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 financial statements as of December 31, 2005
and 2004 and for the years ended December 31, 2005, 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 Canadian securities
regulatory authorities.
a) Reconciliation from U.S. GAAP to Canadian GAAP
Following is a reconciliation of net income (loss) from U.S. GAAP to
Canadian GAAP:
YEAR ENDED DECEMBER 31,
------------------------------------
2005 2004 2003
----------- ----------- --------
AS RESTATED AS RESTATED
Net income (loss) per U.S. GAAP ..................... $ 8,119 $42,474 $ (9,399)
Amortization of Practice Management Agreements (1) .. (1,512) (1,512) (1,512)
Depreciation of fixed assets (2) .................... (280) (280) (280)
Interest income on note receivable related to the
sale-leaseback of building (3) ................... 78 78 78
Variable accounting for stock options (4) ........... 29 108 --
Fair value accounting of stock options (4) .......... (6,488) (1,245) --
------- ------- --------
Net income (loss) per Canadian GAAP ................. $ (54) $39,623 $(11,113)
======= ======= ========
Net income (loss) per share for Canadian GAAP -
basic ............................................ $ (0.00) $ 0.58 $ (0.17)
======= ======= ========
Net income (loss) per share for Canadian GAAP -
diluted .......................................... $ (0.00) $ 0.56 $ (0.17)
======= ======= ========
The most significant balance sheet differences between U.S. GAAP and
Canadian GAAP are as follows:
DECEMBER 31, DECEMBER 31,
2005 2004
------------ ------------
Investments and Other Assets
Balance per U.S. GAAP ............................... $ 19,838 $ 10,482
Note receivable related to the sale-leaseback of
building (2) ..................................... 850 913
--------- ---------
Balance per Canadian GAAP ........................... $ 20,688 $ 11,395
========= =========
Intangibles, Net
Balance per U.S. GAAP ............................... $ 24,021 $ 18,140
Difference in impairment write-off of intangibles
(1) .............................................. 6,334 6,334
Amortization of Practice Management Agreements (1) .. (5,418) (3,906)
--------- ---------
Balance per Canadian GAAP ........................... $ 24,937 $ 20,568
========= =========
Fixed Assets, Net
Balance per U.S. GAAP ............................... $ 49,159 $ 46,199
Adjustment for the sale-leaseback of building (2) ... (829) (829)
Depreciation of fixed assets (2) .................... (1,258) (978)
--------- ---------
Balance per Canadian GAAP ........................... $ 47,072 $ 44,392
========= =========
80
DECEMBER 31, DECEMBER 31,
2005 2004
------------ ------------
AS RESTATED
Long-Term Debt, Less Current Maturities
Balance per U.S. GAAP ............................... $ 12,665 $ 9,991
Adjustment for note payable related to the
sale-leaseback of building (2) ................... 787 850
Cumulative interest payments received on note
receivable related to the sale-leaseback of
building (3) ..................................... (309) (224)
--------- ---------
Balance per Canadian GAAP ........................... $ 13,143 $ 10,617
========= =========
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) .............................................. 7,733 1,245
--------- ---------
Balance per Canadian GAAP ........................... $ 21,340 $ 14,852
========= =========
Option and Warrant Equity
Balance per U.S. GAAP ............................... $ 1,861 $ 2,872
Adjustment to compensation expense for warrants and
stock options (4) ................................ (359) (330)
--------- ---------
Balance per Canadian GAAP ........................... $ 1,502 $ 2,542
========= =========
Accumulated Deficit
Balance per U.S. GAAP ............................... $(244,159) $(252,278)
Adjustment to the value of intangible Practice
Management Agreements (1) ........................ 916 2,428
Adjustment for the sale-leaseback of building (2) ... (2,087) (1,807)
Cumulative interest on note receivable related to the
sale-leaseback of building (3) ................... 322 244
Adjustment to compensation expense for warrants and
stock options (4) ................................ (7,374) (915)
Adjustment for change in accounting policy related to
the fair value of stock options (4) .............. (13,607) (13,607)
--------- ---------
Balance per Canadian GAAP ........................... $(265,989) $(265,935)
========= =========
(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
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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.
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 $5.4 million of amortization expense for
Canadian GAAP compared to U.S. GAAP through December 31, 2005.
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 Note ($0.9 million as of December 31, 2005) is
included in investments and other assets.
As of December 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 $2.1 million higher for U.S. GAAP. Investments and other assets
is $0.9 million higher and notes payable is $0.5 million higher (of which
$0.5 million is classified as long-term) for Canadian GAAP. For each of the
years ended December 31, 2005, 2004 and 2003, depreciation expense is
higher for U.S. GAAP by $280,000.
(3) For each of the years ended December 31, 2005, 2004 and 2003, the Company
reported $78,000 of interest income related to the Note on the
sale-leaseback of the building as described above.
As of December 31, 2005, $13,000 of interest income was not yet received,
and the associated interest receivable was included in prepaids and other
current assts for Canadian GAAP purposes. In the above U.S. GAAP to
Canadian GAAP reconciliation, cumulative interest payments received of
$309,000 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.
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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 for Canadian GAAP purposes 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 years ended December 31, 2005 and 2004, the Company recorded for
Canadian GAAP purposes stock-based compensation expense, net of minority
interests, of $6.5 million and $1.2 million, respectively, which is
included in general and administrative expenses. The fair values of
TLCVision's options granted in 2005 and 2004 were estimated at the date of
grant using the Black-Scholes option pricing model with the following
weighted average assumptions: risk free interest rate of 3.99% and 2.84%,
respectively; dividend rate of 0%; volatility factor of 0.75; and expected
life of 2.5 years. The fair values of OccuLogix's options granted in 2005
were estimated at the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions: risk free interest
rate of 3.88%; dividend rate of 0%; volatility factor of 0.73; and expected
life of 2.4 years.
TLCVision issued 0.2 million and 1.0 million stock options during 2005 and
2004, respectively. OccuLogix issued 1.8 million stock options during 2005.
No compensation expense determined under fair value-based method for stock
options was included in the determination of net loss for the year ended
December 31, 2003. For the year ended December 31, 2003, the following
table presents the Company's pro forma net loss and net loss per share as
if the fair value-based method of CICA 3870 had been applied for all stock
options granted:
YEAR ENDED
DECEMBER 31,
2003
------------
Net loss per Canadian GAAP ................. $(11,113)
Total pro forma stock-based compensation
expense determined under fair value-based
method .................................. (1,121)
--------
Pro forma net loss ......................... $(12,234)
========
Basic and diluted net loss per share
As reported ................................ $ (0.17)
Pro forma .................................. $ (0.19)
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 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 year
83
ended December 31, 2004, the Company recognized, for U.S. GAAP purposes,
additional stock compensation expense of $108,000 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.
YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004
Net loss for the year ended December 31, 2005 was $0.1 million or $0.00 per
share compared to income of $39.6 million or $0.56 per share for the year
ended December 31, 2004. The decrease in net income was primarily due to an
increase in fair value stock option compensation expense, an increase in
non-cash income tax expense and a significant decrease in net income from
the AMD segment.
Amortization expense was $5.6 million for the years ended December 31, 2005
and 2004. Amortization expense included lower expenses from certain fully
amortized intangible assets offset by increases from intangibles acquired
during the year ended December 31, 2005.
Net cash provided by operating activities was $22.5 million for the year
ended December 31, 2005. The cash flows provided by operating activities
during the year ended December 31, 2005 were primarily due to a net loss of
$0.1 million plus non-cash items including depreciation and amortization of
$18.1 million, deferred taxes of $5.1 million, minority interest expense of
$1.3 million and compensation expense of $7.9 million. These cash flows
were partially offset by an increase in net operating assets of $7.7
million and earnings from equity investments of $2.5 million. The increase
in net operating assets consisted of a $3.0 million increase in accounts
receivable due primarily to higher revenues, a $2.0 million increase in
prepaid expenses and a $2.8 million decrease in accounts payable and
accrued liabilities.
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
Net income for the year ended December 31, 2004 was $39.6 million or $0.56
per share compared to a net loss of $11.1 million or $0.17 per share for
the year ended December 31, 2003. The significant improvement in net income
primarily resulted from significant growth in both the refractive and other
healthcare services businesses and a gain on the sale of OccuLogix's common
stock.
Amortization expense decreased to $5.6 million for the year ended December
31, 2004 from $8.2 million for the year ended December 31, 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 $35.4 million for the year
ended December 31, 2004. The cash flows provided by operating activities
during the year ended December 31, 2004 were primarily due to net income of
$39.6 million plus non-cash items including depreciation and amortization
of $19.5 million, minority interest expense of $7.0 million, the write-off
of investments related to research and development arrangements of $0.8
million, deferred taxes of $1.2 million, compensation expense of $1.6
million and the loss on sale of fixed assets of $0.8 million. These cash
flows were offset by an increase in net operating assets of $5.0 million, a
gain on sale of subsidiary stock of $25.8 million, earnings from equity
investments of $2.1 million, an adjustment to the fair value of investments
and long-term receivables of $1.2 million and a gain on sale of interest in
subsidiary of $1.1 million. The increase in net operating assets consisted
of a $1.5 million increase in accounts receivable due primarily to higher
revenues, a $1.8 million increase in prepaid expenses and a $1.7 million
decrease in accounts payable and accrued liabilities.
c) For comparative purposes, the following tables illustrate previously filed
financial statements in accordance with both Canadian GAAP and U.S. GAAP
for the year ended December 31, 2003. Differences between Canadian GAAP and
U.S. GAAP are described above.
84
TLC VISION CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of U.S. dollars except per share amounts)
YEAR ENDED
DECEMBER 31, 2003
-------------------------
CANADIAN GAAP U.S. GAAP
------------- ---------
Revenues:
Refractive:
Centers ............................. $115,290 $115,290
Access .............................. 36,140 36,140
Other healthcare services .............. 49,488 49,488
-------- --------
Total revenues ............................ 200,918 200,918
-------- --------
Cost of revenues:
Refractive:
Centers ............................. 91,283 91,283
Access .............................. 25,424 25,424
Other healthcare services .............. 31,836 31,836
-------- --------
Total cost of revenues .................... 148,543 148,543
-------- --------
Gross margin ........................... 52,375 52,375
-------- --------
General and administrative ................ 27,281 27,001
Marketing ................................. 18,781 18,781
Research and development .................. 1,598 1,598
Amortization of intangibles ............... 8,197 6,685
Other expenses, net ....................... 1,165 1,165
-------- --------
57,022 55,230
-------- --------
Operating loss ............................ (4,647) (2,855)
Interest income ........................... 1,458 1,380
Interest expense .......................... (2,744) (2,744)
Minority interests ........................ (4,672) (4,672)
-------- --------
Loss before income taxes .................. (10,605) (8,891)
Income tax expense ........................ (508) (508)
-------- --------
Net loss .................................. $(11,113) $ (9,399)
======== ========
Net loss per share - basic and diluted .... $ (0.17) $ (0.15)
======== ========
Weighted average number of common shares
outstanding - basic and diluted ........ 64,413 64,413
85
TLC VISION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
YEAR ENDED
DECEMBER 31, 2003
-------------------------
CANADIAN GAAP U.S. GAAP
------------- ---------
Net loss .................................. $(11,113) $ (9,399)
Adjustments to reconcile net loss to net
cash from operating activities:
Depreciation and amortization .......... 24,385 22,593
Write-off of investment in research and
development arrangement ............. 1,598 1,598
Minority interests ..................... 4,672 4,672
Loss (gain) on sales and disposals of
fixed assets ........................ (484) (484)
Adjustments to the fair values of
intangibles, long-term receivables
and long-term liabilities ........... (206) (206)
Non-cash compensation expense .......... 125 125
Other .................................. 677 677
Changes in operating assets and
liabilities, net of acquisitions and
dispositions:
Accounts receivable ................. (489) (489)
Prepaid expenses, inventory and other
current assets ................... (1,042) (964)
Accounts payable and accrued
liabilities ...................... (13,831) (13,831)
-------- --------
Cash from operating activities ........... 4,292 4,292
-------- --------
INVESTING ACTIVITIES
Purchases of fixed assets ................. (4,433) (4,433)
Proceeds from sale of fixed assets ........ 578 578
Proceeds from divestitures of investments
and subsidiaries, net .................. 221 221
Investment in research and development
arrangements ........................... (1,598) (1,598)
Acquisitions and equity investments ....... (8,015) (8,015)
Proceeds from short-term investments ...... 15,709 15,709
Purchases of short-term investments ....... (21,050) (21,050)
Other ..................................... (229) (229)
-------- --------
Cash from investing activities ............ (18,817) (18,817)
-------- --------
FINANCING ACTIVITIES
Restricted cash movement .................. 2,599 2,599
Principal payments of debt financing and
capital leases ......................... (8,018) (8,018)
Proceeds from debt financing .............. 3,450 3,450
Distributions to minority interests ....... (4,901) (4,901)
Proceeds from the issuances of common
stock .................................. 8,744 8,744
-------- --------
Cash from financing activities ............ 1,874 1,874
-------- --------
Net decrease in cash and cash equivalents
during the period ...................... (12,651) (12,651)
Cash and cash equivalents, beginning of
period ................................. 34,231 34,231
-------- --------
Cash and cash equivalents, end of period .. $ 21,580 $ 21,580
======== ========
86