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 March 31, 2005 and for the
three months ended March 31, 2005 and 2004 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 MARCH 31,
-----------------------------
2005 2004
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Net income per U.S. GAAP................................................... $ 9,606 $ 8,052
Amortization of Practice Management Agreements (1)......................... (378) (378)
Depreciation of fixed assets (2)........................................... (70) (70)
Interest income on note receivable related to the
sale-leaseback of building (3).......................................... 20 20
Variable accounting for stock options (4).................................. -- 319
Fair value accounting for stock options (4)................................ (1,007) (276)
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Net income per Canadian GAAP............................................... $ 8,171 $ 7,667
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Earnings per share for Canadian GAAP - basic............................... $ 0.12 $ 0.11
========= =========
Earnings per share for Canadian GAAP - diluted............................. $ 0.11 $ 0.11
========= =========
The most significant balance sheet differences between U.S. GAAP and Canadian
GAAP are as follows:
MARCH 31, DECEMBER 31,
2005 2004
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Investments and Other Assets
Balance per U.S. GAAP...................................................... $ 16,012 $ 10,482
Note receivable related to the sale-leaseback of building (2).............. 913 913
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Balance per Canadian GAAP.................................................. $ 16,925 $ 11,395
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Intangibles, Net
Balance per U.S. GAAP...................................................... $ 17,129 $ 18,140
Difference in impairment write-off of intangibles (1)...................... 6,334 6,334
Amortization of Practice Management Agreements (1)......................... (4,284) (3,906)
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Balance per Canadian GAAP.................................................. $ 19,179 $ 20,568
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Fixed Assets, Net
Balance per U.S. GAAP...................................................... $ 45,623 $ 46,199
Adjustment for the sale-leaseback of building (2).......................... (829) (829)
Depreciation of fixed assets (2)........................................... (1,048) (978)
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Balance per Canadian GAAP.................................................. $ 43,746 $ 44,392
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MARCH 31, DECEMBER 31,
2005 2004
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Long-Term Debt, Less Current Maturities
Balance per U.S. GAAP....................................... $ 9,654 $ 9,991
Adjustment for note payable related to the sale-leaseback
of building (2).......................................... 850 850
Cumulative interest payments received on note receivable
related to the sale-leaseback of building (3)............ (224) (224)
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Balance per Canadian GAAP................................... $ 10,280 $ 10,617
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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 13,607
Adjustment for fair value accounting of stock options (4)... 2,252 1,245
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Balance per Canadian GAAP................................... $ 15,859 $ 14,852
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Option and Warrant Equity
Balance per U.S. GAAP....................................... $ 2,095 $ 2,872
Adjustment to compensation expense for warrants and stock
options (4).............................................. (330) (330)
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Balance per Canadian GAAP................................... $ 1,765 $ 2,542
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Accumulated Deficit
Balance per U.S. GAAP....................................... $(241,438) $(251,044)
Adjustment to the value of intangible Practice Management
Agreements (1)........................................... 2,050 2,428
Adjustment for the sale-leaseback of building (2)........... (1,877) (1,807)
Interest on note receivable related to the sale-leaseback
of building (3).......................................... 264 244
Adjustment to compensation expense for warrants and stock
options (4).............................................. (1,922) (915)
Adjustment for change in accounting policy related to the
fair value of stock options (4).......................... (13,607) (13,607)
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Balance per Canadian GAAP................................... $(256,530) $(264,701)
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(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 exceeds the carrying value of such assets.
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 $4.3 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 sales-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 Note ($0.9 million as of March 31, 2005) is included
in investments and other assets.
As of March 31, 2005, 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 $1.9 million higher for U.S. GAAP. Investments and other
assets is $0.9 million higher and notes payable is $0.7 million higher (of
which $0.6 million is classified as long-term) for Canadian GAAP. For both
of the three months ended March 31, 2005 and 2004, depreciation expense is
higher for Canadian GAAP by $70,000.
(3) For both of the three months ended March 31, 2005 and 2004, the Company
reported $20,000 of interest income related to the Note on the
sale-leaseback of the building as described above.
As of March 31, 2005, $40,000 of interest income was not yet received, and
the associated interest receivable was included in prepaids and other
current assets for Canadian GAAP purposes. In the above U.S. GAAP to
Canadian GAAP reconciliation, cumulative interest payments received of
$224,000 are recorded as reductions to long-term debt in order to adjust
the U.S. GAAP treatment of the payments, which increases the debt upon
their receipt.
(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.
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 months ended March 31, 2005 and 2004, the Company recorded
stock-based compensation expenses of $1,007,000 (of which $227,000 relates
to OccuLogix, Inc. stock options) and $276,000, respectively, which are
included in general and administrative expenses. The fair value of the
options granted by the Company was estimated at the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions:
MARCH 31, MARCH 31,
2005 2004
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Risk-free interest rate 3.21% 1.75%
Volatility 0.75 0.75
Weighted average expected life 2.5 2.5
The dividend rate for options issued by the Company during the three
months ended March 31, 2005 and 2004 was nil.
The Company granted 32,000 and 18,500 stock options during the three
months ended March 31, 2005 and 2004, respectively.
OccuLogix, Inc. granted 1.2 million options during the three months ended
March 31, 2005. The fair value of the options granted by OccuLogix, Inc.
during the three months ended March 31, 2005 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 3.86%; volatility
of 0.78; expected life of 2 years; and dividend rate of 0%.
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 months ended March 31, 2005 and 2004,
the Company recognized additional stock compensation expense of $0 and
$319,000, 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 and cash flows.
THREE MONTHS ENDED MARCH 31, 2005, COMPARED TO THREE MONTHS ENDED MARCH
31, 2004
Net income for the three months ended March 31, 2005 was $8.2 million or
$0.11 per share compared to income of $7.7 million or $0.11 per share for
the three months ended March 31, 2004.
Amortization expenses were $1.4 million for both the three months ended
March 31, 2005 and 2004.
Net cash provided by operating activities was $5.8 million for the three
months ended March 31, 2005. The cash flows provided by operating
activities during the three months ended March 31, 2005 were primarily due
to net income of $8.2 million plus non-cash items including depreciation
and amortization of $4.5 million, compensation expense of $1.1 million and
minority interest expense of $0.7, offset by an increase in net operating
assets of $7.5 million, earnings from equity investments of $0.7 million
and a gain on the sale of a subsidiary of $0.3 million. The increase in
net operating assets consisted of a $3.5 million increase in accounts
receivable due primarily to higher revenues, a $2.3 million increase in
prepaid expenses and a $1.7 million decrease in accounts payable and
accrued liabilities.