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, 2005 and for
the three and nine months ended September 30, 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
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2005 2004 2005 2004
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Net income per U.S. GAAP ............................... $ 1,699 $3,322 $16,816 $17,613
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) .............. (6) (228) -- 106
Fair value accounting for stock options (4) ............ (1,287) (311) (3,655) (865)
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Net income (loss) per Canadian GAAP .................... $ (22) $2,355 $11,876 $15,569
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Earnings (loss) per share for Canadian GAAP - basic .... $ (0.00) $ 0.03 $ 0.17 $ 0.23
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Earnings (loss) per share for Canadian GAAP - diluted .. $ (0.00) $ 0.03 $ 0.17 $ 0.22
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The most significant balance sheet differences between U.S. GAAP and
Canadian GAAP are as follows:
SEPTEMBER 30, DECEMBER 31,
2005 2004
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Investments and Other Assets
Balance per U.S. GAAP .......................................... $12,497 $10,482
Note receivable related to the sale-leaseback of building (2) .. 913 913
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Balance per Canadian GAAP ...................................... $13,410 $11,395
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Intangibles, Net
Balance per U.S. GAAP .......................................... $22,703 $18,140
Difference in impairment write-off of intangibles (1) .......... 6,334 6,334
Amortization of Practice Management Agreements (1) ............. (5,040) (3,906)
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Balance per Canadian GAAP ...................................... $23,997 $20,568
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Fixed Assets, Net
Balance per U.S. GAAP .......................................... $47,348 $46,199
Adjustment for the sale-leaseback of building (2) .............. (829) (829)
Depreciation of fixed assets (2) ............................... (1,188) (978)
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Balance per Canadian GAAP ...................................... $45,331 $44,392
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SEPTEMBER 30, DECEMBER 31,
2005 2004
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Long-Term Debt, Less Current Maturities
Balance per U.S. GAAP .......................................... $ 12,020 $ 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) ............... (231) (224)
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Balance per Canadian GAAP ...................................... $ 12,639 $ 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) ...... 4,900 1,245
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Balance per Canadian GAAP ...................................... $ 18,507 $ 14,852
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Option and Warrant Equity
Balance per U.S. GAAP .......................................... $ 1,868 $ 2,872
Adjustment to compensation expense for warrants and stock
options (4) ................................................. (330) (330)
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Balance per Canadian GAAP ...................................... $ (1,538) $ 2,542
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Accumulated Deficit
Balance per U.S. GAAP .......................................... $(234,228) $(251,044)
Adjustment to the value of intangible Practice Management
Agreements (1) .............................................. 1,294 2,428
Adjustment for the sale-leaseback of building (2) .............. (2,017) (1,807)
Interest on note receivable related to the sale-leaseback of
building (3) ................................................ 303 244
Adjustment to compensation expense for warrants and stock
options (4) ................................................. (4,570) (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 ...................................... $(252,825) $(264,701)
========= =========
(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.
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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 $5.0 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 September 30, 2005) is
included in investments and other assets.
As of September 30, 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 $2.0 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 the three
and nine months ended September 30, 2005 and 2004, depreciation expense is
higher for Canadian GAAP by $70,000 and $210,000, respectively.
(3) For each of the three months ended September 30, 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.
For each of the nine months ended September 30, 2005 and 2004, the Company
reported $59,000 of interest income related to the Note on the
sale-leaseback of the building as described above.
As of September 30, 2005, $72,000 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
$231,000 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
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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 September 30, 2005 and 2004, the Company
recorded stock-based compensation expenses of $1,287,000 (of which $562,000
relates to OccuLogix, Inc. stock options) and $311,000, respectively. For
the nine months ended September 30, 2005 and 2004, the Company recorded
stock-based compensation expenses of $3,655,000 (of which $1,380,000
relates to OccuLogix, Inc. stock options) and $865,000, 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:
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
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Risk free interest rate ........................................ 3.45% 2.54%
Volatility factors ............................................. 0.75 0.75
Weighted average expected option life (in years) ............... 2.5 2.5
Dividend rate .................................................. 0% 0%
The Company granted 65,500 and 97,000 stock options during the nine months
ended September 30, 2005 and 2004, respectively.
OccuLogix, Inc. granted 1.5 million options during the nine months ended
September 30, 2005. The fair value of the options granted by OccuLogix,
Inc. during the nine months ended September 30, 2005 was estimated at the
date of grant using the Black-Scholes option pricing model.
During the nine months ended September 30, 2005, OccuLogix, Inc. granted
options that have vesting periods contingent upon the date at which
OccuLogix, Inc. receives FDA approval for its RHEO(TM) System. These
options are subject to APB 25's variable method of accounting for stock
options. During the three and nine months ended September 30, 2005,
OccuLogix, Inc. recorded ($12,000) and $0, respectively, of variable
compensation expense (reduction of expense) related to these options (of
which the Company recognized ($6,000) and $0, respectively, after minority
interests).
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
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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 months
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
and cash flows.
THREE MONTHS ENDED SEPTEMBER 30, 2005, COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2004
Net loss for the three months ended September 30, 2005 was $22,000 or $0.00
per share compared to income of $2.4 million or $0.03 per share for the
three months ended September 30, 2004.
Amortization expenses were $1.4 million for each of the three months ended
September 30, 2005 and 2004.
Net cash provided by operating activities was $6.4 million for the three
months ended September 30, 2005. The cash flows provided by operating
activities during the three months ended September 30, 2005 were primarily
due to net loss of $22,000 plus non-cash items including depreciation and
amortization of $4.5 million, compensation expense of $1.4 million and
minority interest expense of $0.6 million, a decrease in net operating
assets of $0.5 million offset by earnings from equity investments of $0.5
million. The decrease in net operating assets consisted of a $0.9 million
increase in prepaid expenses offset by a $0.7 million increase in accounts
payable and accrued liabilities and a $0.8 million decrease in accounts
receivable.
NINE MONTHS ENDED SEPTEMBER 30, 2005, COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2004
Net income for the nine months ended September 30, 2005 was $11.9 million
or $0.17 per share compared to income of $15.6 million or $0.22 per share
for the nine months ended September 30, 2004.
Amortization expenses were $4.2 million for each of the nine months ended
September 30, 2005 and 2004.
Net cash provided by operating activities was $19.1 million for the nine
months ended September 30, 2005. The cash flows provided by operating
activities during the nine months ended September 30, 2005 were primarily
due to net income of $11.9 million plus non-cash items including
depreciation and amortization of $13.4 million, minority interest expense
of $2.4 million and compensation expense of $3.9 million. These increases
were offset by an increase in net operating assets of $9.9 million, a gain
on the sale of Aspen of $0.3 million, a $0.3 million reimbursement from a
previous research and development investment, losses on sales of fixed
assets of $0.2 million and earnings from equity investments of $1.8
million. The increase in net operating assets primarily consisted of a $1.5
million increase in accounts receivable, a $4.2 million decrease in
accounts payable and accrued liabilities and a $4.3 million increase in
prepaid expenses.
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