method had been applied. Effective January 1, 2004, the
Company adopted the fair value-based method for recognizing employee
stock-based compensation on a retroactive basis to January 1, 1996, without
restatement of prior periods. At January 1, 2004, the cumulative effect of
the change in accounting policy on prior periods resulted in a charge to
accumulated deficit of $13.6 million which represents the sum of the
previously disclosed pro forma fair value adjustments with a corresponding
increase to contributed surplus.
For the three and six months ended June 30, 2004, the Company recorded
stock-based compensation expense of $278,000, and $554,000, respectively,
which is included in general and administrative expenses. No compensation
expense for stock options granted to employees at fair market value was
included in the determination of net income for the three and six months
ended June 30, 2003. For the three and six months ended June 30, 2003, the
following table presents the Company's pro forma net income and earnings
per share as if the fair value-based method of CICA 3870 had been applied
for all stock options granted:
THREE MONTHS SIX MONTHS
------------ ----------
ENDED ENDED
----- -----
JUNE 30, 2003 JUNE 30, 2003
------------- -------------
Net Income per Canadian GAAP .................................... $(3,881) $(3,240)
Total pro forma stock-based compensation expense
determined under fair value-based method ........................ (259) (528)
------- -------
Pro forma net income ............................................ $(4,140) $(3,768)
======= =======
BASIC AND DILUTED EARNINGS PER SHARE
As reported $ (0.06) $ (0.05)
Pro forma $ (0.07) $ (0.06)
During the year ended May 31, 2002, the Company allowed the holders of
outstanding TLC Vision Corporation stock options with an exercise price
greater than $8.688 (C$13.69) to elect to reduce the exercise price of
their options to $8.688 (C$13.69), in some cases by surrendering existing
options for a greater number of shares than the number of shares issuable
on exercise of each repriced option. For U.S. GAAP purposes, such
modification which results in a change in the exercise price of the
underlying stock options is subject to APB 25's variable method of
accounting for stock options. Variable accounting requires that differences
between the price of the Company's common shares at the end of each
reporting period and the modified exercise price be charged to income as
compensation expense over the remaining vesting period of the outstanding
options. For the three and six month periods ended June 30, 2004, the
Company recognized additional stock compensation expense of $15,000 and
$334,000, respectively, related to the modified stock options.
CICA 3870 does not require the application of variable method of accounting
for stock options.
31
The fair value of the options granted was estimated at the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions:
JUNE 30, JUNE 30,
2004 2003
---- ----
Risk free interest rate 2.35% 2.35%
Volatility 0.75 0.75
Weighted average expected life 2.5 2.5
The dividend rate for options issued in 2004 and 2003 was nil.
The Company issued 12,000 and 30,500 stock options during the three and six
months ended June 30, 2004, respectively.
For the three and six month periods ended June 30, 2004, for Canadian GAAP
purposes the Company recognized $278,000 and $554,000, respectively, in
stock option compensation expense related to the amortization of the fair
value of issued stock options.
b) Management's Discussion and Analysis - Canadian Supplement
Management's Discussion and Analysis - Canadian Supplement ("Canadian
Supplement") in this document is based on consolidated financial statements
of TLC Vision Corporation prepared in accordance with U.S. GAAP. The
Canadian Supplement has been prepared by management to provide an analysis
of the impact of material differences that differ from U.S. GAAP on net
income and trending analysis of the consolidated statements of operations.
THREE MONTHS ENDED JUNE 30, 2004, COMPARED TO THREE MONTHS ENDED JUNE 30,
2003
Net income for the three months ended June 30, 2004 was $5.5 million or
$0.08 per share compared to a net loss of $3.9 million or $0.06 per share
for the three months ended June 30, 2003.
Amortization expenses decreased to $1.4 million for the three months ended
June 30, 2004 from $2.1 million for the three months ended June 30, 2003.
The decrease was largely due to the reduction in Practice Management
Agreements resulting from the deconsolidation of Laser Eye Care of
California.
Net cash provided by operating activities was $8.5 million for the three
months ended June 30, 2004. The cash flows provided by operating activities
during the three months ended June 30, 2004 were primarily due to net
income of $5.5 million plus non-cash items including depreciation and
amortization of $4.9 million, minority interest expense of $2.5 million,
offset by an increase in net operating assets of $3.5 million, an
adjustment to the fair value of investments and long-term receivables of
$1.2 million, and earnings from equity investments of $0.6 million . The
increase in net operating assets primarily consisted of a $2.8 million
decrease in accounts payable and accrued liabilties and a $0.9 million
increase in prepaid expenses offset by a $0.2 million decrease in accounts
receivable. Settlement of litigation or payment of accrued liabilities in
future periods could reduce cash without affecting working capital.
SIX MONTHS ENDED JUNE 30, 2004, COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
Net income for the six months ended June 30, 2004 was $13.2 million or
$0.19 per share compared to a net loss of $3.2 million or $0.05 per share
for the six months ended June 30, 2003.
Amortization expenses decreased to $2.8 million for the six months ended
June 30, 2004 from $4.1 million for the six months ended June 30, 2003. The
decrease was largely due to the reduction in Practice Management Agreements
resulting from the deconsolidation of Laser Eye Care of California.
32
Net cash provided by operating activities was $19.4 million for the six
months ended June 30, 2004. The cash flows provided by operating activities
during the six months ended June 30, 2004 were primarily due to net income
of $13.2 million and research and development expenditures of $0.7 million,
plus non-cash items including depreciation and amortization of $9.9
million, minority interest expense of $4.3 million, non-cash compensation
expense of $0.8 million, and a loss on the disposal of fixed assets of $0.7
million. These increases were offset by an increase in net operating assets
of $7.0 million, an adjustment to the fair value of investments and
long-term receivables of $1.2 million, a gain on the divestiture of LECC of
$1.1 million, and earnings from equity investments of $1.0 million . The
increase in net operating assets primarily consisted of a $3.8 million
increase in accounts receivable, a $1.7 million decrease in accounts
payable and accrued liabilities and a $1.5 million increase in prepaid
expenses. Settlement of litigation or payment of accrued liabilities in
future periods could reduce cash without affecting working capital.
c) For comparative purposes, the following tables illustrate previously filed
financial statements in accordance with both Canadian GAAP and U.S. GAAP
during the respective time periods in 2003. Differences between Canadian
GAAP and U.S. GAAP are described above.
33
TLC VISION CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands of U.S. dollars except per share amounts)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2003 JUNE 30, 2003
------------- -------------
CANADIAN GAAP U.S. GAAP CANADIAN GAAP U.S. GAAP
------------- --------- ------------- ---------
Revenues:
Refractive:
Centers .............................. $ 26,237 $ 26,237 $ 57,160 $ 57,160
Access ............................... 9,647 9,647 20,576 20,576
Other healthcare services ................. 11,648 11,648 23,386 23,386
--------- --------- --------- ---------
Total revenues .............................. 47,532 47,532 101,122 101,122
--------- --------- --------- ---------
Cost of revenues:
Refractive:
Centers .............................. 20,636 20,636 43,179 43,179
Access ............................... 6,481 6,481 13,643 13,643
Other healthcare services ................. 7,950 7,950 15,430 15,430
--------- --------- --------- ---------
Total cost of revenues ...................... 35,067 35,067 72,252 72,252
--------- --------- --------- ---------
Gross margin .............................. 12,465 12,465 28,870 28,870
--------- --------- --------- ---------
General and administrative .................. 8,383 8,313 16,472 16,332
Marketing ................................... 3,496 3,496 7,157 7,157
Amortization of intangibles ................. 2,056 1,678 4,106 3,350
Adjustment to the fair value of
investments and long-term receivables...... (651) (651) (448) (448)
Restructuring, severance and other charges .. 1,720 1,720 1,720 1,720
--------- --------- --------- ---------
15,004 14,556 29,007 28,111
--------- --------- --------- ---------
Operating income (loss) ..................... (2,539) (2,091) (137) 759
Other income, net ........................... 198 198 566 566
Interest expense, net ....................... (373) (393) (722) (761)
Minority interests .......................... (961) (961) (2,502) (2,502)
--------- --------- --------- ---------
Income (loss) before income taxes ........... (3,675) (3,247) (2,795) (1,938)
Income tax expense .......................... (206) (206) (445) (445)
--------- --------- --------- ---------
Net income (loss) ........................... $ (3,881) $ (3,453) $ (3,240) $ (2,383)
========= ========= ========= =========
Earnings (loss) per share - basic and
diluted ................................... $ (0 06) $ (0.05) $ (0.05) $ (0.04)
========= ========= ========= =========
Weighted average number of common
shares outstanding - basic and
diluted ................................... 63,457 63,457 63,435 63,435
34
TLC VISION CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars)
DECEMBER 31, 2003
-----------------
CANADIAN GAAP U.S. GAAP
------------- ---------
ASSETS
Current assets
Cash and cash equivalents ........................... $ 29,580 $ 29,580
Short-term investments .............................. 748 748
Accounts receivable ................................. 15,617 15,617
Prepaids and other current assets ................... 11,812 11,646
--------- ---------
Total current assets ............................... 57,757 57,591
Restricted cash ....................................... 1,376 1,376
Investments and other assets .......................... 4,078 3,102
Intangibles, net ...................................... 26,899 22,959
Goodwill, net ......................................... 48,829 48,829
Fixed assets, net ..................................... 55,364 56,891
--------- ---------
Total assets .......................................... $ 194,303 $ 190,748
========= =========
LIABILITIES
Current liabilities
Accounts payable .................................... $ 10,627 $ 10,627
Accrued liabilities ................................. 25,811 25,811
Current portion of long-term debt ................... 10,348 10,285
--------- ---------
Total current liabilities ............................. 46,786 46,723
Other long-term liabilities ........................... 2,607 2,607
Long term-debt, less current maturities ............... 20,155 19,242
Minority interests .................................... 10,907 10,907
SHAREHOLDERS' EQUITY
Capital stock ......................................... 397,878 397,878
Option and warrant equity ............................. 7,921 8,143
Accumulated deficit ................................... (291,951) (294,752)
--------- ---------
Total shareholders' equity ............................ 113,848 111,269
--------- ---------
Total liabilities and shareholders' equity ............ $ 194,303 $ 190,748
========= =========
35
TLC VISION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands of U.S. dollars)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2003 JUNE 30, 2003
CANADIAN GAAP U.S. GAAP CANADIAN GAAP U.S. GAAP
------------- --------- ------------- ---------
Net loss ....................................................... $ (3,881) $ (3,881) $ (3,240) $ (2,383)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization .................................. 5,941 5,941 11,943 11,047
Minority interests ............................................. 961 961 2,502 2,502
Adjustment to the fair value of investments and
long-term receivables and impairment of fixed
assets ....................................................... (605) (605) (402) (402)
Loss (gain) on disposal of fixed assets ........................ (391) (391) (391) (391)
Restructuring and other costs .................................. 527 527 527 527
Changes in operating assets and liabilities:
Accounts receivable ............................................ (10) (10) (3,784) (3,784)
Prepaid expenses and other current assets ...................... (1,462) (1,462) (1,199) (1,160)
Accounts payable and accrued liabilities ....................... (705) (705) (5,055) (5,055)
-------- -------- -------- --------
Cash provided by operating activities .......................... 375 375 901 901
-------- -------- -------- --------
INVESTING ACTIVITIES
Purchase of fixed assets ....................................... (974) (974) (2,587) (2,587)
Net proceeds from the sale of investments and subsidiaries ..... 548 548 221 221
Acquisitions and investments ................................... (532) (532) (2,622) (2,622)
Purchase of short-term investments ............................. (86) (86) (324) (324)
Proceeds from sale of fixed assets ............................. 77 77 548 548
Other .......................................................... 220 220 273 273
-------- -------- -------- --------
Cash used in investing activities .............................. (747) (747) (4,491) (4,491)
-------- -------- -------- --------
FINANCING ACTIVITIES
Restricted cash movement ....................................... (489) (489) (439) (439)
Principal payments of debt financing and capital
leases ....................................................... (1,198) (1,198) (3,979) (3,979)
Distributions to minority interests ............................ (1,172) (1,172) (1,802) (1,802)
Proceeds from debt financing ................................... 1,450 1,450 1,450 1,450
Proceeds from the issuance of common stock ..................... 899 899 905 905
-------- -------- -------- --------
Cash used in financing activities .............................. (510) (510) (3,865) (3,865)
-------- -------- -------- --------
Net decrease in cash and cash equivalents during the
period ....................................................... (882) (882) (7,455) (7,455)
Cash and cash equivalents, beginning of period ................. 29,508 29,508 36,081 36,081
-------- -------- -------- --------
Cash and cash equivalents, end of period ....................... $ 28,626 $ 28,626 $ 28,626 $ 28,626
======== ======== ======== ========
36