Providing
the Facilities . . .
for Exceptional
Healthcare
2015 ANNUAL REPORT
Corporate Profile
Medical Facilities Corporation owns majority interests in four specialty
surgical hospitals located in Arkansas, Oklahoma and South Dakota, and an
ambulatory surgery center located in California. Our facilities, which are
owned in partnership with physicians, offer a range of surgical, imaging,
diagnostic, pain management and other ancillary services such as urgent
and primary care and occupational health. Revenue is derived from fees
charged for the usage of our facilities.
Medical Facilities is publicly traded on the Toronto Stock Exchange under
the symbol “DR”. In 2015, the Company paid a monthly dividend of
$0.09375 per common share. Since April 2004, the Company has paid over
140 consecutive dividends. Medical Facilities has a Dividend Reinvestment
and Share Purchase Plan for shareholders resident in Canada.
ABOUT MFC
TABLE OF CONTENTS
1 2015 Financial Highlights
2 Letter from the CEO
4 Our Facilities Map
6 Black Hills Surgical Hospital
8 Sioux Falls Specialty Hospital
10 Oklahoma Spine Hospital
12 Arkansas Surgical Hospital
14 The Surgery Center of Newport Coast
16 Patient Care
17 Performance
18 Our Markets
20 Directors and Officers
MFC at a Glance
Our facilities provide a competitive alternative to larger, traditionally-run
hospitals. We offer an unsurpassed standard of care to our patients, efficiently
and cost-effectively. Our streamlined processes minimize disruptions to our
patients while enhancing the professional and personal lives of our physician
partners. Physicians are attracted to our facilities which are managed with a
physician focus.
Acquisitions and Opportunities
In January 2016, Medical Facilities added an accretive asset to its healthcare
focused portfolio which complements our strategic direction and vision. This
diversified healthcare service company provides third-party business solutions to
healthcare entities such as physician practices, facilities, and insurance
companies.
With more than 6000 ambulatory surgery centers and over 200 specialty hospitals
in the United States, there are attractive opportunities for potential acquisitions.
2015 FINANCIAL HIGHLIGHTS
2015 generated year-over-year revenue growth of 3.8%
and an increase in income from operations of 12.0%
Repurchased 300,600 common shares at an average
price of C$15.05
Since April 2004, over 140 consecutive monthly
dividends paid to our shareholders
Revenue
2015
2014
1
$308.8M
$297.4M
Cash Available for Distribution
2
2015
2014
C$45.9M
C$41.4M
Income from Operations
2015
2014
1
$74.7M
$66.7M
Payout Ratio
2
2015
2014
76.7%
85.2%
Operating Margin
2015
2014
1
24.2%
22.4%
Strategies for Growth
Acquisition of specialty surgical hospitals and ambulatory surgery centers
Adding new service lines and increasing the complement of physicians with
medical staff privileges at our facilities
Creating purchasing efficiencies and synergies by leveraging our aggregate
purchasing power
Acquisition or development of healthcare related ventures that are accretive and
enhance the value proposition for our physician partners
All figures in US$ unless otherwise stated.
Figures have been restated for the classification of Dakota Plains Surgical Center, LLP as discontinued operation. Refer to Note 4 of Medical
1
Facilities’ 2015 audited consolidated financial statements.
Non-IFRS Financial Measures. Refer to Medical Facilities’ 2015 Management’s Discussion and Analysis.
2
1
2015 ANNUAL REPORT
Providing the Facilities . . .
for a Solid Company
Our facilities are highly ranked,
state-of-the-art facilities for
scheduled short stay and
outpatient surgeries and provide
a foundation for our plans to
capitalize on further
opportunities in this
fast-growing industry.
LETTER FROM THE CEO
Celebrating 12 years as a publicly listed
company on the Toronto Stock Exchange,
Medical Facilities Corporation (“MFC”) is
pleased to report revenue of $308.8
million and income from operations of
$74.7 million, representing a year-to-year
change of 3.8% and 12.0%, respectively.
The Future is Bright: a Thriving
Healthcare Industry
MFC is positioned to capitalize on the
robust demand for medical services. The
U.S. $2.2 trillion healthcare market is
projected to double in size over the next
decade. As well, the healthcare sector is
relatively resistant to economic
fluctuations. Healthcare is one of the
fastest growing sectors in the U.S.
economy.
SEYMOUR TEMKIN
Chair of the Board & Interim CEO
2
2015 ANNUAL REPORT
Capitalizing on Short Stay
and Outpatient Surgeries
The growth in short stay and
outpatient procedures represents an
increasing trend in healthcare. These
procedures have grown at a compound
annual rate of more than 8.5% since
1981. The popularity and efficiencies
of short stay and outpatient surgeries
attract both physicians and patients to
MFC facilities. New and more complex
surgical procedures are expected to
increase growth, revenues, and
efficiencies.
Industry Leading Standard
of Care and Efficiencies
MFC combines the highest standard of
care with a fine hospitality
environment. We provide quality
services that address every aspect of
our patients’ stays. From spacious,
state-of-the-art operating facilities to
some of the best nurse patient ratios
in the industry, our comfortable
facilities are welcoming to family
members and visitors.
Standard of care and efficiency are
central to every aspect of our
business. Our facilities specialize in a
specific range of inpatient and
outpatient surgeries. MFC's facilities
compare favourably with the larger,
traditional hospitals, which often
exhibit costly and frustrating
inflexibility for physicians and their
patients.
High standards in our facilities are
corroborated by rigorous and neutral
third-party evaluations that rank us
against the best hospitals in the
nation. The data consistently shows
that our facilities are equivalent to, or
surpass the highest customer
satisfaction regarding our medical
teams, facilities, services, and
communications with our patients.
Strengthening Local
Communities
MFC’s facilities are distinguished in
each of their respective marketplaces.
They provide services in smaller
communities that boost the local
economy, while serving as medical
destinations which draw visitors from
neighboring towns, cities and states.
The MFC Model: Physician
Investors
To ensure an alignment of
management and investors, a majority
of MFC physicians are significant
investors in their local facility. Besides
retaining a financial interest, the
physicians are actively involved in
managing our facilities, in contrast
with the model used in most large
hospital systems in the United States.
The MFC physicians’ expertise in their
respective fields of medicine is key to
attracting the best medical teams, as
well as leading technologies, in a
context of quality care, efficiencies
and responsiveness.
Stable Income Distributions
MFC pays out a majority of its free
cash flows from operations in the form
of a monthly dividend to common
shareholders. To build value
throughout our facilities and our
organization, MFC keeps a keen eye on
business metrics. We monitor our
operations and procedures to enhance
our standard of care, and to ensure
efficiencies that reduce waiting times,
minimize costs, and improve
outcomes. This disciplined focus
builds value for our shareholders in
the context of stable cash flows. Our
overall strategy is to return a stable
and secure income for our
shareholders.
With a proven track record, MFC has a
promising future in a growing industry.
By improving its standards of care,
efficiencies and services, increasing
profitability, and using a disciplined
acquisition strategy, the future for
MFC and its shareholders is bright.
Thank you for your continued
confidence and support of Medical
Facilities Corporation.
SEYMOUR TEMKIN
Chair of the Board & Interim CEO
3
2015 ANNUAL REPORT
Our Facilities
Black Hills Surgical Hospital
Sioux Falls Specialty Hospital
Oklahoma Spine Hospital
Arkansas Surgical Hospital
The Surgery Center of Newport Coast
Black Hills
Surgical
Hospital
Rapid City, South Dakota
The Surgery
Center of
Newport
Coast
Newport Beach, California
4
2015 ANNUAL REPORT
Sioux Falls
Specialty
Hospital
Sioux Falls, South Dakota
Arkansas
Surgical
Hospital
North Little Rock,
Arkansas
Oklahoma
Spine
Hospital
Oklahoma City, Oklahoma
5
2015 ANNUAL REPORT
Providing the Facilities . . .
for Exceptional Healthcare
95%
of patients would
recommend our
hospital. Awarded
CMS 5 star rating
One of the top 100 spine
hospitals in the U.S.
(www.healthgrades.com)
Black Hills
Surgical Hospital
Rapid City, South Dakota
6
2015 ANNUAL REPORT
Operating as a licensed specialty
hospital since 1997. Ranked 6th
in clinical care and service out of
more than 3,000 hospitals by
Modern Healthcare, a premiere
weekly medical journal in the
United States.
BHSH is a multi-specialty facility with a large component of
orthopedic and neurosurgical procedures. The hospital
features approximately 75,000 square feet with 11 operating
rooms, 26 private recovery suites, 97 physicians with
medical staff privileges and a clinical staff of 283. BHSH
utilizes the 3T MRI, the world’s most powerful imaging tool.
BHSH offers one nurse for every 3 patients, a hotel-like
ambiance, and quality food.
7
2015 ANNUAL REPORT
The health services industry in
Sioux Falls is one of the city's
primary industries
Sioux Falls
Specialty Hospital
Sioux Falls, South Dakota
Originally built in 1985, the 76,000 square feet hospital
features 13 operating rooms, 35 overnight rooms and a
clinical staff of 187. SFSH has 224 physicians with medical
staff privileges. A recovery care department addresses
patient’s postoperative needs. Primary care and occupational
health clinics are also available.
8
2015 ANNUAL REPORT
A full complement of radiology
and diagnostic services,
including 3T and open upright
MRI's
91%
of patients would recommend
our hospital. Awarded CMS 5 star
rating
To assure recovery, SFSH has a
high nurse to patient ratio
9
2015 ANNUAL REPORT
88%
of patients would recommend
our hospital. Awarded CMS 5
star rating
Number one rank of all
hospitals in Oklahoma for spinal
surgery
(www.carechex.com)
10
2015 ANNUAL REPORT
Oklahoma Spine
Hospital
Oklahoma City, Oklahoma
On-site, the OSH features
pharmacy, laboratory and dietary
services. As part of its
comprehensive care program,
OSH features a 7,500 square feet,
off-site, physical therapy service
owned and operated by the
hospital.
In a 61,000 square foot facility, OSH is a licensed specialty
hospital with a focus on a limited number of clinical and
surgical specialties, including neurosurgery and pain
management. OSH features 7 large operating rooms, 25
private patient beds and a clinical staff of 200. 96
physicians have medical staff privileges.
11
2015 ANNUAL REPORT
Arkansas
Surgical Hospital
North Little Rock, Arkansas
ASH opened in 2005 as a physician-owned specialty hospital. The hospital is at the
forefront of orthopedic, spine and reconstructive surgeries. Expertise is provided in
breast oncology and pain management procedures. X-ray, CT, MRI and myelography
services are also provided. The hospital features 11 operating rooms, 41 overnight
rooms and a clinical staff of 208. There are currently 209 physicians with medical staff
privileges at ASH.
12
2015 ANNUAL REPORT
Recovery is facilitated with
quality, caring Registered
Nurses
ASH is a leading facility for
orthopedic, spine and
reconstructive surgeries, as well
as breast oncology.
91%
of patients would recommend our
hospital. Awarded CMS 5 star
rating
13
2015 ANNUAL REPORT
SCNC is an accredited Medicare
Deemed Multi-Specialty Facility
by the Accreditation
Association for Ambulatory
Health Care.
The Surgery Center
of Newport Coast
Newport Beach, California
Since 2004, this 7,000 square foot facility specializes in orthopedics,
pain management, general surgery, gastroenterology, gynecology, and
cosmetic surgery. Focusing on same-day surgeries, the facility has two
large operating rooms and a special procedure room, as well as private
and comfortable pre-operative and post-operative recovery rooms.
14
2015 ANNUAL REPORT
Our medical director consults
with our physicians and director
of nursing to ensure quality
care
SCNC is the premiere hip
arthroscopy center in Orange
County, CA. Patients from all over
the United States visit Dr. Warren
Kramer and his team for hip
arthroscopy.
15
2015 ANNUAL REPORT
PATIENT CARE
Providing the Facilities . . .
for Optimal Patient Outcomes
Surgeons, registered nurses
and medical support staff at
our facilities help ensure that
their patients are provided
quality care during their
operation, post-operation, and
rehabilitation phases.
OPERATION
POST-OPERATION
REHABILITATION
The physicians and staff at our
facilities provide medical and surgical
expertise focused on a limited number
of specialized procedures. To facilitate
quality care, our facilities utilize state-
of-the-art medical equipment. Positive
outcomes are enhanced with high
nurse to patient coverage ratios. Our
expertise provides faster turnaround
times in operating rooms, and in
post-operative care. Surveys show
that our facilities have low infection
rates and post-operative
complications.
Our facilities are designed to ensure a
pleasant stay, for patients and families
alike. Patients enjoy our high
standards, equivalent to a fine
hospitality service. Facilities include
private suites, coupled with guest
rooms for family members and
caregivers. Amenities may include
flowers, robes, complimentary bath
products and toiletries, flat screen TVs
with DVD players, newspapers and
magazines, iPads and complimentary
Internet. Our facilities receive
excellent feedback about their
amenities and tasty and nutritious
food.
Our facilities provide services and
procedures to help patients return to
optimal functionality in a timely
manner. Services include customized
rehabilitation programs and on-going
monitoring. Board-certified pain and
rehabilitation specialists,
multispecialty therapists, and
professional support staff incorporate
innovative products and best-practice
procedures.
16
2015 ANNUAL REPORT
PERFORMANCE
A Proven Business Model
Increasing revenue, income from operations, and
generation of free cash flow demonstrate the efficacy
of Medical Facilities’ business model.
1
Revenue (US$M)
Income from Operations and
Operating Margin
US$M
1
100
400
300
200
100
0
293.2 297.4
308.8
75
70.7
72.9
66.8
66.7
74.7
225.4
203.3
2011
2012
2013
2014
2015
50
25
0
34.7
32.3
22.8
22.4
24.2
2011
2012
2013
2014
2015
Operating Margin (%)
Income from Operations (US$M)
All figures in US$ unless otherwise stated.
1
Figures have been restated for the classification of Dakota Plains Surgical Center,
LLP as discontinued operation. Refer to Note 4 of Medical Facilities’ 2015 audited
consolidated financial statements.
%
100
75
50
25
0
Cash Available for Distribution , Dividends Paid,
Payout Ratio
C$M
2
2
50
92.3
83.3
84.3
85.2
41.4
45.9
76.7
35.2
40.8
37.8
33.8
31.2
31.5
34.4
35.3
25
0
2011
2012
2013
2014
2015
Payout Ratio (%)
Cash Available for Distribution (C$M)
Dividends Paid (C$M)
2
Non-IFRS Financial Measures. Refer to Medical Facilities’
2015 Management’s Discussion and Analysis.
%
100
75
50
25
0
Share Price Performance* (C$)
Total Return* (C$)
25
20
15
10
5
0
$14.39
2011
2012
2013
2014
2015
* Share price as at market close.
300
240
180
120
60
0
$195.98
$96.78
2011
2012
2013
2014
2015
Medical Facilties
S&P/TSX Composite Index
* Assumes C$100 investment with dividends reinvested in Medical Facilities’
common shares.
17
2015 ANNUAL REPORT
OUR MARKETS
Providing the Facilities . . .
for Exceptional Growth Potential
2015 PAYOR MIX
Gross Billings (%)
Net Revenue (%)
Our facilities operate in markets where Blue
Cross/Blue Shield and affiliates comprise the
largest portions of their payor mix.
Our facilities actively negotiate with payors for
improved re-imbursement rates, contract
terms and access to large patient populations
covered by payor contracts.
Emphasizing cost advantages, efficiencies,
and high standard of care, our facilities market
their hospitals directly to payors.
Blue Cross/Blue Shield
Medicare/Medicaid
Worker's Comp
Other Private Insurers
Other
HEALTHCARE REFORM
Medical Facilities’ track record of efficiently delivering the highest standard of care to our patients is being rewarded
under the Patient Protection and Affordable Care Act. Payors demand efficient, cost-effective services, with excellent
outcomes, which align with the strategic focus and best practices of Medical Facilities. Our strategic, disciplined and
efficient approach positions us to be attractively compensated by payors and to address the future challenges of
healthcare reform. With our excellent performance on the 20 factors used by Medicare to evaluate hospital inpatient
stays, our facilities qualified for incentive payments.
18
2015 ANNUAL REPORT
HEALTH EXPENSES BY SOURCE
2013 (%)
2024E (%)
Medical Facilities has a track record of high levels
of patient satisfaction while generating profit
within Medicare rates.
Total health spending growth in the United States
is expected to average 5.8% over 2014-2024.
1
The insured rate is expected to rise from 86.0% to
92.4% as the number of uninsured is projected to
fall by 18 million over the next 11 years.
1
The enrollment of baby boomers, coupled with
reform mandated changes, are projected to
increase Medicare and Medicaid expenditures from
35% in 2012 to 40% by 2023.
1
Source: Centers for Medicare & Medicaid Services, 2014-2024 Projections
of National Health Expenditures Data Release, Press Release of July 28,
2015.
Medicare/Medicaid
Private Health Insurance
Other Third-Party Payors
Out of Pocket
Other Health Insurance
Source: Center for Medicare & Medicaid Services, National Health
Expenditures, December 2015.
REGIONAL TABLE
11
UUnneemmppllooyymmeenntt RRaattee ((%%))
UU..SS..
SSoouutthh DDaakkoottaa
OOkkllaahhoommaa
AArrkkaannssaass
Strategically located in smaller
regional metropolitan areas, our
Facilities are the preferred choice of
residents in the local and surrounding
areas.
2015
2014
5.0
5.6
2.9
3.3
4.1
3.9
4.7
5.7
22
6655 aanndd OOvveerr ((%% ooff ppooppuullaattiioonn))
2014
14.5
15.3
14.5
15.7
1
2
Source: The Bureau of Labour Statistics of the US Department of Labor.
Source: U.S. Census Bureau, Population Estimates as of July 1, 2014. Release Date: June 2015.
POPULATION
PROJECTIONS
The 45+ population is expected to
drive demand for the services
provided by our facilities.
19
2015 ANNUAL REPORT
2020 Projections
~335M
U.S. Population
2030 Projections
~356M
U.S. Population
Source: U.S. Census Bureau, National Population Projections, December 2014.
~46%
of Population 45+
~44%
of Population 45+
DIRECTORS & OFFICERS
Expert Guidance
and Strong Leadership
Seymour Temkin
Interim CEO
and Chair of the Board
David Bellaire
Director
Marilynne Day-Linton
Lead Director
Stephen Dineley
Director
Dr. Gil Faclier
Director
Irving Gerstein
Director
Dale Lawr
Director
Jeffrey Lozon
Director
John Perri
Director
Dr. Donald Schellpfeffer
Director
Michael Salter
Chief Financial Officer
20
2015 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FOR THE THREE MONTHS AND YEAR ENDED
DECEMBER 31, 2015
March 16, 2016
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, 2015, 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
Caution Concerning Forward-Looking Statements ............................................................................ 2
1.
Non-IFRS Financial Measures ............................................................................................................ 3
2.
Business Overview .............................................................................................................................. 3
3.
Financial and Performance Highlights ................................................................................................ 5
4.
Consolidated Operating and Financial Review ................................................................................... 7
5.
Quarterly Operating and Financial Results ....................................................................................... 17
6.
Reconciliation of Non-IFRS Financial Measures ............................................................................. 19
7.
Subsequent Event .............................................................................................................................. 21
8.
Outlook .............................................................................................................................................. 21
9.
Liquidity and Capital Resources ....................................................................................................... 23
10.
Share Capital and Dividends ............................................................................................................. 26
11.
Financial Instruments ........................................................................................................................ 27
12.
13. Related Party Transactions ................................................................................................................ 29
14. Critical Accounting Judgments and Estimates .................................................................................. 31
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. Forward-
looking 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 forward-
looking 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 financial measures which it believes provide useful measures for
evaluation and assessment of the Corporation’s performance. Non-IFRS financial 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 financial measures which are presented in Section 7 of this
MD&A under the heading “Reconciliation of Non-IFRS Financial Measures” and reconciled to the
applicable IFRS measures:
Cash available for distribution is a non-IFRS financial 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, non-controlling interest in cash flows at the Center level and gains or
losses on foreign exchange forward contracts matured in the relevant 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 financial measure calculated as
the cash available for distribution divided by the weighted average number of 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 financial 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. 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 (“convertible
debentures”). The Corporation’s current monthly dividend on its common shares is Cdn$0.09375 per
share.
3
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”), five of which own 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 orthopedic, neurosurgery, pain management and
other non-emergency elective procedures. In addition, three of the SSHs provide primary and urgent care
to their communities.
On June 4, 2015, Dakota Plains Surgical Center, LLP (“DPSC”), the Corporation’s 65% owned
subsidiary, entered into an asset purchase agreement to sell the assets related to the operation of its SSH in
Aberdeen, South Dakota, to Avera St. Luke’s. The transaction was completed on June 30, 2015 for net
proceeds of $33.8 million. For the year ended December 31, 2015, results for DPSC, including gain on
sale of DPSC’s assets, are presented in “Income for the year from discontinued operation” in the
statement of comprehensive income. The Corporation’s share of the gain on disposal of assets of DPSC
amounted to $9.3 million on an after-tax basis. For additional information on the discontinued operation,
please see Note 4 in the Corporation’s financial statements.
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.
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
4
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, 2015
Location
Year Opened
Year Acquired by the Corporation
Ownership Interest
Non-controlling Interest
Exchangeable Interest
Size
Operating Rooms
Overnight Rooms
(1) Licensed for 49 beds.
Black Hills
Surgical
Hospital
(“BHSH”)
Rapid City
South Dakota
1997
2004
54.2%
45.8%
10.8%
75,000 sq ft
11
26
Sioux Falls
Specialty
Hospital
(“SFSH”)
Sioux Falls
South Dakota
1985
2004
51.0%
49.0%
14.0%
76,000 sq ft
13
35
Oklahoma
Spine
Hospital
(“OSH”)
Oklahoma City
Oklahoma
1999
2005
60.3%
39.7%
4.7%
61,000 sq ft
7
25
Arkansas
Surgical
Hospital
(“ASH”)
North Little Rock
Arkansas
2005
2012
51.0%
49.0%
5.0%
126,000 sq ft
11
41(1)
The Surgery
Center of
Newport Coast
(“SCNC”)
Newport Beach
California
2004
2008
51.0%
49.0%
-
7,000 sq ft
2
-
4. FINANCIAL AND PERFORMANCE HIGHLIGHTS
Selected Financial Information from Continuing Operations
In thousands of U.S. dollars, except per share amounts and as indicated otherwise
Facility service revenue
Operating expenses
Income from operations
Income for the year from continuing operations
Attributable to:
Owners of the Corporation
Non-controlling interest(1)
Earnings per share attributable to owners of the Corporation
Basic
Fully diluted
Cash available for distribution(2)
Distributions
Cash available for distribution per common share(2)
Distributions per common share
2015
308,778
234,086
74,692
70,179
37,018
33,161
$ 1.18
$ 0.53
C$ 45,853
C$ 35,186
C$ 1.466
C$ 1.125
For the Years Ended December 31,
2013
293,160
226,402
66,758
39,250
2014
297,382
230,695
66,687
51,151
21,245
29,906
8,137
31,113
$ 0.68
$ 0.51
C$ 41,366
C$ 35,261
C$ 1.320
C$ 1.125
$ 0.27
$ 0.27
C$ 40,823
C$ 34,402
C$ 1.340
C$ 1.129
Payout ratio(2)
76.7%
85.2%
84.3%
Total assets
Total long-term financial liabilities(3)
At December 31,
2015
At December 31,
2014
At December 31,
2013
382,952
58,194
409,709
71,799
439,253
59,141
(1) Income from continuing operations attributable to non-controlling interest represents the interest of the Centers’ non-controlling interests in the net
income of the Centers on a stand-alone basis and, therefore, varies in direct relation to the operating results of the Centers. On the other hand, income from
continuing operations 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.
5
(2) Non-IFRS financial 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” for a reconciliation to the equivalent IFRS measure.
(3) Consists of long-term debt and convertible debentures.
Selected Financial Information from Continuing Operations for the Year Ended December 31, 2015
Compared to the Year Ended December 31, 2014
For the year ended December 31, 2015, revenue was $308.8 million, an increase of 3.8% over 2014 due to
the growth in revenue recorded by all Centers. Income from operations increased by 12.0% to
$74.7 million, or 24.2% of revenue, compared to $66.7 million, or 22.4% of revenue, in 2014. Income for
the year from continuing operations was $70.2 million compared to $51.2 million in 2014. The increase in
income from continuing operations was primarily due to the positive impact of declines in the values of
exchangeable interest liability and convertible debentures, and higher income from operations, which
were partially offset by an increase in income tax expense. The Corporation generated cash available for
distribution of Cdn$45.9 million, an increase of 10.9% over the prior year. Distributions per common
share remained consistent between the years at Cdn$1.125, while the payout ratio was 76.7% compared to
85.2% for the year ended December 31, 2014. For a reconciliation of the foregoing non-IFRS financial
measures to the applicable IFRS measures, see Section 7 under the heading “Reconciliation of Non-IFRS
Financial Measures”.
Selected Financial Information from Continuing Operations for the Year Ended December 31, 2014
Compared to the Year Ended December 31, 2013
For the year ended December 31, 2014, revenue was $297.4 million, an increase of 1.4% 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 0.1% to $66.7 million, or 22.4% of revenue, compared to
$66.8 million, or 22.8% of revenue, in 2013. Income for the year from continuing operations of
$51.2 million increased by 30.3%, 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.
6
5. CONSOLIDATED OPERATING AND FINANCIAL REVIEW
Three Months Ended December 31, 2015
The following table and discussion compare operating and financial results of the Corporation from
continuing operations for the three months ended December 31, 2015 to the three months ended
December 31, 2014.
Unaudited
In thousands of U.S. dollars, except per share amounts
Facility service revenue
Operating expenses
Salaries and benefits
Drugs and supplies
General and administrative expenses
Depreciation of property and equipment
Amortization of other intangibles
Three Months Ended
December 31,
2015
89,760
2014
82,457
$ Change % Change
8.9%
7,303
22,145
24,138
9,768
2,119
3,796
61,966
20,259
22,791
11,524
2,361
3,408
60,343
1,886
1,347
(1,756)
(242)
388
1,623
9.3%
5.9%
(15.2%)
(10.2%)
11.4%
2.7%
Income from operations
27,794
22,114
5,680
25.7%
Finance costs
Decrease in value of convertible debentures
Decrease (increase) in value of exchangeable interest liability
Interest expense on exchangeable interest liability
Interest expense, net of interest income
Loss on foreign currency
Income before income taxes
Income tax expense
Income for the period from continuing operations
Attributable to:
Owners of the Corporation
Non-controlling interest
(2,077)
(8,249)
2,263
753
293
(7,017)
(242)
8,017
2,069
895
1,705
12,444
(1,835)
(16,266)
194
(142)
(1,412)
(19,461)
758.3%
(202.9%)
9.4%
(15.9%)
(82.8%)
(156.4%)
34,811
9,670
25,141
259.8%
9,500
2,923
6,577
225.0%
25,311
6,747
18,564
274.9%
13,343
11,968
(2,561)
9,308
15,904
2,660
(621.0%)
28.6%
Basic earnings (loss) per share attributable to owners of the Corporation
Fully diluted earnings (loss) per share attributable to owners of the Corporation
$ 0.43
$ 0.22
($ 0.08)
($ 0.08)
$ 0.51
$ 0.30
(637.5%)
(375.0%)
Revenue
Unaudited
In thousands of U.S. dollars
BHSH
SFSH
OSH
ASH
SCNC
Facility service revenue
Three Months Ended December 31,
2014
21,687
26,158
16,853
15,783
1,976
82,457
2015
22,539
29,988
17,625
17,447
2,161
89,760
$ Change
852
3,830
772
1,664
185
7,303
% Change
3.9%
14.6%
4.6%
10.5%
9.4%
8.9%
For the three months ended December 31, 2015, consolidated revenue of $89.8 million increased by
$7.3 million or 8.9% from the same period in 2014 primarily due to the growth in case volume
($7.2 million), a favourable shift in payor mix ($0.8 million), and higher ancillary revenue from pain
7
management, imaging and urgent and primary care cases ($0.5 million), which were partially offset by an
unfavourable shift in case mix ($1.4 million).
Total surgical cases increased by 9.3%, a large portion of which was for outpatient cases which have a
lower fee schedule. Total pain management procedures increased by 3.6%. The payor mix reflected a
higher proportion of cases which were funded by commercial insurance and self-pay patients.
The above factors are reflected in each Center’s revenue as follows:
BHSH recorded growth in surgical case volume and more favourable payor mix, which were partially
offset by changes in case mix, primarily related to smaller cases that generate lower revenue per case.
SFSH recorded an increase in surgical cases, a favourable shift in payor mix, and growth in pain
management, imaging, and primary care revenue, which were partially offset by changes in case mix
and electronic health records (“EHR”) incentive payments.
OSH’s revenue increased primarily due to an increase in surgical cases and the addition of urgent care
revenue, partially offset by changes in payor mix and EHR incentive payments.
ASH recorded an increase in surgical case volume which was partially offset by changes in case mix.
SCNC’s revenue was positively impacted by a more favourable case mix attributable to increased
women’s health and complex orthopedic cases and billings due to flow-through charges for implants,
along with favourable changes to payor mix, which were partially offset by a decline in surgical cases.
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 $62.0 million, an increase of $1.6 million or 2.7%. As a percentage of
revenue, operating expenses decreased to 69.0% from 73.2% in the same period a year earlier.
Unaudited
Three Months Ended December 31,
In thousands of U.S. dollars
BHSH
SFSH
OSH
ASH
SCNC
Corporate
Operating expenses
2015
14,003
16,958
13,648
9,829
1,636
5,892
61,966
Percentage
of Revenue
62.1%
56.5%
77.4%
56.3%
75.7%
n/a
69.0%
2014
14,178
14,607
13,523
11,542
1,574
4,919
60,343
Percentage
of Revenue
65.4%
55.8%
80.2%
73.1%
79.7%
n/a
73.2%
$ Change
(175)
2,351
125
(1,713)
62
973
1,623
% Change
(1.2%)
16.1%
0.9%
(14.8%)
3.9%
19.8%
2.7%
Consolidated salaries and benefits increased by $1.9 million or 9.3%. Salaries and benefits at the Center
level increased primarily due to annual salary increases and employee profit sharing at ASH which
together totaled $0.7 million, increased staffing levels at BHSH ($0.2 million), increased urgent care and
pain management staffing at OSH ($0.2 million), and administrative salary increases and incentive pay
changes at SFSH ($0.3 million). Salaries and benefits at the corporate level were higher compared to the
same period in 2014 due to retirement allowance and incentive compensation. As a percentage of revenue,
consolidated salaries and benefits increased to 24.7% from 24.6% a year earlier.
8
Consolidated drugs and supplies increased by $1.3 million or 5.9% primarily due to higher case volumes
($2.0 million) and an accrual at SFSH for performance fees of $0.4 million in relation to the orthopedic
service line management agreement (refer to Section 13 of this MD&A under the heading “Related Party
Transactions”), which were partially offset by changes in case mix and cost savings amounting to
$1.1 million. As a percentage of revenue, consolidated cost of drugs and supplies declined to 26.9% from
27.6% a year earlier.
Consolidated general and administrative expenses (“G&A”) decreased by $1.8 million or 15.2% primarily
due to a non-cash reversal of an accrued rent liability by ASH ($2.7 million) that resulted from the early
termination of ASH’s premises lease, and declines in contributions ($0.5 million), which were made in
2014 to Patient Choice for South Dakota in support of Initiated Measure 17, and purchased services
($0.2 million). These decreases were partially offset by $0.5 million in payments by SFSH for
management services related to the orthopedic service line management agreement and $0.2 million in
accountable care organization costs (refer to Section 13 of this MD&A under the heading “Related Party
Transactions”), and $0.7 million in professional fees, consulting fees, information technology costs and
repairs and maintenance costs. As a percentage of revenue, consolidated G&A decreased to 10.9% from
14.0% a year earlier.
Consolidated depreciation of property and equipment declined by $0.2 million or 10.2% primarily due to
certain assets being fully depreciated at the Centers. As a percentage of revenue, consolidated
depreciation of property and equipment declined to 2.4% from 2.9% a year earlier.
Consolidated amortization of other intangibles increased by $0.4 million or 11.4%. As a percentage of
revenue, consolidated amortization of other intangibles increased to 4.2% from 4.1% a year earlier.
Income from Operations
Consolidated income from operations of $27.8 million was $5.7 million or 25.7% higher than
consolidated income from operations recorded a year earlier, representing 31.0% of revenue compared to
26.8% in the same period in 2014. The increase in consolidated income from operations reflects the
growth in consolidated revenue, coupled with lower G&A at ASH due to the non-cash reversal of an
accrued rent liability.
Unaudited
Three Months Ended December 31,
In thousands of U.S. dollars
BHSH
SFSH
OSH
ASH
SCNC
Corporate
Income from operations
Finance Costs
2015
8,536
13,030
3,977
7,618
525
(5,892)
27,794
Percentage
of Revenue
37.9%
43.5%
22.6%
43.7%
24.3%
n/a
31.0%
2014
7,509
11,551
3,330
4,241
402
(4,919)
22,114
Percentage
of Revenue
34.6%
44.2%
19.8%
26.9%
20.3%
n/a
26.8%
$ Change
1,027
1,479
647
3,377
123
(973)
5,680
% Change
13.7%
12.8%
19.4%
79.6%
30.6%
19.8%
25.7%
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
9
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 calculations of the changes in values of the convertible debentures for the
reporting periods:
In thousands of U.S. dollars, except as
indicated otherwise
Face value of convertible
debentures outstanding in
thousands of Canadian dollars
December 31,
2015
September 30,
2015
Unaudited
Change
December 31,
2014
September 30,
2014
Unaudited
Change
C$41,743
C$41,755
(C$12)
C$41,786
C$41,786
-
Closing price of convertible
debentures outstanding
Closing exchange rate of U.S.
dollar to Canadian dollar
Market value of convertible
debentures outstanding
Repurchase of convertible debentures under
C$101.50
C$1.3840
C$104.51
(C$3.01)
C$105.50
C$102.50
C$3.00
C$1.3345
C$0.0495
C$1.1601
C$1.1200 C$0.0401
30,614
32,700
(2,086)
38,000
38,242
(242)
normal course issuer bid
Change in value of convertible debentures
9
(2,077)
-
(242)
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
(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 calculations of the changes in values of the exchangeable interest liability
for the reporting periods:
In thousands of U.S. dollars, except as
indicated otherwise
Number of common shares to be
issued for exchangeable interest
liability
Less number of common shares to be
issued for exchangeable interest
liability attributable to discontinued
operation
Number of common shares to be
issued for exchangeable interest
liability attributable to continuing
operations
Closing price of the Corporation’s
common shares
Closing exchange rate of U.S. dollar to
Canadian dollar
Exchangeable interest liability
December 31,
2015
September 30,
2015
Unaudited
Change
December 31,
2014
September 30,
2014
Unaudited
Change
5,932,340
5,940,296
(7,956)
5,851,799
6,009,415
(157,616)
-
-
-
-
(17,716)
17,716
5,932,340
5,940,296
(7,956)
5,851,799
5,991,699
(139,900)
C$14.39
C$15.71
(C$1.32)
C$18.41
C$15.86
C$2.55
C$1.3840
61,681
C$1.3345
69,930
C$0.0495
(8,249)
C$1.1601
92,864
C$1.1200
84,847
C$0.0401
8,017
10
Interest on Exchangeable Interest Liability
For the three months ended December 31, 2015, interest expense on the exchangeable interest liability
increased by $0.2 million over the same period in 2014, primarily due to the variation in distributions
from the Centers between the reporting periods.
Interest Expense
For the three months ended December 31, 2015, interest expense, net of interest income, decreased by
$0.1 million from the same period in 2014, primarily due to lower interest expense at Center level and a
decline in Canadian dollar interest expense on the convertible debentures due to the changes in foreign
exchange rates.
Foreign Currency Losses
The Corporation’s functional and 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 decline in foreign currency losses of $1.4 million compared to the same period in 2014 is
attributable to the fluctuations in the value of the Canadian dollar in relation to U.S. dollar during the
three months ended December 31, 2015 compared to the same period in 2014, as well as the expiry and
settlement of foreign exchange forward contracts in the respective periods.
Income Tax
Current and deferred tax components of the income tax expense for the reporting periods are as follows:
Unaudited
In thousands of U.S. dollars
Current income tax expense
Deferred income tax expense
Income tax expense
Three Months Ended December 31,
2014
2015
2,801
6,699
9,500
1,905
1,018
2,923
$ Change
% Change
896
5,681
6,577
47.0%
558.1%
225.0%
The increase in current income taxes was primarily attributable to the increase in taxable income. The
increase in deferred income tax expense was primarily attributable to the tax effect of the change in
exchangeable interest liability and the utilization of the deferred tax asset related to the Canadian
cumulative tax operating losses.
Income from Continuing Operations
The $18.6 million increase in income from continuing operations for the three months ended
December 31, 2015 over the same period in 2014 was primarily due to the impact of a decline in the value
of exchangeable interest liability and improved performance of the Centers.
11
Year Ended December 31, 2015
The following table and discussion compare operating and financial results of the Corporation from
continuing operations for the year ended December 31, 2015 to the year ended December 31, 2014.
In thousands of U.S. dollars, except per share amounts
Facility service revenue
Operating expenses
Salaries and benefits
Drugs and supplies
General and administrative expenses
Depreciation of property and equipment
Amortization of other intangibles
Years Ended
December 31,
2015
308,778
2014
297,382
80,223
84,810
44,995
8,909
15,149
234,086
77,331
84,537
43,882
9,573
15,372
230,695
$ Change % Change
3.8%
11,396
2,892
273
1,113
(664)
(223)
3,391
3.7%
0.3%
2.5%
(6.9%)
(1.5%)
1.5%
Income from operations
74,692
66,687
8,005
12.0%
Finance costs
Decrease in value of convertible debentures
Decrease in value of exchangeable interest liability
Interest expense on exchangeable interest liability
Interest expense, net of interest income
Loss on foreign currency
Income before income taxes
Income tax expense
Income for the year from continuing operations
Attributable to:
Owners of the Corporation
Non-controlling interest
Basic earnings per share attributable to owners of the Corporation
Fully diluted earnings per share attributable to owners of the Corporation
(7,353)
(30,036)
9,172
3,024
4,987
(20,206)
(3,253)
(12,757)
8,591
3,538
5,091
1,210
(4,100)
(17,279)
581
(514)
(104)
(21,416)
126.0%
135.4%
6.8%
(14.5%)
(2.0%)
(1,769.9%)
94,898
65,477
29,421
44.9%
24,719
14,326
10,393
72.5%
70,179
51,151
19,028
37.2%
37,018
33,161
21,245
29,906
$ 1.18
$ 0.53
$ 0.68
$ 0.51
15,773
3,255
$ 0.51
$ 0.03
74.2%
10.9%
73.5%
3.9%
Revenue
In thousands of U.S. dollars
BHSH
SFSH
OSH
ASH
SCNC
Facility service revenue
Years Ended December 31,
2015
78,749
95,773
63,363
63,061
7,832
308,778
2014
76,687
88,118
63,913
60,450
8,214
297,382
$ Change
2,062
7,655
(550)
2,611
(382)
11,396
% Change
2.7%
8.7%
(0.9%)
4.3%
(4.7%)
3.8%
For the year ended December 31, 2015, consolidated revenue of $308.8 million increased by
$11.4 million or 3.8% over 2014. Consolidated revenue growth was attributable to higher case volumes,
which generated additional revenue of $14.1 million, and increased ancillary (imaging, and primary and
urgent care) revenue of $2.3 million, which were partially offset by changes in case mix of $3.9 million
and a decline in EHR incentive payments of $1.1 million.
12
Total surgical cases increased by 4.5%, a large portion of which was due to outpatient cases. Total pain
management procedures increased by 6.6%.
The above factors are reflected in each Center’s revenue as follows:
BHSH recorded revenue growth due to a favourable shift in payor mix, increases in urgent care, pain
management and imaging revenue, and pharmacy fee increases, which were partially offset by changes
in EHR incentive payments.
SFSH recorded an increase in surgical cases, favourable changes in payor mix, and growth in imaging,
pain management and primary care revenue, which were partially offset by changes in case mix and
EHR incentive payments.
OSH’s revenue decreased primarily due to unfavourable changes in payor mix and EHR incentive
payments, which were partially offset by growth in case volumes.
ASH recorded growth in case volumes and EHR incentive payments, which were partially offset by
changes in case mix.
SCNC’s revenue was negatively impacted by a decline in surgical cases and unfavourable changes in
payor mix, which were partially offset by a favourable change in case mix attributable to increases in
women’s health and complex orthopedic cases.
Operating Expenses
Consolidated operating expenses totaled $234.1 million, an increase of $3.4 million or 1.5%. As a
percentage of revenue, operating expenses declined to 75.8% from 77.6% a year earlier.
In thousands of U.S. dollars
BHSH
SFSH
OSH
ASH
SCNC
Corporate
Operating expenses
Years Ended December 31,
Percentage
of Revenue
68.1%
59.6%
80.4%
71.4%
78.8%
n/a
75.8%
2014
53,577
51,988
52,244
46,061
6,043
20,782
230,695
Percentage
of Revenue
69.9%
59.0%
81.7%
76.2%
73.6%
n/a
77.6%
2015
53,662
57,035
50,941
45,054
6,174
21,220
234,086
$ Change
85
5,047
(1,303)
(1,007)
131
438
3,391
% Change
0.2%
9.7%
(2.5%)
(2.2%)
2.2%
2.1%
1.5%
Consolidated salaries and benefits increased by $2.9 million or 3.7% compared to 2014. Salaries and
benefits at the Center level increased primarily due to $1.8 million of annual salary increases at the
Centers and higher employee profit sharing at ASH, $0.8 million relating to higher administrative salaries,
primary care staffing and incentive payment at SFSH, increased staffing at BHSH ($0.5 million), and
increased urgent care and pain management staffing at OSH ($0.3 million), which were partially offset by
lower benefits costs ($0.8 million). Salaries and benefits at the corporate level increased compared to
2014 primarily due to retirement allowance ($0.7 million), which was partially offset by the changes in
the value of the directors’ deferred share unit plan ($0.5 million). As a percentage of revenue,
consolidated salaries and benefits remained unchanged at 26.0%.
13
Consolidated drugs and supplies increased by $0.3 million or 0.3% compared to 2014 primarily due to
higher case volume ($4.1 million) and a $1.4 million expense at SFSH for performance fees in relation to
the orthopedic service line management agreement (refer to Section 13 of this MD&A under the heading
“Related Party Transactions”), which were partially offset by changes in case mix and cost savings
aggregating to $5.2 million. As a percentage of revenue, consolidated cost of drugs and supplies declined
to 27.5% from 28.4% a year earlier.
Consolidated G&A increased by $1.1 million or 2.5%, from a year earlier. The increase in G&A was
attributable to a number of factors, the most significant of which were $1.8 million in payments by SFSH
for management services related to the orthopedic service line management agreement and $0.6 million in
accountable care organization costs (refer to Section 13 of this MD&A under the heading “Related Party
Transactions”), $0.5 million in repairs and maintenance costs, $0.4 million in information technology
costs and $0.4 million in consulting fees. These increases were partially offset by the non-cash reversal of
an accrued rent liability by ASH ($2.7 million). As a percentage of revenue, consolidated G&A decreased
to 14.6% from 14.8% a year earlier.
Consolidated depreciation of property and equipment declined by $0.7 million or 6.9% primarily due to
the full depreciation of certain property and equipment at certain Centers. As a percentage of revenue,
consolidated depreciation of property and equipment declined to 2.9% from 3.2% a year earlier.
Consolidated amortization of other intangibles declined by $0.2 million or 1.5% primarily due to the full
amortization of certain referral source assets. As a percentage of revenue, consolidated amortization of
other intangibles declined to 4.9% from 5.2% a year earlier.
Income from Operations
Consolidated income from operations of $74.7 million was $8.0 million or 12.0% higher than
consolidated income from operations recorded a year earlier, representing 24.2% of revenue compared to
22.4% in 2014.
In thousands of U.S. dollars
BHSH
SFSH
OSH
ASH
SCNC
Corporate
Income from operations
Finance Costs
Years Ended December 31,
2015
25,087
38,738
12,422
18,007
1,658
(21,220)
74,692
Percentage
of Revenue
31.9%
40.4%
19.6%
28.6%
21.2%
n/a
24.2%
2014
23,110
36,130
11,669
14,389
2,171
(20,782)
66,687
Percentage
of Revenue
30.1%
41.0%
18.3%
23.8%
26.4%
n/a
22.4%
$ Change
1,977
2,608
753
3,618
(513)
(438)
8,005
% Change
8.6%
7.2%
6.5%
25.1%
(23.6%)
2.1%
12.0%
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 year. 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.
14
The following table provides calculations of the changes in values of the convertible debentures for the
reportable years:
In thousands of U.S. dollars, except
as indicated otherwise
Face value of convertible
debentures outstanding in
thousands of Canadian
dollars
Closing price of convertible
debentures outstanding
Closing exchange rate of U.S.
dollar to Canadian dollar
Market value of convertible
debentures outstanding
Effect of conversion
Repurchase of convertible
debentures under normal
course issuer bid
December 31,
2015
December 31,
2014
Change
December 31,
2014
December 31,
2013
Change
C$41,743
C$41,786
(C$43)
C$41,786
C$41,800
(C$14)
C$101.50
C$105.50
(C$4.00)
C$105.50
C$105.00
C$0.50
C$1.3840
C$1.1601
C$0.2239
C$1.1601
C$1.0636
C$0.0965
30,614
38,000
(7,386)
-
33
(7,353)
38,000
41,266
(3,266)
13
-
(3,253)
Change in value of convertible debentures
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 year. Changes in the
recorded value of the exchangeable interest liability between the reportable years are attributable to
(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 changes in values of exchangeable interest liability for the
reportable years:
In thousands of U.S. dollars, except as
indicated otherwise
Number of common shares to be
issued for exchangeable interest
liability
Less number of common shares to be
issued for exchangeable interest
liability attributable to discontinued
operation
Number of common shares to be
issued for exchangeable interest
liability attributable to continuing
operations
Closing price of the Corporation’s
common shares
December 31,
2015
December 31,
2014
Change
December 31,
2014
December 31,
2013
Change
5,932,340
5,851,799
80,541
5,851,799
6,274,969
(423,170)
-
-
-
-
(13,091)
13,091
5,932,340
5,851,799
80,541
5,851,799
6,261,878
(410,079)
C$14.39
C$18.41
(C$4.02)
C$18.41
C$17.94
C$0.47
Closing exchange rate of U.S. dollar to
C$1.3840
Canadian dollar
61,681
Exchangeable interest liability
Exercise of exchangeable rights by non-controlling interests
Change in value of exchangeable interest liability
C$1.1601
92,864
C$0.2239
(31,183)
1,147
(30,036)
C$1.1601
92,864
C$1.0636
105,621
C$0.0965
(12,757)
-
(12,757)
Interest on Exchangeable Interest Liability
Interest expense on the exchangeable interest liability increased by $0.6 million primarily due to the
variation in distributions from the Centers between the reporting years.
15
Interest Expense
Interest expense, net of interest income, decreased by $0.5 million primarily due to lower interest expense
at Center level and a decline in Canadian dollar interest expense on the convertible debentures due to the
changes in foreign exchange rates.
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
decrease in foreign currency losses of $0.1 million compared to 2014 is attributable to the fluctuations in
the value of the Canadian dollar in relation to the U.S. dollar during 2015 compared to 2014.
Income Tax
Current and deferred tax components of the income tax expense for the reporting years are as follows:
In thousands of U.S. dollars
Current income tax expense
Deferred income tax expense
Income tax expense
Years Ended December 31,
2015
1,015
23,704
24,719
2014
1,637
12,689
14,326
$ Change
% Change
(622)
11,015
10,393
(38.0%)
86.8%
72.5%
The decrease in current income tax expense is primarily attributable to increased tax deductible expenses
compared to the prior year. The increase in deferred income tax expense is primarily attributable to the
tax effect of the change in exchangeable interest liability and the utilization of the deferred tax asset
related to the Canadian cumulative tax operating losses.
Income from Continuing Operations
A $19.0 million increase in income from continuing operations was primarily due to the impact of the
declines in the respective values of the exchangeable interest liability and convertible debentures, as well
as to the improved performance of the Centers, which were partially offset by an increase in income tax
expense.
16
6. QUARTERLY OPERATING AND FINANCIAL RESULTS
Summary of Quarterly Operating and Financial Results from Continuing Operations
Unaudited
In thousands of U.S. dollars, except per share amounts
Facility service revenue
2015
2014
Q4
89,760
Q3
73,137
Q2
73,636
Q1
72,245
Q4
82,457
Q3
74,218
Q2
71,231
Q1
69,476
Operating expenses
Salaries and benefits
Drugs and supplies
General and administrative expenses
Depreciation of property and equipment
Amortization of other intangibles
22,145
24,138
9,768
2,119
3,796
61,966
19,680
20,734
11,990
2,209
3,791
58,404
19,240
20,450
11,914
2,234
3,817
57,655
19,158
19,488
11,323
2,347
3,745
56,061
20,259
22,791
11,524
2,361
3,408
60,343
18,729
21,799
10,659
2,426
4,034
57,647
19,119
20,003
10,503
2,408
3,988
56,021
19,224
19,944
11,196
2,378
3,942
56,684
Income from operations
27,794
14,733
15,981
16,184
22,114
16,571
15,210
12,792
Finance costs
Increase (decrease) in value of convertible
debentures
Increase (decrease) in value of exchangeable
interest liability
Interest expense on exchangeable interest liability
Interest expense, net of interest income
Loss (gain) on foreign currency
(2,077)
(1,567)
(677)
(3,031)
(242)
(2,933)
(971)
893
(8,249)
2,263
753
293
(7,017)
(2,338)
2,019
774
1,620
508
(4,953)
2,143
747
(567)
(3,307)
(14,496)
2,747
750
3,641
(10,389)
8,017
2,069
895
1,705
12,444
(19,692)
1,851
874
2,876
(17,024)
(12,065)
2,117
853
(2,598)
(12,664)
10,983
2,554
916
3,108
18,454
Income (loss) before income taxes
34,811
14,225
19,288
26,573
9,670
33,595
27,874
(5,662)
Income tax expense (recovery)
9,500
3,614
2,882
8,723
2,923
8,600
5,489
(2,686)
Income (loss) for the period from continuing
operations
Attributable to:
Owners of the Corporation
Non-controlling interest
25,311
10,611
16,406
17,850
6,747
24,995
22,385
(2,976)
13,343
11,968
3,663
6,948
9,279
7,127
10,733
7,117
(2,561)
9,308
17,512
7,483
15,422
6,963
(9,128)
6,152
Earnings (loss) per share attributable to owners of the Corporation:
Basic
Fully diluted
$ 0.43
$ 0.22
$ 0.12
$ 0.08
$ 0.30
$ 0.20
$ 0.34
$ 0.04
($ 0.08)
($ 0.08)
$ 0.56
$ 0.11
$ 0.49
$ 0.23
($ 0.29)
($ 0.29)
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 result in lower revenue 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 is 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 last eight quarterly reporting periods, revenue has
also been impacted by the periodic receipt of EHR incentive payments and the 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 costs related to the Corporation’s strategic move into urgent and primary care. During the last
17
four quarterly reporting periods, operating expenses have been impacted by costs related to the
establishment of an accountable care organization by SFSH as well as the entering by SFSH into a
management agreement for its orthopedic service line (refer to Section 13 of this MD&A under heading
“Related Party Transactions”). In addition, in the fourth quarter of 2015, ASH recorded a non-cash
reversal of an accrued rent liability of $2.7 million that resulted from the early termination of its
premises lease.
The changes in the recorded value 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 the exchange
rate of the Canadian dollar in relation to U.S. dollar.
Fluctuations in current income taxes have been driven by changes in operating performance of the
Centers, the deductibility of corporate expenses, intercompany interest expense deductions and taxable
(deductible) foreign exchange gains (losses). Fluctuations in deferred income taxes have been driven
primarily by changes in the exchangeable interest liability and Canadian cumulative tax operating
losses.
18
7. RECONCILIATION OF NON-IFRS FINANCIAL MEASURES
The following table presents reconciliation of cash available for distribution to the cash provided by
operating activities:
In thousands of U.S. dollars, except as indicated otherwise
CASH PROVIDED BY OPERATING ACTIVITIES
Non-controlling interest in cash flows of the Centers(1)
Interest expense on exchangeable interest liability(2)
Difference between straight-line rent expense and actual payments made(3)
Maintenance capital expenditures(4)
Difference between accrual based amounts and actual cash flows related to interest
and taxes(5)
Change in non-cash operating working capital items(6)
Realized losses on foreign exchange forward contracts which matured in the
current period(7)
Repayment of non-revolving debt(8)
CASH AVAILABLE FOR DISTRIBUTION
Realized losses on matured foreign exchange forward contracts, net of taxes
CASH AVAILABLE FOR DISTRIBUTION EXCLUDING REALIZED LOSSES ON
FOREIGN EXCHANGE FORWARD CONTRACTS
DISTRIBUTIONS
CASH AVAILABLE FOR DISTRIBUTION PER COMMON SHARE(9)
Including realized losses on foreign exchange forward contracts
Excluding realized losses on foreign exchange forward contracts
Three Months Ended
December 31,
2015
Unaudited
23,346
2014
Unaudited
27,197
Years Ended
December 31,
2015
2014
80,240
88,000
USD
(14,667)
2,263
(2,535)
(862)
(13,739)
2,064
123
(1,062)
(45,706)
9,172
(2,175)
(2,780)
(44,344)
8,603
563
(2,984)
63
4,384
(1,690)
(892)
9,410
12,566
1,242
10,652
14,225
(2,930)
912
(981)
(836)
10,748
12,205
579
11,327
12,863
5,631
1,517
(6,475)
(3,565)
35,859
45,853
4,759
40,618
51,938
(1,270)
(3,840)
(3,034)
(4,242)
37,452
41,366
1,790
39,242
43,343
8,766
8,808
35,186
35,261
$ 0.403
$ 0.456
$ 0.390
$ 0.411
$ 1.466
$ 1.660
$ 1.320
$ 1.383
USD
CDN
USD
USD
CDN
CDN
CDN
CDN
TOTAL DISTRIBUTIONS PER COMMON SHARE(9)
CDN
$ 0.281
$ 0.281
$ 1.125
$ 1.125
PAYOUT RATIO
Including realized losses on foreign exchange forward contracts
Excluding realized losses on foreign exchange forward contracts
69.7%
61.6%
72.1%
68.4%
76.7%
67.8%
85.2%
81.3%
Average exchange rate of Cdn$ to US$ for the period
Weighted average number of common shares outstanding
1.3354
31,185,411
1.1356
31,317,912
1.2787
31,287,313
1.1045
31,344,891
(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 non-
controlling 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 the difference between rent expense recorded using the straight-line
method over the life of the lease versus actual payments made. As a non-cash adjustment, this item is added back in the calculation of cash available for
distribution. The results for the three months and year ended December 31, 2015 include the non-cash reversal of a $2,692 accrual that resulted from the early
termination of a premises lease.
(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 losses (gains) 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.
19
(8) Repayment of non-revolving debt at the Center level reflects contractual obligations of the Centers and is deducted in the calculation of cash available for
distribution.
(9) Calculated based on the weighted average number of common shares outstanding.
Cash available for distribution for the year ended December 31, 2015 includes the interest of the
Corporation in the cash flows from the operations of DPSC up to the date of disposal of the operating
assets, but excludes the gain on disposal, net of tax, on those assets.
Cash available for distribution in the three-month period ended December 31, 2015 (Cdn$12.6 million)
exceeded the total amount of distributions in the same period (Cdn$8.8 million) by Cdn$3.8 million. On a
per common share basis, cash available for distribution of Cdn$0.403 was Cdn$0.122, or 43.4%, higher
than distributions of Cdn$0.281, resulting in a payout ratio of 69.7% as compared to a payout ratio of
72.1% in the same period in 2014.
Cash available for distribution in the year ended December 31, 2015 (Cdn$45.9 million) exceeded the
total amount of distributions in 2014 (Cdn$35.2 million) by Cdn$10.7 million. On a per common share
basis, cash available for distribution of Cdn$1.466 was Cdn$0.341, or 30.3%, higher than distributions of
Cdn$1.125, resulting in a payout ratio of 76.7% as compared to a payout ratio of 85.2% in 2014.
The Corporation’s cash available for distribution comes solely from the Centers. The following table
provides a reconciliation of cash generated at the Center level to the Corporation’s cash available for
distribution:
In thousands of U.S. dollars
Cash flows from the Centers:
Income before interest expense and depreciation
Debt service costs:
Interest
Repayment of non-revolving debt
Maintenance capital expenditures
Difference between straight-line rent expense and actual payments made
Cash available for distribution at Center level
Non-controlling interest in cash available for distribution at Center level
Corporation’s share of the cash available for distribution at Center level
Corporate expenses
Interest expense on convertible debentures
Realized losses on foreign exchange forward contracts which matured in the
current period
Provision for current income taxes
Cash available for distribution
Three Months Ended
December 31,
2015
Unaudited
2014
Unaudited
Years Ended
December 31,
2015
2014
35,674
31,930
106,656
102,481
(269)
(892)
(862)
(2,535)
31,116
(14,667)
16,449
(2,106)
(465)
(1,690)
(2,778)
9,410
(362)
(836)
(1,062)
123
29,793
(13,739)
16,054
(1,514)
(547)
(981)
(2,264)
10,748
(1,080)
(3,565)
(2,780)
(2,175)
97,056
(45,706)
51,350
(6,128)
(1,930)
(6,475)
(958)
35,859
(1,381)
(4,242)
(2,984)
563
94,437
(44,344)
50,093
(5,441)
(2,237)
(3,034)
(1,929)
37,452
Compared to the three months ended December 31, 2014, the cash available for distribution decreased by
US$1.3 million or 12.5% primarily due to higher foreign currency losses on foreign exchange forward
contracts, corporate expenses and provision for current income taxes.
Compared to the year ended December 31, 2014, the cash available for distribution decreased by
US$1.6 million or 4.2% primarily due to higher foreign currency losses on foreign exchange forward
contracts and corporate expenses, partially offset by stronger cash flows from the Centers and a lower
provision for current income taxes.
20
The chart below shows the Corporation’s cash available for distribution, distributions and payout ratios
for the last twelve quarters:
Cash Available for Distribution
C$mill
16.000
14.000
12.000
10.000
8.000
6.000
4.000
2.000
-
120.0%
100.0%
80.0%
60.0%
40.0%
20.0%
0.0%
1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15
Generated C$
Distributed C$
Payout Ratio
8. SUBSEQUENT EVENT
On January 14, 2016, the Corporation, through its wholly-owned U.S.-based subsidiary, Medical
Facilities IMD Holdings, Inc. (“MF IMD”), acquired 51% interest in Integrated Medical Delivery, LLC
(“IMD”), for a cash purchase price of $1.8 million. IMD is a diversified healthcare service company
located in Oklahoma City, Oklahoma that provides third-party business solutions to healthcare entities
such as physicians, facilities, and insurance companies.
9. OUTLOOK
As noted in the cautionary language concerning forward-looking disclosures in Section 1 of this MD&A
under the heading “Caution Concerning Forward-Looking Statements”, this section contains forward-
looking statements including with respect to the overall impact of the U.S. and local economies, ongoing
changes in the healthcare industry and management strategies of the Corporation. Such statements
involve known and unknown risks, uncertainties and other factors outside of management’s control,
including the risk factors set forth in Section 17 under the heading “Risk Factors” in this MD&A and the
Corporation’s most recently filed annual information form, that could cause results to differ materially
from those described or anticipated in the forward-looking statements.
The outlook for the Corporation is influenced by many inter-related factors including the economy, the
healthcare industry and the management strategies of the Corporation.
The Economy
Management’s expectations could be impacted by the general state of the U.S. economy. The strength of
the local economies of the areas served by the Corporation’s facilities is an important factor in the
Corporation’s outlook. Management believes that the current growth of the U.S. economy, and in
21
particular, growth in the service areas of its Centers, if it continues, will reflect positively on the
Corporation’s financial performance.
Healthcare Industry
While impossible to currently quantify, ongoing implementation of the Patient Protection and Affordable
Care Act (“PPACA”), demographic changes and growing healthcare costs present numerous challenges
and opportunities, including:
the challenge of continuing pressure on reimbursement levels from government-funded plans
(Medicare, Medicaid and similar plans) and private insurance companies;
the opportunity arising from reimbursement incentives which reward healthcare entities that meet
specified quality and operational goals and operate in the most efficient and low cost manner;
the opportunity for an increase in the number of patients with health insurance which is expected to
lead to an increase in surgical cases and a reduction in uncompensated care; and
an increased demand for services provided by the Corporation’s Centers due to the increasing
average age and life expectancy of the U.S. population, overall population growth and advances in
science and technology.
It is still unclear what the final outcome will be for the expansion in Medicaid beneficiaries which was
envisioned under the PPACA. South Dakota and Oklahoma have not implemented an expansion of their
Medicaid plans.
Management Strategies
Management intends to continue to capitalize on the unique attributes of its Centers, including a
physician-centric focus complemented by physician ownership and an active role in Center management.
The Corporation will, in conjunction with its Centers, continue to focus on:
Expanding the complement of physicians practicing at the Centers;
Reviewing and adjusting service lines;
Reviewing and expanding regions serviced;
Achieving benefits of corporate-wide purchasing programs; and
Sharing and implementing best practices and cost reduction strategies.
Management of the Corporation believes that implementation of these strategies combined with a strong
balance sheet, a proven management track record and continuing search for suitable accretive acquisition
opportunities will help sustain the Corporation’s operating performance and ability to continue its cash
distribution practices.
22
The Corporation’s dividends, interest on its convertible debentures and certain corporate expenses are
paid in Canadian dollars. All of the Corporation’s revenue and the majority of its expenses are domiciled
in U.S. dollars. The Corporation does not currently have any outstanding foreign exchange forward
contracts in place covering its Canadian dollar requirements. The impact on the Corporation’s cash
available for distribution in Canadian dollars and its calculated payout ratios will reflect fluctuations in
the exchange rate of the Canadian dollar in relation to U.S. dollar.
10. LIQUIDITY AND CAPITAL RESOURCES
As noted in the cautionary language concerning forward-looking disclosures in Section 1 of this MD&A
under the heading “Caution Concerning Forward-Looking Statements”, this section contains forward-
looking statements including with respect to cash flows and future contractual payments. Such statements
involve known and unknown risks, uncertainties and other factors outside of management’s control,
including the risk factors set forth in Section 17 under the heading “Risk Factors” in this MD&A and the
Corporation’s most recently filed annual information form, that could cause results to differ materially
from those described or anticipated in the forward-looking statements.
Cash Balances
The Corporation’s cash and cash equivalents balances and short-term and long-term investments are as
follows:
In thousands of U.S. dollars
Cash and cash equivalents at Center level
Cash and cash equivalents at corporate level
Cash and cash equivalents
Short-term investments
Long-term investments
Cash and cash equivalents and short-term and long-term investments
December 31,
2015
13,024
44,945
57,969
12,975
-
70,944
December 31,
2014
15,830
25,479
41,309
9,305
3,559
54,173
Cash Flow Activity
Cash Flow
In thousands of U.S. dollars
Cash provided by operating activities
Cash generated by (used in) investing activities
Cash used in financing activities
Increase in cash and cash equivalents
Effect of exchange rate fluctuations on cash balances
Cash and cash equivalents, beginning of the year
Cash and cash equivalents, end of the year
Years Ended
December 31,
2015
80,240
29,427
(84,393)
25,274
(8,614)
41,309
57,969
2014
88,000
(8,630)
(69,660)
9,710
(4,273)
35,872
41,309
$ Change
% Change
(7,760)
38,057
(14,733)
15,564
(4,341)
5,437
16,660
(8.8%)
(441.0%)
21.1%
160.3%
101.6%
15.2%
40.3%
The Corporation expects to fund operations with cash derived from operating activities. Deficiencies
arising from short-term working capital requirements and capital expenditures may be financed on a
short‐term basis with bank indebtedness as all Centers have lines of credit available to them or on a
permanent basis with offerings of securities. Negative changes in the general state of the U.S. economy
could affect the Corporation’s liquidity by reducing cash generated from operating activities or by
limiting access to short‐term financing as a result of tightening credit markets. Included in the balance of
23
cash and cash equivalents as at December 31, 2015 is $21.5 million in proceeds to the Corporation from
the sale of DPSC’s assets completed on June 30, 2015.
Operating Activities and Working Capital
Cash from operating activities in the year ended December 31, 2015 decreased by $7.8 million compared
to 2014 primarily due to a $5.9 million increase in income taxes, including withholding taxes, and
negative changes in non-cash working capital ($5.4 million), which were partially offset by higher
operating income from the Centers.
As at December 31, 2015, the Corporation recorded consolidated net working capital of $85.7 million
compared to $61.9 million as at December 31, 2014. The level of working capital, including financing
required to cover any deficiencies, is dependent on operating performance of the Centers and fluctuates
from period to period. The increase in working capital since December 31, 2015 is primarily the result of
increased cash balances due to the sale of DPSC’s assets in the second quarter of 2015.
As at December 31, 2015, accounts receivable were $48.8 million (December 31, 2014: $47.0 million),
accounts payable and accrued liabilities totaled $33.3 million (December 31, 2014 $32.2 million), total
assets were $383.0 million (December 31, 2014: $409.7 million) and total long-term liabilities were
$58.2 million (December 31, 2014: $71.8 million).
Investing Activities
The $38.1 million increase in cash from investing activities in the year ended December 31, 2015,
compared to 2014 was primarily due to $36.9 million in gross proceeds received from the sale of DPSC’s
assets. DPSC distributed $33.3 million of net proceeds from disposal of the assets to its partners,
including $21.5 million to the Corporation and $11.8 million to the holders of the non-controlling interest
in the Center.
Financing Activities
Cash used in financing activities in the year ended December 31, 2015 increased by $14.7 million
compared to 2014 primarily due to an increase in distributions to non-controlling interest ($13.6 million)
of which $11.8 million related to the sale DPSC, discharge of a real estate loan at DPSC ($3.2 million)
and an increase in the repurchase of the Corporation’s common shares ($2.6 million), partially offset by
lower dividends paid ($4.3 million) primarily attributable to a favourable variance in the Canadian dollar
exchange rate.
The Centers have credit facilities in place, excluding capital leases, in the aggregate amount of
$57.7 million, of which $33.4 million was utilized as at December 31, 2015. The balances available under
the credit facilities, combined with cash and cash equivalents as at December 31, 2015, are available to
manage the Centers’ accounts payable, supply inventory and other short-term cash requirements. The
Center’s access to available financing resources, including those with fixed interest rates, is sufficient to
manage its exposure to changes in interest rates on the Centers’ revolving credit facilities, which are on a
floating basis.
The partnership or operating agreements governing each of the respective Centers do not permit the
Corporation to access the assets of the Centers to settle the liabilities of other subsidiaries of the
Corporation, and the Centers have no obligation to (and could not, without the approval of the holders of
24
the non-controlling interest) take any steps to settle the liabilities of the Corporation or its other
subsidiaries.
The Corporation has in place a Cdn$100.0 million line of credit with a Canadian chartered bank which
matures on December 31, 2018 (“credit facility”). The credit facility can be used for general corporate
purposes, including working capital and capital expenditures, finance of acquisitions, repayment of
convertible debentures, and/or repurchase of the Corporation’s common shares. No amount was drawn
under the credit facility as of December 31, 2015.
The Corporation’s convertible debentures are denominated in Canadian dollars and are reflected in the
financial statements in U.S. dollars at fair value at the rate of exchange in effect at the balance sheet date.
As at December 31, 2015, the Corporation had Cdn$41.7 million aggregate principal amount of
convertible debentures outstanding while the market value of the convertible debentures was
$30.6 million. The convertible debentures pay interest semi-annually in arrears on June 30 and
December 31 of each year. The convertible debentures mature on December 31, 2019 (“Maturity Date”)
and are convertible into 52.3286 common shares per Cdn$1,000 principal amount of convertible
debentures, at any time, at the option of the holder, representing a conversion price of Cdn$19.11 per
common share (“Conversion Price”). If the holders of the convertible debentures do not exercise the right
to convert their holdings into the Corporation’s common shares prior to the Maturity Date, the principal
amount is due and payable in full. The convertible debentures are subordinate to all other existing and
future senior unsecured indebtedness of the Corporation.
The convertible debentures contain a provision whereby, in connection with a change in control
transaction, holders of the convertible debentures would be entitled to convert their debentures within a
specified time period and would receive, in addition to the number of shares on conversion, additional
shares calculated as a function of the change of control offer price and time remaining to maturity.
After December 31, 2015 and prior to December 31, 2017, the convertible debentures may be redeemed
by the Corporation, in whole or in part from time to time, at a redemption price equal to the principal
amount plus accrued and unpaid interest up to but excluding the redemption date, provided that the
volume weighted average trading price of the common shares on the Toronto Stock Exchange for the
20 consecutive trading days ending five trading days preceding the date on which notice of redemption is
given is at least 125% of the Conversion Price. On or after December 31, 2017 but prior to the Maturity
Date, the convertible debentures may be redeemed in whole or in part from time to time at the option of
the Corporation, at a redemption price equal to the principal amount plus accrued and unpaid interest up
to but excluding the redemption date.
In December 2014, the Corporation received regulatory approval for a normal course issuer bid under
which the Corporation could purchase up to Cdn$522,325 aggregate principal amount of its outstanding
convertible debentures during the period from December 30, 2014 to December 29, 2015. During the
three-month period ended December 31, 2015, the Corporation purchased Cdn$12,000 aggregate
principal amount of its outstanding convertible debentures for a total consideration of $9. During the
twelve-month period ended December 31, 2015, the Corporation purchased Cdn$43,000 aggregate
principal amount of its outstanding convertible debentures for a total consideration of $33.
25
Contractual Obligations
The mandatory repayments under the credit facilities and other contractual obligations and commitments
including expected interest payments, on a non-discounted basis, as of December 31, 2015, are as follows:
Future payments (including principal and interest)
In thousands of U.S. dollars
Interest payable
Dividends payable
Accounts payable
Accrued liabilities
Revolving credit facilities
Notes payable and term loans
Finance lease obligations
Convertible debentures
Operating leases and other
Carrying values
at December 31,
2015
2,107
19,035
14,307
849
4,500
28,861
2,067
30,614
Total
2,107
19,035
14,307
849
4,520
31,575
2,158
37,838
commitments (not recorded in the
financial statements)
Total contractual obligations
-
102,340
77,292
189,681
Less than
1 year
1-3 years
4-5 years
Thereafter
2,107
19,035
14,307
849
4,520
3,239
984
1,806
7,357
54,204
-
-
-
-
-
8,557
978
3,612
12,644
25,791
-
-
-
-
-
19,501
196
32,420
9,919
62,036
-
-
-
-
-
278
-
-
47,372
47,650
The Corporation anticipates renewing, extending, repaying or replacing its credit facilities which fall due
over the next twelve months and expects that cash flows from operations and working capital will be
adequate to meet future payments on other contractual obligations over the next twelve months.
11. SHARE CAPITAL AND DIVIDENDS
As noted in the cautionary language concerning forward-looking disclosures in Section 1 of this MD&A
under the heading “Caution Concerning Forward-Looking Statements”, this section contains forward-
looking statements including with respect to the Corporation’s expected payment of dividends. Such
statements involve known and unknown risks, uncertainties and other factors outside of management’s
control, including the risk factors set forth in Section 17 under the heading “Risk Factors” in this MD&A
and the Corporation’s most recently filed annual information form, that could cause results to differ
materially from those described or anticipated in the forward-looking statements.
As at December 31, 2015, the Corporation had 31,113,445 common shares outstanding. In the event that
all Cdn$41.7 million aggregate principal amount of convertible debentures outstanding were converted
into the common shares of the Corporation prior to their Maturity Date, the total number of additional
common shares issuable would be 2,184,353.
Normal Course Issuer Bids
The Corporation’s current normal course issuer bid for its common shares is in effect from May 15, 2015
to May 14, 2016. During the three-month period ended December 31, 2015, the Corporation purchased
124,900 of its common shares for a total consideration of $1,387. During the twelve-month period ended
December 31, 2015, the Corporation purchased 300,600 of its common shares for a total consideration of
$3,448.
During the three-month period ended December 31, 2014, the Corporation purchased 1,500 of its
twelve-month period ended
common shares for a
total consideration of $21. During
the
26
December 31, 2014, the Corporation purchased 55,600 of its common shares for a total consideration of
$872.
All common shares acquired under the bids were cancelled. Cancellation of common shares purchased in
2015 reduced the annual dividends paid by the Corporation by Cdn$267,200 (at a current rate of
Cdn$1.125 per common share).
Dividends
Dividend declarations are determined based on monthly reviews of the Corporation’s earnings, capital
expenditures and related cash flows by a sub-committee of the board of directors. Such declarations take
into account that the cash generated in the period is to be distributed to the maximum extent considered
prudent after (i) debt service obligations, (ii) other expense and tax obligations, and (iii) reasonable
reserves for working capital and capital expenditures. The Corporation maintained a consistent level of
monthly distributions since its formation (in aggregate Cdn$1.10 per common share annually) until
September 2012, when the monthly distribution was increased to Cdn$0.09375 per common share (or
Cdn$1.125 per common share annually). The Corporation expects, subject to its monthly performance
reviews as explained above and the judgment of the board of directors, to maintain the current level of
dividends on its common shares. Cash distributions declared in the period from January 1, 2015 to
December 31, 2015 totaled Cdn$1.125 per common share.
Dividend Reinvestment and Share Purchase Plan
The Corporation has a Dividend Reinvestment and Share Purchase Plan which allows shareholders
resident in Canada to automatically re-invest, in a cost-effective manner, the monthly cash dividends on
their common shares into additional common shares of the Corporation. In 2015, 140,901 common shares
were purchased with reinvested dividends totaling Cdn$2.3 million on the open market.
12. FINANCIAL INSTRUMENTS
Financial instruments held in the normal course of business included in the consolidated balance sheet as
at December 31, 2015 consist of cash and cash equivalents, short-term and long-term investments,
accounts receivable, other assets, dividends payable, accounts payable, accrued liabilities, borrowings
(including long‐term debt and convertible debentures) and exchangeable interest liability.
The fair values of convertible debentures and exchangeable interest liability are determined based on the
closing trading price of the securities at each reporting period. The fair values of long‐term debt (notes
payable and term loans) are not significantly different than their carrying values, as these instruments bear
interest at rates comparable to current market rates. The fair values of all other financial instruments of
the Corporation, due to the short-term nature of these instruments, approximate their carrying values.
Foreign Exchange Risk
The Centers derive revenues, incur expenses and make distributions to their owners, including the
Corporation, in U.S. dollars. The Corporation pays dividends to common shareholders and interest on its
convertible debentures and incurs a portion of its expenses in Canadian dollars. The amounts of
distributions from the Centers to their owners, including the Corporation and non-controlling interest, are
27
dependent on the results of the operations and cash flows generated by the Centers in any particular
period.
Strengthening of the Canadian dollar against the U.S. dollar negatively impacts currency translation
differences with respect to the funds available for the Corporation’s Canadian dollar denominated
dividends, interest payments, and expenses. A weakening Canadian currency in relation to U.S. currency
has the opposite effect.
The graph below shows the movement of the monthly average exchange rates between Canadian and U.S.
dollars since February 2011:
Canadian Dollars per 1 U.S. Dollar
$1.45
$1.40
$1.35
$1.30
$1.25
$1.20
$1.15
$1.10
$1.05
$1.00
$0.95
$0.90
The Corporation from time to time may enter into foreign exchange forward contracts depending upon
actual or anticipated company performance and currency market conditions. As of December 31, 2015,
the Corporation did not hold any foreign exchange forward contracts.
Credit Risk
The substantial portion of the Corporation’s accounts receivable balance is with governmental payors and
health insurance companies which are assessed as having a low risk of default and is consistent with the
Centers’ history with these payors. Management reviews reimbursement rates and aging of the accounts
receivable to monitor its credit risk exposure. On an ongoing basis, management assesses the
circumstances affecting the recoverability of its accounts receivable and adjusts allowances based on
changes in those factors. Monthly, actual bad debts for a trailing period are compared with the
Corporation’s allowance to support the estimate of recoverability. Considerations related to historical
experience are also factored into the valuation of the current period accounts receivable.
From time to time, the Corporation may enter into foreign exchange forward contracts and may place
excess funds for investment with certain financial institutions. Investment of excess funds is guided by
the investment policy of the Corporation that, among other things, (i) prescribes the eligible types of
28
investments and (ii) establishes limits on the amounts that can be invested with any one financial
institution.
Interest Rate Risk
The Corporation and the Centers are exposed to interest rate fluctuations which can impact their
borrowing costs. The Corporation’s Centers use floating rate debt facilities for operating lines of credit
that fund short-term working capital needs and use fixed rate debt facilities to fund investments and
capital expenditures.
Price Risk
The Corporation’s convertible debentures and exchangeable interest liability are measured on quoted
market prices in active markets and, therefore, the Corporation is exposed to variability in net income as
prices change. Price risk includes the impact of foreign exchange. The Corporation does not have any
hedges against price risk.
Liquidity Risk
Liquidity risk is the risk that the Corporation, including its Centers, will not be able to meet its financial
obligations as they fall due. The Corporation manages liquidity risk through the management of its capital
structure and financial leverage. The Corporation also manages liquidity risk by continuously monitoring
actual and projected cash flows and by taking into account the receipts and maturity profile of financial
assets and liabilities. The board of directors of the Corporation reviews and approves operating and
capital budgets, as well as any material transactions out of the ordinary course of business.
13. RELATED PARTY TRANSACTIONS
The Centers routinely enter into transactions with certain related parties. These parties are considered
related through ownership in them by the holders of non-controlling interest in the respective Centers.
Such transactions are in the normal course of operations and are measured at the exchange amount, which
is the amount of consideration established and agreed by the related parties.
In February 2015, SFSH incorporated a wholly-owned subsidiary which is designed to function as an
accountable care organization (“ACO”). The ACO has applied for acceptance and participation in the
Medicare Shared Savings Program, which is an incentive program established under the provisions of the
PPACA. As one of the initiatives of the ACO, SFSH entered into an agreement with Great Plains
Surgical, LLC (“Great Plains”), an entity controlled by certain indirect non-controlling owners of SFSH,
for the provision of management services in relation to the orthopedic service line at SFSH to improve the
quality of services provided and realize savings on implants and other supplies used in that service line. In
addition to the payment of fees for providing management of the orthopedic service line, Great Plains is
entitled to receive performance payments for realized cost savings and the attainment of quality levels.
29
The Centers had transactions with the following related parties during the reporting periods:
Related Party
Nature of Relationships
Nature of Transactions
In thousands of U.S. dollars
Entity
BHSH
Black Hills Orthopedic and
Spine Center (“BHOSC”)
Certain indirect non-controlling
owners of BHSH are also
owners of BHOSC.
Neurosurgical & Spinal
Surgery Associates
(“NSSA”)
Certain indirect non-controlling
owners of BHSH are also
owners of NSSA.
Years Ended
December 31,
2015
$
2014
$
264
239
92
165
4
2
-
-
3
3
-
392
182
182
Provision of physical therapy
services to BHSH and physician
professional fees in relation to
South Dakota State Employee
Health Plan.
Provision of physical therapy and
intraoperative monitoring services
to BHSH. As of June 30, 2014,
intraoperative monitoring services
agreement was mutually
terminated by BHSH and NSSA.
NSSA pays rental income for
parking to BHSH.
Physician professional fees in
relation to South Dakota State
Employee Health Plan.
Physician professional fees in
relation to South Dakota State
Employee Health Plan.
Provision of dietary and nutrition
counselling.
Reimbursement by DPSC of
salaries and benefits expenses
incurred on behalf of DPSC. This
arrangement was terminated in
February 2014.
Provision of certain physician
services to DPSC. This
arrangement was terminated in
February 2014.
Provision of anesthesia services to
SFSH.
Provision of laundry services to
SFSH.
246
216
Provision of management services
in relation to orthopedic service
line at SFSH.
Purchase of medical products and
inventory from GPSD by SFSH
and payment of rental income by
GPSD to SFSH.
Purchase of medical products from
Medical Designs by SFSH.
Lease of space for SFSH’s
primary care operations. This
arrangement was discontinued in
August 2014.
Provision of lithotripter services to
SFSH.
Provision of physical and
occupational therapy services to
SFSH and lease of space for
SFSH’s primary care operations.
3,208
-
884
1,379
748
1,080
-
6
182
219
237
269
Rapid City Medical Center Certain indirect non-controlling
Dr. Tim and Kim Watt
DPSC
Orthopedic Center of the
Dakotas (“OCD”)
owner of BHSH is also owner of
Rapid City Medical Center.
Indirect non-controlling physician
owners.
Certain indirect non-controlling
owners of DPSC are also
owners of OCD.
Orthopedic Surgery
Specialists (“OSS”)
Certain indirect non-controlling
owners of DPSC are also
owners of OSS.
SFSH
Center Inn
Anesthesiology Associates Certain indirect non-controlling
owner of SFSH is also owner of
Anesthesiology Associates.
Certain indirect non-controlling
owners of SFSH are also
owners of Center Inn.
Certain indirect non-controlling
owners of SFSH are also
owners of GPS.
Certain indirect non-controlling
owners of SFSH are also
owners of GPSD.
Great Plains Surgical
Distributorship, LLC
(“GPSD”)
Great Plains Surgical, LLC
(“GPS”)
Medical Designs
Midwest Medical Care PC
(“MMC”)
Midwest Urologic Stone
Unit LP (“MUSU”)
Orthopedic Institute
Indirect non-controlling physician
owner of SFSH is also owner of
Medical Designs.
Certain indirect non-controlling
owners of SFSH are also
owners of MMC.
Certain indirect non-controlling
owners of SFSH are also
owners of MUSU.
Certain indirect non-controlling
owners of SFSH are also
owners of Orthopedic Institute.
30
In thousands of U.S. dollars
Entity
Related Party
Nature of Relationships
Nature of Transactions
Renovis
South Dakota
Interventional Pain
Institute, LLC (“SDIPI”)
Surgical Management
Professionals, LLC
(“SMP”) and Sioux Falls
Surgical Physicians, LLC
(“Surgical Physicians”)
Various professional
medical practices(1)
OSH
IMD
Memorial Property
Holdings, LLC (“MPH”)
MM Property Holdings,
LLC (“MM Property”)
Parkway Medical Center,
LLC (“PMC”)
A.S.H. Land &
Development, LLC (“ASH
L&D”)
A.S.H. Imaging Partners,
LLC (“ASH Imaging”)
ASH
Certain indirect non-controlling
owner of SFSH is also an owner
of Renovis.
Surgical Physicians and the
Corporation own equity interest
in SDIPI.
Surgical Physicians own 49% of
SFSH. SMP is owned by certain
indirect non-controlling owners
of SFSH.
Certain indirect non-controlling
owners of SFSH are also
owners of various professional
medical practices.
To the end of 2015, certain
indirect non-controlling owners
of OSH were also owners of
IMD.
The majority of owners of MPH
are also indirect non-controlling
owners of OSH.
MM Property is owned by two
physicians who are indirect non-
controlling owners in OSH.
MPH owns an equity share of
PMC.
Certain indirect non-controlling
owners of ASH are also owners
of ASH L&D.
Certain indirect non-controlling
owners of ASH are also owners
of ASH Imaging.
Related party expenses
Key management and governance compensation
Total
Years Ended
December 31,
2015
$
477
2014
$
-
659
767
1,573
1,481
290
377
2,940
3,000
Purchase of implants.
Use of a facility and related
equipment by SFSH.
SFSH pays to and receives
reimbursements from SMP for
various shared services, such as
utilities, computer software, travel,
etc. SMP provides billing and
coding services to SFSH and
management services to DPSC.
Physician professional fees in
relation to SFSH’s agreement with
South Dakota Bureau of Personnel
to provide outpatient surgeries
under bundled billing
arrangements and other bundled
cases.
Provision of accounting and
management services to OSH.
Lease of hospital building by OSH.
1,488
1,488
Lease of additional office space by
OSH. This lease terminated in first
quarter of 2015.
Lease of additional office space by
OSH.
33
78
130
-
Lease of facility building by ASH.
1,110
3,585
Sub-lease of MRI equipment by
ASH.
594
594
15,291
2,927
18,218
15,575
2,338
17,913
(1) SFSH has an agreement with South Dakota Bureau of Personnel to provide specified outpatient surgical procedures including the use of facility,
anesthesia, radiology, labs, and physician professional fees. SFSH is reimbursed for these outpatient surgeries based on a fixed fee schedule, which includes
the facility and physician professional fees. SFSH entered into fee-for-service agreements for the physician professional fee component with various
professional medical practices owned by individuals having an indirect non-controlling ownership in SFSH.
14. CRITICAL ACCOUNTING JUDGMENTS AND ESTIMATES
The Corporation estimates certain amounts reflected in its consolidated financial statements based on
historical experience, current trends and other assumptions that are believed to be reasonable under the
circumstances. Actual results could differ from those estimates because of the uncertainties inherent in
making assumptions and estimates regarding unknown future outcomes. Note 21 to the consolidated
financial statements of the Corporation for the year ended December 31, 2015 details critical accounting
judgments and estimates used in the preparation of the Corporation’s financial statements.
31
The accounting estimates discussed below are highlighted because they require difficult, subjective, and
complex management judgments. The Corporation believes that each of its assumptions and estimates is
appropriate to the circumstances and represents the most likely future outcome.
Revenue
Revenue is recorded in the period when healthcare services are provided based on actual amounts
received and the estimated net realizable amounts due from patients and payors. The amounts due are
estimated using established billing rates less adjustments required by contractual arrangements with the
payors. Estimates of contractual adjustments are based on the payment terms specified in the related
contractual agreements and payment history. Payor contractual payment terms are generally based on
predetermined rates per procedure or discounted fee-for-service rates. For payors for which the Centers do
not have contracts, the Centers estimate the necessary adjustments based on a twelve-month history of
reimbursements on closed cases. If payments from third-party payors were reduced, the revenue and
profitability of the Corporation may be adversely affected.
Allowance for Non-Collectible Receivable Balances
The Corporation maintains an allowance for non-collectible receivable balances for estimated losses
resulting from the inability to collect on its accounts receivable. To arrive at allowance for non-collectible
receivable balances, management uses estimates that are based on the age of the outstanding accounts
receivable and on historical collection and loss experience. Future collections of accounts receivable that
differ from current estimates would affect the results of operations in future periods. The allowance for
non-collectible receivable balances is subject to change as general economic, industry and customer
specific conditions change.
Impairment of Non-Financial Assets
Non-financial assets that have an indefinite useful life, such as goodwill and trade names, are tested at
least annually for impairment and when events or changes in circumstances indicate that the carrying
amount may not be recoverable. Non-financial assets that have definite useful life and are subject to
amortization are reviewed for impairment when events or changes in circumstances indicate that the
carrying amount may not be recoverable.
The methodology used to test for impairment includes significant judgment, estimates, and assumptions.
Impairment exists when the carrying amount of an asset or cash generating unit (“CGU”) exceeds its
recoverable amount, which is the higher of an asset’s fair value less cost to dispose and value in use.
Value in use is based on the estimated future cash flows, discounted to their present value using a pre-tax
discount rate that reflects current market assessments of the time value of money and the risks specific to
the asset. As a result, any impairment losses are a result of management’s best estimates of expected
revenues, expenses, cash flows, and discount rates at a specific point in time. These estimates are subject
to measurement uncertainty as they are dependent on factors outside of management’s control. In
addition, by their nature, impairment tests involve a significant degree of judgment as expectations
concerning future cash flows and the selection of appropriate market inputs are subject to considerable
risks and uncertainties.
Management is required to use judgment in determining the grouping of assets to identify their CGUs for
the purposes of testing fixed assets for impairment. Judgment is further required to determine appropriate
groupings of CGUs for the level at which goodwill and indefinite life intangible assets are tested for
32
impairment. Each Center represents a separate CGU for the purposes of testing impairment of non-
financial assets. In addition, judgment is used to determine whether a triggering event has occurred
requiring an impairment test to be completed.
Factors considered by management in determining a triggering event include: deterioration in market and
economic conditions, volatility in the financial markets causing declines in the Corporation’s share price,
increases in the Corporation’s weighted-average cost of capital, changes in valuation multiples, changes
to healthcare legislation in the United States both federally and in the jurisdictions in which the Centers
operate, changes to the physician complement at the Centers, decreases in expected future reimbursement
rates, declining patient referrals, physical conditions of facilities and equipment, and increased costs of
inputs, such as drugs, supplies, and labour.
When considered significant, management incorporates changes to these factors in its estimated future
cash flows to assess the impact on the recoverable value of its non-financial assets.
Management calculates the recoverable amount of each CGU using earnings before income taxes,
depreciation and amortization (“EBITDA”) specific to each CGU by a multiple determined using market
data, such as EBITDA to market capitalization ratios of comparable publicly traded companies and recent
prices for capital transactions within the industry. Management has estimated cost to dispose to be 1% of
the fair value of the CGUs, based on recent market data. To ensure reasonableness of recoverable
amounts, management reconciles the recoverable amounts of its CGUs to the enterprise value of the
Corporation as at December 31 based on (i) the market capitalization of the outstanding common shares,
taking into account a 20% equity control premium attributable to the common shares, (ii) the fair value of
convertible debentures outstanding, and (iii) the Corporation’s portion of the Centers’ long-term debt, less
(iv) cash on hand.
Management performed its annual impairment tests for goodwill and other intangibles with indefinite
lives as at December 31, 2015 and concluded that the recoverable amount of the CGUs exceeded their
carrying amount and, therefore, there was no impairment.
Taxes
Uncertainties exist with respect to the interpretation of complex tax regulations and the amount and
timing of deferred taxable income. The Corporation’s income tax assets and liabilities are based on
interpretations of income tax legislation across various jurisdictions in Canada and the United States. The
Corporation’s effective tax rate can change from year to year based on the mix of income among different
jurisdictions, changes in tax laws in these jurisdictions, and changes in the estimated value of deferred tax
assets and liabilities. The Corporation’s income tax expense reflects an estimate of the cash taxes the
Corporation is expected to pay for the current year and a provision for changes arising in the values of
deferred tax assets and liabilities during the year. The carrying value of these assets and liabilities is
impacted by factors such as accounting estimates inherent in these balances, management’s expectations
about future operating results, and previous tax audits and differing interpretations of tax regulations by
the taxable entity and the responsible tax authorities. Such differences in interpretation may arise on a
wide variety of issues depending on the conditions prevailing in the respective legal entity’s domicile. On
a regular basis, management assesses the likelihood of recovering value from deferred tax assets, such as
loss carry forwards, as well as from the depreciation of capital assets, and adjusts the tax provision
accordingly.
33
Deferred tax assets are recognized for all unused tax losses to the extent that it is probable that taxable
profit will be available against which the losses can be used. Significant management judgment is
required to determine the amount of deferred tax assets that can be recognized, based on the likely timing
and the level of future taxable profits together with future tax-planning strategies. If management’s
estimates or assumptions change from those used in current valuation, management may be required to
recognize an adjustment in future periods that would increase or decrease deferred income tax asset or
liability and increase or decrease income tax expense.
15. RECENTLY ANNOUNCED ACCOUNTING PRONOUNCEMENTS
The following are IFRS changes that have been issued by the International Accounting Standards Board
(“IASB”) which may affect the Corporation, but are not yet effective:
IFRS 9 Financial Instruments (“IFRS 9”)
The IASB has issued the complete IFRS 9 in 2014, replacing the multiple rules in IAS 39 Financial
Instruments – Recognition and Measurement. The mandatory effective date of IFRS 9 is for annual
periods beginning on or after January 1, 2018 and must be applied retrospectively with some exemptions.
The Corporation intends to adopt IFRS 9 for the annual period beginning on January 1, 2018. The extent
of the impact of adoption of the standard has not yet been determined.
IFRS 15 Revenue from Contracts with Customers (“IFRS 15”)
IFRS 15 establishes a single comprehensive model for entities to use in accounting for revenue arising
from contracts with customers. The new standard is effective for annual periods beginning on or after
January 1, 2018. Earlier application is permitted. The Corporation intends to adopt IFRS 15 for the annual
period beginning on January 1, 2018. The extent of the impact of adoption of the standard has not yet
been determined.
IFRS 16 Leases (“IFRS 16”)
In January 2016, the IASB issued IFRS 16 which provides guidance for leases whereby lessees will
recognize a liability for the present value of future lease liabilities and record a corresponding right of use
asset on the balance sheet. There are minimal changes to lessor accounting. IFRS 16 is effective for
annual periods beginning on or after January 1, 2019. Early adoption is permitted, provided IFRS 15 has
been adopted. The Corporation intends to adopt IFRS 16 for the annual period beginning on
January 1, 2019. The extent of the impact of adoption of the standard has not yet been determined.
16. DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER
FINANCIAL REPORTING
Management is responsible for the financial information published by the Corporation. In accordance
with National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, the
Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”) have certified that annual
filings fairly present in all material respects the financial condition, results of operations and cash flows
and have also certified regarding controls as described below.
By their nature, controls, no matter how well conceived or operated, provide reasonable assurance, but not
absolute assurance, that the objectives of the control systems will be met.
34
Under the supervision of, and with the participation of the CEO and the CFO, management has designed
disclosure controls and procedures (“DC&P”) to provide reasonable assurance that (i) material
information relating to the Corporation, including its consolidated subsidiaries, is made known to the
CEO and the CFO by others within those entities for the period in which the annual and interim filings of
the Corporation are being prepared, and (ii) information required to be disclosed by the Corporation in its
annual filings, interim filings or other reports filed or submitted by it under securities legislation is
recorded, processed, summarized and reported within the time periods specified in applicable securities
legislation.
In addition to DC&P, under the supervision of, and with the participation of the CEO and the CFO,
management has designed internal controls over financial reporting (“ICFR”) using the 2013 Committee
of Sponsoring Organizations of the Treadway Commission (“COSO”) framework to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of the consolidated financial
statements for external purposes in accordance with IFRS.
Management, including the CEO and the CFO, performed an evaluation of the effectiveness of DC&P as
of December 31, 2015, and has concluded that the design and effectiveness of these controls and
procedures at December 31, 2015 provide reasonable assurance that material information relating to the
Corporation, including its subsidiaries, was made known to the CEO and CFO on a timely basis to ensure
adequate disclosure.
Management, including the CEO and the CFO, performed an evaluation of the effectiveness of its ICFR
as of December 31, 2015 using the COSO framework. Management has concluded that the overall design
and effectiveness of these controls at December 31, 2015 provide reasonable assurance of the reliability
of financial reporting and the preparation of the consolidated financial statements for external purposes in
accordance with IFRS.
There have been no changes in the Corporation’s ICFR during the period beginning on October 1, 2015
and ended on December 31, 2015, that have materially affected, or are reasonably likely to materially
affect, the Corporation’s ICFR.
From time to time, to supplement a small corporate office, the Corporation engages various outside
experts and advisors to assist with various accounting, controls and tax issues in the normal course.
17. RISK FACTORS
The following information is a summary of risk factors and is qualified in its entirety by reference to, and
must be read in conjunction with the detailed information appearing in the Corporation’s most recently
filed annual information form available on SEDAR at www.sedar.com.
Risks Related to the Business and the Industry of the Corporation
The revenue and profitability of the Corporation and its subsidiaries, including the Centers, depend
heavily on payments from third-party payors, including government healthcare programs (Medicare and
Medicaid) and managed care organizations, which are subject to frequent regulatory changes and cost
containment initiatives. Changes in the terms and conditions of, or reimbursement levels under, insurance
or healthcare programs, which are typically short-term agreements, could adversely affect the revenue and
profitability of the Corporation. The Corporation’s revenue and profitability could be impacted by its
35
ability to obtain and maintain contractual arrangements with insurers and payors active in its service areas
and by changes in the terms of such contractual arrangements.
The revenue and profitability of the Centers is dependent upon physician relationships. There can be no
assurance that physician groups performing procedures at the Centers will maintain successful medical
practices, or that one or more key members of a particular physician group will continue practicing with
that group or that the members of that group will continue to perform procedures at the Centers at current
levels or at all.
Healthcare facilities, such as the Centers, are subject to numerous legal, regulatory, professional and
private licensing, certification and accreditation requirements. Receipt and renewal of such licenses,
certifications and accreditations are often based on inspections, surveys, audits, investigations or other
reviews, some of which may require affirmative compliance actions by the Centers that could be
burdensome and expensive.
There are a number of U.S. federal and state regulatory initiatives, which apply to healthcare providers,
and in particular to SSHs, including the Centers. Among the most significant are the federal Anti-
Kickback Statute, the federal physician self-referral law (commonly referred to as the Stark Law), the
PPACA, the False Claims Act and the federal rules relating to management and protection of patient
records and patient confidentiality.
The PPACA contains provisions that prohibit the formation or development of any new physician owned
hospitals in the United States after a specified date. However, the grandfathering provisions of the law
that permit existing physician owned hospitals, such as the Centers, to continue their operations and
billings to government payors like Medicare and Medicaid for hospital services, provided they meet
certain investment and patient transparency requirements. The law, among other things:
(a) prohibits the existing or grandfathered hospitals from expanding the baseline number of overnight
beds, operating rooms or procedure rooms from the number of such rooms that the existing
hospital had as of the date of enactment of the legislation, unless certain narrowly-drawn growth
criteria are met;
(b) prohibits increases in the aggregate percentage value of physician ownership or investment in
physician owned hospitals, or in entities whose investments include the hospitals;
(c) imposes restrictions on the manner of physician investment in physician owned hospitals; and
(d) requires disclosure to patients of physician ownership and requires hospitals to obtain a signed
patient acknowledgement as to whether the hospital has physicians present 24 hours a day, seven
days a week.
The full impact of the PPACA on the Corporation is not clear, as the roll-out of the law continues to
develop. The Corporation has undertaken an extensive review to ensure that the Centers’ operating
agreements and procedures are in compliance with the provisions and limitations of the PPACA. As a
consequence of its reviews, all Centers have updated the operating agreements and procedures to conform
to the requirements of the PPACA.
36
While the Centers carry general and professional liability insurance against claims arising in the ordinary
course of business, the insurance market is dynamic and there can be no assurance that adequate coverage
will be available in the future or that any coverage in place will be adequate to cover claims.
Any major capital expenditures at the Centers will require additional capital, which may be funded
through additional debt or equity financings. These funding sources could result in significant additional
interest expense or ownership dilution to current holders of the Corporation’s securities.
There is significant competition in the healthcare business. The Centers compete with other healthcare
facilities in providing services to physicians and patients, contracting with managed care payors and
recruiting qualified staff.
The Centers may be vulnerable to economic downturns and may be limited in their ability to withstand
such financial pressures. Increased unemployment or other adverse economic conditions may impact the
volume of services performed, cause shifts to payors with lower reimbursements (e.g., Medicare) and/or
result in higher uncollectible accounts.
Maintenance capital expenditures, which are deducted in the calculation of cash available for distribution
(please refer to Section 2 under the heading “Non-IFRS Financial Measures” and Section 7 under the
heading “Reconciliation of Non-IFRS Financial Measures” above), represent expenditures that are
required to maintain the productive capacity of the Centers. Historically, such expenditures have
represented on average 1.4% of revenue of the Centers. Management believes that such level of
maintenance capital expenditures will continue in the future and, accordingly, will not adversely impact
the cash available for distribution generated by the Corporation.
Risks Related to the Structure of the Corporation
The Corporation is entirely dependent on the operations and assets of the Centers through the indirect
ownership of between 51.0% and 65.0% of these Centers. Future dividend payments by the Corporation
are not guaranteed and are totally dependent upon the operating results and related cash flows from the
Centers and the limitations of applicable laws.
The payout by the Centers and the Corporation of a substantial majority of their operating cash flows will
make additional capital and operating expenditures dependent on increased cash flows or additional
financing in the future.
The Corporation’s dividend payments to its shareholders are denominated in Canadian dollars, whereas
all of its revenue is denominated in U.S. dollars. To the extent that future dividend payments are not
covered by foreign exchange forward contracts, the Corporation is exposed to currency exchange risk.
There can be no assurance that the Corporation will be able to repay the principal amount outstanding on
its convertible debentures when due. Additionally, the convertible debentures are payable in Canadian
dollars and, therefore, the Corporation is exposed (at maturity and/or repayment) to currency exchange
risk with respect to the principal amounts of these instruments.
Non-competition agreements executed by physician owners of the non-controlling interests in the Centers
may not be enforceable, which lack of enforceability could impact the revenue and profitability of the
Centers.
37
The Corporation does not have the ability to direct day-to-day governance or management inputs in
respect of the Centers, except in certain limited circumstances.
The degree to which the Corporation is leveraged on a consolidated basis could have important
consequences to the holders of the common shares, including:
(a) The Corporation’s and Centers’ ability in the future to obtain additional financing for working
capital, capital expenditures, acquisitions or other purposes may be limited.
(b) The Corporation or Centers being unable to refinance indebtedness on terms acceptable to the
Corporation or at all.
(c) A portion of the Corporation’s cash flow (on a consolidated basis) from operations is likely to be
dedicated to the payment of the principal of and interest on its indebtedness, thereby reducing
funds available for future operations, capital expenditures, acquisitions and/or dividends on its
common shares.
The Corporation has a credit facility that contains restrictive covenants which limit the discretion of the
Corporation or its management with respect to certain matters. Furthermore, the Centers have credit
facilities that contain restrictive covenants which may limit the Centers’ abilities to make distributions.
Additional common shares may be issued by the Corporation pursuant to exchange agreements with the
holders of the non-controlling interests in the Centers, in connection with future financing or acquisitions
by the Corporation or in connection with the exercise of the conversion option by the holders of the
convertible debentures. The issuance of common shares may dilute an investor’s investment in the
Corporation and reduce distributable cash per common share.
MFA, MFH and MF IMD are organized under the laws of the State of Delaware. The Centers that are
located in South Dakota are formed under the laws of the State of South Dakota. The Center located in
Oklahoma is formed under the laws of the State of Oklahoma, the Center located in Arkansas is formed
under the laws of the State of Arkansas and the Center located in California is formed under the laws of
the State of Delaware. All of the assets of the Centers are located outside of Canada and certain of the
directors and officers of the Corporation and its subsidiaries are residents of the United States. As a result,
it may be difficult or impossible for investors to effect service within Canada upon the Corporation’s
subsidiaries, the Centers, or their directors and officers who are not residents of Canada, or to realize
against them in Canada upon judgments of courts of Canada predicated upon the civil liability provisions
of applicable Canadian provincial securities laws.
The market price of the common shares may be subject to general volatility.
Payment of Dividends is not Guaranteed
Dividends to shareholders are paid at the discretion of the Corporation’s board of directors and are not
guaranteed. The Corporation may alter its dividend level and dividends from the Corporation, if any, will
depend on, among other things, the results of operations, cash requirements, financial condition,
contractual restrictions, business opportunities, provisions of applicable law, and other factors that the
board of directors may deem relevant. The directors may decrease the level of dividends provided for in
their existing dividend policies, or discontinue dividends at any time, and without prior notice.
38
Eligibility for Investment
There can be no assurance that the common shares will continue to be qualified investments for trusts
governed by registered retirement savings plans, registered retirement income funds, deferred profit
sharing plans, registered education savings plans, tax-free savings accounts and registered disability
savings plans.
The Corporation is Subject to Canadian Tax
As a Canadian corporation, the Corporation is generally subject to Canadian federal, provincial and other
taxes. The Corporation is required to include in computing its taxable income the interest received by the
Corporation on the two promissory notes issued by MFA to the Corporation (“MFA Promissory Notes”).
Management expects that the Corporation’s existing tax attributes will be available initially to offset this
income inclusion such that it will not result in an immediate material increase to the Corporation’s
liability for Canadian taxes. However, once the Corporation fully utilizes its existing tax attributes (or if,
for any reason, these attributes were not available to the Corporation), the Corporation’s Canadian tax
liability would materially increase. Although management intends to explore potential opportunities in the
future to preserve the tax efficiency of the Corporation’s structure, no assurances can be given that the
Corporation’s Canadian tax liability will not materially increase at that time.
There can be no assurance that Canadian federal income tax laws and Canada Revenue Agency’s
administrative policies respecting the Canadian federal income tax consequences generally applicable to
the Corporation or to a holder of common shares will not be changed in a manner which adversely affects
holders of the Corporation’s common shares.
The Corporation’s Structure may be Subject to Additional U.S Federal Income Tax Liability
MFA is subject to U.S. federal income tax on its income at regular corporate rates (currently 35%, plus
state and local taxes). MFA will claim interest deductions with respect to the MFA Promissory Notes in
computing its income for U.S. federal income tax purposes. To the extent this interest expense is
disallowed or is otherwise not deductible, the U.S. federal income tax liability of MFA will increase,
which could materially affect the after-tax cash available to distribute to the Corporation and therefore to
holders of common shares. While the Corporation has received advice from an independent third party,
based on certain representations by the Corporation and MFA and determinations made by the
Corporation’s independent financial advisors, that the MFA Promissory Notes should be treated as debt
for U.S. federal income tax purposes, it is possible that the Internal Revenue Service (“IRS”) could
successfully challenge that position and assert that the MFA Promissory Notes should be treated as equity
rather than debt for U.S. federal income tax purposes.
The determination of whether the MFA Promissory Notes are debt or equity for U.S. federal income tax
purposes is based on an analysis of the facts and circumstances. There is no clear statutory definition of
debt for U.S. federal income tax purposes, and its characterization is governed by principles developed in
case law, which analyzes numerous factors that are intended to identify the economic substance of the
purported creditor’s interest in the corporation. Furthermore, not all courts have applied this analysis in
the same manner, and some courts have placed more emphasis on certain factors than other courts have.
Moreover, subsequent changes in fact or subsequent actions or inactions by the Corporation or MFA
could impact this analysis or could be used by the IRS to call into question this analysis or the facts as of
the date such indebtedness was incurred. A successful challenge of this position would increase the U.S.
federal income tax liability of MFA for the applicable open tax years, which would affect the ability of
39
MFA to make interest and principal payments on the MFA Promissory Notes and would reduce the
amount of after-tax cash generated by MFA that could otherwise be available to make distributions to the
Corporation. In addition, otherwise deductible payments of interest would be re-characterized as non-
deductible equity distributions and would be subject to U.S. withholding tax to the extent MFA had
current or accumulated earnings and profits.
Alternatively, the IRS could argue that the interest on the MFA Promissory Notes exceeds an arm’s length
rate, in which case only the portion of the interest expense that does not exceed an arm’s length rate may
be deductible and the remainder would be subject to U.S. withholding tax to the extent that MFA had
current or accumulated earnings and profits. The Corporation has received advice from independent
financial advisors that the interest rates on the MFA Promissory Notes are commercially reasonable in the
circumstances. However, the advice received by the Corporation is not binding on the IRS. Furthermore,
MFA’s deductions attributable to the interest expense on the MFA Promissory Notes may be limited by
the amount by which its net interest expense (the interest paid by MFA on all debt, including the MFA
Promissory Notes, less its interest income) exceeds 50% of its adjusted taxable income (generally, U.S.
federal taxable income before net interest expense, depreciation, amortization and taxes). Any disallowed
interest expense may currently be carried forward to future years. Proposed legislation has been
introduced, though not enacted, several times in recent years that would further limit the 50% of adjusted
taxable income cap described above to 25% of adjusted taxable income, although recent proposals in the
U.S. Federal Fiscal Year Budget for 2015 would only apply the revised rules to certain foreign
corporations that were expatriated. Furthermore, other limitations on the deductibility of interest under
U.S. federal income tax laws, potentially including limitations applicable to certain high-yield debt
obligations, could apply under certain circumstances to defer and/or eliminate all or a portion of the
interest deduction that MFA would otherwise be entitled to with respect to interest on such indebtedness.
United States Investment Company Act of 1940
While the Corporation believes that through its subsidiaries and affiliates it is actively engaged in
operating businesses and does not meet the definition of an investment company for purposes of the
United States Investment Company Act of 1940 (the “1940 Act”), depending on the composition and
valuation of the Corporation’s assets and the sources of the Corporation’s income from time to time, the
Corporation could fall within the technical definition of the term “investment company” in the 1940 Act.
Moreover, the determination of whether a company like the Corporation is an investment company
involves complex analysis of regulations and facts, and the Corporation has not sought and does not
anticipate seeking confirmation from the Securities and Exchange Commission (the “SEC”) that it agrees
with the Corporation’s analysis. If the SEC were to disagree with the Corporation’s analysis or the
Corporation otherwise were to determine that it is an investment company as defined in the 1940 Act, the
Corporation may, among other steps, prudently acquire or sell assets in order to avoid remaining an
“investment company” as defined under the 1940 Act. Such acquisitions or sales could be on terms other
than those on which it would otherwise acquire or sell such assets or the timing of such transactions could
be disadvantageous to the Corporation. If the Corporation were unable to avoid being an investment
company and were therefore required to register as such under the 1940 Act, the Corporation would
become subject to substantial regulation with respect to its capital structure (including its ability to use
leverage), management, operations, transactions with affiliated persons, portfolio composition (including
restrictions with respect to diversification), and other matters.
40
Consolidated Financial Statements of
MEDICAL FACILITIES
CORPORATION
December 31, 2015 and 2014
(In U.S. dollars)
FINANCIAL STATEMENTS
TABLE OF CONTENTS
Management’s Responsibility for Financial Reporting ............................................................................ 3
Independent Auditors’ Report .................................................................................................................. 4
Consolidated Balance Sheets ................................................................................................................. 5
Consolidated Statements of Changes in Equity ...................................................................................... 6
Consolidated Statements of Comprehensive Income ............................................................................. 7
Consolidated Statements of Cash Flows................................................................................................. 8
Page
NOTES TO THE FINANCIAL STATEMENTS
Page
1. Reporting entity .............................................................................................................................. 9
2. Statement of compliance ................................................................................................................ 9
3. Basis of presentation ...................................................................................................................... 9
4. Discontinued operation ................................................................................................................. 10
5. Property and equipment ............................................................................................................... 12
6. Goodwill and other intangibles ..................................................................................................... 13
7.
Long-term debt ............................................................................................................................. 14
8. Convertible debentures ................................................................................................................ 15
9. Share capital ................................................................................................................................. 16
10. Non-controlling interest ................................................................................................................ 19
11. Net changes in non-cash working capital ..................................................................................... 21
12. Financial instruments and risk management ................................................................................ 21
13. Capital .......................................................................................................................................... 29
14. Employee future benefits .............................................................................................................. 30
15.
Income taxes ................................................................................................................................ 30
16.
Interest expense, net of interest income from continuing operations ........................................... 32
17. Loss on foreign currency .............................................................................................................. 32
18. Related party transactions and balances ..................................................................................... 33
19. Commitments and contingencies ................................................................................................. 35
20. Significant accounting policies ..................................................................................................... 35
21. Use of judgments and estimates .................................................................................................. 46
22. Subsequent event......................................................................................................................... 47
2
Management’s Responsibility for Financial Reporting
The accompanying consolidated
financial statements of Medical Facilities Corporation (the
“Corporation”) are the responsibility of management and have been approved by the Board of
Directors of the Corporation. This responsibility includes the selection and consistent application of
appropriate accounting principles and methods in addition to making judgments and estimates
necessary to prepare the consolidated financial statements in accordance with International Financial
Reporting Standards as issued by the International Accounting Standards Board.
The Corporation maintains appropriate systems of internal control, policies and procedures, which
provide management with reasonable assurance that assets are safeguarded from loss or
unauthorized use and financial records are reliable and form a proper basis for the preparation of the
consolidated financial statements.
The Board of Directors of the Corporation ensures that management fulfills its responsibilities for
financial reporting and internal control through an Audit Committee. The Board of Directors appoints
the Audit Committee, all members of which are independent members of the Board of Directors. The
Audit Committee meets periodically with management and the Corporation’s auditors to discuss the
results of the audit, the adequacy of internal accounting controls and financial reporting matters. On
the recommendation of the Audit Committee, the consolidated financial statements are forwarded to
the Board of Directors for their approval.
“Seymour Temkin”
“Michael Salter”
Seymour Temkin, CPA, CA, FMCA
Interim Chief Executive Officer
Michael Salter, CPA, CA
Chief Financial Officer
Toronto, Canada
March 16, 2016
3
KPMG LLP
Bay Adelaide Centre
333 Bay Street Suite 4600
Toronto ON M5H 2S5
Canada
Telephone
Fax
Internet
(416) 777-8500
(416) 777-8818
www.kpmg.ca
Independent Auditors’ Report
To the Shareholders of Medical Facilities Corporation:
We have audited the accompanying consolidated financial statements of Medical Facilities Corporation, which
comprise the consolidated balance sheets as at December 31, 2015 and 2014, the consolidated statements of
comprehensive income, changes in equity and cash flows for the years then ended, and notes, comprising a
summary of significant accounting policies and other explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in
accordance with International Financial Reporting Standards, and for such internal control as management
determines is necessary to enable the preparation of consolidated financial statements that are free from
material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We
conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards
require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance
about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on our judgment, including the assessment
of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In
making those risk assessments, we consider internal control relevant to the entity’s preparation and fair
presentation of the consolidated financial statements in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal
control. An audit also includes evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of
the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis
for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated
financial position of Medical Facilities Corporation as at December 31, 2015 and December 31, 2014 and its
consolidated financial performance and its consolidated cash flows for the years then ended in accordance with
International Financial Reporting Standards.
Chartered Professional Accountants, Licensed Public Accountants
March 16, 2016
Toronto, Canada
4
MEDICAL FACILITIES CORPORATION
Consolidated Balance Sheets
(In thousands of U.S. dollars)
ASSETS
Current assets
Cash and cash equivalents
Short-term investments
Accounts receivable
Supply inventory
Prepaid expenses and other
Total current assets
Non-current assets
Long-term investments
Deferred income tax assets
Property and equipment
Goodwill
Other intangibles
Other assets
Total non-current assets
TOTAL ASSETS
LIABILITIES AND EQUITY
Current liabilities
Dividends payable
Accounts payable
Accrued liabilities
Income tax payable
Foreign exchange forward contracts
Current portion of long-term debt
Total current liabilities
Non-current liabilities
Long-term debt
Deferred income tax liabilities
Convertible debentures
Exchangeable interest liability
Total non-current liabilities
Total liabilities
Equity
Share capital
Deficit
Equity attributable to owners of the Corporation
Non-controlling interest
Total equity
Commitments and contingencies
TOTAL LIABILITIES AND EQUITY
Note
12.5.2
15
5
6.1
6.2
18.2
15
12.1
7
7
15
8
12.2
9.1
10
19
December 31,
2015
$
2014
$
57,969
12,975
48,754
6,031
4,160
129,889
-
18,286
61,121
102,714
70,103
839
253,063
382,952
2,107
19,035
14,307
849
-
7,848
44,146
27,580
4,249
30,614
61,681
124,124
168,270
41,309
9,305
46,994
5,841
3,450
106,899
3,559
38,168
66,517
105,189
88,604
773
302,810
409,709
2,532
15,192
17,026
151
3,627
6,438
44,966
33,799
-
38,000
92,864
164,663
209,629
398,166
(232,312)
165,854
48,828
400,467
(252,110)
148,357
51,723
214,682
200,080
382,952
409,709
The accompanying notes are an integral part of these consolidated financial statements.
On behalf of the Board:
Marilynne Day-Linton
Dale Lawr
5
MEDICAL FACILITIES CORPORATION
Consolidated Statements of Changes in Equity
(In thousands of U.S. dollars)
Note
Attributable to Owners of the
Corporation
Non-
controlling
Interest
Total
Equity
Share
Capital
$
400,467
-
-
-
Deficit
$
Total
$
$
$
(252,110)
47,127
(27,329)
-
148,357
47,127
(27,329)
-
51,723
45,416
-
(48,311)
200,080
92,543
(27,329)
(48,311)
1,147
-
1,147
-
1,147
9.3
(3,448)
398,166
-
(232,312)
(3,448)
165,854
-
48,828
(3,448)
214,682
401,033
-
-
-
(243,594)
23,308
(31,824)
-
293
13
-
-
157,439
23,308
(31,824)
-
293
13
54,716
31,673
-
(34,666)
212,155
54,981
(31,824)
(34,666)
-
-
293
13
9.3
(872)
400,467
-
(252,110)
(872)
148,357
-
51,723
(872)
200,080
2015
Balance at January 1, 2015
Net income for the year
Dividends to owners of the Corporation
Distributions to non-controlling interest
Acquisition of additional interest in
Oklahoma Spine Hospital, LLC
Purchase of common shares under
normal course issuer bids
Balance at December 31, 2015
2014
Balance at January 1, 2014
Net income for the year
Dividends to owners of the Corporation
Distributions to non-controlling interest
Acquisition of additional interest in
Dakota Plains Surgical Center, LLP
Conversion of convertible debentures
into common shares
Purchase of common shares under
normal course issuer bids
Balance at December 31, 2014
The accompanying notes are an integral part of these consolidated financial statements.
6
MEDICAL FACILITIES CORPORATION
Consolidated Statements of Comprehensive Income
(In thousands of U.S. dollars, except per share amounts)
Facility service revenue
Operating expenses
Salaries and benefits
Drugs and supplies
General and administrative
Depreciation of property and equipment
Amortization of other intangibles
Income from operations
Finance costs
Decrease in value of convertible debentures
Decrease in value of exchangeable interest liability
Interest expense on exchangeable interest liability
Interest expense, net of interest income
Loss on foreign currency
Income before income taxes
Income tax expense
Note
5
6.2
8
12.2
12.2
16
17
Years Ended
December 31,
2015
$
2014
$
308,778
297,382
80,223
84,810
44,995
8,909
15,149
234,086
77,331
84,537
43,882
9,573
15,372
230,695
74,692
66,687
(7,353)
(30,036)
9,172
3,024
4,987
(20,206)
(3,253)
(12,757)
8,591
3,538
5,091
1,210
94,898
65,477
15
24,719
14,326
Income for the year from continuing operations
70,179
51,151
Discontinued operation
Income for the year from discontinued operation, net of tax
4.4
22,364
3,830
Net income for the year
Attributable to:
Owners of the Corporation
Non-controlling interest
Earnings per share
From continuing and discontinued operations
Basic
Fully diluted
From continuing operations
Basic
Fully diluted
92,543
54,981
47,127
45,416
92,543
23,308
31,673
54,981
$ 1.51
$ 0.79
$ 0.74
$ 0.56
$ 1.18
$ 0.53
$ 0.68
$ 0.51
10
9.2
9.2
9.2
9.2
The accompanying notes are an integral part of these consolidated financial statements.
7
MEDICAL FACILITIES CORPORATION
Consolidated Statements of Cash Flows
(In thousands of U.S. dollars)
Cash flows from operating activities
Net income for the year
Adjustments for:
Depreciation of property and equipment
Amortization of other intangibles
Share of equity income in an associate
Decrease in value of convertible debentures
Decrease in value of exchangeable interest liability
Interest expense, net of interest income, including interest expense on
exchangeable interest liability
Gain on sale of Dakota Plains Surgical Center, LLP’s assets, included in
discontinued operation, net of tax
Loss on foreign currency
Income tax expense
Changes in non-cash operating working capital
Interest paid
Income and withholding taxes paid
Net cash provided by operating activities
Cash flows from investing activities
Purchase of property and equipment, net of disposals
Gross proceeds from the sale of Dakota Plains Surgical Center, LLP’s assets included
in discontinued operation
Investment in Black Hills Surgical Physicians, LLC
Net investment in short-term investments
Net redemption of long-term investments
Net cash generated by (used in) investing activities
Cash flows from financing activities
Net proceeds from revolving credit facilities at the Centers
Repayments of notes payable and obligations under lease arrangements at the
Centers
Discharge of real estate loan at Dakota Plains Surgical Center, LLP
Distributions, return of capital and loan receivable from an associate
Distributions to non-controlling interest
Dividends paid
Purchase of common shares under the terms of normal course issuer bids
Purchase of convertible debentures under the terms of normal course issuer bid
Net cash used in financing activities
Increase in cash and cash equivalents
Effect of exchange rate fluctuations on cash balances
Cash and cash equivalents, beginning of the year
Cash and cash equivalents, end of the year
Non-cash transactions:
Acquisition of additional interest in Oklahoma Spine Hospital, LLC
Acquisition of additional interest in Dakota Plains Surgical Center, LLP
Conversion of convertible debentures into common shares
Note
5
6.2
18.2
8
12.2
4.3
17
15
11
5
4.1
18.2
7
7
4.1
18.2
10
9.3
8
17
The accompanying notes are an integral part of these consolidated financial statements.
8
Years Ended
December 31,
2015
$
2014
$
92,543
54,981
9,083
15,460
(135)
(7,353)
(30,036)
9,980
16,018
(128)
(3,253)
(12,684)
12,265
12,286
(20,953)
4,987
24,750
100,611
(1,517)
99,094
(12,266)
(6,588)
80,240
-
5,091
14,815
97,106
3,840
100,946
(12,278)
(668)
88,000
(7,385)
(8,297)
36,923
-
(2,903)
2,792
29,427
-
(341)
(240)
248
(8,630)
1,806
2,060
(3,565)
(3,157)
69
(48,311)
(27,754)
(3,448)
(33)
(84,393)
25,274
(8,614)
41,309
57,969
1,147
-
-
(4,242)
-
117
(34,666)
(32,057)
(872)
-
(69,660)
9,710
(4,273)
35,872
41,309
-
293
13
MEDICAL FACILITIES CORPORATION
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2015 and 2014
1.
REPORTING ENTITY
Medical Facilities Corporation (the “Corporation”) is a British Columbia corporation. The address of the
Corporation’s head office is 45 St. Clair Avenue West, Suite 200, Toronto, Ontario, Canada. The
common shares of the Corporation are listed on the Toronto Stock Exchange under the ticker
symbol “DR”.
The Corporation’s operations are based in the United States. Through its wholly-owned subsidiaries, the
Corporation owns controlling interests in six limited liability entities (the “Centers”), five of which own a
specialty hospital or an ambulatory surgery center. On June 30, 2015, Dakota Plains Surgical
Center, LLP, the Corporation’s 65% owned subsidiary, sold assets related to the operation of its
specialty hospital to Avera St. Luke’s (note 4).
The Centers, their locations and the Corporation’s ownership interest in each are as follows:
Centers
Black Hills Surgical Hospital, LLP (“BHSH”)
Sioux Falls Specialty Hospital, LLP (“SFSH”)
Oklahoma Spine Hospital, LLC (“OSH”)
Arkansas Surgical Hospital, L.L.C. (“ASH”)
The Surgery Center of Newport Coast, LLC (“SCNC”)
2.
STATEMENT OF COMPLIANCE
Location
Rapid City, South Dakota
Sioux Falls, South Dakota
Oklahoma City, Oklahoma
North Little Rock, Arkansas
Newport Beach, California
Ownership Interest
December 31,
2015
2014
54.2%
51.0%
60.3%
51.0%
51.0%
54.2%
51.0%
58.8%
51.0%
51.0%
These consolidated financial statements have been prepared in accordance with International Financial
Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and
Interpretations of the International Financial Reporting Interpretations Committee. The Corporation’s
significant accounting policies are presented in note 20 to these consolidated financial statements.
These consolidated financial statements were approved by the Corporation’s Board of Directors on
March 16, 2016.
3.
BASIS OF PRESENTATION
These consolidated financial statements include the accounts of the Corporation and all its subsidiaries
and have been prepared on the historical cost basis except for certain financial instruments, which are
measured at fair value (note 20.14).
These consolidated financial statements are presented in United States dollars.
9
MEDICAL FACILITIES CORPORATION
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2015 and 2014
4.
DISCONTINUED OPERATION
On June 4, 2015, Dakota Plains Surgical Center, LLP (“DPSC”), the Corporation’s 65% owned
subsidiary, entered into an asset purchase agreement to sell its assets related to the operation of its
specialty hospital in Aberdeen, South Dakota, to Avera St. Luke’s and to discharge any encumbrances
related to the assets sold. The transaction was completed on June 30, 2015.
4.1
Consideration received
Gross proceeds from the sale of DPSC’s assets
Less discharge of real estate loan
Net proceeds from the sale of DPSC’s assets
$
36,923
(3,157)
33,766
Subsequent to June 30, 2015, DPSC distributed $11,776 to the holders of non-controlling interest in
DPSC. The remaining amount was retained
the Corporation. As at
in
December 31, 2015, the non-controlling interest in DPSC remains outstanding.
the subsidiaries of
4.2
Analysis of DPSC assets disposed
Prepaid expenses and other
Property and equipment
Goodwill
Other intangibles
Total assets disposed of
4.3
Gain on sale of DPSC’s assets
Gross proceeds from the sale of DPSC’s assets
Assets disposed of
Transaction costs
Gain on sale of DPSC’s assets before income taxes
Income tax expense
Total gain on sale of DPSC’s assets
10
$
16
3,697
2,475
3,041
9,229
$
36,923
(9,229)
(73)
27,621
(6,668)
20,953
MEDICAL FACILITIES CORPORATION
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2015 and 2014
4.
DISCONTINUED OPERATION (Continued)
4.4
Results of discontinued operation
The comparative statement of comprehensive income has been re-presented to show the discontinued
operation separately from continuing operations.
Facility service revenue
Operating expenses
Income from operations
Finance costs
Income before income taxes
Income tax expense
Gain on sale of DPSC’s assets, net of tax
Income for the year from discontinued operation
4.5
Cash flows from discontinued operation
Net cash provided by operating activities
Net cash generated by (used in) investing activities
Net cash used in financing activities
Net cash flow for the year
Years Ended
December 31,
2015
$
6,213
4,701
1,512
70
1,442
31
20,953
22,364
2014
$
14,452
9,903
4,549
234
4,315
485
-
3,830
Years Ended
December 31,
2015
$
2014
$
1,899
36,913
(17,033)
21,779
7,264
(62)
(2,610)
4,592
11
MEDICAL FACILITIES CORPORATION
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2015 and 2014
5.
PROPERTY AND EQUIPMENT
Cost
Balance at January 1, 2014
Additions
Reclassifications
Disposals
Balance at December 31, 2014
Additions
Reclassifications
Disposals
Sale of DPSC’s assets
Balance at December 31, 2015
Accumulated Depreciation
Balance at January 1, 2014
Charged for the year
Disposals
Balance at December 31, 2014
Charged for the year
Disposals
Sale of DPSC’s assets
Balance at December 31, 2015
Carrying Amounts
At December 31, 2014
At December 31, 2015
Land and
Improvements
$
Construction
in Progress
$
Building and
Improvements
$
Equipment
and Furniture
$
5,143
279
-
-
5,422
925
-
-
(394)
5,953
(40)
(25)
-
(65)
(26)
-
-
(91)
39
3,378
(856)
-
2,561
2,160
(2,602)
-
-
2,119
-
-
-
-
-
-
-
62,485
971
640
-
64,096
238
1,916
-
(4,792)
61,458
(20,267)
(4,810)
-
(25,077)
(3,206)
-
1,849
(26,434)
49,508
3,672
216
(814)
52,582
4,061
686
(1,930)
(3,274)
52,125
(28,668)
(5,145)
811
(33,002)
(5,851)
1,930
2,914
(34,009)
Total
$
117,175
8,300
-
(814)
124,661
7,384
-
(1,930)
(8,460)
121,655
(48,975)
(9,980)
811
(58,144)
(9,083)
1,930
4,763
(60,534)
5,357
5,862
2,561
2,119
39,019
35,024
19,580
18,116
66,517
61,121
Included in the equipment and furniture for the years 2015 and 2014 is certain equipment under finance
lease agreements as follows:
Equipment
Less accumulated depreciation
Total
2015
$
7,320
(4,336)
2,984
2014
$
8,909
(4,714)
4,195
12
MEDICAL FACILITIES CORPORATION
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2015 and 2014
6.
GOODWILL AND OTHER INTANGIBLES
6.1
Goodwill
carrying
The
amount
(December 31, 2014: $105,189) (see note 4.2).
goodwill
of
as
at December
31,
2015 was
$102,714
6.2
Other intangibles
Cost
Balance at January 1, 2014
Balance at December 31, 2014
Sale of DPSC’s assets
Balance at December 31, 2015
Accumulated Amortization
Balance at January 1, 2014
Amortization charges
Balance at December 31, 2014
Amortization charges
Sale of DPSC’s assets
Balance at December 31, 2015
Carrying Amounts
At December 31, 2014
At December 31, 2015
Amortization period (years)
6.3
Impairment
Hospital
Operating
Licenses
$
1,714
1,714
(238)
1,476
(931)
(200)
(1,131)
(199)
238
(1,092)
583
384
5
Medical
Charts and
Records
$
7,981
7,981
(582)
7,399
(7,198)
(200)
(7,398)
(199)
582
(7,015)
583
384
5-10
Referral
Sources
$
206,127
206,127
(10,204)
195,923
(112,897)
(15,618)
(128,515)
(15,062)
7,861
(135,716)
77,612
60,207
10-15
Trade
Names
$
9,826
9,826
(698)
9,128
-
-
-
-
-
-
Total
$
225,648
225,648
(11,722)
213,926
(121,026)
(16,018)
(137,044)
(15,460)
8,681
(143,823)
9,826
9,128
88,604
70,103
N/A
(indefinite life)
The Corporation performed its annual impairment tests for goodwill and other intangibles with indefinite
lives as at December 31, 2015 and December 31, 2014 and determined that there was no impairment.
The Corporation identified five cash generating units (“CGUs”) for which impairment testing was
performed. Management calculated the recoverable amount of each CGU using earnings before income
taxes, depreciation and amortization (“EBITDA”) specific to each CGU by a multiple determined using
market data, such as EBITDA to market capitalization ratios of comparable publicly traded companies
and recent prices for capital transactions within the industry. Management has estimated cost to
dispose to be 1% of the fair value of the CGUs, based on recent market data.
For the December 31, 2015 impairment test, enterprise value to EBITDA multiples of 10.1 to 11.1
(2014: 9.7 to 10.7) were determined to be appropriate based on the factors specific to each CGU and a
comparison to market information available at the time of the test.
13
MEDICAL FACILITIES CORPORATION
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2015 and 2014
6.
GOODWILL AND OTHER INTANGIBLES (Continued)
To ensure reasonableness of recoverable amounts, management reconciles the recoverable amounts of
its CGUs to the enterprise value of the Corporation as at December 31 based on (i) the market
capitalization of the outstanding common shares, taking into account a 20% equity control premium
attributable to the common shares, (ii) the fair value of convertible debentures outstanding, and (iii) the
Corporation’s portion of the Centers’ long-term debt, less (iv) cash on hand.
7.
LONG-TERM DEBT
Authorized
Balance
2015
Effective
Interest Rate
2014
Maturity
Balance
Effective
Interest Rate
December 31,
Revolving credit facilities
BHSH
SFSH
OSH
ASH
SCNC
Notes payable
BHSH
DPSC
SFSH
ASH
Capital leases
SFSH
ASH
Less current portion
$
9,000
7,000
6,350
4,000
2,500
$
-
-
4,500
-
-
28,850
4,500
11,201
11,201
-
16,330
1,330
28,861
-
-
-
16,330
1,330
28,861
1,528
539
2,067
35,428
(7,848)
27,580
%
2.8
1.4
3.0
3.3
3.5
3.0
-
2.9
4.3
2016 – 2017
2019
2016
2016
2016
2018 – 2020
-
2016 – 2019
2021
2.3
5.7
2016 – 2019
2018 – 2020
%
3.0
1.9
2.7
3.0
3.5
3.5
4.5
2.9
-
2.7
5.6
$
-
-
4,400
1,000
-
5,400
12,086
3,116
16,497
-
31,699
2,464
674
3,138
40,237
(6,438)
33,799
Each credit facility and note payable is secured by an interest in all property and a mortgage on real
property owned by the respective Center. These credit facilities and notes payable contain certain
restrictive financial and non-financial covenants. As at December 31, 2015, the Centers were in
compliance with their covenants.
14
MEDICAL FACILITIES CORPORATION
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2015 and 2014
7.
LONG-TERM DEBT (Continued)
The following are the future maturities of long-term debt, including capital leases, for the years ending
December 31:
2016
2017
2018
2019
2020
2021
Future maturities of long-term debt
8.
CONVERTIBLE DEBENTURES
$
7,848
2,702
5,401
18,580
629
268
35,428
issued,
the Corporation
On December 21, 2012,
in a public offering, Cdn$41,800 (US$42,042)
aggregate principal amount of 5.9% convertible unsecured subordinated debentures (“convertible
debentures”). The convertible debentures pay interest semi-annually in arrears on June 30 and
December 31 of each year, mature on December 31, 2019 (“Maturity Date”), and are convertible into
52.3286 common shares per Cdn$1,000 principal amount of convertible debentures at the option of the
holder, representing a conversion price of Cdn$19.11 per common share (“Conversion Price”). If the
holders of the convertible debentures do not exercise the right to convert their holdings into the
Corporation’s common shares prior to the Maturity Date, the principal amount is due and payable in full.
The convertible debentures are subordinate to all other existing and future senior unsecured
indebtedness of the Corporation.
The convertible debentures contain a provision whereby, in connection with a change of control
transaction, holders of the convertible debentures would be entitled to convert their debentures within a
specified time period and would receive, in addition to the number of shares on conversion, additional
shares calculated as a function of the change of control offer price and time remaining to maturity.
After December 31, 2015 and prior to December 31, 2017, the convertible debentures may be
redeemed by the Corporation, in whole or in part from time to time, at a redemption price equal to the
principal amount plus accrued and unpaid interest up to but excluding the redemption date, provided
that the volume weighted average trading price of the common shares on the Toronto Stock Exchange
for the 20 consecutive trading days ending five trading days preceding the date on which notice of
redemption is given is at least 125% of the Conversion Price. On or after December 31, 2017, but prior
to the Maturity Date, the convertible debentures may be redeemed in whole or in part from time to time
at the option of the Corporation, at a redemption price equal to the principal amount plus accrued and
unpaid interest up to but excluding the redemption date.
15
MEDICAL FACILITIES CORPORATION
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2015 and 2014
8.
CONVERTIBLE DEBENTURES (Continued)
The Corporation’s normal course issuer bid for its convertible debentures was in effect from
December 30, 2014 to December 29, 2015. In 2015, the Corporation purchased Cdn$43,000 aggregate
principal amount of its outstanding convertible debentures for a total consideration of $33. The
Corporation did not purchase any of its convertible debentures under the normal course issuer bid which
terminated on December 29, 2014.
The following table represents changes in the convertible debentures for the years 2015 and 2014:
Balance at January 1, 2014
Conversion of convertible debentures into common shares
Decrease in fair value of convertible debentures at market price
Balance at December 31, 2014
Convertible debentures purchased under the terms of normal course issuer bid
Decrease in fair value of convertible debentures at market price
Balance at December 31, 2015
9.
SHARE CAPITAL
9.1
Share capital
$
41,266
(13)
(3,253)
38,000
(33)
(7,353)
30,614
The following table represents changes in the number and value of common shares issued and
outstanding for the years 2015 and 2014:
Balance at January 1, 2014
Common shares issued for acquisition of additional interest in DPSC
Common shares issued on exchange of convertible debentures
Common shares purchased and cancelled under the terms of normal course issuer bids (note 9.3)
Balance at December 31, 2014
Common shares issued for acquisition of additional interest in OSH
Common shares purchased and cancelled under the terms of normal course issuer bids (note 9.3)
Balance at December 31, 2015
Number of Common
Shares
31,366,750
17,716
732
(55,600)
31,329,598
84,447
(300,600)
31,113,445
$
401,033
293
13
(872)
400,467
1,147
(3,448)
398,166
16
MEDICAL FACILITIES CORPORATION
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2015 and 2014
9.
SHARE CAPITAL (Continued)
9.2
Earnings per share
Basic earnings per share attributable to owners of the Corporation are calculated as follows:
Year Ended December 31,
2015
Year Ended December 31,
2014
Continuing
Operations
Discontinued
Operation
Total
Continuing
Operations
Discontinued
Operation
Total
$
37,018
10,109
47,127
21,245
2,063
23,308
31,287,313
31,287,313
31,287,313
31,344,891
31,344,891
31,344,891
Net income for the year
attributable to owners
of the Corporation
Divided by weighted
average number of
common shares
outstanding for the
period
Basic earnings per share
attributable to owners
of the Corporation
$
1.18
0.32
1.51
0.68
0.07
0.74
17
MEDICAL FACILITIES CORPORATION
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2015 and 2014
9.
SHARE CAPITAL (Continued)
Fully diluted earnings per share attributable to owners of the Corporation are calculated as follows:
Year Ended December 31,
2015
Year Ended December 31,
2014
Continuing
Operations
Discontinued
Operation
Total
Continuing
Operations
Discontinued
Operation
Total
$
37,018
10,109
47,127
21,245
2,063
23,308
(7,353)
1,419
(19,223)
9,172
-
-
-
-
(7,353)
(3,253)
1,419
1,644
-
-
(3,253)
1,644
(19,223)
(8,164)
45
(8,119)
9,172
8,591
19
8,610
$
21,033
10,109
31,142
20,063
2,127
22,190
Net income for the year
attributable to owners of
the Corporation
Decrease in value of
convertible debentures
Interest expense on
convertible debentures (tax
effected)
Decrease in value of
exchangeable interest
liability (tax effected)
Interest expense on
exchangeable interest
liability
Modified net income for the
year attributable to
owners of the
Corporation
Divided by weighted average
number of common shares:
Outstanding for the
period
31,287,313
-
31,287,313
31,344,891
-
31,344,891
Deemed to be issued on
the conversion of the
outstanding
convertible
debentures
Deemed to be issued on
the exchange of the
outstanding
exchangeable
interest liability
Weighted average number of
common shares
Fully diluted earnings per
2,185,478
-
2,185,478
2,186,969
-
2,186,969
5,892,069
39,364,860
-
-
5,892,069
6,047,980
15,404
6,063,384
39,364,860
39,579,840
15,404
39,595,244
share
$
0.53
0.79
0.51
0.56
9.3
Normal course issuer bids
Pursuant to the terms of the Corporation’s normal course issuer bids, in 2014, the Corporation
purchased 55,600 of its common shares for a total consideration of $872 (note 9.1). In 2015, the
Corporation purchased 300,600 of its common shares for a total consideration of $3,448 (note 9.1). The
purchases under the bids are recorded in share capital. All common shares acquired under these bids
were cancelled.
18
MEDICAL FACILITIES CORPORATION
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2015 and 2014
10.
NON-CONTROLLING INTEREST
The following tables summarize financial information in respect of the non-controlling interest of each
Center. The summarized
intra-group
eliminations.
information below represents amounts before
financial
December 31, 2015
Non-controlling interest percentage
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Equity attributable to owners of the Corporation
Non-controlling interest
Facility service revenue
Operating expenses
Net income attributable to owners of the Corporation
Net income attributable to non-controlling interest
Net income
BHSH
$
SFSH
$
35%
35%
14,130
24,349
11,823
9,983
10,837
5,836
78,749
53,662
16,058
8,647
24,705
24,505
24,120
13,915
16,089
12,104
6,517
95,773
57,035
24,834
13,372
38,206
OSH
$
35%
16,737
4,138
10,497
343
6,523
3,512
63,363
50,941
8,001
4,308
12,309
ASH
$
44%
11,962
6,871
9,360
1,572
4,425
3,477
63,061
45,055
10,093
7,930
18,023
SCNC
$
49%
3,337
997
296
-
2,059
1,979
7,832
6,174
846
812
1,658
Distributions to non-controlling interest
8,551
12,845
4,575
7,582
841
Cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activities(1)
Net cash inflow (outflow)
27,380
(3,993)
(25,316)
(1,929)
38,390
(1,342)
(37,802)
(754)
12,651
(823)
(12,720)
(892)
18,854
(907)
(16,134)
1,813
2,457
(1,717)
(219)
521
(1) Cash flows from financing activities include distributions paid to the Corporation and non-controlling interest.
19
MEDICAL FACILITIES CORPORATION
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2015 and 2014
10.
NON-CONTROLLING INTEREST (Continued)
December 31, 2014
BHSH
$
DPSC
$
SFSH
$
Non-controlling interest percentage
35%
35%
35%
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Equity attributable to owners of the Corporation
Non-controlling interest
Facility service revenue
Operating expenses
Net income attributable to owners of the Corporation
Net income attributable to non-controlling interest
Net income
15,457
23,203
13,096
8,868
10,852
5,844
76,687
53,577
14,652
7,889
22,541
4,930
3,860
1,954
2,981
2,506
1,349
14,452
9,258
3,282
1,767
5,049
21,891
25,362
13,001
17,036
11,190
6,025
88,118
51,988
23,043
12,408
35,451
OSH
$
35%
16,783
4,884
6,379
4,743
6,854
3,691
63,913
52,244
7,474
4,025
11,499
ASH
$
44%
9,059
7,501
7,571
2,781
3,477
2,732
60,450
46,061
8,161
6,412
14,573
SCNC
$
49%
3,376
1,004
283
-
2,089
2,008
8,214
6,043
1,107
1,064
2,171
Distributions to non- controlling interest
7,735
2,462
11,823
4,553
6,975
1,120
Cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activities(1)
Net cash inflow (outflow)
25,602
(1,926)
(22,776)
900
6,529
(62)
(7,137)
(670)
38,529
(2,742)
(34,282)
1,505
14,211
(332)
(14,243)
(364)
17,406
(2,728)
(14,275)
403
2,580
(34)
(2,285)
261
(1) Cash flows from financing activities include distributions paid to the Corporation and non-controlling interest.
10.1 Significant restrictions
The partnership or operating agreements governing each of the respective Centers (each, a
“Partnership Agreement”) do not permit the Corporation to access the assets of the Centers to settle the
liabilities of other subsidiaries of the Corporation, and the Centers have no obligation to (and could not,
without the approval of the holders of the non-controlling interest) take any steps to settle the liabilities of
the Corporation or its other subsidiaries. The Corporation’s rights in respect of each Center are limited to
representation on the management committee and approval rights over certain fundamental decisions.
The Partnership Agreements require that each Center distribute its available cash to the maximum
extent possible, subject to applicable law and compliance with their existing credit facilities, by way of
monthly distributions on its partnership interests or other distributions on its securities, after (i) satisfying
its debt service obligations under its credit facilities or any other agreements with third parties,
(ii) satisfying its other expense obligations, including withholding and other applicable taxes, and
(iii) retaining reasonable working capital or other reserves, including amounts on account of capital
expenditures and such other amounts as may be considered appropriate by its management committee.
20
MEDICAL FACILITIES CORPORATION
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2015 and 2014
11.
NET CHANGES IN NON-CASH WORKING CAPITAL
The following table summarize net changes in non-cash working capital for the years 2015 and 2014:
Accounts receivable
Supply inventory
Prepaid expenses and other
Accounts payable
Accrued liabilities
Total net changes in non-cash working capital
12.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
12.1 Foreign exchange forward contracts
2015
$
(1,362)
(588)
(726)
3,843
(2,684)
(1,517)
2014
$
3,338
(314)
596
227
(7)
3,840
At December 31, 2015, the Corporation did not hold any foreign exchange forward contracts. As of
December 31, 2014, the fair value of the then outstanding contracts was a liability of $3,627.
12.2 Exchangeable interest liability
Concurrent with the acquisition of its interests in the Centers located in Arkansas, Oklahoma and South
Dakota, the Corporation entered into exchange agreements with the vendors who originally retained a
49% non-controlling interest in these Centers. Pursuant to the terms of these exchange agreements, the
non-controlling interest holders in each of the Centers received the right to exchange a portion of their
interest (“Exchangeable Interest”) in their respective Centers for common shares of the Corporation.
Such exchanges may only take place quarterly and are based on the exchange formulae stipulated in
the exchange agreements and are subject to certain limitations, including a limitation of exchanging not
more than three percent per quarter.
The number of common shares issuable under the Exchangeable Interest is determined by application
of a formula which takes into account the number of partnership units being tendered for exchange and
an exchange ratio based upon the distributions from the Centers over the prior twelve months. The
exchange agreements between the Corporation and the non-controlling interest holders in each of the
Centers contain the details of the exchange rights.
21
MEDICAL FACILITIES CORPORATION
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2015 and 2014
12.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (Continued)
The Corporation accounts for the Exchangeable Interest as a financial liability. Under this method, the
Exchangeable Interest is reflected in the financial statements as follows:
(i)
(ii)
(iii)
(iv)
(v)
The exchange right is considered to have been fully exchanged at the original dates of
acquisition of each of the five Centers in which Exchangeable Interest is held, resulting in the
purchase of a further 14% interest in each such Center, except for ASH where 5% can be
purchased, for an amount (the “imputed purchase price”) proportionate to the price paid for the
original 51% interest in such Centers. The imputed purchase price was allocated to the fair
value of the assets acquired, including goodwill and other intangibles, consistent with the
acquisition of the initial 51% interest.
The corresponding amount of the imputed purchase price relating to the 14% interest (5% in the
case of ASH) is reflected as exchangeable interest liability. The exchangeable interest liability is
carried at fair value, as determined at each reporting date by applying the closing common share
price on the last trading day of the period, converted into U.S. dollars at the closing exchange
rate, to the total number of common shares issuable under the outstanding Exchangeable
Interest. Changes in the fair value of the exchangeable interest liability, including their effect on
the deferred tax position, are included in net income.
Amortization of other intangibles and fair market value of property and equipment in excess of
underlying book values are consistent with the amortization of the assets that arose on
acquisition of the initial 51% interest in each Center.
The distributions made by each Center, that relate to the ownership interest therein that is the
subject of the outstanding Exchangeable Interest, are treated as interest expense in the
Corporation’s consolidated statement of comprehensive income.
The calculation of fully diluted earnings per share involves certain modifications, if applicable, to
net income as reported and the number of issued and outstanding common shares as set out in
note 9.2.
The number of common shares to be potentially issued for the exchangeable interest liability and the fair
value of the exchangeable interest liability as at December 31, 2015 and December 31, 2014 are as
follows:
Number of common shares to be potentially issued for exchangeable interest liability
Fair value of the exchangeable interest liability thousands of U.S. dollars
Fair value of the exchangeable interest liability in thousands of Canadian dollars
December 31,
2014
2015
5,851,799
5,932,340
US$ 61,681
US$ 92,864
Cdn$ 85,367 Cdn$ 107,732
22
MEDICAL FACILITIES CORPORATION
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2015 and 2014
12.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (Continued)
12.3 Fair values and classification of financial instruments
The Corporation obtained the fair value of foreign exchange forward contracts from the counterparties to
such contracts. The fair values of the convertible debentures and exchangeable interest liability are
determined based on the closing trading price of the securities at each reporting period. The fair values
of notes payable and revolving credit facilities at the Centers’ level approximate their book values as the
interest rates are similar to prevailing market rates. The fair values of all other financial instruments of
the Corporation, due to the short-term nature of these instruments, approximate their book values.
The following table presents the carrying values and classification of the Corporation’s financial
instruments as at December 31, 2015 and December 31, 2014:
Financial assets
Fair value through profit or loss
Cash and cash equivalents
Short-term investments
Held-to-maturity (carried at amortized cost)
Short-term investments
Long-term investments
Loans and receivable (carried at amortized cost)
Accounts receivable
Other assets
Financial liabilities
Fair value through profit or loss
Foreign exchange forward contracts
Convertible debentures
Exchangeable interest liability
Other liabilities (carried at amortized cost)
Dividends payable
Accounts payable
Accrued liabilities
Long-term debt
December 31,
2015
$
57,969
3,496
9,479
-
48,754
839
-
30,614
61,681
2,107
19,035
14,307
35,428
2014
$
41,309
-
9,305
3,559
46,994
773
3,627
38,000
92,864
2,532
15,192
17,026
40,237
23
MEDICAL FACILITIES CORPORATION
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2015 and 2014
12.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (Continued)
The financial instruments of the Corporation that are recorded at fair value have been classified into
levels using a fair value hierarchy (note 20.16). The following tables represent the fair value hierarchy of
the Corporation’s financial instruments that were recognized at fair value as of December 31, 2015 and
December 31, 2014. It does not include fair value information for financial instruments not measured at
fair value if the carrying amount is a reasonable approximation of fair value.
Financial assets
Cash and cash equivalents
Short-term investments
Financial liabilities
Convertible debentures
Exchangeable interest liability
Total
Financial assets
Cash and cash equivalents
Financial liabilities
Foreign exchange forward contracts
Convertible debentures
Exchangeable interest liability
Total
12.4 Measurement of fair values
Level 1
$
57,969
3,496
30,614
-
92,079
Level 1
$
December 31, 2015
Level 2
$
Level 3
$
-
-
-
61,681
61,681
-
-
-
-
-
December 31, 2014
Level 2
$
Level 3
$
41,309
-
-
38,000
-
79,309
3,627
-
92,864
96,491
-
-
-
-
-
Total
$
57,969
3,496
30,614
61,681
153,760
Total
$
41,309
3,627
38,000
92,864
175,800
The following are the valuation techniques used in measuring Level 2 fair values (the Corporation does
not have any Level 3 fair values).
Financial Instrument
Foreign exchange forward contracts Market comparison technique: The fair values are obtained from the counterparties to such
contracts. Similar contracts are traded in an active market and the quotes reflect the actual
transactions in similar instruments.
Valuation Technique
Exchangeable interest liability
Market comparison technique: The number of the Corporation’s common shares to issue is
based on the contractual agreements with the holders of non-controlling interest that have
exchange agreements with the Corporation and take into account the distributions to the
non-controlling interest over the prior twelve months. The liability is valued based on the
market price of the Corporation’s common shares converted to the reporting currency as of
the reporting date.
24
MEDICAL FACILITIES CORPORATION
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2015 and 2014
12.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (Continued)
12.5 Financial risk management
In the normal course of its operations, the Corporation faces a number of risks that might have an
impact on results of its operations and values of the financial instruments presented in the financial
statements. Financial risks are outlined below as well as policies and procedures established by the
Corporation for monitoring and controlling these risks.
12.5.1 Foreign Exchange Risk
Dividends to common shareholders of the Corporation, exchangeable interest liability, interest on
convertible debentures and a portion of the Corporation’s expenses are settled in Canadian dollars while
all of its revenues are in U.S. dollars. To mitigate this risk, from time to time, the Corporation may enter
into foreign exchange forward contracts to economically hedge its exposure to the fluctuation of the
exchange rate between U.S. and Canadian dollars. The Corporation has foreign exchange hedging
policies in place and the execution of these policies is monitored by a designated sub-committee of the
Board of Directors. As at December 31, 2015, no foreign exchange contracts existed.
The values of Canadian dollar cash and cash equivalents, investments, foreign exchange forward
contracts, interest paid and received, convertible debentures and exchangeable interest liability, as
reported in the Corporation’s financial statements, are dependent on the movement of the exchange
rate between U.S. and Canadian dollars. A 1% change in the value of the Canadian dollar against the
U.S. dollar would have had the following impact on net income for the years reported:
Exchange rate change
1% strengthening of the Canadian dollar
1% weakening of the Canadian dollar
12.5.2 Credit Risk
The Corporation faces the following credit risks.
Revenue and Accounts Receivable
2015
$
161
(161)
2014
$
(59)
59
The Centers receive payment for services rendered from U.S. federal and state agencies, private
insurance carriers, employers, managed care programs and individual patients. As such, the
Corporation’s accounts receivable principally fall into five categories:
(i) governmental payors,
(ii) health and workers’ compensation insurance companies,
25
MEDICAL FACILITIES CORPORATION
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2015 and 2014
12.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (Continued)
(iii) recoveries from other responsible third parties such as automobile and general liability
insurance,
(iv) recoveries for revision surgery from manufacturers of surgical devices subsequently found
ineffective or defective, and
(v) co-pay and deductibles due from patients.
Revenue and accounts receivable from health insurance companies are further segregated between
those that are independent members of the Blue Cross and Blue Shield System, workers’ compensation
lines and all others.
Services to the beneficiaries of Medicare and Medicaid and other governmental insurance programs as
well as independent members of the Blue Cross and Blue Shield System are reimbursed primarily
based on the established amounts, service codes and fees schedules subject to certain limitations.
Reimbursements from other private insurance companies are based on the discounts from the rate
established at the Centers in accordance with the contracts with such companies (see note 20.20).
The majority of the Corporation’s accounts receivable balance is from governmental payors and health
insurance companies. Health insurance companies are regulated by State Insurance Departments in the
U.S. and are assessed as having a low risk of default, consistent with the Centers’ history with these
payors.
The table below summarizes the percentages of facility service revenue generated from and accounts
receivable balances with each primary third-party payor group in 2015 and 2014:
Medicare and Medicaid – category (i)
Blue Cross and Blue Shield – category (ii)
Workers’ compensation – category (ii)
Other private insurance – category (iii)
Other insurance and self-pay – categories (iv) and (v)
2015
2014
Facility
Service
Revenue
by Payor
%
Accounts
Receivable at
December 31
by Payor
%
Facility
Service
Revenue
by Payor
%
Accounts
Receivable at
December 31
by Payor
%
27.5
32.5
10.4
18.7
10.9
100.0
13.2
28.3
14.6
22.5
21.4
26.5
31.1
12.2
19.9
10.3
100.0
100.0
11.4
26.0
13.8
27.4
21.4
100.0
Recoverability of amounts due in respect of categories (iii) and (iv) above often involves insurance
litigation and is difficult to determine, in which case the full amounts due may be reserved. A very small
portion of the facility service revenue is received directly from patients (including those with no insurance
and those paying deductibles or co-payments). Recoverability of amounts receivable directly from
patients is assessed based on historical experience and amounts considered impaired are provided for
in the allowance for non-collectible receivable.
26
MEDICAL FACILITIES CORPORATION
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2015 and 2014
12.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (Continued)
Management reviews reimbursement rates and aging of the accounts receivable to monitor its credit risk
exposure. On an ongoing basis, management assesses the circumstances affecting the recoverability of
its accounts receivable and adjusts allowances based on changes in those factors. Monthly, actual bad
debts for a trailing period are compared with the Corporation’s allowance to support the accuracy of the
estimate of recoverability. Considerations related to historical experience are also factored into the
valuation of the current period accounts receivable.
The table below summarizes the aging of the Corporation’s accounts receivable and related allowance
for non-collectible receivable balances as at December 31, 2015 and December 31, 2014:
Accounts receivable
Neither past due nor impaired
Past due 61-90 days
Past due 91-120 days
Past due 121-150 days
Past due more than 151 days
Allowance for non-collectible receivable balances
Net accounts receivable
December 31,
2015
$
48,754
39,888
4,364
2,275
2,435
7,526
(7,734)
48,754
2014
$
46,994
38,384
4,129
2,615
1,804
8,350
(8,288)
46,994
A significant portion of the accounts receivable older than 151 days relates to auto insurance cases that
have historically favourable reimbursement rates but may be subject to variations in the timing of
collections and may involve insurance litigation.
Management believes that the unimpaired amounts that are past due by more than 60 days are still
collectible, in full, based on the historical payment behaviour and extensive analysis of customer credit
risk, including underlying customers’ credit ratings, if they are available.
Concentration of Financial Institutions
From time to time, the Corporation enters into foreign exchange forward contracts and places excess
funds for investment with certain financial institutions. Historically, the counterparties to the foreign
exchange forward contracts were banking institutions and the Corporation considered their risk of
default on the contracts to be minimal. Investment of excess funds is guided by the investment policy of
the Corporation that, among other things, (i) prescribes the eligible types of investments and
(ii) establishes limits on the amounts that can be invested with any one financial institution.
27
MEDICAL FACILITIES CORPORATION
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2015 and 2014
12.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (Continued)
12.5.3 Interest Rate Risk
The Corporation and the individual Centers enter into certain long-term credit facilities that expose them
to the risk of interest rate fluctuations. The Corporation uses floating rate debt facilities for operating
lines of credit that fund short-term working capital needs and uses fixed rate debt facilities to fund
investments and capital expenditures.
The interest rate profile of the Corporation’s interest-bearing financial liabilities as at December 31, 2015
and December 31, 2014 was:
Facilities with fixed interest rates
Facilities with variable interest rates
Total
December 31,
2015
$
61,542
4,500
66,042
2014
$
73,837
4,400
78,237
A change of 100 basis points in the interest rates in the reporting period would have led to an increase
or a decrease in interest expense of $13 (2014: $12) on facilities with variable interest rates. This does
not include the impact of the adjustment of fair value of the convertible debentures since these are fixed-
rate instruments.
12.5.4 Price Risk
The Corporation’s convertible debentures and exchangeable interest liability are measured on quoted
market prices in active markets and, therefore, the Corporation is exposed to variability in net income as
prices change. Price risk includes the impact of foreign exchange because common shares are quoted
in Canadian dollars.
28
MEDICAL FACILITIES CORPORATION
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2015 and 2014
12.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (Continued)
12.5.5 Liquidity Risk
The mandatory repayments under the credit facilities, notes payable, and other contractual obligations
interest payments, on a non-discounted basis, as of
and commitments
December 31, 2015, are as follows:
including expected
Contractual Obligations
Dividends payable
Accounts payable
Accrued liabilities
Income tax payable
Revolving credit facilities
Notes payable and term loans
Finance lease obligation
Convertible debentures
Operating leases and other
commitments (not recorded in the
financial statements)
Total contractual obligations
Carrying values
at Dec 31, 2015
$
2,107
19,035
14,307
849
4,500
28,861
2,067
30,614
Future payments (including principal and interest)
Total
$
2,107
19,035
14,307
849
4,520
31,575
2,158
37,838
Less than
1 year
$
1-3 years
$
4-5 years
$
After
5 years
$
2,107
19,035
14,307
849
4,520
3,239
984
1,806
-
-
-
-
-
8,557
978
3,612
-
-
-
-
-
19,501
196
32,420
-
-
-
-
-
278
-
-
-
102,340
77,292
189,681
7,357
54,204
12,644
25,791
9,919
62,036
47,372
47,650
The Corporation’s Cdn$100.0 million credit facility, which matures on December 31, 2018, was undrawn
as at December 31, 2015.
The Corporation anticipates renewing, extending or replacing its revolving credit facilities which fall due
during 2016 and expects that cash flows from operations and working capital will be adequate to meet
future payments on other contractual obligations during 2016.
13.
CAPITAL
The Corporation’s objective when managing capital is to (i) safeguard the Corporation's ability to
continue as a going concern and make acquisitions, (ii) ensure sufficient liquidity to fund current
operations and its growth strategy, and (iii) maximize the return to common shareholders.
The capital of the Corporation is defined to include common shares (note 9.1), convertible debentures
(note 8) and other debt facilities at the corporate level.
The Corporation manages its liquidity and capital structure by monitoring its cash and cash equivalents,
short-term and long-term investments, its current indebtedness and future financing and funding needs.
29
MEDICAL FACILITIES CORPORATION
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2015 and 2014
13.
CAPITAL (Continued)
In addition, the Corporation regularly monitors current and forecasted debt levels and key ratios to
ensure compliance with debt covenants. As of the reporting date, the Corporation is in compliance with
the covenants. The Corporation’s long-term debt and revolving lines of credit require the maintenance of
various financial ratios. Under the terms of the line of credit, the Corporation must meet two pro forma
financial ratios at the time of incurring new debt.
In order to maintain or adjust the capital structure, the Corporation may enter into or repay credit
facilities, adjust the amount of dividends paid to common shareholders, repurchase its publicly traded
securities or
twelve-month period ended
December 31, 2015, the Corporation has returned capital to shareholders through the repurchase and
cancellation of 300,600 common shares under the normal course issuer bids (note 9.3).
issue new shares or convertible debt. During
the
14.
EMPLOYEE FUTURE BENEFITS
Benefits programs at the Centers include qualified 401(k) retirement plans which cover all employees
who meet eligibility requirements. Each participating Center makes matching contributions subject to
certain limits. In 2015, contributions made by the five (2014: six) Centers to such plans were $1,476
(2014: $1,754).
15.
INCOME TAXES
The U.S. tax return for the Corporation is prepared on a consolidated basis for U.S. entities and includes
balances and amounts attributable to these entities. The Canadian income tax return for the Corporation
is prepared on a stand-alone basis and includes non-consolidated balances attributable to the Canadian
entity only.
Income taxes from continuing operations reported in these consolidated financial statements are as
follows:
Provision for Income Taxes
Current
Deferred
Total income tax expense from continuing operations
2015
$
1,015
23,704
24,719
2014
$
1,637
12,689
14,326
The Corporation pays tax instalments on its estimated U.S. income taxes. The Corporation’s income tax
provision is reduced by the instalments for the current income taxes as follows:
Income Tax
Income tax instalments deposited
Provision for current income taxes
Income tax payable
2015
$
6,438
(7,287)
(849)
2014
$
1,778
(1,929)
(151)
30
MEDICAL FACILITIES CORPORATION
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2015 and 2014
15.
INCOME TAXES (Continued)
The following table reconciles income taxes, calculated at the U.S. combined federal and state tax rate
and the Canadian combined federal and provincial income tax rate, to the income tax expense reported
in the consolidated statement of comprehensive income:
Net income for the year from continuing operations attributable to the
owners of the Corporation
Income tax expense from continuing operations
Income before income taxes
Income taxes at the statutory rate in Canada
Effect of:
Impact of differences between statutory tax rates in Canada and U.S.
Other including non-taxable and non-deductible amounts
Change in value of exchangeable interest liability
Change in value of convertible debentures
Foreign exchange losses
Changes in previously recognized deferred tax asset
Income tax expense from continuing operations
2015
$
%
2014
$
%
37,018
24,719
61,737
16,360
2,171
(1,067)
5,201
(1,948)
248
3,754
24,719
21,245
14,326
35,571
9,426
1,603
965
919
(862)
466
1,809
14,326
100.0
26.5
3.5
(1.7)
8.4
(3.2)
0.4
6.1
40.0
100.0
26.5
4.5
2.7
2.6
(2.4)
1.3
5.1
40.3
As of December 31, 2015, the Corporation had net operating loss carry forwards for Canadian tax
purposes totalling $68,415 that are scheduled to expire in the following years:
2027
2028
2029
2030
2031
Net operating loss carry forwards
$
6,016
21,536
20,501
19,351
1,011
68,415
Losses related to the Canadian entity may be used to offset the future income of the Canadian entity for
Canadian income tax purposes. As of December 31, 2015, the Corporation has recognized deferred
income tax assets of $18,130 in respect of net operating loss carry forwards that will be offset against
future taxable income in the Canadian entity.
31
MEDICAL FACILITIES CORPORATION
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2015 and 2014
15.
INCOME TAXES (Continued)
The components of deferred income tax balances are as follows:
Deferred income tax assets
Allowance for non-collectible receivable balance
Accrued liabilities and other
Goodwill and other intangibles
Cumulative change in the value of exchangeable interest liability
Net operating losses and deductions carry forwards
Total deferred income tax assets
Deferred income tax liabilities
Property and equipment
Prepaid expenses and other
Goodwill and other intangibles
Total deferred income tax liabilities
Net deferred income tax assets
2015
$
1,398
1,549
5,798
4,383
18,130
31,258
(3,666)
(110)
(13,445)
(17,221)
14,037
2014
$
1,575
1,719
5,798
15,196
28,091
52,379
(2,808)
(91)
(11,312)
(14,211)
38,168
16.
INTEREST EXPENSE, NET OF INTEREST INCOME FROM CONTINUING OPERATIONS
Interest expense, net of interest income, from continuing operations included in the statement of
comprehensive income consists of the following:
Interest expense at Centers’ level
Interest expense on convertible debentures
Amortization of available credit facility stand-by fees
Interest income at Centers’ level
Interest income at corporate level
Interest expense, net of interest income, from continuing operations
17.
LOSS ON FOREIGN CURRENCY
2015
$
1,144
1,930
277
(133)
(194)
3,024
2014
$
1,471
2,237
330
(235)
(265)
3,538
Loss on foreign currency included in the statement of comprehensive income consists of the following:
Unrealized loss on foreign exchange forward contracts
Realized loss on foreign exchange forward contracts which matured in the current period
Translation loss on cash balances denominated in Cdn$
Change in unrealized gain on foreign exchange forward contracts
Loss on foreign currency
2015
$
-
6,475
2,139
8,614
(3,627)
4,987
2014
$
818
3,034
1,239
5,091
-
5,091
32
MEDICAL FACILITIES CORPORATION
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2015 and 2014
18.
RELATED PARTY TRANSACTIONS AND BALANCES
18.1 Transactions in the normal course of operations
The Centers routinely enter into transactions with certain related parties. These parties are considered
related through common ownership by the holders of non-controlling interest in the respective Centers.
Such transactions are in the normal course of operations and are measured at the exchange amount,
which is the amount of consideration established and agreed by the related parties.
The expenses resulting from the Centers’ transactions with related parties for the years 2015 and 2014
were as follows:
BHSH
DPSC
SFSH
OSH
ASH
Total related party expenses
2015
$
362
-
8,686
4,539
1,704
15,291
2014
$
407
395
5,976
4,618
4,179
15,575
BHSH’s related party transactions relate primarily to the provision of physical therapy, intra-operative
monitoring, and dietary and nutritional counselling services as well as bundled payments to surgeons for
professional fees under health plan arrangements. SFSH’s related party transactions were primarily in
respect of purchase of medical products, billing and coding services, provision of management services,
the use of magnetic resonance imaging (“MRI”) facility and related equipment, and bundled payments to
surgeons for professional fees under health plan arrangements. OSH’s related party transactions were
in respect of facility building lease, management services, and software equipment rental. ASH’s related
party transactions relate to the lease of a building facility, which was sold to a third-party in November
2015, and the sub-lease of MRI equipment.
The amounts payable to the related parties as at December 31, 2015 and December 31, 2014 were as
follows:
BHSH
DPSC
SFSH
OSH
Total payable to related parties
December 31,
2015
$
26
25
715
109
875
2014
$
47
-
392
204
643
33
MEDICAL FACILITIES CORPORATION
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2015 and 2014
18.
RELATED PARTY TRANSACTIONS AND BALANCES (Continued)
In November 2015, SFSH entered into an agreement with Renovis Surgical Technologies, Inc.
(“Renovis”) to purchase $485 of medical inventory. This was recorded as prepaid expense on the
consolidated balance sheet as the amount would be used to offset future purchases of medical products
from Renovis. As of December 31, 2015, SFSH had $378 in prepaid expenses remaining from the
transaction.
18.2 Other transactions
Certain of the physicians, who indirectly own the non-controlling interest in each of the Centers, routinely
provide professional services directly to patients utilizing the facilities of the Centers and reimburse the
Centers for the space and staff utilized. Also, certain of the physicians serve on the boards of
management of the Centers and two such individuals perform the duties of Medical Director at the
respective Centers and are compensated in recognition of their contribution to the Centers. Also, a
physician with non-controlling interest in SFSH is its Chief Executive Officer.
The Corporation owns a 34.2% equity interest in an associate. The Corporation has significant influence
over the associate because of its equity position and it has representation on the board of the associate.
The investment in and loan receivable from the associate as of December 31, 2015 were $391
and $107, respectively (December 31, 2014: $302 and $130, respectively). The Corporation also has a
0.35% ownership interest in an entity that holds an indirect interest in BHSH for a total consideration of
$341, for which the investment is accounted for at cost in the consolidated financial statements. Both
investments comprise the ‘Other assets’ on the consolidated balance sheet.
18.3 Key management and governance compensation
Key management and governance personnel are comprised of executive officers and the directors of
the Corporation. Key management and governance compensation for the years 2015 and 2014 was as
follows:
Salaries and other short-term employee benefits for executive officers
Director compensation
Total key management and governance compensation
2015
$
1,913
1,014
2,927
2014
$
1,271
1,067
2,338
Salaries and other short-term employee benefits for executive officers include payments to executive
officers for their base salaries, bonuses, social security payments, medical and workers’ compensation
insurance payments, retirement allowance, and payments under the Corporation’s long-term incentive
plan. Director compensation consists of retainers, meeting fees and fees for special projects where a
director is asked to undertake such special projects.
34
MEDICAL FACILITIES CORPORATION
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2015 and 2014
19.
COMMITMENTS AND CONTINGENCIES
19.1 Commitments
In the normal course of operations, the Centers lease certain equipment under non-cancellable long-
term leases and enter into various commitments with third parties. In addition, certain of the Centers
lease their facility space from related (note 18) and non-related parties. Minimum payments for these
leases are detailed in “Liquidity risk” section in note 12.5.5.
19.2 Contingencies
In the normal course of business, the Centers are, from time to time, subject to allegations that may
result in litigation. Certain allegations may not be covered by the Centers’ commercial and liability
insurance. The Centers evaluate such allegations by conducting investigations to determine the validity
of each potential claim. Based on the advice of the legal counsel, management records an estimate of
the amount of the ultimate expected loss for each of these matters. Events could occur that would cause
the estimate of the ultimate loss to differ materially from the amounts recorded.
In 2012, ASH recorded an accrued liability of approximately $780 for the estimated cost of surgeries to
replace a recalled hip implant product (“revision surgeries”). ASH has received denials from third-party
payors for the revision surgeries performed and anticipates having to perform additional revision
surgeries that will result in no reimbursement. As at December 31, 2015, this accrued liability had
decreased to $533.
20.
SIGNIFICANT ACCOUNTING POLICIES
The accounting policies set out below have been applied consistently to all periods presented in these
consolidated financial statements and have been applied consistently by the Centers.
20.1
Functional and presentation currency
The Corporation’s financial statements are reported in U.S. dollars which is its functional and
presentation currency. All financial information presented in U.S. dollars has been rounded to the
nearest thousand, unless otherwise indicated.
The Corporation translates monetary assets and liabilities denominated in Canadian dollars, principally
its convertible debentures, exchangeable interest liability and certain of its cash balances, which are all
denominated in Canadian dollars, at exchange rates in effect at the reporting date. Non-monetary items
are translated at rates of exchange in effect when the assets were acquired or obligations were incurred.
Revenue and expenses are translated at rates in effect at the time of the transactions. Foreign
exchange gains and losses, including translation adjustments, are included in the determination of net
income.
35
MEDICAL FACILITIES CORPORATION
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2015 and 2014
20.
SIGNIFICANT ACCOUNTING POLICIES (Continued)
20.2
Basis of consolidation
Subsidiaries are entities controlled by the Corporation. Control exists when the Corporation (a) has the
power over the entity, (b) is exposed, or has rights, to variable returns from its involvement with the
entity, and (c) has the ability to use its power to affect its returns. The financial statements of
subsidiaries are included in the consolidated financial statements from the date that control commences
until the date that control ceases. Non-controlling interest represents the portion of a subsidiary’s net
earnings and net assets that are attributable to shares of such subsidiary not held by the Corporation.
The non-controlling interest in the equity of the Corporation’s subsidiaries is included as a separate
component of equity.
All intra-company balances and transactions have been eliminated in preparing these consolidated
financial statements. The accounting policies of subsidiaries have been changed when necessary to
align them with the policies adopted by the Corporation.
20.3
Business combinations
Business combinations are accounted for using the acquisition method as of the date when control is
transferred to the Corporation. The Corporation measures goodwill as the excess of the sum of the fair
value of the consideration transferred over the net identifiable assets acquired and liabilities assumed,
all measured as at the acquisition date. Transaction costs that the Corporation incurs in connection with
a business combination, other than those associated with the issue of debt or equity securities, are
expensed as incurred.
Any contingent consideration is measured at fair value at the date of acquisition. If an obligation to pay
contingent consideration that meets the definition of a financial instrument is classified as equity, then it
is not re-measured and settlement is accounted for within equity. Otherwise, subsequent changes in the
fair value of the contingent consideration are recognized in net income.
At the date of the acquisition, the non-controlling interest is measured at the non-controlling interest’s
proportionate share of the fair value of identifiable assets of the acquiree. Contingent consideration in
respect of those acquisitions, accounted for as exchangeable interest liability, is recorded on the
balance sheet with periodic changes in fair value of that liability reflected in net income.
20.4
Segment information
The operations and productive capacity of the Centers revolve around the provision of surgical
procedures. Each Center is organized as an individual entity and separate financial statements are
prepared for each entity. The chief operating decision makers of the Corporation, being the Chief
Executive Officer and the Chief Financial Officer, regularly review performance of each individual Center
to make decisions about resources to be allocated to each Center and assess their performance.
Therefore, each Center represents an operating segment as defined by IFRS 8 Operating Segments.
36
MEDICAL FACILITIES CORPORATION
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2015 and 2014
20.
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Management of the Corporation has concluded that the operating segments of the Corporation meet the
criteria for aggregation pursuant to IFRS 8, paragraph 12 and, therefore, discloses a single reportable
segment. In forming its conclusion about the aggregation of the Centers, management of the
Corporation evaluated the long-term economic characteristics of each Center, the comparative nature of
the Centers’ operations, and the level of regulation of each Center.
The service delivered by each Center and the patients who use those services are similar. The vast
majority of patients are insured through private insurance or government insurance programs (i.e.,
Medicaid or Medicare), which allows for a wide group of patients electing to have their procedures
performed at one of the Centers. The Centers principally provide surgical facilities, support staff and pre-
and post-surgical care related to surgeries. Finally, the Centers have similar economic characteristics,
which management defines as comparable long-term operating margins, recognizing differences
between the Centers in payor mix, surgical specialties and local healthcare markets.
20.5
Discontinued operations
A discontinued operation is a component of the Corporation’s business which can be clearly
distinguished from the rest of the Corporation, both operationally and for financial reporting purposes.
Classification as a discontinued operation occurs at the earlier of disposal or when the operation meets
the criteria to be classified as held for sale. When an operation is classified as a discontinued operation,
the comparative statements of comprehensive income are re-presented as if the operation has been
discontinued from the start of the comparative year. Discontinued operations are excluded from the
results of continuing operations and are presented as a single amount net of tax as net income from
discontinued operations in the statement of comprehensive income.
20.6
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand and all liquid investments purchased with a maturity
of three months or less from the purchase date and which can be redeemed by the Corporation.
20.7
Short-term and long-term investments
Investments represent liquid investments purchased with a maturity of three months or more.
Investments with maturities of more than three months but less than twelve months are classified as
short-term and investments with maturities of twelve months or more are classified as long-term. The
Corporation limits its exposure to credit risk through application of its investment policy. The policy
permits investment of its cash and cash equivalents and short-term and long-term investments in
(i) liquid securities issued or guaranteed by the Governments of Canada and the United States of
America, or political subdivisions thereof and with (ii) certain Canadian chartered banks or banks
regulated by the United States of America as listed in the policy. The carrying amount of investments
represents the Corporation’s maximum exposure to credit risk for such investments.
37
MEDICAL FACILITIES CORPORATION
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2015 and 2014
20.
SIGNIFICANT ACCOUNTING POLICIES (Continued)
20.8
Accounts receivable
Accounts receivable are recorded at the time services are rendered at the amounts estimated to be
recoverable from third-party payors and patients, by applying the following policies:
(i)
(ii)
Amounts billed are reduced by an allowance for third-party payor adjustments which are
maintained at a level management believes reflects the estimated adjustments that will be
applied upon collection of the amounts billed. The allowance is established using the third-party
payor contracts effective at period end and/or based on historical payment rates.
An allowance for non-collectible receivable balances is recognized at a level management
believes is adequate to absorb probable losses. Management determines the adequacy of the
allowance based on historical data, current economic conditions, and other pertinent factors for
the respective Center. Patient receivables are written off as non-collectible when all reasonable
collection efforts have been exhausted.
Payments from third-party payors are generally received within 60 days of the billing date. However,
accounts involving non-contracted payment sources, such as auto and general liability insurance, are
subject to recovery efforts, including rebilling and insurance litigation, until they are collected or
considered not collectible. Residual amounts due from patients, such as co-payments and deductibles,
are considered past due 30 days after receiving payment from third-party payors.
20.9
Supply inventory
Supply inventory consists of medical supplies, including implants and pharmaceuticals. It is stated at the
lower of cost or net realizable value, using the first-in, first-out valuation method.
20.10
Property and equipment
Property and equipment are stated at cost less accumulated depreciation. Cost includes expenditures
that are directly attributable to the acquisition of the asset.
Depreciation of property and equipment is computed using the straight-line and declining balance
methods over the estimated useful lives of the assets. Assets under finance leases are depreciated over
the shorter of the lease term and their useful lives unless it is reasonably certain that the Centers will
obtain ownership by the end of the lease term. Land is not depreciated.
The estimated useful lives of property and equipment are as follows:
Building and improvements
Equipment and furniture
3-40 years
3-20 years
38
MEDICAL FACILITIES CORPORATION
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2015 and 2014
20.
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Leases that substantially transfer the risk and benefits of ownership are capitalized with the cost
included in property and equipment and the related liability recorded in long-term debt.
Depreciation methods, useful lives and residual values are reviewed on an annual basis.
20.11 Goodwill
Goodwill arises on the acquisition of subsidiaries and represents the excess of cost over the fair value of
identifiable net assets acquired. For business acquisitions occurring after the date of transition to IFRS
(January 1, 2010), goodwill is also recognized on non-controlling interest. Goodwill is stated at cost less
accumulated impairment losses. Goodwill is not amortized but is reviewed at least annually for
impairment and when events or changes in circumstances indicate that the carrying amount may not be
recoverable.
20.12 Other intangibles
Other intangibles are recognized only when it is probable that the expected future economic benefits
attributable to the assets will be realized by the Corporation and the cost can be reliably measured.
Other intangibles represent the value of the hospital operating licenses, medical charts and records,
referral sources, and trade names. Other intangibles are stated at cost less accumulated amortization
and accumulated impairment losses, when applicable.
Upon recognition of an intangible asset, the Corporation determines if the asset has a definite or
indefinite life. In making the determination, the Corporation considers the expected use, expiry of
agreements, nature of assets, and whether the value of the assets decreases over time.
Amortization is recognized on a straight-line basis over the estimated useful lives of other intangibles,
other than trade names, from the date they are available for use. The estimated useful lives of other
intangibles are as follows:
Hospital operating licenses
Medical charts and records
Referral sources
5 years
5-10 years
10-15 years
Trade names represent the value assigned to the reputation of the hospitals and their standing in the
business and local community which allow them to earn higher than average returns. Trade names are
not amortized as there is no foreseeable limit to the period over which trade names are expected to
generate cash inflows for the Corporation.
39
MEDICAL FACILITIES CORPORATION
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2015 and 2014
20.
SIGNIFICANT ACCOUNTING POLICIES (Continued)
20.13
Impairment of non-financial assets
Non-financial assets that have an indefinite useful life, such as goodwill and trade names, are tested at
least annually for impairment and when events or changes in circumstances indicate that the carrying
amount may not be recoverable. Non-financial assets that have a definite useful life which are subject to
amortization are reviewed for impairment when events or changes in circumstances indicate that the
carrying amount may not be recoverable.
For the purposes of assessing impairment, assets are grouped at the CGU level, which is the lowest
level for which there are separately identifiable cash flows. Management considers each Center as a
CGU.
An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its
recoverable amount. The recoverable amount is the higher of an asset’s fair value less cost to dispose
and value in use. Value in use is based on the estimated future cash flows, discounted to their present
value using a pre-tax discount rate that reflects current market assessments of the time value of money
and the risks specific to the asset.
An impairment loss is recognized in net income. It is allocated first to reduce the carrying amount of any
goodwill allocated to the respective Center and, then, to reduce the carrying amount of the other assets
of the respective Center on a pro rata basis.
20.14 Financial assets and liabilities
The Corporation initially recognizes financial assets on the date that they originate or on the trade date
at which the Corporation becomes a party to the contractual provisions of the instrument. The
Corporation derecognizes a financial asset when the contractual rights to the cash flows from the asset
expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a
transaction in which substantially all the risks and rewards of ownership of the financial asset are
transferred. The Corporation assesses financial assets for impairment at each reporting date.
The Corporation initially recognizes financial liabilities on the date that they originate or on the trade date
at which the Corporation becomes a party to the contractual provisions of the instrument. The
Corporation derecognizes a financial liability when its contractual obligations are discharged, cancelled,
or expire.
40
MEDICAL FACILITIES CORPORATION
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2015 and 2014
20.
SIGNIFICANT ACCOUNTING POLICIES (Continued)
All financial assets and liabilities are initially recorded at fair value and designated into one of the
following categories:
(i)
Fair value through profit or loss (“FVTPL”)
Cash and cash equivalents, certain short-term investments, foreign exchange forward contracts,
convertible debentures and exchangeable interest liability are designated as FVTPL and are carried at
fair value with unrealized gains or losses recognized through net income.
(ii)
Held-to-maturity
Certain short-term and long-term investments are designated as held-to-maturity and are carried at
amortized cost using the effective interest rate method.
(iii)
Loans and receivables
Accounts receivable and other assets are designated as loans and receivables and are carried at
amortized cost using the effective interest rate method.
(iv)
Other liabilities
Dividends payable, accounts payable, accrued liabilities and long-term debt are designated as other
liabilities and are carried at amortized cost using the effective interest rate method.
20.15
Impairment of non-derivative financial assets
Financial assets not designated as FVTPL, including interest in an equity-accounted investee, are
assessed at each reporting date to determine whether there is objective evidence of impairment.
20.15.1 Financial assets measured at amortized cost
The Corporation considers evidence of impairment for financial assets measured at amortized cost on
both an individual and collective basis. In assessing impairment, the Corporation uses historical
information on the timing of recoveries and the amount of loss incurred, and makes an adjustment if
current economic and credit conditions are such that actual losses are likely to be greater or lesser than
suggested by historical trends.
An impairment loss is calculated as the difference between an asset’s carrying amount and the present
value of the estimated future cash flows discounted at the asset’s original effective interest rate. Losses
are recognized in net income and reflected in an allowance account. If the amount of an impairment loss
subsequently decreases, then the amount is reversed through net income.
41
MEDICAL FACILITIES CORPORATION
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2015 and 2014
20.
SIGNIFICANT ACCOUNTING POLICIES (Continued)
20.15.2 Equity-accounted investee
An impairment loss in respect of an equity-accounted investee is measured by comparing the
recoverable amount of the investment with its carrying amount. An impairment loss is recognized in net
income and is reversed if there has been a favourable change in the estimates used to calculate that
recoverable amount.
20.16 Measurements of fair value
A number of the Corporation’s accounting policies and disclosures require the measurement of fair
value, for both financial and non-financial assets and liabilities.
The Corporation has an established control framework with respect to the measurement of fair values.
The valuation of all fair value measurements is overseen directly by the Chief Financial Officer.
Management of the Corporation regularly reviews significant unobservable inputs and valuation
adjustments. If third-party information, such as broker quotes or pricing services, is used to measure fair
values, then management assesses the evidence obtained from these sources to support the
conclusion that such valuations meet the requirements of IFRS, including the level in the fair value
hierarchy in which such valuations should be classified.
When measuring the fair value of an asset or a liability, the Corporation uses observable market data to
the extent possible. Fair values are categorized into different levels in a fair value hierarchy based on
the inputs used in the valuation technique as follows:
Level 1 – unadjusted quoted prices available in active markets for identical assets or liabilities;
Level 2 – inputs other than quoted prices included in Level 1 that are observable for the asset or
liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices); and
Level 3 – inputs for the asset or liability that are not based on observable market data
(unobservable inputs).
If the inputs used to measure the fair value of an asset or liability fall into different levels of the fair value
hierarchy, then the fair value measurement is categorized in its entirety in the same level of the fair
value hierarchy as the lowest level input that is significant to the entire measurement. The Corporation
recognizes transfers between levels of the fair value hierarchy at the end of the reporting period during
which the change has occurred.
42
MEDICAL FACILITIES CORPORATION
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2015 and 2014
20.
SIGNIFICANT ACCOUNTING POLICIES (Continued)
20.17 Provisions
A provision is recognized if, as a result of a past event, the Corporation has a present legal or
constructive obligation that can be estimated reliably and it is probable that an outflow of economic
benefits will be required to settle the obligation. Provisions are measured at the estimated expenditures
required to settle the present obligation, based on the most reliable evidence available at the reporting
date, including the risks and uncertainties associated with the present obligation. Provisions are
discounted to their present values where the time value of money is material. All provisions are reviewed
at each reporting date and adjusted to reflect the current best estimate.
20.18 Convertible debentures
The Corporation’s convertible debentures are convertible into a fixed number of common shares at the
option of the holder. The number of common shares to be issued does not vary with changes in the
market value of the convertible debentures.
The convertible debentures are denominated in Canadian dollars while the Corporation’s functional
currency is U.S. dollars, which requires the Corporation to deliver a variable amount of cash to settle the
obligation. Because the conversion option requires the Corporation to deliver a fixed number of common
shares to settle a variable liability, the convertible debentures are considered hybrid financial
instruments. The Corporation elected to account for the convertible debentures as financial liability
measured at FVTPL. The changes in the recorded amounts of the liability, resulting from the changes in
the fair value of the convertible debentures and fluctuations in foreign exchange rates between the
periods, are reflected in net income.
20.19 Exchangeable interest liability
Exchangeable interest liability represents an estimated liability for the remaining portion of the interest in
the Centers held by the non-controlling interest which can be exchanged, subject to certain restrictions,
for common shares of the Corporation. The exchangeable interest liability has been designated as
FVTPL and accordingly is re-measured at the end of each reporting period taking into account (i) the
calculated amount of common shares potentially issuable for the remaining portion of the exchangeable
interest in the Centers held by the non-controlling interest, (ii) the market value of common shares, and
(iii) the exchange rate between Canadian and U.S. dollars at the end of the reporting period. The
change in value of the exchangeable interest liability is included in net income for the respective periods.
43
MEDICAL FACILITIES CORPORATION
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2015 and 2014
20.
SIGNIFICANT ACCOUNTING POLICIES (Continued)
20.20 Facility service revenue
Facility service revenue consists of the actual amounts received and the estimated net realizable
amounts receivable from patients and third-party payors. Facility service revenue is derived from the
provision of the facilities and ancillary services for the performance of scheduled (as opposed to
emergency) surgical, imaging, and diagnostic procedures. The Centers bill either their patients or the
patients’ third-party payors as of the date of service upon completion of the procedure. Facilities service
revenue is recognized as of the date of the service when the recovery of consideration is probable and
the Corporation is satisfied with the performance objectives.
A small amount of facility service revenue is received directly from self-paying patients while the majority
of facility service revenue is received from third-party payors that provide insurance and coverage to
patients. Each Center has agreements with third-party payors that provide for payments at amounts
different from the Center’s established rates. Payment arrangements include pre-determined rates per
diagnosis, reimbursed costs, discounted charges, and per diem payments. As a result of established
agreements with third-party payors, settlements under reimbursement arrangements are determined
with a high degree of accuracy and are accrued on an estimated basis in the period the services are
rendered, and are adjusted in future periods, as final settlements are determined. Differences between
the estimated amounts accrued and interim and final settlements are reported in operations in the period
of settlement.
20.21
Income taxes
Income tax expense consists of current and deferred taxes. Income tax expense is recognized in the
statement of comprehensive income except to the extent that it relates to a business combination or
items recognized directly in equity, in which case it is recognized in equity or in other comprehensive
income.
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or
substantively enacted on the reporting date, and any adjustment to tax payable in respect of previous
years.
The Corporation calculates deferred income taxes using the asset and liability method on temporary
differences between the carrying amounts of assets and liabilities and their tax bases. Deferred tax
assets and liabilities are calculated, without discounting, at tax rates that are expected to apply to their
respective period of realization, provided they are enacted or substantively enacted at the end of the
reporting period. The effect on tax assets and liabilities of a change in tax rates is recognized in net
income in the period that includes the date of enactment or substantive enactment.
44
MEDICAL FACILITIES CORPORATION
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2015 and 2014
20.
SIGNIFICANT ACCOUNTING POLICIES (Continued)
A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be
available against which the temporary difference can be utilized. Deferred tax assets are reviewed at
each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit
will be realized. Deferred tax liabilities are always recognized in full. Deferred tax assets and liabilities
are offset when they relate to income taxes levied by the same taxation authority and the Corporation
intends to settle its current tax assets and liabilities on a net basis. Deferred tax is provided on
temporary differences arising on investments in subsidiaries, expect where the timing of the reversal of
temporary differences is controlled by the Corporation and it is probable that the temporary differences
will not reverse in the foreseeable future.
20.22
New and revised IFRS not yet adopted
The Corporation has not applied the following new and revised IFRS that have been issued but are not
yet effective:
20.22.1 IFRS 9 Financial Instruments
In July 2014, the IASB issued the complete IFRS 9 Financial Instruments (“IFRS 9 (2014)”). The
mandatory effective date of IFRS 9 (2014) is for annual periods beginning on or after January 1, 2018
and must be applied retrospectively with some exemptions. The Corporation intends to adopt
IFRS 9 (2014)
the annual period beginning on
financial statements
January 1, 2018. The extent of the impact of adoption of the standard has not yet been determined.
its consolidated
for
in
20.22.2 IFRS 15 Revenue from Contracts with Customers
IFRS 15 will supersede
In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers which establishes a
single comprehensive model for entities to use in accounting for revenue arising from contracts with
customers.
including
IAS 11 Construction Contracts, IAS 18 Revenue, and the related Interpretations when it becomes
effective. The new standard is effective for annual periods beginning on or after January 1, 2018. Earlier
application is permitted. The Corporation intends to adopt IFRS 15 in its consolidated financial
statements for the annual period beginning on January 1, 2018. The extent of the impact of adoption of
the standard has not yet been determined.
recognition guidance
the current
revenue
45
MEDICAL FACILITIES CORPORATION
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2015 and 2014
20.
SIGNIFICANT ACCOUNTING POLICIES (Continued)
20.22.3 IFRS 16 Leases
In January 2016, the IASB issued IFRS 16 Leases, which provides guidance for leases whereby lessees
will recognize a liability for the present value of future lease liabilities and record a corresponding right of
use asset on the balance sheet. There are minimal changes to lessor accounting. IFRS 16 is effective
for annual periods beginning on or after January 1, 2019. Early adoption is permitted, provided
IFRS 15 Revenue from Contracts with Customers has been adopted. The Corporation intends to adopt
IFRS 16 in its consolidated financial statements for the annual period beginning on January 1, 2019.
The extent of the impact of adoption of the standard has not yet been determined.
21.
USE OF JUDGMENTS AND ESTIMATES
The preparation of financial statements requires management to make judgments, estimates, and
assumptions that affect the application of accounting policies, reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements, and the
reported amounts of revenue and expenses during the period. On an ongoing basis, management
evaluates its judgments and estimates in relation to assets, liabilities, facility service revenue, and
expenses. Management uses historical experience and various other factors it believes to be
reasonable under the circumstances as the basis for its judgments and estimates. Actual results may
differ from these estimates. Such differences in estimates are recognized when realized on a
prospective basis.
21.1
Judgments
Information about management’s judgments made in applying accounting policies that have the most
significant effect on the amounts recognized in the consolidated financial statements is included in the
following notes: (i) functional currency (discussed in note 20.1), (ii) consolidation of investees (discussed
in note 20.2), (iii) segment information (discussed in note 20.4), (iv) discontinued operations (discussed
in notes 4 and 20.5), (v) classification of leases (discussed in note 20.10), and (vi) recognition of
deferred tax assets and liabilities (discussed in notes 15 and 20.21).
46
MEDICAL FACILITIES CORPORATION
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2015 and 2014
21.
USE OF JUDGMENTS AND ESTIMATES (Continued)
21.2 Estimates
Information about assumptions and estimation uncertainties that have a significant risk of resulting in a
material adjustment in the year ending December 31, 2015 is included in the following notes: (i) timing of
recognition of facility service revenue (discussed in note 20.20) and recovery of accounts receivable
(discussed in notes 12.5.2 and 20.8), (ii) valuation of supply inventory (discussed in note 20.9),
(iii) useful lives of property and equipment (note 20.10) and other intangibles (note 20.12), (iv) fair value
measurements and valuation of financial instruments (discussed in notes 12.4 and 20.16), (v) key
assumptions regarding the valuation of acquired and disposed assets and liabilities, primarily goodwill
and other intangibles (discussed in notes 4.2 and 6), (vi) impairment test, including key assumptions
underlying the recoverable amounts of goodwill and other intangibles (discussed in notes 6.3
and 20.13), (vii) provision for potential liabilities and contingencies and the assessment of the likelihood
and magnitude of outflow of resources (discussed in note 19) and (viii) recognition of deferred tax assets
and the availability of future income against which carry forward tax losses can be used (discussed in
notes 15 and 20.21).
22.
SUBSEQUENT EVENT
On January 14, 2016, the Corporation acquired a 51% controlling interest in Integrated Medical
Delivery, L.L.C. (“IMD”) for a cash purchase price of $1,750. IMD is a diversified healthcare service
company located in Oklahoma City, Oklahoma that provides third-party business solutions to healthcare
entities such as physicians, facilities, and insurance companies.
47
Contact MFC
Head Office
45 St. Clair Avenue West
Suite 200
Toronto, Ontario
Canada M4V 1K6
www.medicalfacilitiescorp.ca
Tel: 416-848-7380
Toll Free: 1-877-402-7162
Investor Information
Shareholders or other interested parties seeking
information about the Company are invited to contact:
Renée Lam
NATIONAL Equicom
416-848-1405
rlam@national.ca
Annual Meeting
May 12, 2016 at 2:00 pm ET
TMX Broadcast Centre, The Exchange Tower
130 King Street West
Toronto, Ontario
Canada M5X 1J2
Stock Exchange Listing
The Toronto Stock Exchange
Common Shares: DR
Convertible Debentures: DR.DB.A
Auditor
KPMG LLP
333 Bay Street, Suite 4600
Toronto, Ontario
Canada M5H 2S5
Transfer Agent and Registrar
Computershare Investor Services Inc.
100 University Avenue
Toronto, Ontario
Canada M5J 2Y1
1-800-564-6253
Contact MFC
Head Office
45 St. Clair Avenue West
Suite 200
Toronto, Ontario
Canada M4V 1K6
www.medicalfacilitiescorp.ca
Tel: 416-848-7380
Toll Free: 1-877-402-7162