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 September 30, 2004 and for
the three and nine months ended September 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 NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, SEPTEMBER 30
------------- ------------
2004 2003 2004 2003
---- ---- ---- ----
Net income (loss) per U.S. GAAP ................................................. $ 3,322 $ (4,090) $ 17,613 $ (6,473)
Amortization of Practice Management Agreements (1) .............................. (378) (378) (1,134) (1,134)
Depreciation of fixed assets (2) ................................................ (70) (70) (210) (210)
Interest income on note receivable related to the sale-leaseback
of building (3) ................................................................. 20 20 59 59
Variable accounting for stock options (4) ....................................... (228) -- 106 --
Fair value accounting of stock options (4) ...................................... (311) -- (865) --
--------- --------- --------- ---------
Net income (loss) per Canadian GAAP ............................................. $ 2,355 $ (4,518) $ 15,569 $ (7,758)
========= ========= ========= =========
Net income (loss) per share for Canadian GAAP - basic ........................... $ 0.03 $ (0.07) $ 0.23 $ (0.12)
========= ========= ========= =========
Net income (loss) per share for Canadian GAAP - diluted ......................... $ 0.03 $ (0.07) $ 0.22 $ (0.12)
========= ========= ========= =========
The most significant balance sheet differences between U.S. GAAP and
Canadian GAAP are as follows:
SEPTEMBER 30, DECEMBER 31,
2004 2003
---- ----
Investments and Other Assets
Balance per U.S. GAAP ....................................... $ 6,237 $ 3,102
Note receivable related to the sale-leaseback
of building (2) ............................................. 976 976
-------- --------
Balance per Canadian GAAP ................................... $ 7,213 $ 4,078
======== ========
Intangibles, Net
Balance per U.S. GAAP ....................................... $ 19,050 $ 22,959
Difference in impairment write-off of intangibles (1) ....... 6,334 6,334
Amortization of Practice Management Agreements (1) .......... (3,528) (2,394)
-------- --------
Balance per Canadian GAAP ................................... $ 21,856 $ 26,899
======== ========
Fixed Assets, Net
Balance per U.S. GAAP ....................................... $ 48,435 $ 56,891
Adjustment for the sale-leaseback of building (2) ........... (829) (829)
Depreciation of fixed assets (2) ............................ (908) (698)
-------- --------
Balance per Canadian GAAP ................................... $ 46,698 $ 55,364
======== ========
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SEPTEMBER 30, DECEMBER 31,
2004 2003
-------------- ------------
Long-Term Debt, Less Current Maturities
Balance per U.S. GAAP ........................................... $ 10,501 $ 19,242
Adjustment for note payable related to the sale-leaseback of
building (2) .................................................... 913 913
--------- ---------
Balance per Canadian GAAP ....................................... $ 11,414 $ 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) ....... 865 --
--------- ---------
Balance per Canadian GAAP ....................................... $ 14,472 $ --
========= =========
Option and Warrant Equity
Balance per U.S. GAAP ........................................... $ 4,244 $ 8,143
Adjustment to compensation expense for warrants and stock
options (4) ..................................................... (328) (222)
--------- ---------
Balance per Canadian GAAP ....................................... $ 3,916 $ 7,921
========= =========
Accumulated Deficit
Balance per U.S. GAAP ........................................... $(277,139) $(294,752)
Adjustment to the value of intangible Practice Management
Agreements (1) .................................................. 2,806 3,940
Adjustment for the sale-leaseback of building (2) ............... (1,737) (1,527)
Interest on note receivable related to the sale-leaseback of
building (3) .................................................... 225 166
Adjustment to compensation expense for warrants and stock options
(4) ............................................................. (537) 222
Adjustment for change in accounting policy related to the fair
value of stock options (4) ...................................... (13,607) --
--------- ---------
Balance per Canadian GAAP ....................................... $(289,989) $(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 $3.5 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 September 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 nine months ended September 30, 2004 and 2003, depreciation
expense is higher for U.S. GAAP by $70,000 and $210,000, respectively.
(3) For each of the three months ended September 30, 2004 and 2003, the
Company reported $20,000 of interest income related to the Note on the
sale-leaseback of the building as described above.
For each of the nine months ended September 30, 2004 and 2003, the Company
reported $59,000 of interest income related to the Note on the
sale-leaseback of the building.
The cumulative interest earned as at September 30, 2004 of $225,000 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 nine months ended September 30, 2004, the Company
recorded stock-based compensation expense of $311,000, and $865,000,
respectively, which is included in general and administrative expenses.
The fair value of the options granted in 2004 was estimated at the date of
grant using the Black-Scholes option pricing model with the following
weighted average assumptions: risk free interest rate of 2.54%; dividend
rate of 0%; volatility factor of 0.75; and expected life of 2.5 years.
The Company issued 66,500 and 97,000 stock options during the three and
nine months ended September 30, 2004, respectively.
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 nine months ended September 30, 2003. For the three and nine months
ended September 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 NINE MONTHS
------------ -----------
ENDED ENDED
----- -----
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2003 2003
---- ----
Net loss per Canadian GAAP ..................... $(4,518) $(7,758)
Total pro forma stock-based compensation expense
determined under fair value-based method ....... (227) (755)
------- -------
Pro forma net loss ............................. $(4,745) $(8,513)
======= =======
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
As reported .................................... $ (0.07) $ (0.12)
Pro forma ...................................... $ (0.07) $ (0.13)
The fair value of the options granted in 2003 was estimated at the date of
grant using the Black-Scholes option pricing model with the following
weighted average assumptions: risk free interest rate of 2.35%; dividend
rate of 0%; volatility factor of 0.75; and expected life of 2.5 years.
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
31
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 nine month periods ended September
30, 2004, the Company recognized additional stock compensation expense
(reduction of expense) of $(228,000) and $106,000, respectively, related
to the modified stock options.
CICA 3870 does not require the application of variable method of
accounting for 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 SEPTEMBER 30, 2004, COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2003
Net income for the three months ended September 30, 2004 was $2.4 million
or $0.03 per share compared to a net loss of $4.5 million or $0.07 per
share for the three months ended September 30, 2003.
Amortization expenses decreased to $1.4 million for the three months ended
September 30, 2004 from $2.0 million for the three months ended September
30, 2003. The decrease was largely due to the reduction in Practice
Management Agreements resulting from the deconsolidation of LECC.
Net cash provided by operating activities was $10.3 million for the three
months ended September 30, 2004. The cash flows provided by operating
activities during the three months ended September 30, 2004 were primarily
due to net income of $2.4 million plus non-cash items including
depreciation and amortization of $4.7 million, minority interest expense
of $1.7 million, and a decrease in net operating assets of $1.3 million.
The decrease in net operating assets primarily consisted of a $1.9 million
decrease in accounts receivable and a $0.2 million decrease in prepaid
expenses offset by a $0.8 million decrease in accounts payable and accrued
liabilities.
NINE MONTHS ENDED SEPTEMBER 30, 2004, COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2003
Net income for the nine months ended September 30, 2004 was $15.6 million
or $0.22 per share compared to a net loss of $7.8 million or $0.12 per
share for the nine months ended September 30, 2003.
Amortization expenses decreased to $4.2 million for the nine months ended
September 30, 2004 from $6.1 million for the nine months ended September
30, 2003. The decrease was largely due to the reduction in Practice
Management Agreements resulting from the deconsolidation of LECC.
Net cash provided by operating activities was $29.7 million for the nine
months ended September 30, 2004. The cash flows provided by operating
activities during the nine months ended September 30, 2004 were primarily
due to net income of $15.6 million plus non-cash items including
depreciation and amortization of $14.6 million, minority interest expense
of $6.0 million, write-off of investments in research and development of
$0.8 million, compensation expense of $1.2 million, and a loss on the
disposal of fixed assets of $1.0 million. These cash flows were offset by
an increase in net operating assets of $5.7 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 $1.6 million. The increase in net operating assets
primarily consisted of a $1.9 million increase in accounts receivable, a
$2.5 million decrease in accounts payable and accrued liabilities and a
$1.3 million increase in prepaid expenses.
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.
32
TLC VISION CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands of U.S. dollars except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2003
------------------ ------------------
CANADIAN GAAP U.S. GAAP CANADIAN GAAP U.S. GAAP
------------- --------- ------------- ---------
Revenues:
Refractive:
Centers ................................ $ 24,932 $ 24,932 $ 82,092 $ 82,092
Access ................................. 8,861 8,861 29,437 29,437
Other healthcare services ................... 12,221 12,221 35,607 35,607
--------- --------- --------- ---------
Total revenues ................................ 46,014 46,014 147,136 147,136
--------- --------- --------- ---------
Cost of revenues:
Refractive:
Centers ................................ 20,239 20,239 63,418 63,418
Access ................................. 6,558 6,558 20,201 20,201
Other healthcare services ................... 7,752 7,752 23,182 23,182
--------- --------- --------- ---------
Total cost of revenues ........................ 34,549 34,549 106,801 106,801
--------- --------- --------- ---------
Gross margin ................................ 11,465 11,465 40,335 40,335
--------- --------- --------- ---------
General and administrative .................... 8,093 8,023 24,565 24,355
Marketing ..................................... 3,118 3,118 10,275 10,275
Research and development ...................... 975 975 975 975
Amortization of intangibles ................... 2,043 1,665 6,149 5,015
Adjustment to the fair value of investments and
long-term receivables ....................... 231 231 (217) (217)
Restructuring, severance and other charges .... -- -- 1,720 1,720
--------- --------- --------- ---------
14,460 14,012 43,467 42,123
--------- --------- --------- ---------
Operating income (loss) ....................... (2,995) (2,547) (3,132) (1,788)
Other income, net ............................. 74 74 640 640
Interest expense, net ......................... (305) (325) (1,027) (1,086)
Minority interests ............................ (1,110) (1,110) (3,612) (3,612)
--------- --------- --------- ---------
Income (loss) before income taxes ............. (4,336) (3,908) (7,131) (5,846)
Income tax expense ............................ (182) (182) (627) (627)
--------- --------- --------- ---------
Net income (loss) ............................. $ (4,518) $ (4,090) $ (7,758) $ (6,473)
========= --------- ========= =========
Earnings (loss) per share - basic and
diluted ....................................... $ (0.07) $ (0.06) $ (0.12) $ (0.10)
========= ========= ========= =========
Weighted average number of common shares
outstanding - basic and diluted ............. 64,743 64,743 63,888 63,888
33
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
========= =========
34
TLC VISION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands of U.S. dollars)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ ------------------
SEPTEMBER 30, 2003 SEPTEMBER 30, 2003
------------------ ------------------
CANADIAN GAAP U.S. GAAP CANADIAN GAAP U.S. GAAP
------------- --------- ------------- ---------
Net loss ............................................... $ (4,518) $ (4,090) $ (7,758) $ (6,473)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization ....................... 6,208 5,760 18,151 16,807
Write-off of investment in research and development
arrangement ........................................ 975 975 975 975
Minority interests .................................. 1,110 1,110 3,612 3,612
Loss (gain) on disposal of fixed assets ............. (147) (147) (538) (538)
Adjustment to the fair value of investments and
long-term receivables and impairment of fixed
assets ............................................. 231 231 (171) (171)
Non-cash restructuring and other costs .............. -- -- 527 527
Changes in operating assets and liabilities:
Accounts receivable ............................... (564) (564) (4,348) (4,348)
Prepaid expenses and other current assets ......... 833 853 (366) (307)
Accounts payable and accrued liabilities .......... (2,711) (2,711) (7,766) (7,766)
-------- -------- -------- --------
Cash provided by operating activities .................. 1,417 1,417 2,318 2,318
-------- -------- -------- --------
INVESTING ACTIVITIES
Purchases of fixed assets .............................. (1,137) (1,137) (3,724) (3,724)
Proceeds from sale of fixed assets ..................... -- -- 548 548
Proceeds from divestitures of investments and
subsidiaries, net of cash ............................. -- -- 221 221
Investment in research and development arrangements .... (975) (975) (975) (975)
Acquisitions and investments, net of cash acquired ..... (4,835) (4,835) (7,457) (7,457)
Sale of short-term investments ......................... 1,112 1,112 788 788
Other .................................................. 32 32 305 305
-------- -------- -------- --------
Cash used in investing activities ...................... (5,803) (5,803) (10,294) (10,294)
-------- -------- -------- --------
FINANCING ACTIVITIES
Restricted cash movement ............................... (146) (146) (585) (585)
Principal payments of debt financing and capital leases (1,586) (1,586) (5,565) (5,565)
Proceeds from debt financing ........................... -- -- 1,450 1,450
Distributions to minority interests .................... (1,791) (1,791) (3,593) (3,593)
Proceeds from the issuance of common stock ............. 4,611 4,611 5,516 5,516
-------- -------- -------- --------
Cash provided by (used in) financing activities ........ 1,088 1,088 (2,777) (2,777)
-------- -------- -------- --------
Net decrease in cash and cash equivalents during the
period ................................................ (3,298) (3,298) (10,753) (10,753)
Cash and cash equivalents, beginning of period ......... 28,626 28,626 36,081 36,081
-------- -------- -------- --------
Cash and cash equivalents, end of period ............... $ 25,328 $ 25,328 $ 25,328 $ 25,328
======== ======== ======== ========
35