EX-99 6 c85574a1exv99.txt RECONCILIATION 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, 2004 and for the three months ended March 31, 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 MARCH 31, ---------------------------- 2004 2003 ---------- --------- Net income per U.S. GAAP ......................................................... $ 8,052 $ 1,070 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 19 Variable accounting for stock options (4) ........................................ 319 -- Fair value accounting for stock options (4) ...................................... (276) -- --------- --------- Net income per Canadian GAAP ..................................................... $ 7,667 $ 641 ========= =========
The most significant balance sheet differences between U.S. GAAP and Canadian GAAP are as follows:
MARCH 31, DECEMBER 31, 2004 2003 --------- ------------ Investments and Other Assets Balance per U.S. GAAP ..................................................... $ 7,518 $ 3,102 Note receivable related to the sale-leaseback of building (2) ............. 976 976 --------- ---------- Balance per Canadian GAAP ................................................. $ 8,494 $ 4,078 ========= ========== Intangibles, Net Balance per U.S. GAAP ..................................................... $ 20,548 $ 22,959 Difference in impairment write-off of intangibles (1) ..................... 6,334 6,334 Amortization of Practice Management Agreements (1) ........................ (2,772) (2,394) --------- ---------- Balance per Canadian GAAP ................................................. $ 24,110 $ 26,899 ========= ========== Fixed Assets, Net Balance per U.S. GAAP ..................................................... $ 52,189 $ 56,891 Adjustment for the sale-leaseback of building (2) ......................... (829) (829) Depreciation of fixed assets (2) .......................................... (768) (698) --------- ---------- Balance per Canadian GAAP ................................................. $ 50,592 $ 55,364 ========= ========== Long-Term Debt, Less Current Maturities Balance per U.S. GAAP ..................................................... $ 13,475 $ 19,242 Adjustment for note payable related to the sale-leaseback of building (2).. 913 913 --------- ---------- Balance per Canadian GAAP ................................................. $ 14,388 $ 20,155 ========= ==========
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MARCH 31, DECEMBER 31, 2004 2003 --------- ------------ 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 variable accounting of stock options (4) .......................... 276 -- --------- ----------- Balance per Canadian GAAP ........................................................ $ 13,883 $ -- ========= =========== Option and Warrant Equity Balance per U.S. GAAP ............................................................ $ 5,047 $ 8,143 Adjustment to compensation expense for warrants and stock options (4) ............ (541) (222) --------- ----------- Balance per Canadian GAAP ........................................................ $ 4,506 $ 7,921 ========= =========== Accumulated Deficit Balance per U.S. GAAP ............................................................ $(286,700) $ (294,752) Adjustment to the value of intangible Practice Management Agreements (1) ......... 3,562 3,940 Adjustment for the sale-leaseback of building (2) ................................ (1,597) (1,527) Interest on note receivable related to the sale-leaseback of building (3) ........ 186 166 Adjustment to compensation expense for warrants and stock options (4) ............ 265 222 Adjustment for change in accounting policy related to the fair value of stock options (4) ...................................................................... (13,607) -- --------- ----------- Balance per Canadian GAAP ........................................................ $(297,891) $ (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 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 $2.8 million of amortization expense for Canadian GAAP compared to U.S. GAAP. 10 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 $1.0 million Note is included in investments and other assets. As of March 31, 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 $1.6 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 months ended March 31, 2004 and 2003, depreciation expense is higher for U.S. GAAP by $70,000 for the three months ended March 31, 2004 and 2003. (3) For the three months ending March 31, 2004 and 2003, the Company reported $20,000 and $19,000 of interest income respectively related to the Note on the sale-leaseback of the building as described above. The cumulative interest earned as at March 31, 2004 of $186,000 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. 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"). 11 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, 2004, the Company recorded stock-based compensation expense of $276,000, which is included in general and administrative expenses. No compensation expense for stock options granted to employees at fair market value was included in the determination of net income for the three months ended March 31, 2003. For the three months ended March 31, 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 ENDED MARCH 31, 2003 ------------ Net Income per Canadian GAAP............................................................... $ 641 Total pro forma stock-based compensation expense determined under fair value-based method.. (269) -------- Pro forma net income....................................................................... $ 372 ======== BASIC AND DILUTED EARNINGS PER SHARE As reported $ 0.01 Pro forma $ 0.01
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-month period ended March 31, 2004, the Company recognized additional stock compensation expense of $319,000 related to the modified stock options. CICA 3870 does not require the application of variable method of accounting for stock options. 12 The fair value of the options granted was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
MARCH 31, MARCH 31, 2004 2003 --------- --------- Risk free interest rate 1.75% 2.35% Volatility 0.75 0.75 Weighted average expected life 2.5 2.5
The dividend rate for options issued in 2003 and 2004 was nil. The Company issued 18,500 stock options during the three-months ended March 31, 2004. For the three-month period ended March 31, 2004, for Canadian GAAP purposes the Company recognized $276,000 in stock option compensation expense related to the amortization of the fair value of previously issued stock options. b) Management's Discussion and Analysis - Canadian Supplement Management's Discussion and Analysis - Canadian Supplement ("Canadian Supplement") in this document is based on consolidated financial statements of TLC Vision Corporation prepared in accordance with U.S. GAAP. The Canadian Supplement has been prepared by management to provide an analysis of the impact of material differences that differ from U.S. GAAP on net income and trending analysis of the consolidated statements of operations and cash flows. Net income for the three months ended March 31, 2004 was $7.7 million or $0.11 per share compared to income of $0.6 million or $0.01 per share for the three months ended March 31, 2003. Amortization expenses decreased to $1.4 million for the three months ended March 31, 2004 from $2.1 million for the three months ended March 31, 2003. The decrease was largely due to the reduction in Practice Management Agreements resulting from the deconsolidation of Laser Eye Care of California. Net cash provided by operating activities was $10.9 million for the three months ended March 31, 2004. The cash flows provided by operating activities during the three months ended March 31, 2004 were primarily due to net income of $7.7 million plus non-cash items including depreciation and amortization of $5.0 million, minority interest expense of $1.9 million and a loss on the disposal of fixed assets of $0.8 million, offset by an increase in net operating assets of $3.5 million and a gain on the sale of a subsidiary of $1.3 million. The increase in net operating assets consisted of a $4.0 million increase in accounts receivable due primarily to higher revenues and a $0.6 million increase in prepaid expenses offset by a $1.1 million increase in accounts payable and accrued liabilities. Settlement of litigation or payment of accrued liabilities in future periods could reduce cash without affecting working capital. 13 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. TLC VISION CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (In thousands of U.S. dollars except per share amounts)
THREE MONTHS ENDED MARCH 31, 2003 -------------------------- CANADIAN GAAP U.S. GAAP ------------- --------- Revenues: Refractive: Centers ............................................... $ 30,923 $ 30,923 Access ................................................ 10,929 10,929 Other healthcare services ................................... 11,738 11,738 -------- -------- Total revenues ................................................. 53,590 53,590 -------- -------- Cost of revenues: Refractive: Centers ............................................... 22,543 22,543 Access ................................................ 7,162 7,162 Other healthcare services .................................... 7,480 7,480 -------- -------- Total cost of revenues ......................................... 37,185 37,185 -------- -------- Gross margin ................................................. 16,405 16,405 -------- -------- General and administrative ..................................... 8,089 8,019 Marketing ...................................................... 3,661 3,661 Amortization of intangibles .................................... 2,050 1,672 Write down in the fair value of investments .................... 203 203 -------- -------- 14,003 13,555 -------- -------- Operating income ............................................... 2,402 2,850 Other income, net .............................................. 368 368 Interest expense, net .......................................... (349) (368) Minority interests ............................................. (1,541) (1,541) -------- -------- Income before income taxes ..................................... 880 1,309 Income tax expense ............................................. (239) (239) -------- -------- Net income ..................................................... $ 641 $ 1,070 ======== ======== Earnings per share - basic and diluted ......................... $ 0.01 $ 0.02 ======== ======== Weighted average number of common shares outstanding - basic and diluted ...................................................... 64,060 64,060
14 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 ========= =========
15 TLC VISION CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands of U.S. dollars)
THREE MONTHS ENDED MARCH 31, 2003 -------------------------- CANADIAN GAAP U.S. GAAP ------------- --------- Net income ...................................................................................... $ 641 $ 1,070 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ............................................................... 6,002 5,554 Minority interests .......................................................................... 1,541 1,541 Adjustment to the fair value of investments and long-term receivables and impairment of fixed assets ..................................................................................... 203 203 Changes in operating assets and liabilities: Accounts receivable ......................................................................... (3,774) (3,774) Prepaid expenses and other current assets ................................................... 263 282 Accounts payable and accrued liabilities .................................................... (4,350) (4,350) ---------- -------- Cash provided by operating activities ........................................................... 526 526 ---------- -------- INVESTING ACTIVITIES Purchase of fixed assets ........................................................................ (1,613) (1,613) Net proceeds from the sale of investments and subsidiaries ...................................... 144 144 Acquisitions and investments .................................................................... (2,090) (2,090) Proceeds from sale of short-term investments .................................................... (238) (238) Other ........................................................................................... 53 53 ---------- -------- Cash used in investing activities ............................................................... (3,744) (3,744) ---------- -------- FINANCING ACTIVITIES Restricted cash movement ........................................................................ 50 50 Principal payments of debt financing and capital leases ......................................... (2,781) (2,781) Distributions to minority interests ............................................................. (630) (630) Proceeds from the issuance of common stock ...................................................... 6 6 ---------- -------- Cash provided by (used in) financing activities ................................................ (3,355) (3,355) ---------- -------- Net increase (decrease) in cash and cash equivalents during the period .......................... (6,573) (6,573) Cash and cash equivalents, beginning of period .................................................. 36,081 36,081 ---------- -------- Cash and cash equivalents, end of period ........................................................ $ 29,508 $ 29,508 ========== ========
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