MANAGEMENT’S DISCUSSION AND ANALYSIS
OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FOR THE THREE-MONTHS AND YEAR ENDED
DECEMBER 31, 2016
March 22, 2017
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, 2016, 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.
Discontinued Operation ...................................................................................................................... 6
4.
Financial and Performance Highlights ................................................................................................ 6
5.
Consolidated Operating and Financial Review ................................................................................... 8
6.
Quarterly Operating and Financial Results ....................................................................................... 18
7.
Reconciliation of Non-IFRS Financial Measures ............................................................................. 20
8.
Outlook .............................................................................................................................................. 22
9.
Liquidity and Capital Resources ....................................................................................................... 24
10.
Share Capital and Dividends ............................................................................................................. 27
11.
12.
Financial Instruments ........................................................................................................................ 28
13. Related Party Transactions ................................................................................................................ 30
14. Critical Accounting Judgments and Estimates .................................................................................. 31
15. Disclosure Controls and Procedures and Internal Controls over Financial Reporting ..................... 33
16. Risk Factors ....................................................................................................................................... 34
17. New and Revised IFRS not yet Adopted .......................................................................................... 40
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, 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 (both of which are available on SEDAR at www.sedar.com).
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
2
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 8 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 and certain non-cash adjustments, 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 calculates 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.
Distributions is a non-IFRS financial measure of cash distributed to holders of common shares,
more commonly referred to as dividends.
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.
The Corporation’s operations are based in the United States. Through its wholly-owned U.S.-based
subsidiaries, Medical Facilities America, Inc. and Medical Facilities (USA) Holdings, Inc., the
3
Corporation owns controlling interests in, and/or controls by virtue of the power to govern, and derives
substantially all of its income from, seven limited liability entities (each a “Center” and, collectively, the
“Centers”), six of which own either a specialty surgical hospital (an “SSH”) or an ambulatory surgery
center (an “ASC”). The SSHs are located in Arkansas, Indiana, Oklahoma, and South Dakota, 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 staffing, 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, two of the SSHs provide primary and urgent care to their communities.
On October 3, 2016, Sioux Falls Specialty Hospital, LLP (“SFSH”), a subsidiary of the Corporation,
acquired 100% of Prairie States Surgical Center, L.L.C. (“PSSC”) which owns and operates Prairie States
Surgical Center located in Sioux Falls, South Dakota. PSSC was acquired for a purchase price of
$20,281, consisting of $4,309 consideration in cash and $15,972 of seller financing, which is required to
be paid in equal instalments over a period of five years. PSSC is an 8,000 square foot facility with two
operating rooms focused on providing facilities for orthopedic procedures, and has been integrated into
the operations of SFSH. The transaction has been accounted for as a business combination with the
Corporation consolidating 100% of the operations as at the acquisition date. The assets and liabilities of
PSSC are included in the consolidated financial statements through the Corporation’s consolidation of
SFSH.
On September 23, 2016, the Corporation acquired a 62% controlling interest in Unity Medical and
Surgical Hospital (“UMASH”), a medical and surgical hospital located in Mishawaka, Indiana, for a cash
purchase price of $27,750, which was funded by a draw on the Corporation’s credit facility. UMASH is a
50,000 square foot, 29-bed Medicare-certified facility with four surgical and two special procedure suites
focused on providing facilities for orthopedic, ophthalmology, podiatry, pain management, and spine
surgery procedures. The transaction has been accounted for as a business combination with the
Corporation consolidating 100% of the operations as at the acquisition date. The assets and liabilities of
UMASH are included in the financial statements with the non-controlling portion reflected in non-
controlling interest.
Black Hills Urgent Care, a 100% subsidiary of Black Hills Surgical Hospital, LLP (“BHSH”) a subsidiary
of the Corporation, expanded its operations to a third location located in Spearfish, South Dakota,
approximately 50 miles from Rapid City. The new urgent care facility opened in September 2016. Total
project costs for the land and new building were $4,325. The lower level of the facility houses urgent care
with seven exam rooms, a digital x-ray machine, and lab. The upper level is occupied by various
specialists who serve patients in the Spearfish market region, including the Northwestern Black Hills area,
Eastern Wyoming and Eastern Montana. On December 23, 2016, the net assets of the Spearfish location
were transferred from BHSH to a newly created entity, Mountain Plains Real Estate Holdings, LLC
(“MPREH”) at carrying value. The Corporation has significant influence over the associate, MPREH,
because of its equity position and because it has representation on its board. The Corporation uses the
equity method to account for this investment which was valued at $678 as of December 31, 2016.
On July 13, 2016, RRI Mishawaka Hospital, LP (“RRIMH”) purchased the real estate assets underlying
UMASH, consisting of land and building, for $27,387. RRIMH is a limited partnership in which the
Corporation has an 84% interest and the remaining 16% interest in the partnership is held directly and
indirectly by Rainier Realty Investments, LP, a third party. By virtue of the Corporation having the power
to govern this entity, the Corporation consolidates the results of operations and the financial position of
4
this partnership in its financial statements. The purchase of the real estate assets was funded solely by a
loan from the Corporation. The Corporation funded the loan from its available cash and a $20,000 draw
on its credit facility.
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 physician practices, facilities, and insurance companies. The transaction has been
accounted for as a business combination with the Corporation consolidating 100% of the operations as at
the acquisition date. The assets and liabilities of IMD are included in the consolidated financial
statements.
Facility service revenue (“revenue”) and certain directly related expenses are subject to seasonal
fluctuations due to the timing of case scheduling, which can be impacted by the vacation schedules of
surgeons, as well as the extent to which patients have remaining deductibles on their insurance coverage,
based on the time of year. Occupancy related expenses, certain operating expenses, depreciation and
amortization, and interest expense remain relatively steady throughout the year.
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) the Centers’ establishment and maintenance of strong 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
Arkansas, Oklahoma, and South Dakota, the non-controlling interest owners were granted the right to
exchange up to 14% (5% in the case of Arkansas Surgical Hospital) of the ownership interest in their
respective Centers for common shares of the Corporation. The liability associated with this derivative
instrument is recorded on the consolidated balance sheet. The non-controlling interest owners of several
Centers have exercised portions of their exchangeable interests.
5
Summary of Center Information as of December 31, 2016
Arkansas
Surgical
Hospital
(“ASH”)
North Little Rock
Arkansas
2005
Unity Medical
and Surgical
Hospital
(“UMASH”)
Mishawaka
Indiana
2009
Oklahoma
Spine
Hospital
(“OSH”)
Oklahoma City
Oklahoma
1999
Black Hills
Surgical
Hospital
(“BHSH”)
Rapid City
South Dakota
1997
Sioux Falls
Specialty
Hospital
(“SFSH”)
Sioux Falls
South Dakota
1985
The Surgery
Center of
Newport Coast
(“SCNC”)
Newport Beach
California
2004
2012
2016
2005
2004
2004
2008
51.0%
49.0%
5.0%
126,000 sq ft
11
41(1)
62.0%
38.0%
-
50,000 sq ft
6
29
60.3%
39.7%
4.7%
61,000 sq ft
7
25
54.2%
45.8%
10.8%
75,000 sq ft
11
26
51.0%
49.0%
14.0%
76,000 sq ft
13
35
51.0%
49.0%
-
7,000 sq ft
2
-
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.
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 the assets related to the operation of its SSH in
Aberdeen, South Dakota. The transaction was completed on September 30, 2015 for net proceeds of
$33.8 million. For the year ended December 31, 2016 and December 31, 2015, results for DPSC are
presented in “Income from discontinued operation” in the statement of income and comprehensive
income. For additional information on the discontinued operation, please see Note 8 in the Corporation’s
financial statements.
5. FINANCIAL AND PERFORMANCE HIGHLIGHTS
Selected Financial Information from Continuing Operations
Years Ended December 31,
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 from
continuing operations
Basic
Fully diluted
Cash available for distribution(2)
Distributions(2)
Cash available for distribution per common share(2)
Distributions per common share(2)
2016
339,472
271,399
68,073
39,688
9,750
29,938
$ 0.31
$ 0.30
C$ 50,655
C$ 34,929
C$ 1.631
C$ 1.125
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
2014
297,382
230,695
66,687
51,151
21,245
29,906
$ 0.68
$ 0.51
C$ 41,366
C$ 35,261
C$ 1.320
C$ 1.125
Payout ratio(2)
69.0%
76.7%
85.2%
Total assets
Total long-term financial liabilities(3)
At December
31, 2016
At December 31,
2015
At December 31,
2014
492,461
135,946
382,952
58,194
409,709
71,799
6
(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, does not vary significantly between the periods. 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.
(2) Non-IFRS measure. Please refer to Section 2 under the heading “Non-IFRS Financial Measures” for a discussion of such measures and to Section 8 under
the heading “Reconciliation of Non-IFRS Financial Measures” for a reconciliation to the equivalent IFRS measure.
(3) Consists of Corporate credit facility, long-term debt and convertible debentures.
Selected Financial Information from Continuing Operations for the Year Ended December 31, 2016
Compared to the Year Ended December 31, 2015
For the year ended December 31, 2016, revenue was $339.5 million, an increase of 9.9% from $308.8
million for the same period in 2015 as growth at all existing Centers and the impact of the acquisitions
during the year of UMASH, PSSC, and IMD contributed an additional $30.7 million to the revenues.
Income from operations decreased by 8.9% to $68.1 million, or 20.1% of revenue, compared to
$74.7 million, or 24.2% of revenue, in 2015. Income for the year from continuing operations was
$39.7 million compared to $70.2 million in 2015, with the decrease mainly attributable to the increase in
the values of exchangeable interest liability and convertible debentures (refer to Section 6 “Consolidated
Operating and Financial Review” of this MD&A under headings “Change in Value of Exchangeable
Interest Liability” and “Change
the year ended
December 31, 2016), and lower income from operations, partially offset by lower income taxes and
foreign exchange losses. The Corporation generated cash available for distribution of Cdn$50.7 million,
representing an increase of 10.5% from Cdn$45.9 million in the prior year. Distributions per common
share remained consistent between the years at Cdn$1.125, while the payout ratio was 69.0% compared to
76.7% for the year ended December 31, 2015. For a reconciliation of the foregoing non-IFRS financial
measures to the applicable IFRS measures, see Section 8 under the heading “Reconciliation of Non-IFRS
Financial Measures”.
in Value of Convertible Debentures” for
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.
7
6. CONSOLIDATED OPERATING AND FINANCIAL REVIEW
Three Months Ended December 31, 2016
The following table and discussion compare operating and financial results of the Corporation from
continuing operations for the three months ended December 31, 2016 to the three months ended
December 31, 2015.
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,
2016
107,994
2015
89,760
$ Change % Change
20.3%
18,234
27,949
31,619
16,162
2,805
4,156
82,691
22,145
24,138
9,768
2,119
3,796
61,966
5,804
7,481
6,394
686
360
20,725
26.2%
31.0%
65.5%
32.4%
9.5%
33.4%
Income from operations
25,303
27,794
(2,491)
(9.0%)
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 period from continuing operations
Attributable to:
Owners of the Corporation
Non-controlling interest
(4,495)
(21,707)
2,181
1,745
284
(21,992)
(2,077)
(8,249)
2,263
753
293
(7,017)
(2,418)
(13,458)
(82)
992
(9)
(14,975)
(116.4%)
(163.2%)
(3.6%)
131.7%
(3.1%)
(213.4%)
47,295
34,811
12,484
35.9%
8,584
9,500
(916)
(9.6%)
38,711
25,311
13,400
52.9%
28,111
10,600
13,343
11,968
14,768
(1,368)
106.8%
(11.4%)
Basic earnings per share attributable to owners of the Corporation from continuing
operations
Fully diluted earnings per share attributable to owners of the Corporation from continuing
operations
$ 0.91
$ 0.43
$ 0.48
111.6%
$ 0.31
$ 0.22
$ 0.09
40.9%
Revenue
Unaudited
In thousands of U.S. dollars
ASH
UMASH
OSH
BHSH
SFSH
SCNC
RRIMH
IMD
Intercompany eliminations
Facility service revenue
Three Months Ended December 31,
2015
17,447
-
17,625
22,539
29,988
2,161
-
-
-
89,760
2016
17,167
13,340
18,488
25,222
30,787
2,364
550
1,269
(1,193)
107,994
$ Change
(280)
13,340
863
2,683
799
203
550
1,269
(1,193)
18,234
% Change
(1.6%)
-
4.9%
11.9%
2.7%
1.1%
-
-
-
20.3%
For the three months ended December 31, 2016, consolidated revenue of $108.0 million increased by
$18.2 million or 20.3% from the same period in 2015, primarily due to new revenues from acquisitions
during the year of $16.3 million, consisting of incremental revenues from UMASH, PSSC and IMD, (the
8
“acquisitions”) including eliminations for intercompany revenues, along with higher case volume at the
pre-existing operations ($4.7 million), better case mix and annual price increases ($1.6 million), and
increases from the new Urgent Care and Ear Nose Throat (“ENT”) clinics at BHSH ($0.7 million), which
were partially offset by changes to payor mix ($1.7 million) and higher bad debt expenses ($0.8 million).
Total surgical cases increased by 1,045 cases or 11.9%, with inpatient and outpatient cases going up by
10.3% and 13.3%, respectively. Pain management procedures increased by 4.5%. Case growth over the
same period last year came predominantly from Blue Cross/Blue Shield (15.2%) and Medicare (15.8%)
cases.
Excluding the incremental impact of acquisitions, surgical case volume was up 2.2%, as UMASH and
PSSC contributed 5.5% and 4.2% of the total case growth.
The above factors are reflected in each subsidiary’s revenue as follows:
ASH recorded a decrease in revenue based mainly on lower case volumes.
UMASH contributed revenue to the overall increase for the full three month period as it was acquired
on September 23, 2016.
OSH’s revenue increased mainly due to higher case volume.
BHSH recorded an increase in revenue primarily due to the increase in case volume, case mix, the new
Urgent Care and ENT clinics, which were offset partially by payor mix.
SFSH’s revenue increase was due to higher case volumes from both the pre-existing operations and the
newly acquired PSSC, which were offset partially by payor mix and bad debt.
SCNC’s revenue increased due to case mix attributable to increased complex orthopedic cases and
stimulator cases as well as better payor mix, which were partially offset by lower case volume.
RRIMH contributed revenue which was fully eliminated.
IMD contributed to revenue growth, net of intercompany eliminations, as it was a new acquisition in
2016.
The intercompany revenue elimination relates primarily to IMD’s service revenue from OSH and
RRIMH’s rental revenue from UMASH.
9
Operating Expenses
Consolidated operating expenses, including salaries and benefits, drugs and supplies, general and
administrative expenses, depreciation of property and equipment, and amortization of other intangibles,
(“operating expenses”) totaled $82.7 million, an increase of $20.7 million or 33.4%. As a percentage of
revenue, operating expenses increased to 76.6% from 69.0% in the same period a year earlier.
Unaudited
Three Months Ended December 31,
In thousands of U.S. dollars
ASH
UMASH
OSH
BHSH
SFSH
SCNC
RRIMH
IMD
Corporate and intercompany eliminations
Operating expenses
2016
13,243
11,762
14,222
16,806
18,621
1,716
176
1,142
5,003
82,691
Percentage
of Revenue
77.1%
88.2%
76.9%
66.6%
60.5%
72.6%
32.1%
90.0%
n/a
76.6%
2015
9,829
-
13,648
14,003
16,958
1,636
-
-
5,892
61,966
Percentage
of Revenue
56.3%
-
77.4%
62.1%
56.5%
75.8%
-
-
n/a
69.0%
$ Change
3,414
11,762
574
2,803
1,663
80
176
1,142
(889)
20,725
% Change
34.7%
-
4.2%
20.0%
9.8%
4.9%
-
-
(15.1%)
33.4%
Consolidated salaries and benefits increased by $5.8 million or 26.2%. Salaries and benefits at the Center
level increased primarily due to acquisitions ($5.3 million), the new Urgent Care and ENT clinics at
BHSH ($0.7 million), higher benefits costs ($0.3 million), annual salary rate increases ($0.4 million), and
higher case volume and staffing levels ($0.3 million). As a percentage of revenue, consolidated salaries
and benefits increased to 25.9% from 24.7% a year earlier.
Consolidated drugs and supplies increased by $7.5 million or 31.0% primarily due to acquisitions ($4.5
million), higher case volumes ($1.0 million), and case mix changes ($0.8 million). As a percentage of
revenue, the consolidated cost of drugs and supplies grew to 29.3% from 26.9% a year earlier due to price
increases and changes in case mix.
Consolidated general and administrative expenses (“G&A”) increased by $6.4 million or 65.5%. The
increase in G&A was mainly attributable to acquisitions ($3.4 million), the non-cash reversal of accrued
rent liability by ASH ($2.7 million) in the prior year, the new Urgent Care clinic at BHSH ($0.3 million),
and professional fees ($0.3 million). As a percentage of revenue, consolidated G&A increased to 15.0%
from 10.9% a year earlier.
Consolidated depreciation of property and equipment was higher, increasing by $0.7 million or 32.4%
primarily due to acquisitions. As a percentage of revenue, consolidated depreciation of property and
equipment marginally increased to 2.6% from 2.4% a year earlier.
Consolidated amortization of other intangibles increased by $0.4 million or 9.5% primarily due to
amortization relating to the acquisitions in the year offset partly by the full amortization of certain
intangible assets. As a percentage of revenue, consolidated amortization of other intangibles declined to
3.8% from 4.2% a year earlier.
10
Income from Operations
Consolidated income from operations for the three months ended December 31, 2016 of $25.3 million
was $2.5 million or 9.0% lower than consolidated income from operations of $27.8 million, recorded a
year earlier, representing 23.4% of revenue compared to 31.0% in 2015. The decline in consolidated
income from operations is the result of increases in operating expenses exceeding increases in revenue at
several Centers. Normalized for the non-cash reversal of an accrued rent liability by ASH ($2.7 million) a
year earlier, the variance would have been an increase of $0.2 million or 0.7%.
Unaudited
Three Months Ended December 31,
In thousands of U.S. dollars
ASH
UMASH
OSH
BHSH
SFSH
SCNC
RRIMH
IMD
Corporate
Income from operations
Finance Costs
2016
3,924
1,577
4,266
8,415
12,165
649
374
127
(6,195)
25,302
Percentage
of Revenue
22.9%
11.8%
23.1%
33.4%
39.5%
27.4%
67.9%
10.0%
n/a
23.4%
2015
7,618
-
3,977
8,536
13,030
525
-
-
(5,892)
27,794
Percentage
of Revenue
43.7%
-
22.6%
37.9%
43.4%
24.2%
-
-
n/a
31.0%
$ Change
(3,694)
1,577
289
(121)
(865)
124
374
127
(303)
(2,492)
% Change
(48.5%)
-
7.3%
(1.4%)
(6.6%)
23.6%
-
-
(5.1%)
(9.0%)
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 periods. Changes
in the recorded value of the convertible debentures are driven by the changes in the market price of the
Corporation’s convertible debentures and fluctuations in the value of the Canadian dollar against the U.S.
dollar.
The following table provides a calculation of the change in fair value of convertible debentures for the
reporting periods:
In thousands of U.S. dollars, except
as indicated otherwise
Face value of convertible
December 31,
2016
September 30,
2016
Unaudited
Change
December 31,
2015
September 30,
2015
Unaudited
Change
debentures outstanding
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$41,743
C$41,743
-
C$41,743
C$41,755
(C$12)
C$103.26
C$115.00
(C$11.74)
C$101.50
C$104.51
(C$3.01)
C$1.3427
C$1.3117
C$0.031
C$1.3840
C$1.3345
C$0.0495
32,102
36,597
(4,495)
30,614
32,700
(2,086)
normal course issuer bid
Change in value of convertible debentures
-
(4,495)
9
(2,077)
Change in Value of Exchangeable Interest Liability
The liability for the exchangeable interest is recorded at fair value, and re-measured at each reporting
date, and the changes in fair value are included in net income for the respective periods. Changes in the
recorded value of the exchangeable interest liability between the reporting periods are attributable to the
(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
11
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 a calculation of the change in value of 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 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,
2016
September 30,
2016
Unaudited
Change
December 31,
2015
September 30,
2015
Unaudited
Change
5,886,925
5,908,674
(21,749)
5,932,340
5,940,296
(7,956)
C$17.57
C$21.92
(C$4.35)
C$14.39
C$15.71
(C$1.32)
C$1.3427
77,034
C$1.3117
98,741
C$0.031
21,707
C$1.3840
61,681
C$1.3345 C$0.0495
(8,249)
69,930
Interest on Exchangeable Interest Liability
Interest expense on the exchangeable interest liability decreased by $0.1 million primarily due to the
variation in distributions from the Centers between the reporting periods.
Interest Expense
Interest expense, net of interest income was up $1.0 million due mainly to the outstanding balance
payable on the corporate credit facility representing the funds borrowed to finance new acquisitions and
incremental interest expense on debt residing in the recently acquired UMASH.
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. Foreign
currency losses were consistent with the same period in 2015.
Income Tax
Current and deferred tax components of the income tax expense for continuing operations 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,
2015
2016
1,000
7,584
8,584
2,801
6,699
9,500
$ Change
% Change
(1,801)
885
(916)
(64.3%)
14.9%
(9.6%)
The decrease in current income tax expense versus last year was mainly due to higher public company
expense deductions versus prior year. The deferred income tax expense versus the prior year was
primarily attributable to the tax effect of the change in exchangeable interest liability, and accumulated
immaterial prior period adjustments to the U.S. deferred tax asset.
12
Income from Continuing Operations
A $13.4 million increase in income from continuing operations was primarily due to decreases in the
values of the exchangeable interest liability and convertible debentures, offset partially by lower income
from operations.
Year Ended December 31, 2016
The following table and discussion compare operating and financial results of the Corporation from
continuing operations for the year ended December 31, 2016 to the year ended December 31, 2015.
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
Income from operations
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
Income before income taxes
Income tax expense (recovery)
Income for the year from continuing operations
Attributable to:
Owners of the Corporation
Non-controlling interest
Years Ended December 31,
2015
308,778
2016
339,472
$ Change % Change
9.9%
30,694
95,774
99,632
53,362
9,255
13,376
271,399
80,223
84,810
44,995
8,909
15,149
234,086
15,551
14,822
8,367
346
(1,773)
37,313
19.4%
17.5%
18.6%
3.9%
(11.7%)
15.9%
68,073
74,692
(6,619)
(8.9%)
1,488
15,353
8,616
4,258
(336)
29,379
(7,353)
(30,036)
9,172
3,024
4,987
(20,206)
8,841
45,389
(556)
1,234
(5,323)
49,585
120.2%
151.1%
(6.1%)
40.8%
(106.7%)
245.4%
38,694
94,898
(56,204)
(59.2%)
(994)
24,719
(25,713)
(104.0%)
39,688
70,179
(30,491)
(43.4%)
9,750
29,938
37,018
33,161
(27,268)
(3,223)
(73.7%)
(9.7%)
Basic earnings per share attributable to owners of the Corporation from continuing
operations
Fully diluted earnings per share attributable to owners of the Corporation from
continuing operations
$ 0.31
$ 1.18
($ 0.87)
(73.7%)
$ 0.30
$ 0.53
($ 0.23)
(43.4%)
Revenue
In thousands of U.S. dollars
ASH
UMASH
OSH
BHSH
SFSH
SCNC
RRIMH
IMD
Intercompany eliminations
Facility service revenue
Years Ended December 31,
2016
67,350
14,203
63,544
85,586
97,562
8,011
1,077
5,708
(3,569)
339,472
2015
63,061
-
63,363
78,749
95,773
7,832
-
-
-
308,778
$ Change
4,289
14,203
181
6,837
1,789
179
1,077
5,708
(3,569)
30,694
% Change
6.8%
-
0.3%
8.7%
1.9%
2.3%
-
-
-
9.9%
13
For the year ended December 31, 2016, consolidated revenue of $339.5 million increased by
$30.7 million or 9.9% over the year 2015. Consolidated revenue growth was attributable to new
acquisitions ($17.4 million) including eliminations for intercompany revenues, higher case volumes which
generated an additional revenue of $14.5 million, and improved case mix impact of $6.9 million, partly
offset by a decline from payor mix of $10.1 million and higher bad debt expense of $1.6 million.
Total surgical cases increased by 7.6%, with outpatient cases up 7.8% and inpatient cases up 7.9%, while
total pain management procedures decreased slightly by 0.6%. Excluding the incremental impact of the
UMASH and PSSC acquisitions, case volume increased by 4.7%.
The above factors impacted each subsidiary’s revenue as follows:
ASH recorded growth in case volumes and favourable changes in case mix as growth in inpatient cases
outpaced growth in outpatient cases.
UMASH contributed revenue to the overall increase from the date of its acquisition on
September 23, 2016.
OSH’s revenue increased slightly due to growth in case volumes which was mostly offset by payor mix
as Medicare cases increased.
BHSH recorded revenue growth due to an increase in case volumes and additional revenue from the
new Urgent Care and ENT clinics, partially offset by declines from payor mix.
SFSH recorded increases from case mix, higher case volumes, and ancillary revenue growth from MRI
and pain clinic, mostly offset by payor mix due to a higher proportion of Medicare and like payors.
SCNC’s revenue increased slightly because of improved case and payor mix mostly offset by reduced
case volume.
RRIMH contributed rent revenue to the consolidated results up to the date the Corporation acquired
UMASH, after which its revenue was eliminated.
IMD contributed to revenue growth, as it is a new acquisition in the current year.
The intercompany revenue eliminations relate to IMD’s service revenue from OSH and RRIMH’s
rental revenue from UMASH.
14
Operating Expenses
Operating expenses totaled $271.4 million, an increase of $37.3 million or 15.9%. As a percentage of
revenue, operating expenses increased to 80.0% from 75.8% in the same period a year earlier.
In thousands of U.S. dollars
ASH
UMASH
OSH
BHSH
SFSH
SCNC
RRIMH
IMD
Corporate and intercompany eliminations
Operating expenses
Years Ended December 31,
Percentage
of Revenue
78.7%
88.1%
84.0%
69.7%
65.5%
80.2%
30.1%
87.4%
n/a
80.0%
2015
45,054
-
50,941
53,662
57,035
6,174
-
-
21,220
234,086
Percentage
of Revenue
71.4%
-
80.4%
68.1%
59.6%
78.8%
-
-
n/a
75.8%
2016
52,984
12,510
53,376
59,693
63,896
6,424
324
4,989
17,203
271,399
$ Change
7,930
12,510
2,435
6,031
6,861
250
324
4,989
(4,017)
37,313
% Change
17.6%
-
4.8%
11.2%
12.0%
4.0%
-
-
(18.9%)
15.9%
Consolidated salaries and benefits increased by $15.6 million or 19.4% due mainly to increases at the
Center level, while higher salaries at the corporate level were mostly offset by lower retirement
allowance. Salaries and benefits at the Center level increased primarily due to acquisitions ($7.4 million),
annual wage and salary increases ($2.4 million), higher benefits costs ($1.7 million), increased staffing
levels due to case volume ($1.4 million), and the new Urgent Care and ENT clinics at BHSH ($1.1
million). As a percentage of revenue, consolidated salaries and benefits increased to 28.2% from 26.0% a
year earlier.
Consolidated drugs and supplies increased by $14.8 million or 17.5%, which was attributable mainly to
the acquisition of UMASH ($4.5 million), higher case volumes ($4.0 million), changes in case mix and
price inflation ($3.8 million), and increased interoperative service fees at OSH ($0.7 million). As a
percentage of revenue, consolidated cost of drugs and supplies increased to 29.3% from 27.5% a year
earlier.
Consolidated G&A increased by $8.4 million or 18.6%. The increase in G&A was attributable to a
number of factors, most significant of which were the non-cash reversal of accrued rent liability by ASH
($2.7 million) in the prior year, increased professional fees ($2.3 million) stemming partly from
transactional legal and consulting fees related to new acquisitions, the incremental impact of acquisitions
($1.9 million), and increases from new Urgent Care and ENT clinics at BHSH ($0.6 million). As a
percentage of revenue, consolidated G&A increased to 15.7% from 14.6% a year earlier.
Consolidated depreciation of property and equipment increased by $0.4 million or 3.9% primarily due to
acquisition activity offset in part by the expiration of depreciation periods of property and equipment at
some of the Centers. As a percentage of revenue, consolidated depreciation of property and equipment
declined to 2.7% from 2.9% a year earlier.
Consolidated amortization of other intangibles declined by $1.8 million or 11.7% primarily due to the
expiration of amortization periods for certain intangible assets. As a percentage of revenue, consolidated
amortization of other intangibles declined to 3.9% from 4.9% a year earlier.
15
Income from Operations
Consolidated income from operations of $68.1 million was $6.6 million or 8.9% lower than consolidated
income from operations recorded a year earlier, representing 20.1% of revenue compared to 24.2% in the
same period in 2015.
In thousands of U.S. dollars
ASH
UMASH
OSH
BHSH
SFSH
SCNC
RRIMH
IMD
Corporate
Income from operations
Finance Costs
Years Ended December 31,
2016
14,366
1,694
10,168
25,893
33,665
1,587
753
719
(20,772)
68,073
Percentage
of Revenue
21.3%
11.9%
16.0%
30.3%
34.5%
19.8%
69.9%
12.6%
n/a
20.1%
2015
18,007
-
12,422
25,087
38,738
1,658
-
-
(21,220)
74,692
Percentage
of Revenue
28.6%
-
19.6%
31.9%
40.4%
21.2%
-
-
n/a
24.2%
$ Change
(3,641)
1,694
(2,254)
806
(5,073)
(71)
753
719
448
(6,619)
% Change
(20.2%)
-
(18.1%)
3.2%
(13.1%)
(4.3%)
-
-
2.1%
(8.9%)
Change in Value of Convertible Debentures
The convertible debentures are recorded as a financial liability at fair value and re-measured at each
reporting date and the changes in fair value are included in net income for the respective periods. Changes
in the recorded value of the convertible debentures are driven by the changes in the market price of the
Corporation’s convertible debentures and fluctuations in the value of the Canadian dollar against the U.S.
dollar.
The following table provides calculation of the change in value of convertible debentures for the reporting
periods:
In thousands of U.S. dollars, except as
indicated otherwise
Face value of convertible debentures
outstanding
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 normal course issuer bid
Change in value of convertible debentures
December 31,
2016
December 31,
2015
Change
December 31,
2015
December 31,
2014
Change
C$41,743
C$41,743
-
C$41,743
C$41,786
(C$43)
C$103.26
C$101.50
C$1.76
C$101.50
C$105.50
(C$4.00)
C$1.3427
C$1.3840
(C$0.0413)
C$1.3840
C$1.1601
C$0.2239
32,102
30,614
1,488
-
1,488
30,614
38,000
(7,386)
33
(7,353)
Change in Value of Exchangeable Interest Liability
The liability for the exchangeable interest is recorded at fair value, which is re-measured at each reporting
date, and the changes in fair value are included in net income for the respective periods. Changes in the
recorded value of the exchangeable interest liability between the reporting periods are attributable to the
(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.
16
The following table provides calculation of the change in value of exchangeable interest liability for the
reporting periods:
In thousands of U.S. dollars, except as indicated
otherwise
Number of common shares to be issued for
December 31,
2016
December 31,
2015
Change
December 31,
2015
December 31,
2014
Change
exchangeable interest liability
5,886,925
5,932,340
(45,415)
5,932,340
5,851,799
80,541
Closing price of the Corporation’s common
shares
C$17.57
C$14.39
C$3.18
C$14.39
C$18.41
(C$4.02)
Closing exchange rate of U.S. dollar to
Canadian dollar
Exchangeable interest liability
Exercise of exchangeable rights by non-controlling interests
Change in value of exchangeable interest
C$1.3427
77,034
liability
C$1.384
61,681
(C$0.041)
15,353
-
15,353
C$1.3840
61,681
C$1.1601
92,864
C$0.2239
(31,183)
1,147
(30,036)
Interest on Exchangeable Interest Liability
The decrease of $0.6 million in interest expense on the exchangeable interest liability is primarily due to
the variation in distributions from the Centers between the reporting periods.
Interest Expense
Interest expense, net of interest income, increased by $1.2 million mainly due to higher interest expense at
the corporate level relating to the draws on the corporate credit facility used to finance the new
acquisitions and the incremental interest expense on debt residing in the recently acquired UMASH
Center.
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 $5.3 million compared to 2015 is mainly attributable to the realized
losses on foreign exchange forward contracts during the prior year, and the fluctuations in the value of the
Canadian dollar in relation to U.S. dollar during the year ended December 31, 2016 compared to the same
period in 2015.
Income Tax
Current and deferred tax components of the income tax expense (recovery) for the reporting periods are as
follows:
In thousands of U.S. dollars
Current income tax expense
Deferred income tax expense (recovery)
Income tax expense (recovery)
Years Ended December 31,
2016
675
(1,669)
(994)
2015
1,015
23,704
24,719
$ Change
% Change
(340)
(25,373)
(25,713)
(33.5%)
(107.0%)
(104.0%)
The decrease in current income tax is primarily attributable to higher public company expense deductions
versus prior year. The deferred income tax recovery versus the prior year 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, as well as accumulated immaterial prior period
adjustments to the U.S. deferred tax asset.
17
Income from Continuing Operations
A $30.5 million decline in income from continuing operations was primarily due to the impact of the
increases in the values of exchangeable interest liability and convertible debentures and lower operating
income, which were partially offset by decreases in income tax expense and foreign currency losses.
7. 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
Q4
2016
Q3
Q2
Q1
Q4
Q3
Q2
Q1
2015
107,994
78,806
76,728
75,945
89,760
73,137
73,636
72,245
Operating expenses
Salaries and benefits
Drugs and supplies
General and administrative expenses
Depreciation of property and equipment
Amortization of other intangibles
27,949
31,619
16,162
2,805
4,156
82,691
22,787
23,250
13,147
2,253
3,187
64,624
22,961
22,538
12,305
2,048
3,111
62,963
22,076
22,225
11,748
2,150
2,922
61,121
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
Income from operations
25,303
14,182
13,765
14,824
27,794
14,733
15,981
16,184
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
(4,495)
2,381
(166)
3,768
(2,077)
(1,567)
(677)
(3,031)
(21,707)
2,181
1,745
284
(21,992)
10,856
1,823
1,079
150
16,289
15,560
2,024
696
12
18,126
10,644
2,590
737
(782)
16,957
(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)
Income (loss) before income taxes
47,295
(2,107)
(4,361)
(2,133)
34,811
14,225
19,288
26,573
Income tax expense (recovery)
8,584
(1,730)
(4,986)
(2,863)
9,500
3,614
2,882
8,723
Income (loss) for the period from continuing
operations
Attributable to:
Owners of the Corporation
Non-controlling interest
38,711
(377)
625
730
25,311
10,611
16,406
17,850
28,111
10,600
(6,836)
6,459
(5,718)
6,343
(5,805)
6,535
13,343
11,968
3,663
6,948
9,279
7,127
10,733
7,117
Earnings (loss) per share attributable to owners of the Corporation from
continuing operations:
Basic
Fully diluted
$0.91
$0.31
$ (0.22)
$ (0.22)
$ (0.18)
$ (0.18)
$ (0.19)
$ (0.19)
$ 0.43
$ 0.22
$ 0.12
$ 0.08
$ 0.30
$ 0.20
$ 0.34
$ 0.04
During the last eight quarters, the following items have had a significant impact on the Corporation’s
financial results:
Revenue varies directly in relation to the number of cases performed as well as to the type of cases
performed and the payor. For example, revenue for orthopedic cases will typically be higher than ear,
nose and throat cases and cases funded by Medicare or Medicaid will be lower than those paid for by
private insurance. Changes in case volumes, case mix and payor mix are normal and expected due to
the nature of the Corporation’s business. Surgical cases are mainly elective procedures and the volume
of cases performed in any given period are subject to medical necessity and patient and physician
preferences in scheduling (e.g., work schedules and vacations). The Corporation generally records
higher revenue in the fourth quarter as many patients tend to seek medical procedures at the end of the
year, primarily as a result of their inability to carry over unused insurance benefits into the following
calendar year. During the course of the last eight quarterly reporting periods, revenue has also been
18
impacted by the periodic receipt of electronic health record incentive payments, development of urgent
and primary care service lines, and new acquisitions.
The changes in operating expenses are consistent with fluctuations in case volumes and case mix as
well as development costs related to the Corporation’s strategic move into urgent and primary care. In
addition, 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 the
orthopedic service line (refer to Section 13 of this MD&A under heading “Related Party Transactions”)
which was in place for the full year in 2016 versus eleven months in 2015.
Revenue and operating expenses have been impacted by acquisitions during the year (refer to Section 3
of this MD&A under the heading “Business Overview”).
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 exchange
rate of the Canadian dollar in relation to U.S. dollar.
Fluctuations in current income taxes have been driven by the changes in operating performance of the
Centers, 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 the changes in the exchangeable interest liability and Canadian cumulative tax operating
loss carryforwards.
19
8. RECONCILIATION OF NON-IFRS FINANCIAL MEASURES
The following table presents reconciliation of cash available for distribution to 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,
2016
Unaudited
20,088
2015
Unaudited
23,346
Years Ended
December 31,
2016
2015
78,290
80,240
USD
(14,360)
2,181
281
(1,027)
(414)
7,831
-
(1,237)
13,343
17,805
-
13,343
17,805
(14,667)
2,263
(2,535)
(862)
(41,859)
8,616
833
(2,557)
(45,706)
9,172
(2,175)
(2,780)
63
4,384
(1,690)
(892)
9,410
12,566
1,242
10,652
14,225
652
(1,723)
-
(4,016)
38,236
50,655
-
38,236
50,655
5,631
1,517
(6,475)
(3,565)
35,859
45,853
4,759
40,618
51,938
8,732
8,766
34,929
35,186
$ 0.573
$ 0.573
$ 0.403
$ 0.456
$ 1.631
$ 1.631
$ 1.466
$ 1.660
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
49.0%
49.0%
69.7%
61.6%
69.0%
69.0%
76.7%
67.8%
Average exchange rate of Cdn$ to US$ for the period
Weighted average number of common shares outstanding
1.3344
31,045,945
1.3354
31,185,411
1.3248
31,050,084
1.2787
31,287,313
(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.
(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 is 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.
20
(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 in the three-month period ended December 31, 2016 (Cdn$17.8 million)
exceeded the total amount of distributions (Cdn$8.7 million) by Cdn$9.1 million. On a per common share
basis, cash available for distribution of Cdn$0.57 was Cdn$0.29, or 103.6% higher than distributions of
Cdn$0.28, resulting in a payout ratio of 49.0% as compared to a payout ratio of 69.7% in the same period
in 2015.
Cash available for distribution in the year ended December 31, 2016 (Cdn$50.7 million) exceeded the
total amount of distributions in the same period of 2016 (Cdn$34.9 million) by Cdn$15.7 million. On a
per common share basis, cash available for distribution of Cdn$1.631 was Cdn$0.506, or 45.0%, higher
than distributions of Cdn$1.125, resulting in a payout ratio of 69.0% as compared to a payout ratio of
76.7% in the same period in 2015.
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,
2016
Unaudited
2015
Unaudited
Years Ended
December 31,
2016
2015
34,330
35,674
98,006
106,656
(1,360)
(1,237)
(1,027)
281
30,987
(14,360)
16,627
(1,820)
(464)
-
(1,000)
13,343
(269)
(892)
(862)
(2,535)
31,116
(14,667)
16,449
(2,106)
(465)
(1,690)
(2,778)
9,410
(2,724)
(4,016)
(2,557)
833
89,542
(41,859)
47,683
(6,937)
(1,833)
-
(677)
38,236
(1,080)
(3,565)
(2,780)
(2,175)
97,056
(45,706)
51,350
(6,128)
(1,930)
(6,475)
(958)
35,859
Compared to the three months ended December 31, 2015, the cash available for distribution increased by
$3.9 million or 41.8% as cash flows from the Centers were relatively flat but there were other favourable
variances due to realized losses on foreign exchange forward contracts and higher current taxes in the
prior year.
Compared to the year ended December 31, 2015, the cash available for distribution increased by
$2.4 million or 6.6% as weaker cash flows from the Centers and higher corporate expenses were more
than offset by the favourable variance to the realized losses on foreign exchange contracts in the prior
year.
21
The chart below shows the Corporation’s cash available for distribution, distributions and payout ratios
for the last twelve quarters:
C$mill
Cash Available for Distribution
20.0
18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
120.0%
100.0%
80.0%
60.0%
40.0%
20.0%
0.0%
1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16
Generated C$
Distributed C$
Payout Ratio
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 under the heading “Risk Factors” in this MD&A and the
Corporation’s most recently filed annual information form, which 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.
Healthcare Industry
While impossible to currently quantify, the potential modification or replacement 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, combined with the
increasing share of case volume that such plans represent;
22
the opportunity for additional case volumes arising from ownership of, and participation in,
Accountable Care Organizations and the related challenge of payor mix shifting to Medicare
plans;
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, while Arkansas expanded Medicaid using an alternative to traditional expansion (see
www.statereforum.org).
Management Strategies
Management is committed to increasing shareholder value, primarily through continued organic growth at
its current Centers, along with the acquisitions of new, accretive facilities that are complementary to our
core business, specifically in the surgical hospital and ambulatory surgery center (ASC) space. In addition
to accretive core acquisitions, we will also consider on other medical ventures where the financial and
operational metrics are strong and could enhance a more comprehensive and integrated delivery model.
In collaboration with local management and physicians, we will continue to differentiate and grow the
Corporation’s Centers by the following attributes to include:
maintaining 5 star service lines of the highest quality;
physician development, including continued recruitment and retention of physician investors and
potential physician utilizers, based on community needs;
expanding the complement of service offerings at the Centers;
in-market acquisitions of ancillary businesses (ASCs, imaging centers and urgent care facilities);
and
sharing and implementing best practices and cost reduction strategies, with emphasis on supply
chain and implant costs
Management has a robust acquisition pipeline and will continue to investigate accretive acquisitive targets
that meet our core attributes to include facilities with:
high quality service lines;
physician alignment and/or affiliations; and
strong earnings and growth potential
23
Management will maintain its emphasis on continuation of these strategies, combined with a strong
balance sheet, an experienced management team and continuing identification of suitable accretive
opportunities to enhance the Corporation’s operating performance.
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 under the heading “Risk Factors” in this MD&A and the
Corporation’s most recently filed annual information form, which 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, including restricted cash held in escrow, short-
term investments 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
Restricted Cash
Short-term investments
Long-term Investments
Cash and cash equivalents, including short-term investments and long-term investments
December 31,
2016
December 31,
2015
13,928
37,086
51,014
6,437
57,451
8,569
1,613
67,633
13,024
44,945
57,969
-
57,969
12,975
-
70,944
Cash Flow Activity
Cash Flow
Years Ended
December 31,
In thousands of U.S. dollars
Cash provided by operating activities
Cash provided by (used in) investing activities
Cash provided by used in financing activities
Increase (decrease) in cash and cash equivalents
Effect of exchange rate fluctuations on cash balances held
Cash and cash equivalents, beginning of the year
Cash and cash equivalents, end of the year
2016
78,290
(74,171)
(4,973)
(854)
336
57,969
57,451
2015
80,240
29,427
(84,393)
25,274
(8,614)
41,309
57,969
$ Change
(1,950)
(103,598)
79,420
(26,128)
8,950
16,660
(518)
% Change
(2.4%)
(352.1%)
94.1%
(103.4%)
103.9%
40.3%
(0.9%)
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.
24
Operating Activities and Working Capital
Cash from operating activities in the year ended December 31, 2016 decreased by $1.9 million compared
to the same period in 2015 primarily due to lower income from continuing operations, offset partly by
lower taxes paid.
As at December 31, 2016, the Corporation had consolidated net working capital of $74.0 million
compared to $85.7 million as at December 31, 2015. The decline was due mainly to increases in accrued
liabilities and current portion of long-term debt relating to the consolidation of UMASH balances. The
level of working capital, including financing required to cover any deficiencies, is dependent on operating
performance of the Corporation and fluctuates from period to period.
As at December 31, 2016, accounts receivable were $61.1 million (December 31, 2015: $48.8 million),
accounts payable and accrued liabilities totaled $42.2 million (December 31, 2015: $33.3 million), total
assets were $492.5 million (December 31, 2015: $383.0 million) and total long-term liabilities were
$135.9 million (December 31, 2015: $62.4 million).
Investing Activities
The $103.6 million decrease in cash from investing activities in the year ended December 31, 2016,
compared to the same period in 2015 was due to the combination of the investment in UMASH ($27.8
million), the purchase of its underlying real estate through RRIMH ($27.4 million), along with increased
purchases of property and equipment and the investment in IMD in the current year, combined with $36.9
million of gross proceeds received from the sale of DPSC’s assets in the prior year.
Financing Activities
Cash from financing activities in the year ended December 31, 2016 increased by $79.4 million compared
to the same period in 2015, primarily due to higher proceeds from revolving credit facilities at the Centers
($14.2 million) and increased Corporate credit facility ($47.8 million), increased long-term debt, along
with a decrease in distributions to non-controlling interest ($16.3 million), reduced purchases of common
shares under normal course issuer bids ($2.8 million), and lower dividends paid ($1.3 million) due to a
decline in the value of the Canadian dollar.
The Centers have available credit facilities in place, excluding capital leases, in the aggregate amount of
$34.1 million, of which $14.2 million was drawn as at December 31, 2016. The balances available under
the credit facilities, combined with cash and cash equivalents as at December 31, 2016, are available to
manage the Corporation’s accounts receivable, supply inventory and other short-term cash requirements.
The Corporation’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. As at December 31, 2016, the Centers were all in compliance with the
terms of their debt covenants.
With the exception of UMASH, 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 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
25
convertible debentures, and/or repurchase of the Corporation’s common shares. During the third quarter
of 2016, $47.8 million was drawn under the credit facility in relation to the acquisition of UMASH and its
underlying property through RRIMH, and remained outstanding as at December 31, 2016. As at
December 31, 2016, the Corporation was in compliance with all of its debt covenants.
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, 2016, the Corporation had Cdn$41.7 million aggregate principal amount of
convertible debentures outstanding while the market value of the convertible debentures was
$32.1 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.
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.
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, 2016, are as follows:
In thousands of U.S. dollars
Dividends payable
Accounts payable
Accrued liabilities
Revolving credit facilities
Income tax payable
Corporate credit facility
Notes payable and term loans
Finance lease obligations
Convertible debentures
Operating leases and other
commitments (not recorded in the
financial statements)
Total contractual obligations
Carrying values at
December 31, 2016
2,168
21,609
20,572
14,240
202
47,750
59,642
3,030
32,102
Future payments (including principal and interest)
Total
2,168
21,609
20,572
15,004
202
50,287
63,061
3,180
44,154
Less than
1 year
2,168
21,609
20,572
7,949
202
2,029
13,762
1,111
2,159
1-3 years
4-5 years
Thereafter
-
-
-
7,055
-
48,257
36,792
1,179
4,318
-
-
-
-
-
-
12,507
890
37,677
-
-
-
-
-
-
-
-
-
-
201,315
70,366
290,603
7,453
79,014
11,886
109,487
8,590
59,664
42,438
42,438
26
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 under the heading “Risk Factors” in this MD&A and the
Corporation’s most recently filed annual information form, which could cause results to differ materially
from those described or anticipated in the forward-looking statements.
As of May 1, 2016, the Corporation granted stock options to acquire 1,000,000 common shares of the
Corporation to its Chief Executive Officer, exercisable at C$17.24 per share. On September 19, 2016, the
Corporation granted stock options to acquire 350,000 common shares of the Corporation to its Chief
Development Officer, exercisable at C$21.15 per share. On November 21, 2016 the Corporation granted
stock options to acquire 425,000 common shares of the Corporation to its Executive Vice President
Finance, who was appointed to the position of Chief Financial Officer on January 1, 2017, exercisable at
C$17.98 per share. The stock options will vest after five years of employment, subject to the
Corporation’s maintenance of a dividend rate not less than the rate in effect at the time of the grant date.
As at December 31, 2016, and as at the date of this document, the Corporation had 31,045,945 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 normal course issuer bid allowing the Corporation to repurchase up to 620,919 of its
common shares is in effect from May 16, 2016 to May 15, 2017. During the three-month period ended
December 31, 2016, the Corporation did not purchase any of its common shares. During the year ended
December 31, 2016, the Corporation purchased 67,500 of its common shares for total consideration of
$644.
During the three-month period ended December 31, 2015, the Corporation purchased 124,900 of its
common shares for total consideration of $1,387. During the year ended December 31, 2015, the
Corporation purchased 300,600 of its common shares for total consideration of $3,448.
All common shares acquired under the bids were cancelled.
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
27
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, 2016 to
December 31, 2016 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.
12. FINANCIAL INSTRUMENTS
Financial instruments held in the normal course of business included in the consolidated balance sheet as
at December 31, 2016 consist of cash and cash equivalents, short-term and long-term investments,
accounts receivable, interest payable, dividends payable, accounts payable, accrued liabilities, borrowings
(including long‐term debt, corporate credit facility 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
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
dividend and interest payments and expenses. A weakening Canadian currency in relation to U.S.
currency has the opposite effect.
28
The graph below shows the movement of the monthly average exchange rates between Canadian and U.S.
dollars since February 2012:
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 may, from time to time, enter into foreign exchange forward contracts dependent upon
actual or anticipated company performance and current market conditions. As of December 31, 2016, 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
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 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.
Share Price Risk
The Corporation’s convertible debentures and exchangeable interest liability are measured on quoted
market prices of its convertible debentures and common shares in active markets and, therefore, the
29
Corporation is exposed to variability in net income as prices change. Share 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
Certain Centers routinely enter into transactions with related parties for provision of services relating to
the use of facilities and equipment. These parties are considered related as the centers have significant
influence over these parties. 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 each of 2016 and 2015, SFSH paid the South Dakota Interventional Pain Institute LLC. (“SDIPI”)
$659 for the use of a facility and related equipment. As of December 31, 2016, SFSH had a balance
payable to SDIPI of $39 (December 31, 2015: $41). Beginning in 2017, MPREH will provide BHSH with
use of the Spearfish facility. 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 was approved for 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.
The following is a summary of transactions at each Center with their respective related parties during the
reporting periods:
30
In thousands of U.S. dollars
Entity
Nature of services or goods received
Lease of facility building, anesthesia equipment lease, and sub-lease of MRI equipment.
ASH
UMASH Provision of physician professional services and billing services.
OSH
Provision of office and management services, lease of hospital building, and lease of office
space.
Provision of physical therapy services, physician professional services, intraoperative
monitoring services, and provision of parking space.
Provision of management services in relation to orthopedic service line at SFSH, physician
professional fees, anesthesia services, physical and occupational therapy services, medical
products and implants, lithotripter services, laundry services, facility and related equipment,
and shared services.
BHSH
SFSH
Total
Years Ended
December 31,
2016
$
726
1,329
2015
$
1,704
-
1,567
4,539
473
362
7,575
11,670
8,686
15,291
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. Notes 25 and 26 to the
consolidated financial statements of the Corporation for the year ended December 31, 2016 detail critical
accounting judgments and estimates used in the preparation of the Corporation’s financial statements.
There have been no changes in the nature of these judgments and estimates since December 31, 2015.
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.
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.
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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
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.
32
Management performed its annual impairment tests for goodwill and other intangibles with indefinite
lives as at December 31, 2016 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.
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. 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 the 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.
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 framework to provide reasonable assurance
33
regarding the reliability of financial reporting and the preparation of the consolidated financial statements
for external purposes in accordance with IFRS.
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. Management believes that
DC&P and ICFR are designed and operative effectively.
There have been no changes in the Corporation’s ICFR during the year beginning on January 1, 2016 and
ended on December 31, 2016, 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.
16. 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
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.
The trend of rising drug costs is currently challenging to counteract and puts downward pressure on the
Centers’ operating margins as they have limited control over price increases.
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.
34
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 Corporation conducted an extensive review to ensure that the Centers operating agreements and
procedures are in compliance with the provisions and limitations of the PPACA. The Centers have
updated their operating agreements and procedures as necessary to ensure compliance with the
requirements of the PPACA.
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 8 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 1.3% 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.
35
Cyber Security Incidents
including protected health
As providers of healthcare services, information technology is a critical component of the day-to-day
operation of the Centers. The Centers rely on information technology to process, transmit and store
sensitive and confidential data,
identifiable
information, and proprietary and confidential business performance data. The Centers utilize electronic
health records and other health information technology, along with additional technology systems, in
connection with their operations, including for, among other things, billing and supply chain and labour
management. The Centers have privacy and security processes in place to protect sensitive health and
business information. The systems used by the Centers, in turn, interface with and rely on third-party
systems. Incident response policies and processes are in place at Centers that provide for prompt
identification and management of security incidents to facilitate maintenance and/or restoration of
business continuity. The Corporation is not aware of the Centers having experienced a material breach of
cyber security.
information, personally
The preventive actions taken to reduce the risk of such incidents and protect information technology may
not be sufficient in the future. As cyber security threats continue to evolve, the Centers may not be able to
anticipate certain attack methods in order to implement effective protective measures, and may be
required to expend significant additional resources to continue to modify and strengthen security
measures, investigate and remediate any vulnerabilities in information systems and infrastructure, or
invest in new technology designed to mitigate security risks. Third parties to whom the Centers outsource
certain functions, or with whom their systems interface, are also subject to the risks outlined above and
may not have or use appropriate controls to protect confidential information. A breach or attack affecting
a third-party service provider or partner could harm the Corporation’s business even if the Corporation
does not control the service that is attacked.
Although the Corporation and the Centers have insurance against some cyber-risks and attacks, it may not
be sufficient to offset the impact of a material loss event. Any cyber security breach or system
interruption could result in the unauthorized disclosure, misuse or loss of confidential, sensitive or
proprietary information, could negatively impact the ability of the Centers to conduct normal business
operations (including the collection of revenues), and could result in potential liability under privacy,
security, consumer protection or other applicable laws, regulatory penalties, negative publicity and
damage to the Corporation’s reputation, any of which could have a material adverse effect on the
Corporation’s business, financial position, results of operations or cash flows.
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.
36
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.
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 Medical Facilities IMD Holdings Inc. 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 Indiana is formed under the laws of the State of Indiana, 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.
37
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.
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 currently to offset this
income inclusion such that it will not result in a current material 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%, and is
also subject to certain U.S. state and local taxes). MFA will claim interest deductions for the interest paid
on MFA Promissory Notes in computing its income for U.S. federal income tax purposes. To the extent
this interest expense deduction 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, historically its characterization has been governed by
principles developed in case law, which analyzes numerous factors that are intended to identify the
38
economic substance of the purported creditor’s interest in the corporation. 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. In addition, on October 13, 2016, the IRS issued final and temporary regulations that address
the treatment of certain related-party debt for U.S. federal income tax purposes. These regulations apply
to certain debt instruments issued by domestic (i.e., U.S.) corporations, and could apply to the Promissory
Notes if those instruments are modified or if new debt instruments are issued by Medical Facilities
America. 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.
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. 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.
A successful challenge of this position taken by Medical Facilities America with respect to interest
deductibility would increase the U.S. federal income tax liability of Medical Facilities America for the
applicable open tax years, which would affect the ability of Medical Facilities America to make interest
and principal payments on the Promissory Notes and would reduce the amount of after-tax cash generated
by Medical Facilities America that could otherwise be available to make distributions to the Corporation.
In addition, payments of interest would be re-characterized as non-deductible equity distributions and
would be subject to U.S. withholding tax to the extent Medical Facilities America had current or
accumulated earnings and profits.
It should also be noted that the current United States Presidential administration and Congress have
announced plans for sweeping U.S. federal income tax law changes, although it is highly uncertain what
actual legislation may be enacted, and whether it would be adverse or beneficial to the Corporation or its
subsidiaries.
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
39
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.
17. 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:
IAS 7 Statement of Cash Flows (“IAS 7”)
As part of their disclosure initiative, the International Accounting Standards Board (“IASB”) has issued
amendments to IAS 7 requiring a reconciliation of liabilities arising from financing activities to enable
users of the financial statements to evaluate both cash flow and non-cash changes in the net debt of a
Company. The Corporation intends to adopt the amendments to IAS 7 in its consolidated financial
statements for the annual period beginning January 1, 2017.
IAS 12 Income Taxes (“IAS 12”)
In January 2016, the IASB has issued amendments to IAS 12 to provide clarification on the requirements
relating to the recognition of deferred tax assets for unrealized losses on debt instruments measured at fair
value. The Corporation intends to adopt the amendments to IAS 12 in its consolidated financial
statements for the annual period beginning January 1, 2017.
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. IFRS 15 will supersede the current revenue recognition guidance
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.
40
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.
IFRS 2 Share-Based Payments (“IFRS 2”)
In September 2016, the IASB issued amendments to IFRS 2. The amendments provide clarification on
how to account for certain types of share-based payment transactions. The Corporation intends to adopt
the amendments to IFRS 2 in its consolidated financial statements for the annual period beginning
January 1, 2018. The extent of the impact of the adoption of the amendments has not yet been determined.
41
Consolidated Financial Statements of
MEDICAL FACILITIES
CORPORATION
December 31, 2016 and 2015
(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 Income and 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 preparation ..................................................................................................................... 10
4. Acquisition of Prairie States Surgical Center ............................................................................... 10
5. Acquisition of Unity Medical and Surgical Hospital ...................................................................... 11
6. Purchase of Unity real estate through partnership ....................................................................... 13
7. Acquisition of Integrated Medical Delivery, L.L.C. ........................................................................ 13
8. Discontinued operation ................................................................................................................. 14
9. Property and equipment ............................................................................................................... 15
10. Goodwill and other intangibles ..................................................................................................... 16
11. Long-term debt ............................................................................................................................. 18
12. Convertible debentures ................................................................................................................ 19
13. Share capital ................................................................................................................................. 20
14. Non-controlling interest ................................................................................................................ 23
15. Net changes in non-cash working capital ..................................................................................... 25
16. Financial instruments and risk management ................................................................................ 25
17. Capital .......................................................................................................................................... 34
18. Employee future benefits .............................................................................................................. 34
19.
Income taxes ................................................................................................................................ 35
20.
Interest expense, net of interest income from continuing operations ........................................... 37
21. Loss (gain) on foreign currency .................................................................................................... 37
2
22. Related party transactions and balances ..................................................................................... 38
23. Commitments and contingencies ................................................................................................. 39
24. Share based compensation .......................................................................................................... 40
25. Significant accounting policies ..................................................................................................... 40
26. Use of judgments and estimates .................................................................................................. 52
3
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 controls and financial reporting matters. On the
recommendation of the Audit Committee, the consolidated financial statements are forwarded to the
Board of Directors for its approval.
“Britt T. Reynolds”
“Tyler C. Murphy”
Britt T. Reynolds
Chief Executive Officer
Tyler C. Murphy
Chief Financial Officer
Toronto, Canada
March 22, 2017
3
KPMG LLP
Bay Adelaide Centre
Suite 4600 Fax (416) 777-8818
Telephone (416) 777-8500
333 Bay Street
www.kpmg.ca
M5H 2S5
Toronto, ON
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, 2016 and December 31, 2015, the consolidated statements of
income and 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 as issued by the International Accounting Standards
Board, 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, 2016 and December 31, 2015, 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 22, 2017
Toronto, Canada
KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. KPMG Canada provides services to KPMG LLP.
MEDICAL FACILITIES CORPORATION
Consolidated Balance Sheets
(In thousands of U.S. dollars)
ASSETS
Current assets
Cash and cash equivalents
Restricted cash
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
Current portion of long-term debt
Total current liabilities
Non-current liabilities
Corporate credit facility
Long-term debt
Deferred income tax liabilities
Convertible debentures
Exchangeable interest liability
Total non-current liabilities
Total liabilities
Equity
Share capital
Contributed surplus
Deficit
Equity attributable to owners of the Corporation
Non-controlling interest
Total equity
Commitments and contingencies
TOTAL LIABILITIES AND EQUITY
Note
16.5.2
9
10.1
10.2
22.2
19
11
11
11
19
12
16.2
13
24
14
23
December 31,
2016
$
2015
$
51,014
6,437
8,569
61,058
6,252
6,011
139,341
1,613
15,712
94,893
136,920
102,427
1,555
353,120
492,461
2,168
21,609
20,572
202
20,818
65,369
47,750
56,094
-
32,102
77,034
212,980
278,349
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
397,522
181
(248,994)
148,709
65,403
398,166
-
(232,312)
165,854
48,828
214,112
214,682
492,461
382,952
The accompanying notes are an integral part of these consolidated financial statements.
5
MEDICAL FACILITIES CORPORATION
Consolidated Statements of Changes in Equity
(In thousands of U.S. dollars)
2016
Balance at January 1, 2016
Net income and comprehensive income
for the year
Share based compensation
Dividends to owners of the Corporation
Distributions to non-controlling interest
Acquisition of Unity Medical and
Surgical Hospital
Acquisition of Integrated Medical
Delivery, L.L.C.
Purchase of common shares under
normal course issuer bids
Balance at December 31, 2016
2015
Balance at January 1, 2015
Net income and comprehensive 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
24
5
7
13.3
13.3
Attributable to Owners of the
Corporation
Non-controlling
Interest
Total
Equity
Share
Capital
$
Contributed
Surplus
$
Deficit
$
Total
$
$
$
398,166
-
(232,312)
165,854
48,828
214,682
-
-
-
-
-
-
9,754
-
(26,436)
-
9,754
181
(26,436)
-
-
-
-
-
181
-
-
-
-
29,940
-
-
(32,058)
39,694
181
(26,436)
(32,058)
17,012
17,012
1,681
1,681
(644)
397,522
-
181
-
(248,994)
(644)
148,709
-
65,403
(644)
214,112
400,467
-
-
-
1,147
(3,448)
398,166
-
-
-
-
-
-
-
(252,110)
148,357
51,723
200,080
47,127
(27,329)
-
47,127
(27,329)
-
45,416
-
(48,311)
92,543
(27,329)
(48,311)
-
1,147
-
1,147
-
(232,312)
(3,448)
165,854
-
48,828
(3,448)
214,682
The accompanying notes are an integral part of these consolidated financial statements.
6
MEDICAL FACILITIES CORPORATION
Consolidated Statements of Income and 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 expenses
Depreciation of property and equipment
Amortization of other intangibles
Income from operations
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
Note
9
10.2
12
16.2
16.2
20
21
Years Ended
December 31,
2016
$
2015
$
339,472
308,778
95,774
99,632
53,362
9,255
13,376
80,223
84,810
44,995
8,909
15,149
271,399
234,086
68,073
74,692
1,488
15,353
8,616
4,258
(336)
29,379
(7,353)
(30,036)
9,172
3,024
4,987
(20,206)
Income before income taxes
38,694
94,898
Income tax expense (recovery)
19
(994)
24,719
Income for the period from continuing operations
39,688
70,179
Discontinued operation
Income for the period from discontinued operation, net of tax
8
6
22,364
Net income and comprehensive income for the year
39,694
92,543
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
14
13.2
13.2
13.2
13.2
9,754
29,940
39,694
47,127
45,416
92,543
$ 0.31
$ 0.30
$ 0.31
$ 0.30
$ 1.51
$ 0.79
$ 1.18
$ 0.53
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
Change in value of convertible debentures
Change in value of exchangeable interest liability
Loss (gain) on foreign currency
Gain on sale of assets
Income tax expense (recovery)
Share based compensation
Interest expense, net of interest income
Changes in non-cash operating working capital
Interest paid, net of received
Income and withholding taxes paid
Net cash provided by operating activities
Cash flows from investing activities
Purchase of property and equipment
Business combinations
Gross proceeds from the sale of Dakota Plains Surgical Center, LLP’s assets
included in discontinued operation
Redemption of (investment in) short-term and long-term bank investments
Net cash generated by (used in) investing activities
Cash flows from financing activities
Net proceeds from revolving credit facilities and issuance of notes payable
Repayments of notes payable at the Centers
Discharge of real estate loan at Dakota Plains Surgical Center, LLP
Distributions, return of capital and loan receivable from an associate
Investment in Black Hills Surgical Hospital, LLP by non-controlling interest
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 generated by (used in) financing activities
Increase (decrease) in cash and cash equivalents
Effect of exchange rate fluctuations on cash balances held
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
Investment in equity accounted investees
Note
9
10.2
22.2
12
16.2
21
8.1
19
24
15
9
4,5,7
8.2
7
22.2
14
13.3
12
21
22.2
The accompanying notes are an integral part of these consolidated financial statements.
8
Years Ended
December 31,
2016
$
2015
$
39,694
92,543
9,255
13,376
(123)
1,488
15,353
(336)
-
(994)
181
12,874
90,768
1,723
92,491
(12,874)
(1,327)
78,290
(43,704)
(33,260)
-
2,793
(74,171)
57,470
(4,016)
-
78
572
(32,058)
(26,375)
(644)
-
(4,973)
(854)
336
57,969
57,451
-
678
9,083
15,460
(135)
(7,353)
(30,036)
4,987
(20,953)
24,750
-
12,265
100,611
(1,517)
99,094
(12,266)
(6,588)
80,240
(7,385)
-
36,923
(111)
29,427
1,806
(3,565)
(3,157)
69
-
(48,311)
(27,754)
(3,448)
(33)
(84,393)
25,274
(8,614)
41,309
57,969
1,147
-
MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
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 seven limited liability entities, six of which own a specialty
hospital or an ambulatory surgery center (the “Centers”). 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 (note 8). On January 14, 2016, the Corporation acquired a 51% controlling interest in
Integrated Medical Delivery, L.L.C., a diversified healthcare service company that provides third-party
business solutions to healthcare entities (note 7). On September 23, 2016, the Corporation acquired an
indirect 62% controlling interest in Unity Medical and Surgical Hospital (note 5). On October 3, 2016,
Sioux Falls Specialty Hospital, LLP, one of the Corporation’s Centers, acquired 100% of Prairie States
Surgical Center, L.L.C., and integrated it into its operations (note 4).
The Corporation’s ownership interest in each of its operating subsidiaries is as follows:
Centers
Arkansas Surgical Hospital, L.L.C. (“ASH”)
Unity Medical and Surgical Hospital (“UMASH”)
Oklahoma Spine Hospital, LLC (“OSH”)
Black Hills Surgical Hospital, LLP (“BHSH”)
Sioux Falls Specialty Hospital, LLP (“SFSH”)
The Surgery Center of Newport Coast, LLC (“SCNC”)
Other
Integrated Medical Delivery, L.L.C. (“IMD”)
2.
STATEMENT OF COMPLIANCE
Location
North Little Rock, Arkansas
Mishawaka, Indiana
Oklahoma City, Oklahoma
Rapid City, South Dakota
Sioux Falls, South Dakota
Newport Beach, California
Ownership Interest
December 31,
2016
51.0%
62.0%
60.3%
54.2%
51.0%
51.0%
2015
51.0%
-
60.3%
54.2%
51.0%
51.0%
Oklahoma City, Oklahoma
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 25 to these consolidated financial statements.
These consolidated financial statements were approved for issue by the Corporation’s Board of
Directors on March 22, 2017.
9
MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
3.
BASIS OF PREPARATION
These consolidated financial statements include the accounts of the Corporation and its subsidiaries
and have been prepared on the historical cost basis except for certain financial instruments and share
based compensation, which are measured at fair value (note 25.15).
The Corporation’s consolidated 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.
4.
ACQUISITION OF PRAIRIE STATES SURGICAL CENTER
On October 3, 2016, Sioux Falls Specialty Hospital, LLP (“SFSH”) acquired 100% of Prairie States
Surgical Center, L.L.C. (“PSSC”) which owns and operates Prairie States Surgical Center located in
Sioux Falls, South Dakota. PSSC was acquired for a purchase price of $20,281, consisting of $4,309
consideration in cash and $15,972 of seller and other financing. Seller financing is required to be paid in
equal instalments over a period of five years, and included in long-term debt on the consolidated
balance sheet.
PSSC is an 8,000 square foot facility with two operating rooms focused on providing facilities for
orthopedic procedures, and has been integrated into the operations of SFSH. The transaction has been
accounted for as a business combination with the Corporation consolidating 100% of the operations as
at the acquisition date. The assets and liabilities of PSSC are included in the consolidated financial
statements through the consolidation of SFSH.
The purchase price allocation as at December 31, 2016 is as follows:
Inventory
Equipment
Goodwill
Intangible asset
Fair value of net assets acquired
$
142
1,030
17,909
1,200
20,281
10
MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
4.
ACQUISITION OF PRAIRIE STATES SURGICAL CENTER (Continued)
Other intangibles represent the value of a non-compete agreement with the physician-owners of PSSC
that will be amortized over an estimated useful life of 5 years. Approximately $142K of acquisition-
related costs have been recognized as an expense in the consolidated statement of income and
comprehensive income. The goodwill attributable to this acquisition includes the value of the workforce
acquired, the benefit of future revenue growth, opportunities to expand within the marketplace and other
key competitive advantages.
Had the acquisition of PSSC occurred as of January 1, 2016, the Corporation’s statement of income and
comprehensive income for the year ended December 31, 2016, would have included facility service
revenue of $7,787 and income from operations of $3,986, inclusive of pre-acquisition facility service
revenue of $5,497 and income from operations of $2,502.
In determining these amounts, management has assumed that the fair value adjustments, determined
provisionally, that arose on the acquisition date would have been the same if the acquisition had
occurred on January 1, 2016.
5.
ACQUISITION OF UNITY MEDICAL AND SURGICAL HOSPITAL
On September 23, 2016, the Corporation acquired an indirect 62.0% controlling interest in Unity Medical
and Surgical Hospital (“UMASH”), a medical and surgical hospital located in Mishawaka, Indiana for a
cash purchase price of $27,750, with funding from a draw on the Corporation’s credit facility. The
hospital's operations are 86.0% owned by Physician’s ASC Management LLC. ("PAM"). Under the terms
of the agreement, the Corporation purchased a 72.1% interest in PAM (representing an indirect 62.0%
ownership interest in UMASH). All but four percent of the remaining ownership interest in PAM can be
purchased over the three subsequent anniversaries of the initial closing, at a price to be determined by
the fair market value of the hospital at the end of the prior calendar year.
UMASH is a 50,000 square foot, 29-bed Medicare-certified facility with four surgical and two special
procedure suites focused on providing facilities for orthopedic, ophthalmology, podiatry, pain
management, and spine surgery procedures. The transaction has been accounted for as a business
combination with the Corporation consolidating 100% of the operations as at the acquisition date. The
assets and liabilities of UMASH are included in the consolidated financial statements.
11
MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
5.
ACQUISITION OF UNITY MEDICAL AND SURGICAL HOSPITAL (Continued)
The preliminary purchase price allocation as at December 31, 2016 is as follows:
Cash
Accounts receivable
Prepaid expenses and other
Property and equipment
Goodwill
Other intangibles
Accounts payable
Accrued liabilities and other liabilities
Long-term debt
Non-controlling interest
Fair value of net assets acquired
$
786
11,653
1,023
2,257
12,215
44,500
(3,358)
(8,444)
(15,870)
(17,012)
27,750
Other intangibles principally represent the values of the care network at UMASH that will be amortized
over estimated useful lives of 13-18 years. Approximately $315 of acquisition-related costs have been
recognized as an expense in the consolidated statement of income and comprehensive income. The
goodwill attributable to this acquisition includes the value of the workforce acquired, the benefit of future
revenue growth, opportunities to expand within the marketplace and other key competitive advantages.
The payment of $27,750 was settled in cash of $16,348 and payables to the seller of $11,402, which
was subsequently settled by year end.
The accounts receivable primarily represent facility service revenue receivable relating to the provision
of operating facilities and services to patients.
Changes have been made to the purchase price allocation versus the preliminary figures presented as
at September 30, 2016, further to a valuation of the intangibles and goodwill consisting of a decrease in
goodwill from $12,609 to $12,215, an increase in other intangible assets from $37,826 to $44,500, and
an increase in non-controlling interest from $10,732 to $17,012.
Had the acquisition of UMASH occurred as of January 1, 2016, the Corporation’s statement of income
and comprehensive income for the year ended December 31, 2016, would have included facility service
revenue of $40,796 and income from operations of $5,259, inclusive of pre-acquisition facility service
revenue of $26,593 and income from operations of $3,152.
In determining these amounts, management has assumed that the fair value adjustments, determined
provisionally, that arose on the acquisition date would have been the same if the acquisition had
occurred on January 1, 2016.
12
MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
6.
PURCHASE OF UNITY REAL ESTATE THROUGH PARTNERSHIP
On July 15, 2016, RRI Mishawaka Hospital LP (“RRIMH”) purchased real estate assets consisting of
UMASH’s underlying land and building for $27,387. RRIMH is a limited partnership in which the
Corporation has an 84% interest and the remaining 16% interest in the partnership is held directly and
indirectly by Rainier Realty Investments LP, a non-related third party. The Corporation consolidates the
results of operations and the financial position of this partnership in its consolidated financial statements.
The purchase of the real estate assets was funded solely by a loan from the Corporation. The
Corporation funded the loan from its available cash and a $20,000 draw on its corporate credit facility.
7.
ACQUISITION OF INTEGRATED MEDICAL DELIVERY, L.L.C.
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 business solutions to healthcare entities
such as physician practices, facilities, and insurance companies. The transaction has been accounted
for as a business combination with the Corporation consolidating 100% of the operations as at the
acquisition date. The assets and liabilities of IMD are included in the consolidated financial statements.
The final purchase price allocation is as follows:
Current assets, less current liabilities (including cash of $12)
Property and equipment
Goodwill
Long-term debt
Non-controlling interest
Fair value of net assets acquired
$
410
337
4,082
(1,398)
(1,681)
1,750
The goodwill attributable to this acquisition includes the value of the workforce acquired, the benefit of
future revenue growth and opportunities to expand within the marketplace.
13
MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
8.
DISCONTINUED OPERATION
On June 4, 2015, Dakota Plains Surgical Center, LLP (“DPSC”), the Corporation’s 65% owned
subsidiary, sold the assets related to the operation of its specialty hospital in Aberdeen, South Dakota,
and discharged encumbrances related to the assets sold for gross proceeds of $36,923, which were to
partially used to discharge the real estate loan of DPSC. The transaction was completed on
June 30, 2015.
8.1
Results of discontinued operation
The comparative statement of income and comprehensive income has been 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
Net income for the period from discontinued operation
8.2
Cash flows from discontinued operation
Net cash provided (used) by operating activities
Net cash generated by investing activities
Net cash used in financing activities
Net cash flow for the period
Years Ended
December 31,
2016
$
47
39
8
-
8
2
-
6
2015
$
6,213
4,701
1,512
70
1,442
31
20,953
22,364
Years Ended
December 31,
2016
$
(18)
-
(229)
(247)
2015
$
1,899
36,913
(17,033)
21,779
14
MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
9.
PROPERTY AND EQUIPMENT
Land and
Improvements
$
Construction
in Progress
$
Building and
Improvements
$
Equipment
and Furniture
$
Cost
Balance at January 1, 2015
Additions
Reclassifications
Disposals
Sale of DPSC’s assets
Balance at December 31, 2015
Additions
Disposals
Disposition of assets to MPREH
Purchase of IMD, UMASH and
PSSC assets
Balance at December 31, 2016
Accumulated Depreciation
Balance at January 1, 2015
Charged for the year
Disposals
Sale of DPSC’s assets
Balance at December 31, 2015
Charged for the year
Disposals
Balance at December 31, 2016
Carrying Amounts
At December 31, 2015
At December 31, 2016
5,422
925
-
-
(394)
5,953
1,359
-
-
7,312
(65)
(26)
-
-
(91)
(25)
-
(116)
5,862
7,196
2,561
2,160
(2,602)
-
-
2,119
2,786
(90)
-
4,815
-
-
-
-
-
-
-
64,096
238
1,916
-
(4,792)
61,458
35,421
(5)
(4,193)
1,116
93,797
(25,077)
(3,206)
-
1,849
(26,434)
(2,777)
15
(29,196)
52,582
4,061
686
(1,930)
(3,274)
52,125
4,138
(197)
(108)
2,508
58,466
(33,002)
(5,967)
1,930
2,914
(34,009)
(6,453)
277
(40,185)
Total
$
124,661
7,384
-
(1,930)
(8,460)
121,655
43,704
(292)
(4,301)
3,624
164,390
(58,144)
(9,255)
1,930
4,763
(60,534)
(9,255)
292
(69,497)
2,119
4,815
35,024
64,601
18,116
18,281
61,121
94,893
Included in the equipment and furniture for the years 2016 and 2015 is certain equipment under finance
lease agreements as follows:
Equipment
Less accumulated depreciation
Total
2016
$
7,952
(5,896)
2,056
2015
$
7,320
(4,336)
2,984
15
MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
10.
GOODWILL AND OTHER INTANGIBLES
10.1 Goodwill
The carrying amount of goodwill as at December 31, 2016 was $136,920 (2015: $102,714).
10.2 Other intangibles
Cost
Balance at January 1, 2015
Sale of DPSC’s assets
Balance at December 31, 2015
Purchase of UMASH assets
Purchase of PSSC assets
Balance at December 31, 2016
Accumulated Amortization
Balance at January 1, 2015
Amortization charges
Sale of DPSC’s assets
Balance at December 31, 2015
Amortization charges
Balance at December 31, 2016
Carrying Amounts
At December 31, 2015
At December 31, 2016
Hospital
Operating
Licenses
$
Medical
Charts and
Records
Care
Network
Trade
Names
Non-
Compete
$
$
$
$
1,714
(238)
1,476
1,100
-
2,576
(1,131)
(199)
238
(1,092)
(244)
(1,336)
384
1,240
7,981
(582)
7,399
200
-
7,599
(7,015)
(199)
582
(7,015)
(192)
(7,207)
206,127
(10,204)
195,923
43,200
-
239,123
(128,515)
(15,062)
7,861
(135,716)
(12,880)
(148,596)
9,826
(698)
9,128
-
-
9,128
-
-
-
-
-
-
384
392
60,207
90,527
9,128
9,128
Total
$
225,648
(11,722)
213,926
44,500
1,200
259,626
(137,044)
(15,460)
8,681
(143,823)
(13,376)
(157,199)
70,103
102,427
-
-
-
-
1,200
1,200
-
-
-
-
(60)
(60)
-
1,140
5
Amortization period (years)
5
5-10
10-15
N/A
(indefinite
life)
10.3
Impairment
The Corporation performed its annual impairment tests for goodwill and other intangibles with indefinite
lives as at December 31, 2016 and December 31, 2015 and determined that there was no impairment.
The Corporation identified seven cash generating units (“CGUs”) for which impairment testing was
performed. Management calculated the recoverable amount of each CGU by determining the fair value
less costs to sell. Management has estimated cost to dispose to be 1% of the fair value of the CGUs,
based on recent market data.
16
MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
10.
GOODWILL AND OTHER INTANGIBLES (Continued)
For the December 31, 2016 impairment test, enterprise value to EBITDA multiples of 7.0 to 9.5
(2015: 10.1 to 11.1) 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.
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.
We do not believe any reasonable possible change in the multiplier or other key assumptions would
cause the carrying value of the CGUs to exceed their recoverable amount.
The following amounts for goodwill and intangibles with indefinite useful lives were allocated to each of
the CGUs:
ASH
UMASH
OSH
BHSH
SFSH
SCNC
IMD
Years Ended December 31,
2016
$
17,911
12,215
18,232
31,244
60,896
2,265
4,082
2015
$
17,911
-
18,232
31,244
42,987
2,265
-
146,845
112,639
17
MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
11.
LONG-TERM DEBT
December 31,
Authorized
Balance
2016
Effective
Interest Rate
Maturity
Balance
2015
Effective
Interest Rate
%
-
-
3.0
-
-
-
-
-
-
4.3
-
2.84
3.0
3.0
-
2.97
-
2.85
5.1
-
-
5.7
-
2.3
Revolving credit facilities
ASH
UMASH
OSH
BHSH
SFSH
SFSH
SFSH
SCNC
$
4,000
4,000
6,350
6,000
7,000
4,235
3,500
2,500
$
-
4,000
2,750
%
3.5
3.8
Oct 31, 2021
Jan 5, 2018
$
-
-
LIBOR+2.6
Nov 4, 2019
4,500
-
LIBOR+1.3
Jul 31, 2017
4,101
3,077
312
LIBOR+1.0
LIBOR+1.0
LIBOR+1.1
Oct 1, 2017
Jun 30, 2017
May 1, 2017
-
LIBOR+3.5
Jul 31, 2017
-
-
-
-
-
4,500
37,585
14,240
Corporate credit facility
MFA
80,000
47,750
4.3
Dec 31, 2018
-
Notes payable
ASH
UMASH
BHSH
BHSH
BHSH
BHSH
BHSH
BHSH
SFSH
SFSH
SFSH
IMD
Capital leases
ASH
UMASH
SFSH
Less current portion
1,136
10,887
1,871
2,368
804
555
4,940
4,867
15,328
-
15,723
1,163
59,642
374
240
2,416
3,030
124,662
(20,818)
103,844
4.3
3.3
2.8
3.0
3.0
3.7
3.0
2.9
2.9
-
1.3
4.8
5.5
5.7
2.3
Oct 31, 2021
Dec 31, 2018
Sep 1, 2020
Aug 1, 2018
Aug 1, 2018
Dec 31, 2021
Dec 31, 2019
Jun 30, 2021
Dec 31, 2019
Oct 1, 2021
Jun 30, 2021
2018 – 2020
2018 – 2020
2016 – 2019
1,330
-
2,336
2,475
912
-
5,478
-
16,034
296
-
-
28,861
539
-
1,528
2,067
35,428
(7,848)
27,580
18
MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
11.
LONG-TERM DEBT (Continued)
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, 2016, the Centers were in
compliance with their covenants.
The following are the future maturities of long-term debt, including capital leases, for the years ending
December 31:
2017
2018
2019
2020
2021
Future maturities of long-term debt
12.
CONVERTIBLE DEBENTURES
$
20,818
65,605
25,202
4,548
8,489
124,662
issued,
the Corporation
in a public offering, Cdn$41,800 (US$42,042)
On December 21, 2012,
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.
19
MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
12.
CONVERTIBLE DEBENTURES (Continued)
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.
The Corporation’s normal course issuer bid for its convertible debentures was in effect from
December 30, 2014 to December 30, 2015. In 2015, the Corporation purchased Cdn$43 aggregate
principal amount of its outstanding convertible debentures for a total consideration of $33.
The following table represents changes in the convertible debentures for the years 2016 and 2015:
Balance at January 1, 2015
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
Increase in fair value of convertible debentures at market price
Balance at December 31, 2016
13.
SHARE CAPITAL
13.1 Share capital
$
38,000
(33)
(7,353)
30,614
1,488
32,102
The following table represents changes in the number and value of common shares issued and
outstanding for the years 2016 and 2015:
Balance at January 1, 2015
Common shares issued for acquisition of additional interest in OSH
Common shares purchased and cancelled under the terms of normal course issuer bids (note 13.3)
Balance at December 31, 2015
Common shares purchased and cancelled under the terms of normal course issuer bids (note 13.3)
Balance at December 31, 2016
Number of Common
Shares
31,329,598
84,447
(300,600)
31,113,445
(67,500)
31,045,945
$
400,467
1,147
(3,448)
398,166
(644)
397,522
20
MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
13.
SHARE CAPITAL (Continued)
13.2 Earnings per share
Basic earnings per share attributable to owners of the Corporation are calculated as follows:
Year Ended December 31,
2016
Year Ended December 31,
2015
Continuing
Operations
Discontinued
Operation
Total
Continuing
Operations
Discontinued
Operation
Total
$
9,750
4
9,754
37,018
10,109
47,127
31,050,084
31,050,084
31,050,084
31,287,313
31,287,313
31,287,313
Net income for the year
attributable to owners
of the Corporation
Divided by weighted
average number of
common shares
outstanding for the year
Basic earnings per share
attributable to owners
of the Corporation
$
0.31
-
0.31
1.18
0.32
1.51
21
MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
13.
SHARE CAPITAL (Continued)
Fully diluted earnings per share attributable to owners of the Corporation are calculated as follows:
Year Ended December 31,
2016
Year Ended December 31,
2015
Continuing
Operations
Discontinued
Operation
Total
Continuing
Operations
Discontinued
Operation
Total
$
9,750
-
-
-
-
$
9,750
4
-
-
-
-
4
9,754
37,018
10,109
47,127
-
-
-
-
(7,353)
1,419
(19,223)
9,172
-
-
-
-
(7,353)
1,419
(19,223)
9,172
9,754
21,033
10,109
31,142
31,050,084
-
31,050,084
31,287,313
-
31,287,313
-
-
1,775,000
32,825,084
-
-
-
-
-
-
2,185,478
-
2,185,478
-
5,892,069
1,775,000
-
32,825,084
39,364,860
0.30
0.53
-
-
-
-
5,892,069
-
39,364,860
0.79
share
$
0.30
(1) For the year ended December 31, 2016, the impact of convertible debentures, exchangeable interest liabilities were excluded from the
dilutive weighted average number of ordinary shares calculation because their effect would have been anti-dilutive.
22
Net income for the year
attributable to owners of
the Corporation
Decrease (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 year
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
Deemed to be issued as
share based
compensation
Weighted average number of
common shares(1)
Fully diluted earnings per
MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
13.
SHARE CAPITAL (Continued)
13.3 Normal course issuer bids
The Corporation’s current normal course issuer bid for up to 620,919 of its common shares, is in effect
from May 16, 2016 to May 15, 2017. During the year ended December 31, 2016, the Corporation
purchased 67,500 of its common shares for a total consideration of $644 from the open market. During
the year ended December 31, 2015, the Corporation purchased 300,600 of its common shares for
$3,448, under a previous normal course issuer bid.
The purchases under the bids are recorded in share capital. All common shares acquired under these
bids were cancelled.
14.
NON-CONTROLLING INTEREST
The following tables summarize financial information in respect of the non-controlling interest of each
Center, IMD and RRIMH. The summarized financial information below represents amounts before intra-
group eliminations.
December 31, 2016
Non-controlling interest
percentage
Current assets
Non-current assets
Current liabilities
Non-current liabilities
ASH UMASH
$
$
OSH
$
BHSH
$
SFSH
$
SCNC
$
IMD
$
RRIMH
$
44%
38%
35%
35%
35%
49%
49%
16%
10,840
6,109
8,492
1,922
20,682
1,936
8,876
24,526
14,339
3,538
5,342
2,968
Equity attributable to owners of
the Corporation
Non-controlling interest
3,660
2,875
(6,686)
(4,098)
6,219
3,348
Facility service revenue
Operating expenses
67,350
53,076
14,203
13,027
63,544
53,574
15,442
26,553
8,747
13,729
12,687
6,832
85,536
60,029
26,114
47,688
24,518
28,947
13,219
7,118
97,562
64,446
3,234
801
464
-
1,822
1,750
8,011
6,411
Net income attributable to owners
of the Corporation
8,000
729
6,481
16,580
21,526
816
6,286
14,286
447
1,176
3,490
9,971
8,927
25,507
11,590
33,116
784
1,600
1,329
266
431
1,163
-
-
5,708
5,051
335
322
657
483
27,064
547
27,265
(223)
(42)
1,077
1,342
(223)
(42)
(265)
Net income attributable to non-
controlling interest
Net income
Distributions to non-controlling
interest
Cash flows from operating
activities
Cash flows from investing
activities
Cash flows from financing
activities(1)
Net cash inflow (outflow)
6,887
-
3,654
9,100
11,340
1,006
-
-
15,826
(2,091)
12,710
28,248
33,739
2,162
739
601
(536)
103
(148)
(10,135)
(8,450)
(28)
(28)
(27,383)
(16,013)
(723)
8,656
6,668
(12,189)
373
(17,472)
641
(26,497)
(1,208)
(2,053)
81
(236)
475
27,265
483
(1) Cash flows from financing activities include distributions paid to the Corporation and the holders of the non-controlling interest.
23
MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
14.
NON-CONTROLLING INTEREST (Continued)
December 31, 2015
ASH
$
OSH
$
BHSH
SFSH
$
$
SCNC
$
Non-controlling interest percentage
44%
35%
35%
35%
49%
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
11,962
16,737
6,871
9,360
1,572
4,425
3,477
63,061
45,055
10,093
7,930
18,023
4,138
10,497
343
6,523
3,512
63,363
50,941
8,001
4,308
12,309
14,130
24,349
11,823
9,983
24,505
24,120
13,915
16,089
10,837
12,104
5,836
6,517
78,749
53,662
16,058
8,647
24,705
95,773
57,035
24,834
13,372
38,206
3,337
997
296
-
2,059
1,979
7,832
6,174
846
812
1,658
Distributions to non-controlling interest
7,582
4,575
8,551
12,845
841
Cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activities(1)
18,854
12,651
(907)
(823)
27,380
(3,993)
38,390
(1,342)
(16,134)
(12,720)
(25,316)
(37,802)
Net cash inflow (outflow)
1,813
(892)
(1,929)
(754)
2,457
(1,717)
(219)
521
(1) Cash flows from financing activities include distributions paid to the Corporation and the holders of the non-controlling interest.
14.1 Significant restrictions
With the exception of UMASH, the partnership or operating agreements governing each of the
respective Centers (each, a “Partnership Agreement”) in certain circumstances 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.
24
MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
15.
NET CHANGES IN NON-CASH WORKING CAPITAL
The net changes in non-cash working capital included in the statement of cash flows consist of the
following:
Accounts receivable
Supply inventory
Prepaid expenses and other
Accounts payable
Accrued liabilities
Net changes in non-cash working capital
Years Ended December 31,
2016
$
144
(79)
(692)
(1,008)
3,358
1,723
2015
$
(1,362)
(588)
(726)
3,843
(2,684)
(1,517)
16.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
16.1 Foreign exchange forward contracts
At December 31, 2016, and December 31, 2015, the Corporation did not hold any foreign exchange
forward contracts.
16.2 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.
25
MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
16.
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 four 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 13.2.
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, 2016 and December 31, 2015 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,
2016
5,886,925
US$ 77,034
Cdn$103,433
2015
5,932,340
US$ 61,681
Cdn$ 85,367
26
MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
16.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (Continued)
16.3 Fair values and classification of financial instruments
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, 2016 and December 31, 2015:
Financial assets
Fair value through profit or loss
Cash and cash equivalents
Restricted cash
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
Convertible debentures
Exchangeable interest liability
Other liabilities (carried at amortized cost)
Dividends payable
Accounts payable
Accrued liabilities
Long-term debt
December 31,
2016
$
51,014
6,437
-
8,569
1,613
61,058
1,555
32,102
77,034
2,168
21,609
20,572
124,662
2015
$
57,969
-
3,496
9,479
-
48,754
839
30,614
61,681
2,107
19,035
14,307
35,428
27
MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
16.
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 25.17). The following tables represent the fair value hierarchy of
the Corporation’s financial instruments that were recognized at fair value as of December 31, 2016 and
December 31, 2015. 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
Long Term Investments
Financial liabilities
Convertible debentures
Exchangeable interest liability
Total
Financial assets
Cash and cash equivalents
Short-term investments
Financial liabilities
Convertible debentures
Exchangeable interest liability
Total
Level 1
$
51,014
8,569
1,613
32,102
-
93,298
Level 1
$
57,969
3,496
30,614
-
92,079
December 31, 2016
Level 2
$
Level 3
$
-
-
-
-
77,034
77,034
-
-
-
-
-
-
December 31, 2015
Level 2
$
Level 3
$
-
-
-
61,681
61,681
-
-
-
-
-
Total
$
51,014
8,569
1,613
32,102
77,034
170,332
Total
$
57,969
3,496
30,614
61,681
153,760
16.4 Measurement of fair values
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
Exchangeable interest liability
Valuation Technique
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.
28
MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
16.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (Continued)
16.5 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.
16.5.1 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 the Audit Committee of the Board of
Directors. As at December 31, 2016, no foreign exchange forward 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
2016
$
(372)
372
2015
$
161
(161)
29
MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
16.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (Continued)
16.5.2 Credit Risk
The Corporation faces the following credit risks.
Revenue and Accounts Receivable
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,
(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 25.21).
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.
30
MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
16.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (Continued)
The table below summarizes the percentages of facility service revenue generated from and accounts
receivable balances with each primary third-party payor group in 2016 and 2015:
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)
2016
2015
Facility
Service
Revenue
by Payor
%
Accounts
Receivable at
December 31
by Payor
%
Facility
Service
Revenue
by Payor
%
Accounts
Receivable at
December 31
by Payor
%
28.7
35.1
8.0
19.7
8.5
100.0
13.4
34.7
8.3
28.9
14.7
27.5
32.5
10.4
18.7
10.9
100.0
100.0
13.2
28.3
14.6
22.5
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.
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, 2016 and December 31, 2015:
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
31
December 31,
2016
$
61,058
49,983
5,918
3,211
1,370
7,745
(7,169)
61,058
2015
$
48,754
39,888
4,364
2,275
2,435
7,526
(7,734)
48,754
MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
16.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (Continued)
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.
16.5.3 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, 2016
and December 31, 2015 was:
Facilities with fixed interest rates
Facilities with variable interest rates
Total
December 31,
2016
$
114,423
10,239
124,662
2015
$
61,542
4,500
66,042
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 $84 (2015: $13) 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.
32
MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
16.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (Continued)
16.5.4 Price Risk
The Corporation’s convertible debentures and exchangeable interest liability are measured based 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
and convertible debentures are quoted in Canadian dollars.
16.5.5 Liquidity Risk
The mandatory repayments under the credit facilities, notes payable, and other contractual obligations
and commitments
interest payments, on a non-discounted basis, as of
December 31, 2016, are as follows:
including expected
Contractual Obligations
Dividends payable
Accounts payable
Accrued liabilities
Income tax payable
Corporate credit facility
Centers’ 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, 2016
$
2,168
21,609
20,572
202
47,750
14,240
59,642
3,030
32,102
Future payments (including principal and interest)
Total
$
2,168
21,609
20,572
202
50,287
15,004
63,061
3,180
44,154
Less than
1 year
$
1-3 years
$
4-5 years
$
After
5 years
$
2,168
21,609
20,572
202
2,029
7,949
13,762
1,111
2,159
-
-
-
-
48,257
7,055
36,792
1,179
4,318
-
-
-
-
-
-
12,507
890
37,677
-
-
-
-
-
-
-
-
-
-
201,315
70,366
290,603
7,453
79,014
11,886
109,487
8,590
59,664
42,438
42,438
The $80,000 Corporate credit facility, which matures on December 31, 2018, had $32,250 undrawn as
at December 31, 2016.
The Corporation anticipates renewing, extending or replacing its revolving credit facilities which fall due
during 2017 and expects that cash flows from operations and working capital will be adequate to meet
future payments on other contractual obligations during 2017.
33
MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
17.
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 13.1), convertible debentures
(note 12) 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.
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 issue new shares or convertible debt. During the year ended December 31, 2016, the
Corporation
repurchase and cancellation
of 67,500 common shares under the normal course issuer bids for $644 (note 13.1). During the year
ended December 31, 2015, the Corporation repurchased and cancelled 300,600 of common shares for
$3,448 under the same program.
returned capital
to shareholders
through
the
18.
EMPLOYEE FUTURE BENEFITS
Benefits programs at the subsidiaries 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 2016, contributions made by the subsidiaries to such plans were $2,203
(2015: $1,476).
34
MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
19.
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 (recovery) from continuing operations
2016
$
675
(1,669)
(994)
2015
$
1,015
23,704
24,719
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
2016
$
475
(677)
(202)
2015
$
6,438
(7,287)
(849)
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 (recovery) from continuing operations
2016
$
%
2015
$
%
9,750
(994)
8,756
2,320
(1,129)
1,551
1,097
395
(92)
(5,136)
(994)
37,018
24,719
61,737
16,360
2,171
(1,067)
5,201
(1,948)
248
3,754
24,719
100.0
26.5
(12.9)
17.7
12.5
4.5
(1.1)
(58.7)
(11.3)
100.0
26.5
3.5
(1.7)
8.4
(3.2)
0.4
6.1
40.0
35
MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
19.
INCOME TAXES (Continued)
As of December 31, 2016, the Corporation had net operating loss carry forwards for Canadian tax
purposes totalling $49,536 that are scheduled to expire in the following years:
2028
2029
2030
2031
Net operating loss carry forwards
$
7,417
21,131
19,946
1,042
49,536
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, 2016, the Corporation has recognized deferred
income tax assets of $13,127 in respect of net operating loss carry forwards that will be offset against
future taxable income in the Canadian entity.
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
2016
$
1,354
2,326
6,218
9,910
14,493
34,301
(3,183)
(111)
(15,295)
(18,589)
15,712
2015
$
1,398
1,549
5,798
4,383
18,130
31,258
(3,666)
(110)
(13,445)
(17,221)
14,037
During the year, the Corporation recorded an additional $4,531 of deferred tax assets and a
corresponding recovery in the statement of income and comprehensive income relating to accumulated
immaterial prior period adjustments.
36
MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
20.
INTEREST EXPENSE, NET OF INTEREST INCOME FROM CONTINUING OPERATIONS
Interest expense, net of interest income, from continuing operations included in the statement of income
and comprehensive income consists of the following:
Interest expense at Centers’ level
Interest expense on convertible debentures
Interest expense at corporate level
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
21.
LOSS (GAIN) ON FOREIGN CURRENCY
2016
$
1,696
1,833
742
231
(25)
(219)
4,258
2015
$
1,144
1,930
-
277
(133)
(194)
3,024
Loss (gain) on foreign currency included in the statement of income and comprehensive income
consists of the following:
Realized loss on foreign exchange forward contracts which matured in the current period
Translation loss (gain) on cash balances denominated in Cdn$
Change in unrealized gain on foreign exchange forward contracts
Loss (gain) on foreign currency
2016
$
-
(336)
(336)
-
(336)
2015
$
6,475
2,139
8,614
(3,627)
4,987
37
MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
22.
RELATED PARTY TRANSACTIONS AND BALANCES
22.1 Related party transactions
Certain Centers routinely enter into transactions with related parties for provision of services relating to
the use of facilities and equipment. These parties are considered related as the Corporation has
significant influence over these entities. 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 each of 2016 and 2015, SFSH paid South Dakota Interventional Pain Institute,
LLC. (“SDIPI”) $659 for the use of a facility and related equipment. As of December 31, 2016, SFSH had
a balance payable to SDIPI of $39 (December 31, 2015: $41). As at December 30, 2016, Mountain
Plains Real Estate Holdings, LLC (“MPREH”), an entity over which the Corporation has significant
influence, entered into an operating lease with a wholly owned subsidiary of BHSH. Total lease
payments in 2016 were nil.
Key management and governance personnel are comprised of executive officers and the directors of
the Corporation. Fees were paid for information systems consulting to a vendor which was closely
related to a member of key management personnel for $6 and $7 for the years 2016 and 2015,
respectively.
22.2 Equity accounted investments
On December 23, 2016, $678 of net assets, consisting primarily of property of $4,325, $3,075 of long-
term debt, and $572 of non-controlling interest, were transferred from BHSH to a newly created entity,
MPREH, at carrying value. The Corporation owns a 54.22% equity interest in MPREH, but does not
control it as control is shared by three owners per MPREH’s operating agreement. The Corporation uses
the equity method to account for this investment which is valued at $678 as of December 31, 2016.
The Corporation owns a 32.0% equity interest in another associate, SDIPI. 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 at December 31,
2016 were $455 and $81, respectively (December 31, 2015: $391 and $107). The Corporation also has
a 0.35% ownership interest in an entity that holds an indirect interest in BHSH for a total investment of
$341 (December 31, 2015: $341), for which the investment is accounted for at cost in the consolidated
financial statements.
Together, the three investments comprise the ‘Other assets’ on the consolidated balance sheet.
38
MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
22.
RELATED PARTY TRANSACTIONS AND BALANCES (Continued)
22.3 Key management and governance compensation
Key management and governance compensation for the years 2016 and 2015 was as follows:
Salaries and other short-term employee benefits for executive officers
Director compensation
Total key management and governance compensation
2016
$
1,648
948
2,596
2015
$
1,913
1,014
2,927
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.
22.4 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 a non-controlling interest in SFSH is its Chief Executive Officer.
23.
COMMITMENTS AND CONTINGENCIES
23.1 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 and non-related parties.
23.2 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.
39
MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
24.
SHARE BASED COMPENSATION
At the Corporation’s Annual and Special Meeting of Shareholders held on May 12, 2016, shareholders
approved a grant of stock options to acquire 1,000,000 common shares of the Corporation to its Chief
Executive Officer. The grant was effective May 1, 2016, and the stock options are exercisable at
C$17.24 per share. On September 19, 2016, stock options to acquire 350,000 common shares of the
Corporations were granted to its Chief Development Officer, exercisable at $21.15 per share. On
November 21, 2016, stock options to acquire 425,000 common shares of the Corporations were granted
to its Executive Vice President Finance, who was appointed Chief Financial Officer on January 1, 2017,
exercisable at $17.98 per share. All three grants of the options (the “Options”) will vest after five years of
employment, subject to the Corporation’s maintenance of a dividend rate not less than the rate in effect
at the time of the grant date.
During the year ending at December 31, 2016, the Corporation recognized $181 relating to the Options
in salaries and benefits expense in the statement of income and comprehensive income. The grant date
fair value of the Options were measured based on the Black-Scholes model. Expected volatility is
estimated by considering historic average share price volatility. The inputs used in the measurement of
the fair values at the grant date of the share-based compensation plan are as follows:
Fair value of Options, grants and assumptions
Fair value at grant date
Share price at grant date
Exercise price
Expected volatility (weighted average volatility)
Option life (expected weighted average life)
Expected dividends
Risk-free rate
Q4 2016
Grants Issued
Q3 2016
Grants Issued
Q2 2016
Grants Issued
C$ 1.37
C$18.19
C$17.98
21.77%
5 years
6.18%
0.99%
C$ 2.00
C$21.57
C$21.15
21.95%
5 years
5.22%
0.73%
C$ 1.33
C$17.01
C$17.24
23.60%
5 years
6.61%
1.03%
25.
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.
25.1 Basis of measurement
These consolidated financial statements have been prepared on the historical cost basis except for
certain financial instruments, which are measured at fair value.
40
MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
25.
SIGNIFICANT ACCOUNTING POLICIES (Continued)
25.2
Functional and presentation currency
The function and presentation currency as presented in these financial statement are in U.S. dollars.
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.
25.3 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.
25.4 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 and comprehensive income.
41
MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
25.
SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 and
comprehensive income.
25.5 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.
Management of the Corporation has concluded that the operating segments of the Corporation meet the
criteria for aggregation pursuant to IFRS 8, Operating Segments 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 services 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.
25.6 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 income and comprehensive income.
42
MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
25.
SIGNIFICANT ACCOUNTING POLICIES (Continued)
25.7 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.
25.8 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.
25.9 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.
43
MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
25.
SIGNIFICANT ACCOUNTING POLICIES (Continued)
25.10 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.
25.11 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
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.
25.12 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.
25.13 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,
care networks and trade names. Other intangibles are stated at cost less accumulated amortization and
accumulated impairment losses, when applicable.
44
MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
25.
SIGNIFICANT ACCOUNTING POLICIES (Continued)
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
Non-compete agreements
Medical charts and records
Care networks
5 years
5 years
5-10 years
10-18 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.
25.14
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.
45
MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
25.
SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
25.15 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.
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, 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 financial assets are designated as loans and receivables and are carried
at amortized cost using the effective interest rate method.
(iv)
Other liabilities
Interest payable, dividends payable, accounts payable, accrued liabilities corporate credit facility and
long-term debt are designated as other liabilities and are carried at amortized cost using the effective
interest rate method.
46
MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
25.
SIGNIFICANT ACCOUNTING POLICIES (Continued)
25.16
Impairment of non-derivative financial assets
Financial assets not designated as FVTPL, including interests in equity accounted investees, are
assessed at each reporting date to determine whether there is objective evidence of impairment.
25.16.1 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 and comprehensive income.
25.16.2 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.
25.17 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.
47
MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
25.
SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
25.18 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.
25.19 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 a 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 and comprehensive income.
48
MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
25.
SIGNIFICANT ACCOUNTING POLICIES (Continued)
25.20 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 and comprehensive
income for the respective periods.
25.21 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. Facility 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. Revenues relating to IMD’s third party business solution service are included in facility
service revenue, and consist of fees for business services provided to healthcare entities, recorded as
services are provided and collection is reasonably assured.
25.22
Income taxes
Income tax expense (recovery) consists of current and deferred taxes. Income tax expense (recovery) is
recognized in the statement of income and 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.
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MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
25.
SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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.
25.23 Share based payments
The Corporation has an equity settled, share-based compensation plan, under which the entity receives
services from a key executive as consideration for the options of the Corporation. The fair value of the
services received in exchange for the grants of the options is recognized as an expense. The total
amount to be expensed is determined by reference to the fair value of the options granted.
Non-market vesting conditions are included in assumptions about the number of options that are
expected to vest. The total expense is recognized over the vesting period, which is the period over
which all of the specified vesting conditions are to be satisfied. When the options are exercised, the
Corporation issues new shares. The proceeds received, together with the amount recorded in
contributed surplus, are credited to share capital when the options are exercised.
The dilutive effect of outstanding options is reflected as additional share dilution in the computation of
fully diluted earnings per share.
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MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
25.
SIGNIFICANT ACCOUNTING POLICIES (Continued)
25.24 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:
25.24.1 IAS 7 Statement of Cash Flows
As part of their disclosure initiative, the IASB has issued amendments to IAS 7 Statement of Cash Flows
requiring a reconciliation of liabilities arising from financing activities to enable users of the financial
statements to evaluate both cash flow and non-cash changes in the net debt of a company. The
Corporation intends to adopt the amendments to IAS 7 in its consolidated financial statements for the
annual period beginning January 1, 2017.
25.24.2 IAS 12 Income Taxes
In January 2016, the IASB has issued amendments to IAS 12 Income Taxes to provide clarification on
the requirements relating to the recognition of deferred tax assets for unrealized losses on debt
instruments measured at fair value. The Corporation intends to adopt the amendments to IAS 12 in its
consolidated financial statements for the annual period beginning January 1, 2017.
25.24.3 IFRS 2 Share-Based Payments
In September 2016, the IASB issued amendments to IFRS 2 Share-Based Payments. The amendments
provide clarification on how to account for certain types of share-based payment transactions. The
Corporation intends to adopt the amendments to IFRS 2 in its consolidated financial statements for the
annual period beginning January 1, 2018.
25.24.4 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) in its financial statements for the annual period beginning on January 1, 2018.
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MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
25.
SIGNIFICANT ACCOUNTING POLICIES (Continued)
25.24.5 IFRS 15 Revenue from Contracts with Customers
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. IFRS 15 will supersede the current revenue recognition guidance 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.
25.24.6 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.
26.
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.
26.1
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 25.2), (ii) segment information (discussed in
note 25.5), (iii) discontinued operations (discussed in notes 8 and 25.6), (iv) recognition of deferred tax
assets and liabilities (discussed in notes 19 and 25.22).
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MEDICAL FACILITIES CORPORATION
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except per share amounts and where otherwise indicated)
For the years ended December 31, 2016 and 2015
26
USE OF JUDGMENTS AND ESTIMATES (Continued)
26.2 Estimates
Information about assumptions and estimation uncertainties that have a significant risk of resulting in a
material adjustment in the year ending December 31, 2016 is included in the following notes: (i) timing of
recognition of facility service revenue (discussed in note 25.21) and recovery of accounts receivable
(discussed in notes 16.5.2 and 25.9), (ii) valuation of supply inventory (discussed in note 25.10),
(iii) useful lives of property and equipment (note 25.11) and other intangibles (notes 10.2 and 25.13),
(iv) fair value measurements and valuation of financial instruments (discussed in notes 16 and 25.17),
(v) key assumptions regarding the valuation of acquired and disposed assets and liabilities, primarily
goodwill and other intangibles (discussed in notes 10.1 and 25.13), (vi) impairment test, including key
assumptions underlying the recoverable amounts of goodwill and other intangibles (discussed in
notes 10.3 and 25.14), (vii) provision for potential liabilities and contingencies and the assessment of the
likelihood and magnitude of outflow of resources (discussed in note 25.18) 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 19 and 25.22).
53