MANAGEMENT S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS AND YEAR ENDED DECEMBER 31, 2014 March 18, 2015 The following Management s Discussion and Analysis ( MD&A ) is intended to assist readers in understanding Medical Facilities Corporation (the Corporation ), its business environment, strategies, performance, outlook and the risks applicable to the Corporation. It is supplemental to and should be read in conjunction with the consolidated financial statements and accompanying notes (the financial statements ) of the Corporation for the year ended December 31, 2014, which have been prepared in accordance with International Financial Reporting Standards ( IFRS ). Substantially all of the Corporation s operating cash flows are in U.S. dollars and all amounts presented in the financial statements and herein are stated in thousands of U.S. dollars, unless indicated otherwise. Additional information about the Corporation and its annual information form are available on SEDAR at www.sedar.com. Table of Contents 1. Caution Concerning Forward-Looking Statements...2 2. Non-IFRS Financial Measures...3 3. Business Overview...4 4. Financial and Performance Highlights...5 5. Consolidated Operating and Financial Review...8 6. Quarterly Operating and Financial Results...18 7. Reconciliation of Non-IFRS Financial Measures...20 8. Outlook...22 9. Liquidity and Capital Resources...23 10. Share Capital and Dividends...26 11. Financial Instruments...27 12. Related Party Transactions...30 13. Critical Accounting Judgments and Estimates...31 14. Changes in Accounting Policies...33 15. Recently Announced Accounting Pronouncements...34 16. Disclosure Controls and Procedures and Internal Controls Over Financial Reporting...34 17. Risk Factors...35 1
1. CAUTION CONCERNING FORWARD-LOOKING STATEMENTS Certain information in this MD&A may constitute forward-looking information within the meaning of applicable securities legislation. All information contained in this MD&A, other than statements of current and historical fact, is forward-looking information. Forward-looking information includes information that relates to, among other things, objectives, strategies and intentions, and future financial and operating performance and prospects. Generally, forward-looking information can be identified by use of words such as may, will, could, should, would, expect, believe, plan, believe, anticipate, intend, forecast, objective and continue (or the negative thereof) and other similar terminology. All of the forward-looking information in this MD&A is qualified by this cautionary statement. Forward-looking information includes, but is not limited to, the discussion of the Corporation s business and operating initiatives, focuses and strategies, expectations of future performance and consolidated financial results, and expectations with respect to cash flows and level of liquidity. Forward-looking information is not, and cannot be, a guarantee of future results or events. Forwardlooking information is based on, among other things, opinions, assumptions, estimates and analyses that, while considered reasonable at the date the forward-looking information is provided, inherently are subject to significant risks, uncertainties, contingencies and other factors that may cause actual results, performance or achievements, industry results or events to be materially different from those expressed or implied by the forward-looking information. The material factors or assumptions that were identified and applied in drawing conclusions or making forecasts or projections set out in the forward-looking information include, but are not limited to: the successful execution of business strategies, consistent and stable economic conditions or conditions in the financial markets, consistent and stable legislative environment in which the Corporation operates, and the opportunity to acquire accretive businesses. Inherent in the forward-looking information are known and unknown risks, uncertainties and other factors that could cause actual results, performance or achievements, or industry results, to differ materially from any results, performance or achievements expressed or implied by such forward-looking information. Those risks, uncertainties and other factors that could cause actual results to differ materially from the forward-looking information include, but are not limited to: ability to obtain and maintain contractual arrangements with insurers and other payors, ability to attract and retain qualified physicians, availability of qualified personnel or management, legislative and regulatory changes, capital expenditures, general state of the economy, competition in the industry, integration of acquisitions, currency risk, interest rate risk, success of new service lines introductions, ability to maintain profitability and manage growth, revenue and cash flow volatility, credit risk, operating risks, performance of obligations/maintenance of client satisfaction, information technology governance and security, risk of future legal proceedings, insurance limits, income tax matters, ability to meet solvency requirements to pay dividends, leverage and restrictive covenants, unpredictability and volatility of common share price, capital investment, and issuance of additional common shares diluting existing shareholders interests, and other factors set forth under the heading Risk Factors in this MD&A and under the heading Risk Factors in the Corporation s most recently filed annual information form (which is available on SEDAR at www.sedar.com). 2
Given these risks, uncertainties and other factors, investors should not place undue reliance on forwardlooking information as a prediction of actual results. The forward-looking information reflects management s current expectations and beliefs regarding future events and operating performance and is based on information currently available to management. Although management has attempted to identify important factors that could cause actual results to differ materially from the forward-looking information contained herein, there are other factors that could cause results not to be as anticipated, estimated or intended. The forward-looking information contained herein is current as of the date of this MD&A and, except as required under applicable law, the Corporation does not undertake the obligation to publicly revise these forward-looking statements to reflect subsequent events or circumstances. 2. NON-IFRS FINANCIAL MEASURES The Corporation uses certain non-ifrs measures which it believes provide useful measures for evaluation and assessment of the Corporation s performance. Non-IFRS measures do not have any standard meaning prescribed by IFRS, are unlikely to be comparable to similar measures presented by other issuers, and should not be considered as alternatives to comparable measures determined in accordance with IFRS as indicators of the Corporation s financial performance, including its liquidity, cash flows, and profitability. The Corporation uses the following non-ifrs measures which are presented in Section 7 under the heading Reconciliation of Non-IFRS Financial Measures of this MD&A and reconciled to the applicable IFRS measures: Cash available for distribution is a non-ifrs measure of cash generated from operations during a reporting period which is available for distribution to common shareholders. Cash available for distribution is derived from cash flows from operations before changes in non-cash working capital, less maintenance capital expenditures, interest and principal repayments on non-revolving debt obligations and non-controlling interest in cash flows at the Center level and gains or losses on foreign exchange forward contracts matured in the respective periods. The Corporation presents cash available for distribution in U.S. dollars and translates it into Canadian dollars using the average exchange rate applicable during the period. Cash available for distribution per common share is a non-ifrs measure calculated as the cash available for distribution divided by the weighted average common shares outstanding during the period. The Corporation also presents this amount exclusive of realized gains or losses on foreign exchange forward contracts. Payout ratio is a non-ifrs measure calculated as total distributions per common share in Canadian dollars divided by cash available for distribution per common share in Canadian dollars. The Corporation also presents this amount exclusive of realized gains or losses on foreign exchange forward contracts. 3
3. BUSINESS OVERVIEW The Corporation is a British Columbia corporation. The capital of the Corporation is in the form of publicly traded common shares and 5.9% convertible unsecured subordinated debentures ( 5.9% debentures ). Prior to April 30, 2013, the capital of the Corporation also included 7.5% convertible secured debentures ( 7.5% debentures ) which matured on April 30, 2013. The 7.5% debentures and 5.9% debentures are hereinafter individually or collectively referred to as convertible debentures. The Corporation s current monthly dividend on its common shares is Cdn$0.09375 per share. The Corporation s operations are based in the United States. Through its wholly-owned U.S.-based subsidiaries, Medical Facilities America, Inc. ( MFA ) and Medical Facilities (USA) Holdings, Inc. ( MFH ), the Corporation owns controlling interests in, and derives substantially all of its income from, six limited liability entities (each a Center and, collectively, the Centers ), each of which owns either a specialty surgical hospital (an SSH ) or an ambulatory surgery center (an ASC ). The SSHs are located in South Dakota, Oklahoma and Arkansas and the ASC is located in California. ASCs are specialized surgical centers that only provide outpatient procedures, whereas SSHs are licensed for both inpatient and outpatient surgeries. The Centers provide facilities, including staff, surgical materials and supplies, and other support necessary for scheduled surgical, pain management, imaging, and diagnostic procedures and derive their revenue primarily from the fees charged for the use of these facilities. The Centers mainly focus on a limited number of clinical specialties such as orthopaedic, neurosurgery, pain management and other non-emergency elective procedures. In addition, two of the SSHs provide primary and urgent care to their communities. Facility service revenue ( revenue ) for any given period is dependent on the volume of the procedures performed as well as the acuity and complexity of the procedures ( case mix ) and composition of payors ( payor mix ), including federal and state agencies (under the Medicare and Medicaid programs), managed care health plans, commercial insurance companies and employers. Various payors have different reimbursement rates for the same type of procedure which are generally based on either predetermined rates per procedure or discounted fee-for-service rates. Medicare and Medicaid typically have lower reimbursement rates than other payors. Revenue is recorded in the period when healthcare services are provided based upon established billing rates less adjustments required by contractual arrangements with the payors. Estimates of contractual adjustments under payor arrangements are based upon the payment terms specified in the related contractual agreements and payment history. The volume of procedures performed at the Centers depends on (among other things): (i) the Centers ability to deliver high quality care and superior services to patients and their family members; (ii) the Centers success in encouraging physicians to perform procedures at the Centers through, among other things, maintenance of an efficient work environment for physicians as well as availability of facilities; and (iii) established relationships with major third-party payors in the geographic areas served. The case mix at each Center is a function of the clinical specialties of the physicians and medical staff and is also dependent on the equipment and infrastructure at each Center. 4
Non-controlling interests in the Centers are indirectly owned primarily by physicians practicing at the Centers. Upon acquisition by the Corporation of indirect controlling interests in the SSHs located in South Dakota, Oklahoma and Arkansas, the non-controlling interest owners were granted the right to exchange up to 14% (5% in the case of Arkansas Surgical Hospital) of the ownership interest in their respective Centers for common shares of the Corporation. The non-controlling interest owners of several Centers have exercised portions of their exchangeable interests. Summary of Center Information as of December 31, 2014 Location Black Hills Surgical Hospital ( BHSH ) Rapid City South Dakota Dakota Plains Surgical Center ( DPSC ) Aberdeen South Dakota Sioux Falls Specialty Hospital ( SFSH ) Sioux Falls South Dakota Oklahoma Spine Hospital ( OSH ) Oklahoma City Oklahoma Arkansas Surgical Hospital ( ASH ) North Little Rock Arkansas The Surgery Center of Newport Coast ( SCNC ) Newport Beach California Year Opened 1997 1998 1985 1999 2005 2004 Year Acquired by the Corporation 2004 2004 2004 2005 2012 2008 Ownership Interest 54.2% 65.0% 51.0% 58.8% 51.0% 51.0% Non-controlling Interest 45.8% 35.0% 49.0% 41.2% 49.0% 49.0% Exchangeable Interest 10.8% - 14.0% 6.2% 5.0% - Size 75,000 sq ft 19,000 sq ft 76,000 sq ft 61,000 sq ft 126,000 sq ft 7,000 sq ft Operating Rooms 11 3 13 7 9 2 Overnight Rooms 26 15 35 25 41 (1) - (1) Licensed for 51 beds. 4. FINANCIAL AND PERFORMANCE HIGHLIGHTS Selected Financial Information For the Years Ended December 31, In thousands of U.S. dollars, except per share amounts and as indicated otherwise 2014 2013 2012 Facility service revenue 311,834 309,162 239,380 Operating expenses (1)(2) 240,598 235,886 173,462 Income from operations (1)(2) 71,236 73,276 65,918 Net income for the year (1) 54,981 44,609 62,359 Attributable to: Owners of the Corporation (1) 23,308 11,020 33,025 Non-controlling interest (1)(3) 31,673 33,589 29,334 Earnings per share attributable to owners of the Corporation (1) Basic $ 0.744 $ 0.362 $ 1.166 Fully diluted $ 0.560 $ 0.362 $ 1.166 Cash available for distribution (4) C$ 41,366 C$ 40,823 C$ 37,769 Distributions C$ 35,261 C$ 34,402 C$ 31,467 Cash available for distribution per common share (4) C$ 1.320 C$ 1.340 C$ 1.333 Distributions per common share C$ 1.125 C$ 1.129 C$ 1.110 Payout ratio (4) 85.2% 84.3% 83.3% At December 31, 2014 At December 31, 2013 At December 31, 2012 Total assets 409,709 439,253 441,012 Total long-term financial liabilities (5) 71,799 59,141 70,119 5
(1) As a result of an error in accounting for leases at one of the Corporation s subsidiaries, the Corporation made an immaterial non-cash correction to general and administrative expenses to reflect the difference between rent expense recorded using the straight-line method over the life of the lease versus actual payments made by the subsidiary. This adjustment is reflected for each period shown in the table above. (2) To comply with the requirements of the Canadian securities regulators, in 2014, the Corporation included amortization of other intangibles as part of operating expenses. Prior to 2014, amortization of other intangibles was classified separately from operating expenses. This change in treatment is reflected for each period shown in the table above. As a result of the different treatment, certain metrics appear different than reported in prior financial statements and MD&A. (3) Net income attributable to non-controlling interest represents the interest of non-controlling interest in the net income of the Centers on a stand-alone basis and, therefore, does not vary significantly between the periods. On the other hand, net income attributable to owners of the Corporation fluctuates significantly between the periods due to variations in finance costs, primarily in the values of convertible debentures and exchangeable interest liability, and income taxes; these charges are incurred at the corporate level rather than at Center level. (4) Non-IFRS measure. Please refer to Section 2 under the heading Non-IFRS Financial Measures for a discussion of such measures and to Section 7 under the heading Reconciliation of Non-IFRS Financial Measures in this MD&A for a reconciliation to the equivalent IFRS measure. (5) Consists of long-term debt and convertible debentures. 2014 Compared to 2013 For the year ended December 31, 2014, revenue was $311.8 million, an increase of 0.9% over 2013, primarily due to the growth recorded by BHSH and ASH, offset by the decline in revenue at all other Centers. Income from operations declined by 2.8% to $71.2 million, or 22.8% of revenue, compared to $73.3 million, or 23.7% of revenue, in 2013. Net income for the year of $55.0 million increased by 23.3%, primarily due to a decline in the value of exchangeable interest liability which was partially offset by the increase in income tax expense. The Corporation generated cash available for distribution of Cdn$41.4 million, an increase of 1.3% over 2013. Distributions per common share declined by 0.4%, while the 2014 payout ratio was 85.2% compared to 84.3% in 2013. 2013 Compared to 2012 For the year ended December 31, 2013, revenue of $309.2 million increased by 29.2%, which was attributable to full 12 months of revenue from the 2012 acquisition of ASH and growth in revenue at all other SSHs. Income from operations increased by 11.2% to $73.3 million, or 23.7% of revenue, compared to $65.9 million, or 27.5%, in 2012. Net income for the year was $44.6 million, a decrease of 28.5%, primarily attributable to losses on foreign currency and an increase in the value of exchangeable interest liability. The Corporation generated cash available for distribution of Cdn$40.8 million, which was higher than Cdn$37.8 million generated in 2012 by 8.1%. Distributions per common share increased by 1.7%, resulting in a payout ratio of 84.3%, compared to the payout ratio of 83.3% in 2012. Redemption and Maturity of Convertible Debentures The Corporation s Cdn$42,979 (US$42,659) principal amount of 7.5% debentures matured on April 30, 2013. Under the terms of the trust indenture governing the terms of the 7.5% debentures, the holders of the 7.5% debentures had the right to convert their holdings into common shares at a conversion price of $13.10 per common share prior to maturity. From June 18, 2012 (the date of the first conversion) through April 30, 2013, Cdn$41,201 (US$40,894) principal amount of 7.5% debentures was converted into an aggregate of 3,145,093 common shares. On April 30, 2013, the Corporation redeemed the remaining outstanding principal amount of Cdn$1,778 (US$1,765) for cash. 2012 Compared to 2011 For the year ended December 31, 2012, revenue of $239.4 million increased by 10.6% as all Centers recorded revenue growth. Income from operations increased by 4.7% to $65.9 million, or 27.6% of revenue, over $63.0 million, or 29.1% of revenue, in 2011. Net income for the year was $62.4 million, an 6
increase of 413.8%, primarily attributable to improved operating performance and decreases in income taxes and interest expense. The Corporation generated cash available for distribution of Cdn$37.8 million, up from Cdn$33.8 million generated in 2011. Distributions per common share increased by 0.9%, resulting in a payout ratio of 83.3%, compared to the 2011 payout ratio of 92.4%. Acquisition of ASH On November 30, 2012, the Corporation purchased, through MFH, a 51% interest in ASH, a specialty surgical hospital located in North Little Rock, Arkansas for a total consideration of $36,706. The acquisition was financed by a draw on the Corporation s line of credit ($27,110) and cash on hand ($9,596). Issuance of Convertible Debentures On December 21, 2012, the Corporation issued, in a public offering, Cdn$41,800 (US$42,042) aggregate principal amount of 5.9% debentures, which pay interest semi-annually in arrears on June 30 and December 31 of each year, mature on December 31, 2019 and are convertible into 52.3286 common shares per Cdn$1,000 principal amount of 5.9% debentures, at any time, at the option of the holder, representing a conversion price of Cdn$19.11 per common share. For further information about the Corporation s 5.9% debentures, please refer to Section 9 under the heading Liquidity and Capital Resources of this MD&A. For a discussion of certain other trends and events that have affected, and may continue to affect, the Corporation s business, please refer to Section 6 under the heading Quarterly Operating and Financial Results and Section 8 under the heading Outlook, which contain forward-looking statements subject to the cautionary statements in Section 1 of this MD&A. 7
5. CONSOLIDATED OPERATING AND FINANCIAL REVIEW Three Months Ended December 31, 2014 The following table and discussion compare operating and financial results of the Corporation for the three months ended December 31, 2014 to the three months ended December 31, 2013. Three Months Ended Unaudited December 31, In thousands of U.S. dollars, except per share amounts 2014 2013 $ Change % Change Facility service revenue 87,623 89,620 (1,997) (2.2%) Operating expenses (1)(2) Salaries and benefits 21,295 21,350 (55) (0.3%) Drugs and supplies 23,768 24,815 (1,047) (4.2%) General and administrative expenses (1) 12,099 11,344 755 6.7% Depreciation of property and equipment 2,464 2,505 (41) (1.6%) Amortization of other intangibles (2) 3,570 4,680 (1,110) (23.7%) 63,196 64,694 (1,498) (2.3%) Income from operations (1)(2) 24,427 24,926 (499) (2.0%) Finance costs Increase (decrease) in value of convertible debentures (242) 188 (430) (228.7%) Increase in value of exchangeable interest liability 8,056 9,609 (1,553) (16.2%) Interest expense on exchangeable interest liability 2,064 2,738 (674) (24.6%) Interest expense, net of interest income 931 958 (27) (2.8%) Loss on foreign currency 1,705 2,573 (868) (33.7%) 12,514 16,066 (3,552) (22.1%) Income before income taxes (1) 11,913 8,860 3,053 34.5% Income tax expense (recovery) (1) 3,339 (12,186) 15,525 (127.4%) Net income for the period (1) 8,574 21,046 (12,472) (59.3%) Attributable to: Owners of the Corporation (1) (1,587) 10,138 (11,725) (115.7%) Non-controlling interest (1) 10,161 10,908 (747) (6.8%) Basic and fully diluted earnings (loss) per share attributable to owners of the Corporation (1) ($ 0.051) $ 0.323 (0.374) (115.8%) (1) As a result of an error in accounting for leases at one of the Corporation s subsidiaries, the Corporation made an immaterial non-cash correction to general and administrative expenses to reflect the difference between rent expense recorded using the straight-line method over the life of the lease versus actual payments made by the subsidiary. This adjustment is reflected for each period shown in the table above. (2) To comply with the requirements of the Canadian securities regulators, in 2014, the Corporation included amortization of other intangibles as part of operating expenses. Prior to 2014, amortization of other intangibles was classified separately from operating expenses. This change in treatment is reflected for each period shown in the table above. As a result of the different treatment, certain metrics appear different than reported in prior financial statements and MD&A. Revenue Unaudited Three Months Ended December 31, In thousands of U.S. dollars 2014 2013 $ Change % Change BHSH 21,687 20,364 1,323 6.5% DPSC 5,166 5,136 30 0.6% SFSH 26,158 26,199 (41) (0.2%) OSH 16,853 19,026 (2,173) (11.4%) ASH 15,783 16,353 (570) (3.5%) SCNC 1,976 2,542 (566) (22.3%) Facility service revenue 87,623 89,620 (1,997) (2.2%) 8
For the three months ended December 31, 2014, consolidated revenue of $87.6 million declined by $2.0 million or 2.2% over the same period in 2013. Despite growth in case volumes which generated additional revenue of $1.0 million and increased ancillary (primary, urgent, imaging, etc.) revenue of $0.2 million, revenue was negatively impacted by shifts in payor and case mix ($1.6 million and $0.5 million, respectively) and a $1.3 million decrease in payments received under the Electronic Health Records Incentive Program ( EHR incentive payments ). The decrease in EHR incentive payments was expected as the payments decline with the completion of each stage under the Program and will ultimately cease. Total surgical cases increased marginally by 0.3%, as growth in outpatient and observation cases was offset by a decline in inpatient, mostly neurosurgery, cases. Total pain management procedures increased by 8.4%. The payor mix had a higher proportion of cases which were funded by government payors with lower reimbursement rates and private insurers with fixed reimbursement schedules. The above factors impacted each Center s revenue as follows: BHSH recorded revenue growth due to an increase in surgical cases and favourable changes in case mix attributable to an increase in inpatient cases, partially offset by a less favourable payor mix and a $0.2 million decline in EHR incentive payments. DPSC recorded a favourable shift in case mix, annual price increases and higher surgical case volumes, which were partially offset by a $0.4 million decline in EHR incentive payments. SFSH s revenue remained consistent with the same period last year as favourable changes in case mix, annual price increases, and growth in ancillary revenue were offset by a decline in surgical cases, primarily plastic surgery and neurosurgery, and an unfavourable change in payor mix. OSH s revenue decline is attributable to an unfavourable change in case mix, lower case volumes and a $0.1 million decline in EHR incentive payments, which were partially offset by favourable changes in payor mix attributable to an increase in cases with higher reimbursement rates. ASH recorded an increase in surgical cases which was offset by a $0.6 million decline in EHR incentive payments and unfavourable changes in payor mix. SCNC s revenue was negatively impacted by unfavourable changes in case and payor mix and a decline in case volumes. 9
Operating Expenses Consolidated operating expenses, including salaries and benefits, drugs and supplies, general and administrative expenses, depreciation of property and equipment, and amortization of other intangibles, ( operating expenses ) totaled $63.2 million, a decrease of $1.5 million or 2.3%. As a percentage of revenue, operating expenses declined slightly to 72.1% from 72.2% in the same period a year earlier. Unaudited Three Months Ended December 31, In thousands of U.S. dollars 2014 Percentage of Revenue 2013 Percentage of Revenue $ Change % Change BHSH 14,178 65.4% 13,787 67.7% 391 2.8% DPSC 2,692 52.1% 2,384 46.4% 308 12.9% SFSH 14,607 55.8% 14,702 56.1% (95) (0.6%) OSH 13,523 80.2% 13,788 72.5% (265) (1.9%) ASH (1) 11,542 73.1% 12,099 74.0% (557) (4.6%) SCNC 1,574 79.7% 1,564 61.5% 10 0.6% Corporate (2) 5,080 n/a 6,370 n/a (1,290) (20.3%) Operating expenses (1)(2) 63,196 72.1% 64,694 72.2% (1,498) (2.3%) (1) As a result of an error in accounting for leases at one of the Corporation s subsidiaries, the Corporation made an immaterial non-cash correction to general and administrative expenses to reflect the difference between rent expense recorded using the straight-line method over the life of the lease versus actual payments made by the subsidiary. This adjustment is reflected for each period shown in the table above. (2) To comply with the requirements of the Canadian securities regulators, in 2014, the Corporation included amortization of other intangibles as part of operating expenses. Prior to 2014, amortization of other intangibles was classified separately from operating expenses. This change in treatment is reflected for each period shown in the table above. As a result of the different treatment, certain metrics appear different than reported in prior financial statements and MD&A. Consolidated salaries and benefits remained consistent between the reporting periods. Salaries and benefits at the Center level were impacted by annual wage and salary increases of $0.3 million as well as higher health insurance and benefits costs of $0.2 million, which were partially offset by reduced staffing levels at some of the Centers of $0.2 million. Salaries and benefits at the corporate level were lower compared to the same period in 2013 due to a decline in executives incentive awards ($0.2 million) and 2013 contractual payments to a former officer of the Corporation ($0.1 million). As a percentage of revenue, consolidated salaries and benefits increased to 24.3% from 23.8% a year earlier. Consolidated drugs and supplies decreased by $1.0 million or 4.2% due to the changes in case mix ($0.5 million) and several purchasing initiatives at the Centers ($0.5 million). As a percentage of revenue, consolidated cost of drugs and supplies declined to 27.1% from 27.7% a year earlier. Consolidated general and administrative expenses ( G&A ) increased by $0.8 million or 6.7%. The increase in G&A was attributable to a number of factors, most considerable of which were the contribution of $0.4 million to Patient Choice for South Dakota in support of Initiated Measure 17, sales tax refund of $0.2 million received by ASH in 2013, and physician and management recruitment costs of $0.1 million. As a percentage of revenue, consolidated G&A increased to 13.8% from 12.7% a year earlier. Consolidated amortization of other intangibles declined by $1.1 million or 23.7% primarily due to the expiration of amortization periods for referral sources from physicians non-owners. As a percentage of revenue, consolidated amortization of other intangibles declined to 4.1% from 5.2% a year earlier. 10
Income from Operations Consolidated income from operations of $24.4 million was $0.5 million or 2.0% lower than consolidated income from operations recorded a year earlier, representing 27.9% of revenue compared to 27.8% in the same period in 2013. Unaudited Three Months Ended December 31, In thousands of U.S. dollars 2014 Percentage of Revenue 2013 Percentage of Revenue $ Change % Change BHSH 7,509 34.6% 6,577 32.3% 932 14.2% DPSC 2,474 47.9% 2,752 53.6% (278) (10.1%) SFSH 11,551 44.2% 11,497 43.9% 54 0.5% OSH 3,330 19.8% 5,238 27.5% (1,908) (36.4%) ASH (1) 4,241 26.9% 4,254 26.0% (13) (0.3%) SCNC 402 20.3% 978 38.5% (576) (58.9%) Corporate (2) (5,080) n/a (6,370) n/a 1,290 (20.3%) Income from operations (1)(2) 24,427 27.9% 24,926 27.8% (499) (2.0%) (1) As a result of an error in accounting for leases at one of the Corporation s subsidiaries, the Corporation made an immaterial non-cash correction to general and administrative expenses to reflect the difference between rent expense recorded using the straight-line method over the life of the lease versus actual payments made by the subsidiary. This adjustment is reflected for each period shown in the table above. (2) To comply with the requirements of the Canadian securities regulators, in 2014, the Corporation included amortization of other intangibles as part of operating expenses. Prior to 2014, amortization of other intangibles was classified separately from operating expenses. This change in treatment is reflected for each period shown in the table above. As a result of the different treatment, certain metrics appear different than reported in prior financial statements and MD&A. Finance Costs Change in Value of Convertible Debentures The convertible debentures are recorded as a financial liability at fair value and re-measured at each reporting date and the changes in fair value are included in net income for the respective periods. Changes in the recorded value of the convertible debentures are driven by the changes in the market price of the Corporation s convertible debentures and fluctuations in the value of the Canadian dollar against the U.S. dollar. The following table provides calculation of the change in value of 5.9% debentures for the reporting periods: In thousands of U.S. dollars, except as indicated otherwise 2014 2013 Dec 31 Sep 30 Unaudited Change Dec 31 Sep 30 Unaudited Change Face value of convertible debentures outstanding C$41,786,000 C$41,786,000 - C$41,800,000 C$41,800,000 - Closing price of convertible debentures outstanding C$105.50 C$102.50 C$3.00 C$105.00 C$101.25 C$3.75 Closing exchange rate of U.S. dollar to Canadian dollar 1.1601 1.1200 0.0401 1.0636 1.0303 0.0333 Market value of convertible debentures outstanding 38,000 38,242 (242) 41,266 41,078 188 Change in Value of Exchangeable Interest Liability The liability for the exchangeable interest is recorded at fair value, which is re-measured at each reporting date, and the changes in fair value are included in net income for the respective periods. Changes in the recorded value of the exchangeable interest liability between the reporting periods are attributable to the 11
(i) changes in the number of common shares to be issued for the exchangeable interest liability, which are driven by the distributions to the non-controlling interest during the twelve-month period ending on the reporting date, (ii) changes in the market price of the Corporation s common shares, and (iii) fluctuations of the value of the Canadian dollar against the U.S. dollar. The following table provides calculation of the change in value of exchangeable interest liability for the reporting periods: In thousands of U.S. dollars, except as indicated otherwise 2014 2013 Dec 31 Sep 30 Unaudited Change Dec 31 Sep 30 Unaudited Change Number of common shares to be issued for exchangeable interest liability 5,851,799 6,009,415 (157,616) 6,274,969 6,271,197 3,772 Closing price of the Corporation s common shares C$18.41 C$15.86 C$2.55 C$17.94 C$15.81 C$2.13 Closing exchange rate of U.S. dollar to Canadian dollar 1.1601 1.1200 0.0401 1.0636 1.0303 0.0333 Exchangeable interest liability 92,864 85,101 7,763 105,841 96,232 9,609 Exercise of exchangeable rights by non-controlling interest 293 - Change in value of exchangeable interest liability 8,056 9,609 Interest on Exchangeable Interest Liability The decrease of $0.7 million in interest expense on the exchangeable interest liability is primarily due to the variation in distributions from the Centers between the reporting periods. Interest Expense Interest expense, net of interest income, remained consistent with the same period last year at $0.9 million. Foreign Currency Losses The Corporation s reporting currency is U.S. dollars; however, certain public company expenses and payments to holders of common shares and convertible debentures are made in Canadian dollars. The change in foreign currency losses of $0.9 million compared to the same period in 2013 is primarily attributable to the fluctuations in the value of the Canadian dollar in relation to U.S. dollar during the three months ended December 31, 2014 compared to the same period in 2013. Income Tax Current and deferred tax components of the income tax expense (recovery) for the reporting periods are as follows: Unaudited Three Months Ended December 31, In thousands of U.S. dollars 2014 2013 $ Change % Change Current income tax expense 2,264 1,240 1,024 82.6% Deferred income tax expense (recovery) 1,075 (13,426) 14,501 (108.0%) Income tax expense (recovery) 3,339 (12,186) 15,525 (127.4%) The increase in current income tax expense is primarily attributable to a higher limitation on the deduction of the interest on the intercompany debt as well as higher non-deductible expenses. The increase in deferred income tax expense is primarily attributable to the tax effect of the change in 12
exchangeable interest liability and the utilization of the deferred tax asset related to the Canadian cumulative tax operating losses. Net Income A $12.5 million decline in net income was primarily due to an increase in income tax expense as described above. Year Ended December 31, 2014 The following table and discussion compare operating and financial results of the Corporation for the year ended December 31, 2014 to the year ended December 31, 2013. Years Ended December 31, In thousands of U.S. dollars, except per share amounts 2014 2013 $ Change % Change Facility service revenue 311,834 309,162 2,672 0.9% Operating expenses (1)(2) Salaries and benefits 81,291 79,947 1,344 1.7% Drugs and supplies 87,483 86,425 1,058 1.2% General and administrative expenses (1) 45,826 42,921 2,905 6.8% Depreciation of property and equipment 9,980 9,465 515 5.4% Amortization of other intangibles (2) 16,018 17,128 (1,110) (6.5%) 240,598 235,886 4,712 2.0% Income from operations (1)(2) 71,236 73,276 (2,040) (2.8%) Finance costs Increase (decrease) in values of convertible debentures (3,253) 306 (3,559) (1,163.1%) Increase (decrease) in value of exchangeable interest liability (12,684) 20,414 (33,098) (162.1%) Interest expense on exchangeable interest liability 8,603 9,006 (403) (4.5%) Interest expense, net of interest income 3,683 4,742 (1,059) (22.3%) Loss on foreign currency 5,091 5,561 (470) (8.5%) 1,440 40,029 (38,589) (96.4%) Income before income taxes (1) 69,796 33,247 36,549 109.9% Income tax expense (recovery) (1) 14,815 (11,362) 26,177 (230.4%) Net income for the year (1) 54,981 44,609 10,372 23.3% Attributable to: Owners of the Corporation (1) 23,308 11,020 12,288 111.5% Non-controlling interest (1) 31,673 33,589 (1,916) (5.7%) Basic earnings per share attributable to owners of the Corporation (1) $ 0.744 $ 0.362 0.382 105.5% Fully diluted earnings per share attributable to owners of the Corporation (1) $ 0.560 $ 0.362 0.198 54.7% (1) As a result of an error in accounting for leases at one of the Corporation s subsidiaries, the Corporation made an immaterial non-cash correction to general and administrative expenses to reflect the difference between rent expense recorded using the straight-line method over the life of the lease versus actual payments made by the subsidiary. This adjustment is reflected for each period shown in the table above. (2) To comply with the requirements of the Canadian securities regulators, in 2014, the Corporation included amortization of other intangibles as part of operating expenses. Prior to 2014, amortization of other intangibles was classified separately from operating expenses. This change in treatment is reflected for each period shown in the table above. As a result of the different treatment, certain metrics appear different than reported in prior financial statements and MD&A. 13
Revenue Years Ended December 31, In thousands of U.S. dollars 2014 2013 $ Change % Change BHSH 76,687 69,345 7,342 10.6% DPSC 14,452 16,002 (1,550) (9.7%) SFSH 88,118 89,304 (1,186) (1.3%) OSH 63,913 66,703 (2,790) (4.2%) ASH 60,450 58,602 1,848 3.2% SCNC 8,214 9,206 (992) (10.8%) Facility service revenue 311,834 309,162 2,672 0.9% For the year ended December 31, 2014, revenue grew by $2.7 million or 0.9%, which was attributable to an increase in case volumes which generated additional revenue of $7.9 million, a favourable shift in case mix and price increases of $2.8 million and growth in ancillary revenue of $2.2 million, partially offset by an unfavourable shift in payor mix of $9.0 million and a decline in EHR incentive payments of $1.3 million. Total surgical cases increased by 2.7% and pain management procedures increased by 6.4%. Net revenue per surgical case decreased by 2.2%, reflecting a decline in inpatient cases which generate higher per case revenue. Payor mix had a higher proportion of cases funded by payors with higher reimbursement rates and directly by patients. The above factors impacted each Center s revenue as follows: BHSH recorded revenue growth due to increases in surgical cases and urgent care revenue which was partially offset by a $0.2 million decline in EHR incentive payment. DPSC recorded a decline in surgical cases, unfavourable changes in payor mix and a $0.4 million decline in EHR incentive payments, partially offset by a favourable case mix and annual price increases. SFSH recorded a decline in revenue due to an unfavourable shift in payor mix and a decrease in surgical cases, which were partially offset by an increase in inpatient case volumes resulting in favourable changes in case mix, annual price increases and an increase in ancillary revenue. OSH s revenue was negatively impacted by unfavourable changes in payor and case mix and a $0.1 million decline in EHR incentive payments despite growth in surgical cases. ASH benefited from an increase in surgical case volumes and a favourable shift in payor mix, which were partially offset by a $0.6 million decline in EHR incentive payments. SCNC s revenue was impacted by a less favourable payor mix, which was partially offset by the growth in surgical cases. 14
Operating Expenses Operating expenses totaled $240.6 million, an increase of $4.7 million or 2.0% compared to 2013. As a percentage of revenue, operating expenses increased to 77.2% from 76.3% a year earlier. Years Ended December 31, In thousands of U.S. dollars 2014 Percentage of Revenue 2013 Percentage of Revenue $ Change % Change BHSH 53,577 69.9% 50,470 72.8% 3,107 6.2% DPSC 9,258 64.1% 8,777 54.8% 481 5.5% SFSH 51,988 59.0% 51,052 57.2% 936 1.8% OSH 52,244 81.7% 51,260 76.8% 984 1.9% ASH (1) 46,060 76.2% 45,822 78.2% 238 0.5% SCNC 6,043 73.6% 5,656 61.4% 387 6.8% Corporate (2) 21,428 n/a 22,849 n/a (1,421) (6.2%) Operating expenses (1)(2) 240,598 77.2% 235,886 76.3% 4,712 2.0% (1) As a result of an error in accounting for leases at one of the Corporation s subsidiaries, the Corporation made an immaterial non-cash correction to general and administrative expenses to reflect the difference between rent expense recorded using the straight-line method over the life of the lease versus actual payments made by the subsidiary. This adjustment is reflected for each period shown in the table above. (2) To comply with the requirements of the Canadian securities regulators, in 2014, the Corporation included amortization of other intangibles as part of operating expenses. Prior to 2014, amortization of other intangibles was classified separately from operating expenses. This change in treatment is reflected for each period shown in the table above. As a result of the different treatment, certain metrics appear different than reported in prior financial statements and MD&A. Consolidated salaries and benefits increased by $1.3 million or 1.7%. At the Center level, salaries and benefits were impacted by annual wage and salary increases of $1.2 million, higher health insurance and benefits costs of $1.3 million and costs related to urgent and primary care of $0.4 million, which were partially offset by outsourcing of information technology costs of $0.3 million. At the corporate level, salaries and benefits declined due to the completion of contractual payments to a former officer of the Corporation ($0.6 million in 2013), the decrease in the value of the Corporation s deferred share unit plan of $0.5 million and a decline in executives incentive awards of $0.2 million. As a percentage of revenue, consolidated salaries and benefits increased to 26.1% from 25.9% a year earlier. Consolidated drugs and supplies increased by $1.1 million or 1.2%, as $1.8 million growth in case volumes was partially offset by cost savings of $0.7 million due to purchasing initiatives introduced in the second half of 2014. As a percentage of revenue, consolidated cost of drugs and supplies increased slightly to 28.1% from 28.0% a year earlier. Consolidated G&A increased by $2.9 million or 6.8%. This increase is attributable to (i) increases in contractual and purchased services of $1.1 million, (ii) contributions of $0.6 million to Patient Choice for South Dakota in support of Initiated Measure 17, (iii) professional fee increases of $0.4 million, and (iv) physician and management recruitment costs of $0.3 million. As a percentage of revenue, consolidated G&A increased to 14.7% from 13.9% a year earlier. Consolidated depreciation of property and equipment increased by $0.5 million or 5.4% primarily due to increased depreciation attributable to an investment in EHR at SFSH and a second urgent care location at BHSH. As a percentage of revenue, consolidated depreciation of property and equipment increased slightly to 3.2% from 3.1% a year earlier. Consolidated amortization of other intangibles declined by $1.1 million or 6.5% primarily due to the expiration of amortization periods for referral sources from physicians non-owners. As a percentage of revenue, consolidated amortization of other intangibles declined to 5.1% from 5.5% a year earlier. 15
Income from Operations Consolidated income from operations of $71.2 million was $2.0 million or 2.8% lower than consolidated income from operations recorded a year earlier, representing 22.8% of revenue compared to 23.7% in 2013, due to increased operating expenses. Years Ended December 31, In thousands of U.S. dollars 2014 Percentage of Revenue 2013 Percentage of Revenue $ Change % Change BHSH 23,110 30.1% 18,875 27.2% 4,235 22.4% DPSC 5,194 35.9% 7,225 45.2% (2,031) (28.1%) SFSH 36,130 41.0% 38,252 42.8% (2,122) (5.5%) OSH 11,669 18.3% 15,443 23.2% (3,774) (24.4%) ASH (1) 14,390 23.8% 12,780 21.8% 1,610 12.6% SCNC 2,171 26.4% 3,550 38.6% (1,379) (38.8%) Corporate (2) (21,428) n/a (22,849) n/a 1,421 (6.2%) Income from operations (1)(2) 71,236 22.8% 73,276 23.7% (2,040) (2.8%) (1) As a result of an error in accounting for leases at one of the Corporation s subsidiaries, the Corporation made an immaterial non-cash correction to general and administrative expenses to reflect the difference between rent expense recorded using the straight-line method over the life of the lease versus actual payments made by the subsidiary. This adjustment is reflected for each period shown in the table above. (2) To comply with the requirements of the Canadian securities regulators, in 2014, the Corporation included amortization of other intangibles as part of operating expenses. Prior to 2014, amortization of other intangibles was classified separately from operating expenses. This change in treatment is reflected for each period shown in the table above. As a result of the different treatment, certain metrics appear different than reported in prior financial statements and MD&A. Finance Costs Change in Value of Convertible Debentures The following table provides calculation of the change in value of 5.9% debentures for the reporting periods: 2014 2013 2013 2012 In thousands of U.S. dollars, except as indicated otherwise Dec 31 Dec 31 Change Dec 31 Dec 31 Change Face value of convertible debentures outstanding C$41,786,000 C$41,800,000 (C$14,000) C$41,800,000 C$41,800,000 - Closing price of convertible debentures outstanding C$105.50 C$105.00 C$0.50 C$105.00 C$101.00 C$4.00 Closing exchange rate of U.S. dollar to Canadian dollar 1.1601 1.0636 0.0965 1.0636 0.9949 0.0687 Market value of convertible debentures outstanding 38,000 41,266 (3,266) 41,266 42,434 (1,168) Effect of conversion 13 - Change in value of convertible debentures (3,253) (1,168) The 7.5% debentures matured on April 30, 2013. As of the date of their maturity, the change in value of 7.5% debentures was $1,474. 16
Change in Value of Exchangeable Interest Liability The following table provides calculation of the change in value of exchangeable interest liability for the reporting periods: 2014 2013 2013 2012 In thousands of U.S. dollars, except as indicated otherwise Dec 31 Dec 31 Change Dec 31 Dec 31 Change Number of common shares to be issued for exchangeable interest liability 5,851,799 6,274,969 (423,170) 6,274,969 6,162,453 112,516 Closing price of the Corporation s common shares C$18.41 C$17.94 C$0.47 C$17.94 C$13.84 C$4.10 Closing exchange rate of U.S. dollar to Canadian dollar 1.1601 1.0636 0.0965 1.0636 0.9949 0.0687 Exchangeable interest liability 92,864 105,841 (12,977) 105,841 85,726 20,115 Exercise of exchangeable rights by non-controlling interest 293 299 Change in value of exchangeable interest liability (12,684) 20,414 Interest on Exchangeable Interest Liability The decline of $0.4 million in interest expense on exchangeable interest liability is primarily due to the variation in distributions from the Centers between the reporting periods. Interest Expense The decrease of $1.1 million in interest expense, net of interest income, is primarily due to the maturity of the 7.5% debentures on April 30, 2013. Foreign Currency Losses The decrease in foreign currency losses of $0.5 million is primarily attributable to the fluctuations in the value of the Canadian dollar in relation to the U.S. dollar during 2014. Income Tax Current and deferred tax components of the income tax expense (recovery) for the reporting periods are as follows: Years Ended December 31, In thousands of U.S. dollars 2014 2013 $ Change % Change Current income tax expense 1,929 1,929 - - Deferred income tax expense (recovery) 12,886 (13,291) 26,177 (197.0%) Income tax expense (recovery) 14,815 (11,362) 26,177 (230.4%) The increase in deferred income tax expense is primarily attributable to the tax effect of the change in exchangeable interest liability partially offset by the utilization of the deferred tax asset related to the Canadian cumulative tax operating losses. Net Income A $10.4 million increase in net income for the year was primarily attributable to the impact of the decline in the value of exchangeable interest liability partially offset by the increase in income tax expense. 17
6. QUARTERLY OPERATING AND FINANCIAL RESULTS Summary of Quarterly Operating and Financial Results (unaudited) 2014 2013 In thousands of U.S. dollars, except per share amounts Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Facility service revenue 87,623 76,964 74,353 72,894 89,620 72,974 73,677 72,891 Operating expenses (1)(2) Salaries and benefits 21,295 19,647 20,123 20,226 21,350 19,601 19,439 19,556 Drugs and supplies 23,768 22,379 20,667 20,669 24,815 20,843 20,707 20,060 General and administrative expenses (1) 12,099 11,202 10,917 11,608 11,344 10,141 10,581 10,855 Depreciation of property and equipment 2,464 2,528 2,509 2,479 2,505 2,458 2,312 2,191 Amortization of other intangibles (2) 3,570 4,195 4,149 4,104 4,680 4,195 4,149 4,104 63,196 59,951 58,365 59,086 64,694 57,238 57,188 56,766 Income from operations (1)(2) 24,427 17,013 15,988 13,808 24,926 15,736 16,489 16,125 Finance costs Increase (decrease) in values of convertible debentures (242) (2,933) (971) 893 188 (154) (3,232) 3,504 Increase (decrease) in value of exchangeable interest liability 8,056 (19,762) (11,977) 10,999 9,609 7,816 (4,609) 7,598 Interest expense on exchangeable interest liability 2,064 1,849 2,132 2,558 2,738 1,995 1,939 2,334 Interest expense, net of interest income 931 911 890 951 958 922 1,142 1,720 Loss (gain) on foreign currency 1,705 2,876 (2,598) 3,108 2,573 (2,105) 3,079 2,014 12,514 (17,059) (12,524) 18,509 16,066 8,474 (1,681) 17,170 Income (loss) before income taxes (1) 11,913 34,072 28,512 (4,701) 8,860 7,262 18,170 (1,045) Income tax expense (recovery) (1) 3,339 8,530 5,548 (2,602) (12,186) (1,688) 3,588 (1,076) Net income (loss) for the period (1) 8,574 25,542 22,964 (2,099) 21,046 8,950 14,582 31 Attributable to: Owners of the Corporation (1) (1,587) 17,860 15,686 (8,651) 10,138 982 7,307 (7,407) Non-controlling interest (1) 10,161 7,682 7,278 6,552 10,908 7,968 7,275 7,438 Earnings (loss) per share attributable to owners of the Corporation: (1) Basic $ (0.051) $ 0.570 $ 0.500 $ (0.276) $ 0.323 $ 0.031 $ 0.237 $ (0.261) Fully diluted $ (0.051) $ 0.115 $ 0.241 $ (0.276) $ 0.323 $ 0.031 $ 0.093 $ (0.261) (1) As a result of an error in accounting for leases at one of the Corporation s subsidiaries, the Corporation made an immaterial non-cash correction to general and administrative expenses to reflect the difference between rent expense recorded using the straight-line method over the life of the lease versus actual payments made by the subsidiary. This adjustment is reflected for each period shown in the table above. (2) To comply with the requirements of the Canadian securities regulators, in 2014, the Corporation included amortization of other intangibles as part of operating expenses. Prior to 2014, amortization of other intangibles was classified separately from operating expenses. This change in treatment is reflected for each period shown in the table above. As a result of the different treatment, certain metrics appear different than reported in prior financial statements and MD&A. During the last eight quarters, the following items have had a significant impact on the Corporation s financial results: Revenue varies directly in relation to the number of cases performed as well as to the type of cases performed and the payor. For example, revenue for orthopedic cases will typically be higher than ear, nose and throat cases and cases funded by Medicare or Medicaid will be lower than those paid for by private insurance. Changes in case volumes, case mix and payor mix are normal and expected due to the nature of the Corporation s business. Surgical cases are mainly elective procedures and the volume of cases performed in any given period are subject to medical necessity and patient and physician preferences in scheduling (e.g., work schedules and vacations). The Corporation generally records higher revenue in the fourth quarter as many patients tend to seek medical procedures at the end of the year, primarily as a result of their inability to carry over unused insurance benefits into the following calendar year. During the course of the eight quarterly reporting periods, revenue has also been 18
impacted by the periodic receipt of EHR incentive payments and development of urgent and primary care service lines. The changes in operating expenses are consistent with fluctuations in case volumes and case mix as well as development costs for urgent and primary care. The changes in the recorded values of the convertible debentures have been driven by the changes in the market price of the Corporation s convertible debentures and fluctuations in the value of the Canadian dollar against the U.S. dollar. The changes in the recorded value of the exchangeable interest liability have been driven by (i) the changes in the number of common shares issuable for the exchangeable interest liability, which are in turn driven by the distributions to the non-controlling interest during the twelve-month period ending on the reporting date, (ii) the changes in the market price of the Corporation s common shares, and (iii) the fluctuations of the value of the Canadian dollar against the U.S. dollar. The fluctuations in interest expense on the exchangeable interest liability are due to the variation in distributions from the Centers between the reporting periods. The fluctuations in loss (gain) on foreign currency have been driven by the movements of exchange rate of the Canadian dollar in relation to U.S. dollar. Fluctuations in current income taxes have been driven by the changes in operating performance of the Centers, deductible corporate expenses, interest expense and taxable (deductible) foreign exchange gains (losses). Fluctuations in deferred income taxes have been driven primarily by the changes in the exchangeable interest liability and Canadian cumulative tax operating losses. 19
7. RECONCILIATION OF NON-IFRS FINANCIAL MEASURES The following table presents reconciliation of cash available for distribution to the cash provided by operating activities. Three Months Ended December 31, Years Ended December 31, 2014 2013 2014 2013 In thousands of U.S. dollars, except as indicated otherwise Unaudited CASH PROVIDED BY OPERATING ACTIVITIES USD 27,197 31,089 88,000 85,902 Non-controlling interest in cash flows of the Centers (1) (13,739) (14,524) (44,344) (44,447) Interest expense on exchangeable interest liability (2) 2,064 2,115 8,603 9,006 Difference between straight-line rent expense and actual payments made (3) 123 150 563 668 Maintenance capital expenditures (4) (1,062) (912) (2,984) (4,295) Difference between accrual based amounts and actual cash flows related to interest and taxes (5) (2,930) (1,007) (1,270) (4,897) Change in non-cash operating working capital items (6) 912 (2,326) (3,840) 3,308 Realized gains (losses) on foreign exchange forward contracts which matured in the current period (7) (981) (389) (3,034) 97 Repayment of debt (non-revolving) (8) (836) (1,324) (4,242) (5,704) CASH AVAILABLE FOR DISTRIBUTION USD 10,748 12,872 37,452 39,638 CDN 12,205 13,508 41,366 40,823 Realized losses (gains) on matured foreign exchange forward contracts, net of taxes USD 579 229 1,790 (58) CASH AVAILABLE FOR DISTRIBUTION EXCLUDING REALIZED LOSSES USD 11,327 13,101 39,242 39,580 (GAINS) ON FOREIGN EXCHANGE FORWARD CONTRACTS CDN 12,863 13,748 43,343 40,763 DISTRIBUTIONS CDN 8,808 8,822 35,261 34,402 CASH AVAILABLE FOR DISTRIBUTION PER COMMON SHARE (9) Including realized losses (gains) on foreign exchange forward contracts CDN $ 0.390 $ 0.431 $ 1.320 $ 1.340 Excluding realized losses (gains) on foreign exchange forward contracts CDN $ 0.411 $ 0.438 $ 1.383 $ 1.338 TOTAL DISTRIBUTIONS PER COMMON SHARE (9) CDN $ 0.281 $ 0.281 $ 1.125 $ 1.129 PAYOUT RATIO Including realized losses (gains) on foreign exchange forward contracts 72.1% 65.2% 85.2% 84.3% Excluding realized losses (gains) on foreign exchange forward contracts 68.4% 64.2% 81.3% 84.4% Average exchange rate of Cdn$ to US$ for the period 1.1356 1.0494 1.1045 1.0299 Weighted average number of common shares outstanding 31,317,912 31,366,749 31,344,891 30,474,446 (1) Non-controlling interest in cash flows of the Centers is deducted in determining cash available for distribution as distributions from the Centers to the noncontrolling interest holders are required to be made concurrently with distributions from the Centers to the Corporation. (2) Interest expense on exchangeable interest liability represents a notional amount of interest expense deducted in the determination of net income attributable to owners of the Corporation. It is added back to determine cash available for distribution as it is a non-cash charge and is not distributable to the holders of the non-controlling interest. (3) Difference between straight-line rent expense and actual payments made represents difference between rent expense recorded using straight-line method over the life of the lease versus actual payments made. As it is a non-cash adjustment, it is added back in the calculation of cash available for distribution. (4) Maintenance capital expenditures at the Center level reflect expenditures incurred to maintain the current operating capacities of the Centers and are deducted in the calculation of cash available for distribution. (5) Cash flows from operating activities, as presented in the Corporation s consolidated statements of cash flows, represent actual cash inflows and outflows, while calculation of cash available for distribution is based on the accrued amounts and, therefore, the difference between the accrual based amounts and actual cash inflows and outflows related to interest, income and withholding taxes are included in the above table. (6) While changes in non-cash operating working capital are included in the calculation of cash provided by operating activities, they are not included in the calculation of cash available for distribution as they represent only temporary sources or uses of cash due to the differences in timing of recording revenue and corresponding expenses and actual receipts and outlays of cash. Such changes in non-cash operating working capital are financed from the available cash or credit facilities of the Centers. (7) Realized gains (losses) on foreign exchange forward contracts which matured in the current period are adjusted in the determination of cash available for distribution while they are excluded from cash provided by operating activities. 20