Toronto Stock Exchange Symbol: CLC.UN
MISSISSAUGA, ON, March 14 /CNW/ - CML HealthCare Income Fund (the "Fund"), (TSX: CLC.UN) today reported its financial results for the three and twelve-month periods ended December 31, 2006.
2006 Highlights
- Revenue increased 6.0% to $288.9 million from $272.6 million for the
year ended December 31, 2005
- Net earnings increased 16.1% to $92.4 million compared to
$79.6 million in 2005
- EBITDA(xx) increased 8.1% to $117.0 million compared to
$108.3 million in 2005
- The Fund generated distributable cash(x) of $98.8 million and
declared distributions (including payments to non-controlling
interest and Part VI.1 tax paid) totaling $85.1 million, representing
a payout ratio of 86.2%
- Increased annualized unitholder distributions from $0.9468 per unit
to $1.00 per unit, representing a 5.6% increase, effective as of the
Fund's May 2006 distribution
- Senior management team strengthened with the appointments of: Paul
Bristow as President and CEO; Tom Weber as CFO; and Cameron Duff as
Vice President, Corporate Development
- New three-year funding agreement for community based laboratory
services between the Ontario Association of Medical Laboratories
("OAML") and the Ontario Ministry of Health and Long-Term Care
("MOH")
- Completed acquisitions of seven medical imaging clinics in Ontario;
pending acquisition of three additional clinics in Alberta expected
to close in early 2007
"Our continued revenue growth and strong EBITDA(xx) margins demonstrate our commitment to growing our business while maintaining strong operating efficiencies and financial discipline," said Paul Bristow, President and CEO of CML HealthCare Income Fund. "Looking ahead, we remain focused on leveraging our core assets, improving our business processes and increasing our capacity utilization. Strategic initiatives in 2007 will include growing our non-capped revenues; driving physician cross-referrals between our Lab and Imaging services; elevating the national profile of CML HealthCare through an enhanced brand awareness program; and adopting new cost-effective technologies. Accretive acquisitions will also play a key role in our growth. We are developing an acquisition pipeline in medical imaging and evaluating opportunities to add complementary healthcare services to our network."
Financial Results
For the three months ended December 31, 2006, the Fund generated distributable cash(x) of $29.3 million, and declared distributions (including payments to non-controlling interest and Part VI.1 tax paid) totaling $21.7 million, representing a payout ratio of 74.2%. For the year ended December 31, 2006, the Fund generated distributable cash(x) of $98.8 million, and declared distributions (including payments to non-controlling interest and Part VI.1 tax paid) totaling $85.1 million, representing a payout ratio of 86.2%.
Revenue for the Fund in the fourth quarter of 2006 increased 4.2% to $72.0 million compared to revenue of $69.1 million in the fourth quarter of 2005. The Fund's increased revenue in the quarter reflects increased lab services funding from the Ontario Ministry of Health and Long-Term Care ("MOH"), as well additional funding as set out in the agreement, and organic growth of non-cap revenues. For the twelve months ended December 31, 2006, revenue for the Fund increased 6.0% to $288.9 million compared to $272.6 million for the year ended December 31, 2005. Increased revenue in 2006 resulted from: $2.5 million in previously unrecorded cap revenue representing the 2% retroactive cap increase from April 1, 2005, to December 31, 2005; a $5.8 million increase in MOH fiscal 2006 and fiscal 2007 cap revenues based on the new funding agreement; $1.1 million in additional funding as set out in the new MOH agreement for the period April 1, 2005, to December 31, 2005; $1.4 million in additional funding as set-out in the new MOH agreement for the period January 1, 2006, to December 31, 2006; a 2% price increase in certain professional fee codes; and organic growth of non-cap revenues.
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October 1, January 1,
2006 to 2006 to
Distributable cash(x) ($000s) December 31, December 31,
(unaudited) 2006 2006
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Cash flow from operating activities 30,109 98,942
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Normalizing adjustments to non-cash
working capital items(1) 486 4,909
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Discretionary/non-recurring expenses(2) 124 3,071
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Capital Expenditures:
Maintenance capital expenditures (2,178) (4,961)
Capital lease payments (285) (1,122)
Changes in maintenance capital expenditure
notional reserve 838 (417)
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Sub-total (1,625) (6,500)
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Part VI.1 tax adjustment(3) 194 1,889
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Cash available for distributions 29,288 102,311
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Non-recurring revenue(4) 0 (3,550)
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Distributable cash(x) 29,288 98,761
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Distributions to unitholders 21,375 79,647
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Payments to non-controlling interest 159 3,549
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Part VI.1 tax paid 194 1,889
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Total distributions/payments to non-controlling
interest and Part VI.1 tax paid 21,728 85,085
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Total payouts as a percentage of
distributable cash(x) 74.2% 86.2%
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(1) Comprised primarily of timing differences in respect of MOH cap
revenue receivables, interest payments on long-term debt and
corporate insurance. On a year to date basis, the amount also
includes the reversal of taxes in respect of non-recurring revenue.
(2) Comprised primarily of expenses paid in respect of a potential
acquisition of $2.1 million, professional expenses paid in respect of
non-recurring tax planning of $0.1 million during Q4 2006 and
$0.5 million for the year ended December 31, 2006. This amount also
includes a retirement bonus paid to the CEO of $0.5 million.
(3) Adjustment to normalize the income tax expense which would not be
payable if the Exchangeable Shares were converted to Trust units.
Refer to the table for corresponding inclusion of Part VI.1 tax paid
in total distributions/payments to non-controlling interest.
(4) The amount represents revenue recognized from the MOH relating to
2005.
Operating, general and administrative ("OG&A") expenses for the fourth quarter of 2006 were $45.6 million, or 63.3% of revenue, compared to OG&A expenses of $43.1 million, or 62.4% of revenue, for the comparable period in the prior year. Increased operating, general and administrative expenses resulted from an incremental, non-cash LTIP (Long Term Incentive Plan) expense and increased operating expenses in line with increased billings. OG&A expenses for the twelve months ended December 31, 2006 totaled $171.9 million or 59.5% of revenue, compared to $164.3 million or 60.3% of revenue in 2005. The increase in OG&A expenses for the year ended December 31, 2006, was driven primarily by increase in operating expenses (including salaries, professional fees and supplies) to support the increased billings, and $1.1 million in expenses related to the retirement of the former CEO.
Earnings Before Interest, Taxes, Depreciation, Amortization, Non-Controlling Interest, Other Expenses and Provisions (EBITDA)(xx) in the fourth quarter of 2006 totaled $26.4 million, or 36.7% of revenue, compared to EBITDA(xx) of $26.0 million, or 37.6% of revenue, for the fourth quarter of 2005. EBITDA(xx) for the year ended December 31, 2006, totaled $117.0 million or 40.5% of revenue, compared to EBITDA(xx) of $108.3 or 39.7% of revenue for the year ended December 31, 2005. The change in EBITDA(xx) for the year ended December 31, 2006, was primarily attributable to items discussed in the revenue and OG&A sections above.
The Fund's net earnings for the fourth quarter of 2006 increased 25.3% to $21.8 million or $0.27 per Fund unit (basic and diluted), compared to net earnings of $17.4 million or $0.22 per Fund unit (basic and diluted) in the fourth quarter of 2005. For the year ended December 31, 2006, the Fund's net earnings increased 16.1% to $92.4 million or $1.14 per Fund unit (basic and diluted), compared to $79.6 million or $1.00 per Fund unit (basic and diluted) for the year ended December 31, 2005. During 2006, the Fund incurred and expensed professional fees of $2.1 million in respect of a potential acquisition that was not completed.
As at December 31, 2006, the Fund had working capital of $72.9 million, including cash and cash equivalents of $70.7 million, compared to working capital of $68.6 million, including cash and cash equivalents of $68.2 million as at December 31, 2005. Long-term debt of the Fund, including the current portion, was $192.3 million as at December 31, 2006, compared to $193.4 million as at December 31, 2005.
As at December 31, 2006, 961,392 exchangeable shares of CML HealthCare Inc. were issued and outstanding (excluding those held by the Fund and its affiliates) and 85,681,012 Fund units were issued and outstanding. Subsequent to year end, all of the outstanding exchangeable shares of CML HealthCare Inc. were exchanged for Fund units on a one-for-one basis. There are now approximately 86.6 million Fund units issued and outstanding.
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Comparative Quarterly Financial Summary
($ millions, except per unit amounts)
(unaudited) Q4/06 Q4/05
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Revenue 72.0 69.1
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Operating, general and administrative 45.6 43.1
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EBITDA(xx) 26.4 26.0
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Amortization 0.9 0.5
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Provision for impairment of investments and
other assets - 1.7
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Interest 3.0 3.0
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Provision for income taxes 0.5 1.8
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Earnings before the following 22.0 19.0
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Non-controlling interest 0.2 1.6
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Net earnings for the period 21.8 17.4
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Basic and diluted earnings per unit 0.27 0.22
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On October 31, 2006 the Department of Finance (Canada) announced the "Tax Fairness Plan" whereby the income tax rules applicable to publicly traded trusts and partnerships will be significantly modified. In particular, certain income of (and distributions made by) these entities will be taxed in a manner similar to income earned by (and distributions made by) a corporation. These proposals, if adopted, will be effective for the 2007 taxation year with respect to trusts which commence public trading after October 31, 2006, but the application of the rules will be delayed to the 2011 taxation year with respect to trusts, such as CML HealthCare Income Fund, which were publicly traded prior to November 1, 2006. The Fund is considering this announcement and the possible impact of the proposed rules to the Fund. The proposed rules may adversely affect the marketability of the Fund's units and the ability of the Fund to undertake financings and acquisitions, and, at such time as the proposed rules apply to the Fund, the distributable cash of the Fund may be materially reduced. The Trustees of the Fund and senior management of CML HealthCare continue to monitor this development.
Notice of Conference Call
Management of CML HealthCare Income Fund will host a conference call today, March 14 at 10:00 am (EST) to discuss the Fund's 2006 year end financial results. A live audio webcast of the call will be available at www.cmlhealthcare.com. Webcast attendees are welcome to listen to the conference in real-time or on-demand at your convenience. A taped replay of the conference call will be available until March 21 at midnight at 1-877-289-8525 or 416-640-1917, reference number 21219834No..
(x) Distributable cash of the Fund is not a Canadian generally accepted
accounting principle ("GAAP") measure but is generally used by
Canadian open-ended trusts as an indicator of financial performance
and should not be seen as a measure of liquidity or a substitute
for comparable metrics prepared in accordance with GAAP. The Fund's
distributable cash may differ from similar calculations as reported
by other similar entities and, accordingly, may not be comparable
to distributable cash as reported by such entities.
(xx) EBITDA is not a recognized measure under Canadian generally accepted
accounting principles (GAAP). Management believes that in addition
to net income, EBITDA is a useful supplemental measure as it
provides investors with an indication of the Fund's performance.
Investors should be cautioned, however, that EBITDA should not be
construed as an alternative to net income. The Fund's method of
calculating EBITDA may differ from other companies' or income
trusts' and, accordingly, EBITDA may not be comparable to measures
used by other companies or income trusts.
Caution concerning forward-looking statements
---------------------------------------------
Statements made in this news release, other than those concerning historical financial information, may be forward-looking and therefore subject to various risks and uncertainties. Some forward-looking statements may be identified by words like "may", "will", "anticipate", "estimate", "expect", "intend", or "continue" or the negative thereof or similar variations. Readers are cautioned not to place undue reliance on such statements, as actual results may differ materially from those expressed or implied in such statements. Factors that could cause results to vary include, but are not limited to: dependence on government-based revenues; pending and proposed legislative or regulatory developments including the impact of changes in laws, regulations and the enforcement thereof; intensifying competition from established competitors and new entrants in the businesses in which we operate; technological change; interest rate fluctuations and general economic conditions; insurance coverage of sufficient scope to satisfy any liability claims; fluctuations in operating results; dependence on our operating subsidiary to pay its interest obligations; fluctuations in cash distributions and capital investment; management of credit, market, liquidity and funding and operational risks; judicial judgments and legal proceedings; our ability to complete strategic acquisitions and to integrate our acquisitions successfully; changes in accounting policies and methods we use to report our financial condition, including uncertainties associated with critical accounting assumptions and estimates; operational and infrastructure risks including possible equipment failure and performance of information technology systems; fluctuations in total patient referrals; loss of services of key senior management personnel; other factors that may affect future growth and results including, timely development and introduction of new products and services; changes in our estimates relating to reserves and allowances; future sales of units; changes in tax laws; technological changes and obsolescence, natural disasters, the possible impact on our businesses from public health emergencies, international conflicts and other developments including those relating to terrorism; and our success in anticipating and managing the foregoing risks.
We caution that the foregoing list of factors is not exhaustive and that when reviewing our forward-looking statements, investors and others should refer to the "Risk Factors" section of the Fund's Annual Information Form, the "Risks and Uncertainties" and other sections of our Management's Discussion and Analysis of Operating Results and Financial Position and our other periodic filings with Canadian securities regulatory authorities. All forward-looking statements presented herein should be considered in conjunction with such filings. The Fund does not undertake to update any forward-looking statements; such statements speak only as of the date made.
About CML HealthCare Income Fund
CML HealthCare Income Fund is an unincorporated open-ended trust that owns CML HealthCare Inc., one of Canada's largest healthcare services businesses. CML is a leading provider of laboratory testing services in Ontario and the largest private provider of medical imaging services in Canada. CML HealthCare Income Fund is publicly traded on the Toronto Stock Exchange under the symbol "CLC.UN" and has approximately 86.6 million units outstanding. To reach CML HealthCare Income Fund via the worldwide web log on to www.cmlhealthcare.com.
CML Healthcare Income Fund
Consolidated Balance Sheets
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(in thousands of dollars) December 31, December 31,
2006 2005
$ $
ASSETS (note 7)
Current assets
Cash and cash equivalents 70,715 68,178
Accounts receivable 29,772 27,590
Income taxes receivable 3,088 2,487
Other current assets 2,097 1,778
Future income taxes (note 12) 1,383 1,113
Due from related parties (note 14) 123 56
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107,178 101,202
Property and equipment (note 5) 23,318 19,375
Licences 491,980 430,538
Goodwill 195,437 153,678
Investments and other assets (note 6) 1,551 1,261
Restricted cash (note 7) 912 912
--------------------------
Total Assets 820,376 706,966
--------------------------
--------------------------
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities 26,022 25,231
Distributions payable (note 10) 7,125 6,284
Current portion of long-term debt (note 7) 1,180 1,122
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34,327 32,637
Long-term debt (note 7) 191,138 192,318
Future income taxes (note 12) 69,848 60,994
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Total Liabilities 295,313 285,949
--------------------------
--------------------------
Non-controlling interest (notes 3 and 4) 7,902 9,622
UNITHOLDERS' EQUITY
Trust units (note 8) 500,636 407,654
Retained earnings (note 8) 16,525 3,741
--------------------------
517,161 411,395
--------------------------
Total Liabilities and Unitholders' equity 820,376 706,966
--------------------------
--------------------------
Contingencies and commitments (note 11)
The accompanying notes are an integral part of these consolidated
financial statements.
Approved by the Board of Trustees
John D. Mull, M.D., F.R.C.P.(C) Stephen R. Wiseman, C.A.
Chairman Trustee
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CML Healthcare Income Fund
Consolidated Statements of Earnings
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(in thousands of dollars,
except for per unit amounts) Year ended Year ended
December 31, December 31,
2006 2005
$ $
Revenue (notes 2, 16 and 18) 288,894 272,605
--------------------------
Expenses
Operating, general and administrative (note 14) 171,883 164,345
Amortization of property and equipment 3,275 2,830
Other expenses (note 17) 2,113 -
--------------------------
177,271 167,175
--------------------------
Income before the undernoted 111,623 105,430
Provision for (recovery of) impairment of
investments and other assets (note 6) (553) 1,733
Interest expense
Long-term debt 11,452 11,414
--------------------------
Earnings before income taxes 100,724 92,283
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Provision for income taxes (note 12)
Current taxes 3,186 2,534
Future taxes (1,286) 3,194
--------------------------
1,900 5,728
Earnings before the following 98,824 86,555
Non-controlling interest (notes 3 and 4) 6,393 6,947
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Net earnings for the year 92,431 79,608
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Basic and diluted earnings per unit (note 9) 1.14 1.00
The accompanying notes are an integral part of these consolidated
financial statements.
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CML Healthcare Income Fund
Consolidated Statements of Retained Earnings (Deficit)
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(in thousands of dollars) Year ended Year ended
December 31, December 31,
2006 2005
$ $
Retained earnings - Beginning of year
as previously reported 3,741 1,321
Change in accounting policy (note 3) - (1,775)
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Retained earnings (deficit) - Beginning of
year as restated 3,741 (454)
Distributions declared during the
year to unitholders (note 10) (79,647) (75,413)
Net earnings for the year 92,431 79,608
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Retained earnings - End of year 16,525 3,741
--------------------------
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The accompanying notes are an integral part of these consolidated
financial statements.
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CML Healthcare Income Fund
Consolidated Statements of Cash Flows
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(in thousands of dollars)
Year ended Year ended
December 31, December 31,
2006 2005
$ $
Cash provided by (used in)
Operating activities
Earnings from continuing operations 92,431 79,608
Items not affecting cash
Amortization of property and equipment 3,275 2,830
Long-term incentive plan expense 2,092 1,648
Non-cash interest expense 210 210
Provision for (recovery of) impairment of
investments and other assets (553) 1,733
Future income taxes (1,286) 3,194
Non-controlling interest 6,393 6,947
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102,562 96,170
Net change in non-cash working capital
items (note 15) (3,620) 6,362
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98,942 102,532
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Investing activities
Proceeds of investments and other assets 553 -
Purchase of property and equipment (6,116) (3,913)
Deposit paid for future acquisition (500) 152
Acquisition of licences (375) (361)
Business acquisitions (net of cash
acquired of $205) (4,461) -
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(10,899) (4,122)
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Financing activities
Principal repayment of long-term debt (1,122) (1,147)
Distributions paid (78,806) (75,412)
Payments to non-controlling interest (note 10) (3,549) (4,394)
Treasury units acquired (notes 2 and 8) (1,962) (1,250)
Decrease (increase) in due from
related parties - net (67) 773
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(85,506) (81,430)
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Increase in cash and cash equivalents 2,537 16,980
Cash and cash equivalents, beginning of year 68,178 51,198
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Cash and cash equivalents, end of year 70,715 68,178
--------------------------
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Supplementary information
Interest paid $ 11,242 $ 11,193
Income taxes paid $ 7,218 $ 5,648
The accompanying notes are an integral part of these consolidated
financial statements.
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CML Healthcare Income Fund
Notes to Consolidated Financial Statements
December 31, 2006 and December 31, 2005
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1 Organization and nature of operations
The CML Healthcare Income Fund (the "Fund") is a trust established
under the laws of the Province of Ontario pursuant to a declaration
of trust dated January 16, 2004. The Fund was created to invest in
common shares and $729,207,000 of 12% unsecured subordinated notes of
CML Healthcare Inc. ("CML"). Through its wholly-owned subsidiaries,
the Fund provides medical laboratory services in Ontario and medical
imaging services in the Provinces of Ontario, Quebec, Manitoba,
Alberta and British Columbia.
2 Summary of significant accounting policies
These consolidated financial statements have been prepared in
accordance with Canadian generally accepted accounting principles
(Canadian GAAP).
Basis of consolidation
These consolidated financial statements include the accounts of the
Fund and its subsidiaries and variable interest entities where the
Fund is exposed to the expected losses or returns. Subsidiaries that
are acquired during the year are consolidated from their respective
dates of acquisition. The purchase method is used to account for
business combinations. Intercompany transactions and balances are
eliminated on consolidation.
Significant accounting policies used in the preparation of these
consolidated financial statements are as follows:
Variable interest entity
On July 18, 2005, the Fund created a Trust, administered by a third
party, to act as trustee for the Fund's Long-Term Incentive Plan
("LTIP"). During 2006, the Fund paid $1,962,000 (2005 - $1,250,000)
to the trust for exceeding certain 2005 defined distributable cash
threshold amounts, subsequent to which the trustee acquired
135,000 units (2005 - 87,254 units) of the Fund on the open market.
The Fund units held by the trust will be distributed to the employees
in accordance with the terms of the LTIP. As of December 31, 2006,
109,416 units (2005 - 43,631 units) of the Fund that had vested were
distributed to the employees.
The Trust is considered a variable interest entity. The Fund holds a
variable interest in the trust and has determined that it is the
primary beneficiary of the trust and, therefore, the Fund has
consolidated the trust in accordance with The Canadian Institute of
Chartered Accountants' ("CICA") Accounting Guideline 15
"Consolidation of Variable Interest Entities". The Fund has not
guaranteed the value of the units held by the trust should the market
value of the Fund's units decrease from the value at which the trust
acquired the units. The Fund units held by the trust have been
classified as treasury units in these consolidated financial
statements. Distributions on the Fund units are paid to employees and
recorded as compensation expense when declared.
Translation of foreign currencies
The functional currency of the Fund's subsidiaries is the Canadian
dollar. Revenues and expenses of the Fund and its Canadian
subsidiaries arising from foreign currency transactions are
translated into Canadian dollars using the exchange rate in effect at
the transaction date. Monetary assets and liabilities are translated
using the rate in effect at the balance sheet dates. Related exchange
gains and losses are included in the determination of earnings.
Use of estimates
The preparation of the consolidated financial statements requires
management to make estimates and assumptions that could affect the
reported amounts of assets and liabilities and the related
disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting periods presented. Actual results could
materially differ from the estimates and assumptions.
Cash and cash equivalents
Cash and cash equivalents are defined as cash and short-term deposits
with original maturities of three months or less.
Property and equipment
Property and equipment are recorded at cost, less accumulated
amortization. Amortization is computed using the declining balance
method and applies the following rates estimated to amortize the cost
over the useful lives of the assets or lease terms.
Laboratory and diagnostic equipment 7% to 20%
Computer equipment 20%
Computer software 33.3%
Furniture and fixtures 10%
Leasehold improvements 20%
Maintenance and repair costs are expensed as incurred.
Government assistance
Government assistance received for the purchase of diagnostic
equipment is accounted for as a reduction in the cost of the related
diagnostic equipment.
Goodwill and licences
Goodwill represents the excess of the costs of the investment in
acquired businesses over the fair value of the underlying tangible
and identifiable intangible net assets acquired. The Fund's licences
are intangible assets with indefinite lives. The licences enable the
Fund to perform health care diagnostic services in Canada. In
accordance with the requirements of CICA handbook section 3062,
Goodwill and Other Intangible Assets, the Fund does not amortize
goodwill or indefinite-lived licences but subjects goodwill and
indefinite-lived licences to an annual impairment test, or earlier,
when circumstances indicate an impairment may exist. The need for any
write-down of the goodwill and licences due to an impairment in their
value is based on the assessment of the fair value of the individual
business units and the related goodwill and licences. Any write-down
of goodwill and licences arising from an impairment in value is
recorded in the period in which the impairment is identified.
Impairment of long-lived assets
The Fund periodically reviews the useful lives and the carrying
values of its long-lived assets. The Fund reviews for impairment in
long-lived assets whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be
recoverable. If the sum of the undiscounted expected future cash
flows expected to result from the use and eventual disposition of an
asset is less than its carrying amount, it is considered to be
impaired. An impairment loss is measured at the amount by which the
carrying amount of the asset exceeds its fair value, which is
estimated as the expected future cash flows discounted at a rate
proportionate with the risks associated with the recovery of the
asset.
Investments
Long-term investments are recorded at cost and are written down to
their estimated recoverable amount if there is evidence of
impairment.
Revenues
Revenues are recorded as laboratory and imaging services are provided
to customers.
The vast majority of the Fund's laboratory services revenue is earned
from the Ontario Ministry of Health and Long-Term Care ("MOH"). This
revenue is recognized as services are performed, based on the
industry cap funding agreement with the MOH.
Laboratory revenue is recognized at the lower of corporate cap (pro
rated on a monthly basis) and amounts based on services performed.
The MOH has set certain limits on healthcare expenditures and set
graduated limits on the amounts reimbursed for clinical laboratory
services. To the extent that fees subject to a corporate cap are paid
to private laboratories, and exceed the set limits, amounts received
will have to be reimbursed. In addition, certain revenues under the
corporate cap are not known until the MOH completes its annual
industry reconciliation. Each year, the repayment amounts or
additional revenues, if any, are not determined until after the
completion of the fiscal year end of the Province of Ontario, which
is March 31.
The Fund has used the latest available information in estimating the
amount of fees received that will have to be reimbursed. Assumptions
were made with respect to the amount of reimbursement required and
the volume and type of laboratory tests referred to the Fund. It is
possible that changes in future conditions in the near term could
require a change in the amount to be reimbursed, or received, and
such changes could be material.
Income taxes
The fund legal entity is a unit trust for income tax purposes and, as
such, the fund legal entity is only taxable on taxable income not
distributed to unitholders. As substantially all taxable income of
the fund legal entity is distributed to unitholders, no provision for
income taxes has been made in respect of earnings of the fund legal
entity.
On December 21, 2006, the Minister of Finance of Canada released
draft legislation relating to the federal income taxation of publicly
traded income trusts commencing with the taxation years ending on or
after 2011. If enacted, the Fund will be subject to income taxes on
income earned from investments in its subsidiaries beginning in 2011.
The Fund's subsidiaries follow the asset and liability method of
accounting for income taxes whereby future income tax assets and
liabilities are recognized based on the differences between the bases
of assets and liabilities used for financial and income tax purposes.
Future income tax assets are recognized only to the extent that
management determines that it is more likely than not that the future
income tax assets will be realized. Future income tax assets and
liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment or substantive enactment. The income
tax expense or benefit is the income tax payable or receivable for
the year, plus or minus the change in future income tax assets and
liabilities during the period.
Stock-based compensation
The Fund has adopted the CICA handbook section 3870, "Stock-Based
Compensation and Other Stock-Based Payments". This standard requires
the recognition of compensation expense for fair value of grants of
stock, stock options and other equity instruments to employees
subsequent to January 1, 2002.
3 Change in accounting policy
In January 2005, the Emerging Issues Committee issued EIC 151,
Exchangeable Securities Issued by Subsidiaries of Income Trusts. The
EIC was further clarified during February 2005. EIC 151 requires
that, in certain circumstances such as those pertaining to the Fund,
exchangeable shares issued by a subsidiary of an income trust be
presented as non-controlling interest in the subsidiary and not as
part of unitholders' equity. In accordance with the transitional
provisions of EIC 151, during the quarter ended June 30, 2005, the
Fund retroactively restated the consolidated financial statements to
reclassify the exchangeable shares of CML Healthcare Inc. from
unitholders' equity to non-controlling interest and to apply fair
value accounting to the conversions of exchangeable shares into units
of the Fund.
The effect of this change in accounting policy on the consolidated
balance sheet as at January 1, 2005 was as follows:
Balance as
previously Balance as
reported Adjustment restated
(in thousands of dollars) $ $ $
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Opening retained earnings
(deficit) 1,321 (1,775) (454)
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4 Acquisition of non-controlling interest
Each exchangeable share of CML HealthCare Inc has the same economic
rights (including the right to receive dividends on the exchangeable
shares, and voting rights) with respect to the Fund as the Units of
the Fund. In addition, holders of exchangeable shares have the right
to exchange their exchangeable shares for Units.
During 2006, 5,988,196 exchangeable shares (2005 - 57,600) of CML
HealthCare Inc. were converted to 5,988,196 units of the Fund
(2005 - 57,600). The conversion of the exchangeable shares has been
accounted for as a step acquisition and has resulted in a reduction
of the non-controlling interest. The 5,988,196 Units of the Fund were
valued at $93,392,000 (2005 - 786,000)
This amount less the excess of the purchase price over the carrying
value of the non-controlling interest of $4,564,000 (2005 - $44,000)
was allocated as follows:
Year ended Year ended
December 31, December 31,
2006 2005
(in thousands of dollars) $ $
Licences 57,624 448
Goodwill 40,748 378
Future tax liability (9,544) (84)
--------------------------
$ 88,828 742
--------------------------
--------------------------
As at December 31, 2006, 961,392 (December 31, 2005 - 6,949,588)
exchangeable shares of CML Healthcare Inc. are issued and outstanding
(excluding those held by the Fund and its affiliates).
5 Property and equipment
December 31,
2006
----------------------------------------
Accumulated
Cost Amortization Net
(in thousands of dollars) $ $ $
Laboratory and diagnostic
equipment 35,502 19,060 16,442
Computer equipment 7,833 5,655 2,178
Computer software 2,162 1,598 564
Furniture and fixtures 2,288 1,707 581
Leasehold improvements 8,848 5,295 3,553
- -
----------------------------------------
56,633 33,315 23,318
----------------------------------------
----------------------------------------
December 31,
2005
----------------------------------------
Accumulated
Cost Amortization Net
(in thousands of dollars) $ $ $
Laboratory and diagnostic
equipment 30,797 16,830 13,967
Computer equipment 6,526 5,342 1,184
Computer software 1,838 1,503 335
Furniture and fixtures 2,224 1,656 568
Leasehold improvements 8,030 4,709 3,321
----------------------------------------
49,415 30,040 19,375
----------------------------------------
----------------------------------------
Included in laboratory and diagnostic equipment is equipment under
capital lease with a cost of $9,874,000 (2005 - $9,874,000 ) and a
net book value of $3,500,000 (2005 - $4,357,000 ). During the year
ended December 31, 2006, the Fund received $1, 300,000 from the MOH
for expenditures on diagnostic et.
6 Investments and other assets
December 31, December 31,
2006 2005
(in thousands of dollars) $ $
Deferred financing fees (net of
accumulated amortization of $508
(December 31, 2005 - $298)) (note 7) 964 1,174
Deposit on business acquisition (note 19) 500 -
Other assets 87 87
--------------------------
1,551 1,261
--------------------------
--------------------------
The Fund held a note receivable bearing interest at 6.0% per annum,
repayable through quarterly payments of principal and interest of
$112,000 (US$96,000) and was due June 1, 2007. During 2005, the Fund
determined that the note receivable was impaired due to the
uncertainty of the amounts and timing of repayments of this note
receivable. Accordingly, an impairment charge of $1,733,000 was
recorded to reduce the carrying value of the note receivable to its
estimated fair value of $nil. During 2006, the Fund recovered
$553,000 in respect of this note receivable upon settlement.
The Fund holds 1,900,000 common shares of Genetic Diagnostic Inc. at
December 31, 2006 and 2005. The amount of this investment is
$2,750,000 and is accounted for on the cost basis of accounting.
During the period ended December 31, 2004, a provision of $2,750,000
was recorded against the investment in Genetic Diagnostic Inc.
7 Long-term debt
December 31, December 31,
2006 2005
(in thousands of dollars) $ $
Senior secured notes(a) 190,000 190,000
Obligations under capital lease due in
monthly payments through 2008 2,318 3,440
--------------------------
192,318 193,440
Less current portion of long-term debt 1,180 1,122
--------------------------
191,138 192,318
--------------------------
--------------------------
a) On August 6, 2004, the Fund issued $190,000,000 of senior secured
notes to a syndicate of institutional investors in Canada and the
United States. The senior secured notes bear a fixed interest rate
of 5.754%, payable semi-annually and in arrears. The $190,000,000
principal is fully due and payable on August 6, 2011.
The Fund paid fees of $1,472,000 in respect of the senior secured
notes. These financing fees have been deferred and are being
amortized over the seven-year term of the notes.
The notes are secured by:
i) a first security interest over all assets of the Fund subject
to permitted liens;
ii) a leasehold mortgage over property;
iii) a share pledge agreement in respect of all of the issued and
outstanding shares of each subsidiary owned by the Fund, other
than inactive subsidiaries;
iv) an assignment of all intellectual property owned by the Fund;
and
v) an assignment of all laboratory licences owned by the Fund to
the extent permitted by law and provided that such assignment
would not result in a default or revocation thereof.
The Fund is required to maintain an amount of $912,000 on deposit to
support the Ontario MRI/CT clinics.
The effective rate of interest for the long-term debt outstanding
during 2006 was 5.74% (2005 - 5.74%).
The minimum principal repayments required in the next five years and
thereafter are as follows:
(in thousands of dollars) $
2007 1,180
2008 1,138
2009 -
2010 -
2011 and thereafter 190,000
-------------
192,318
-------------
-------------
8 Unitholders' equity
The authorized capital of the Fund consists of an unlimited amount of
trust units. Under the Arrangement, shareholders of CML transferred
their common shares, directly or indirectly, to the Fund and received
either four units of the Fund, or four exchangeable shares of CML
AcquisitionCo, a wholly-owned subsidiary of the Fund. Exchangeable
shares can be converted at the option of the holder on a one-to-one
basis for units of the Fund. Any exchangeable shares still held
(other than by the Fund) as of February 23, 2007 will be exchanged
into one unit of the Fund on that date. In addition, if on any date,
the aggregate number of issued and outstanding exchangeable shares is
less than 7,409,000, then on that date or any date thereafter, the
Fund has the option to convert these exchangeable shares into a
corresponding number of units of the Fund.
The following is a summary of changes in unitholders' equity from
January 1, 2005 to December 31, 2006
(in thousands) Trust Units Treasury Units Net Units
Number $ Number $ Number $
January 1,
2005 79,635 407,492 - - 79,635 407,492
Exchangeable
Shares
exchanged
for trust
units 58 786 58 786
Trust units
acquired 87 1,250 (87) (1,250)
Trust units
distributed
to employees (43) (626) 43 626
------------------------------------------------------
December 31,
2005 79,693 408,278 44 624 79,649 407,654
------------------------------------------------------
Trust units
acquired 135 1,962 (135) (1,962)
Trust units
distributed
to employees (109) (1,552) 109 1,552
Exchangeable
shares
exchanged
for trust
units (note 4) 5,988 93,392 - - 5,988 93,392
------------------------------------------------------
December 31,
2006 85,681 501,669 70 1,034 85,611 500,636
------------------------------------------------------
------------------------------------------------------
Long-Term Incentive Plan
Effective February 23, 2004, the Fund created a Long-Term Incentive
Plan "LTIP" for certain employees of the Fund. Pursuant to the LTIP,
the Fund pays to the Trust amounts for exceeding certain defined
distributable cash threshold amounts, as defined in the agreement,
over the base distribution on an annual basis of $1.00 per unit. The
Trust purchases units of the Fund in the open market on behalf of
eligible employees. The units will be transferred to the employees
over a three-year vesting period commencing November 30, each year.
On July 18, 2005, the Fund created a Trust, administered by a third
party, to act as trustee for the Fund's Long-Term Incentive Plan
("LTIP"). During 2006, the Fund paid $1,962,000 ($1,250,000 in 2005)
to the trust for exceeding certain 2005 defined distributable cash
threshold amounts, subsequent to which the trustee acquired 135,000
units (87,254 units in 2005) of the Fund on the open market. The
Fund units held by the trust will be distributed to the employees in
accordance with the terms of the LTIP. As of December 31, 2006,
109,416 units (2005 - 43,631 units) of the Fund that had vested
were distributed to the employees. In addition, the Fund paid
$280,000 to settle an LTIP liability in cash rather than units of the
Fund.
As at December 31, 2006, the Fund has recorded a liability of
$1,670,000 (2005 -$1,410,000) relating to the LTIP and recognized
compensation expense of $2,092,000 (2005 - $1,648,000) in respect of
this LTIP.
Phantom unit plan
The Fund has a phantom unit plan that provides for the granting of
stock appreciation rights ("SARs") to directors and certain employees
(the "participants"). The SARs provide the holder with the
opportunity to earn a cash benefit equal to the fair market value of
the Fund's trust units less the price at which the SARs were issued.
Compensation expense is measured based on the market price of the
Fund's units at the end of each reporting period and recognized as an
expense over the vesting period. The SARs outstanding under the plan
have been granted at the average closing price of the Fund's trust
units five days prior to the date of grant and vest at the end of the
three-year period.
During the year, the Fund granted 430,000 and 40,000 SARs which vest
on August 11, 2009 and September 7, 2009, respectively. The
participants will be entitled to a cash payment equal to the
difference between the quoted market value of the Fund units and
$14.97 and $14.95 respectively, the average market value of a Fund
unit for the five days prior to the date of grant.
As the market value of a Fund unit was $13.95 at the end of the year
was below grant value, no compensation cost has been recognized in
the financial statements for the year ended December 31, 2006.
Retained earnings
The following is a summary of the accumulated earnings and
accumulated distributions:
December 31, December 31,
2006 2005
(in thousands of dollars) $ $
Accumulated earnings 419,291 326,860
Accumulated distributions (402,766) (323,119)
--------------------------
Retained earnings 16,525 3,741
--------------------------
--------------------------
9 Earnings per unit
Earnings per unit is calculated using the weighted average number of
units outstanding, including the treasury units. The weighted average
number of units outstanding for the year-ended December 31, 2006 was
81,174,108 (2005 - 79,677,719).
Diluted earnings per share reflects the effect of the conversion of
the exchangeable shares of CML Healthcare Inc. for units of the Fund.
The following table reconciles the basic and diluted weighted average
number of Fund units outstanding and basic and diluted earnings per
unit:
Adjustments
for
Basic conversions
earnings of Diluted
(in thousands of dollars, per exchangeable earnings per
except per unit amounts) Fund unit shares Fund unit
Year ended December 31, 2006
Net earnings for the period $ 92,431 $ 6,393 $ 98,824
Earnings per Fund unit $ 1.14 $ - $ 1.14
Weighted average number of
Fund units outstanding 81,174,108 5,468,296 86,642,404
Year ended December 31, 2005
Net earnings for the year $ 79,608 $ 6,947 $ 86,555
Earnings per Fund unit $ 1.00 $ - $ 1.00
Weighted average number of
Fund units outstanding 79,677,719 6,949,588 86,627,307
10 Distributions and payments to non-controlling interest declared
During the year ended December 31, 2006, the Fund declared total
distributions to unitholders of $79,647,000 and total dividends to
non-controlling interest of $3,549,000. The amounts and record dates
of distributions and payments were as follows:
(in thousands of dollars, except per unit and per share amounts)
Trust Units Non-controlling interest
Amount Amount
Record Date $ per Unit $ per Share
---------------------------------------------------------------------
January 31, 2006 6,285 0.0789 365 0.0526
February 28, 2006 6,285 0.0789 365 0.0526
March 31, 2006 6,285 0.0789 365 0.0526
April 30, 2006 6,285 0.0789 365 0.0526
May 31, 2006 6,627 0.0833 386 0.0556
June 30, 2006 6,627 0.0833 386 0.0556
July 30, 2006 6,626 0.0833 386 0.0556
August 31, 2006 6,626 0.0833 386 0.0556
September 30, 2006 6,626 0.0833 386 0.0556
October 31, 2006 7,125 0.0833 53 0.0556
November 30, 2006 7,125 0.0833 53 0.0556
December 31, 2006 7,125 0.0833 53 0.0556
---------------------------------------------------------------------
79,647 0.9820 3,549 0.6552
---------------------------------------------------------------------
---------------------------------------------------------------------
During the year ended December 31, 2005, the Fund declared total
distributions to unitholders of $75,413,000 and total dividends to
non-controlling interest of $4,394,000. The amounts and record dates
of distributions and payments were as follows:
(in thousands of dollars, except per unit and per share amounts)
Trust Units Non-controlling interest
Amount Amount
Record Date $ per Unit $ per Share
---------------------------------------------------------------------
January 31, 2005 6,283 0.0789 368 0.0526
February 28, 2005 6,286 0.0789 366 0.0526
March 31, 2005 6,287 0.0789 366 0.0526
April 30, 2005 6,287 0.0789 366 0.0526
May 31, 2005 6,287 0.0789 366 0.0526
June 30, 2005 6,287 0.0789 366 0.0526
July 30, 2005 6,288 0.0789 366 0.0526
August 31, 2005 6,281 0.0789 366 0.0526
September 30, 2005 6,281 0.0789 366 0.0526
October 31, 2005 6,281 0.0789 366 0.0526
November 30, 2005 6,281 0.0789 366 0.0526
December 31, 2005 6,284 0.0789 366 0.0526
---------------------------------------------------------------------
75,413 0.9468 4,394 0.6312
---------------------------------------------------------------------
---------------------------------------------------------------------
11 Contingencies and commitments
Minimum lease commitments
Minimum lease commitments under operating leases with respect to
laboratory and diagnostic equipment and premises for each of the next
five years and thereafter are as follows:
(in thousands of dollars) $
2007 17,151
2008 11,836
2009 5,508
2010 3,963
2011 2,070
Thereafter 5,208
-------------
45,736
-------------
-------------
Legal proceedings
Various lawsuits and claims in the normal course of business are
pending against the Fund. It is not possible to determine the merits
of certain claims or to estimate the possible financial liability, if
any, to the Fund. Accordingly, no provision has been made for these
claims in these consolidated financial statements.
12 Income taxes
The effective income tax rate on consolidated earnings is influenced
by items such as non-taxable income and non-deductible expenses:
Year-ended Year-ended
December 31, December 31,
2006 2005
(in thousands of dollars) $ $
Combined Canadian federal and provincial
income tax at statutory rate of 36.12%
(2005- 36.12%) 36,382 33,333
Increase (decrease) in statutory income
tax resulting from the following:
Fund income not taxable (28,295) (26,975)
Change in enacted income tax rates (6,271) -
Non-deductible expenses and other 84 (630)
--------------------------
Provision for income taxes 1,900 5,728
--------------------------
--------------------------
Future income tax assets (liabilities) of the Fund are as follows:
December 31, December 31,
2006 2005
(in thousands of dollars) $ $
Differences in property and equipment and
licences asset bases (68,380) (64,246)
Capital leases 800 1,242
Accounting reserves not deducted for tax 1,383 1,059
Capital and non-capital loss carryforwards 971 5,147
Other 327 1,537
--------------------------
(64,899) (55,261)
Valuation allowance (3,566) (4,620)
--------------------------
(68,465) (59,881)
--------------------------
--------------------------
Future income tax asset 1,383 1,113
Future income tax liability (69,848) (60,994)
--------------------------
(68,465) (59,881)
--------------------------
--------------------------
The Fund has $1,579,000 in non-capital loss carryforwards as at
December 31, 2006 (12,874,000 in 2005), which are available to reduce
future years' taxable income. These loss carryforwards expire in
varying amounts from 2007 to 2016. The Fund also has $2,218,000 of
capital losses (2,750,000 in 2005), which can be used to offset
future capital gains and which do not expire.
A valuation allowance of $3,160,000 was primarily established in
respect of certain future tax assets of a prior acquisition. The
realization in the future of the benefit from these future assets
will result in a reduction of licenses of the acquired company. The
balance of the valuation allowance has been recorded to reduce the
net benefit recorded in the financial statements relating to certain
capital losses.
13 Financial instruments
Credit risk exposures
Financial instruments that potentially subject the Fund to credit
risk consist principally of cash and cash equivalents and accounts
receivable. The Fund places its cash with high credit quality
financial institutions. Credit risk with respect to accounts
receivable is limited, as the majority of the receivable balance is
due from the MOH and other government bodies.
Interest rate exposures
The Fund's long-term debt of $190,000,000 has a fixed interest rate.
Accordingly, the fair value of the long-term debt will vary with
changes in interest rates.
Fair values of financial assets and liabilities
The fair values of cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities, amounts due from related
parties, and distributions payable approximate their carrying amounts
included in the consolidated balance sheets, due to the relatively
short period of maturity of the instruments.
The fair value of the capital lease obligations approximate their
carrying values.
The fair value of long-term debt is estimated to be $197,298,000
($193,000,000 in 2005) based on current interest rates adjusted for
the Fund's credit rating. There is no formal market for the long-term
debt and, therefore, the estimated fair market value may not be
representative of the aggregate fair value of the securities.
14 Related party balances and transactions
Due from related parties balance comprises the following:
December 31, December 31,
2006 2005
(in thousands of dollars) $ $
Cipher(a) 123 56
--------------------------
123 56
--------------------------
--------------------------
a) On February 23, 2004, CML entered into an administrative services
agreement with Cipher Pharmaceuticals Inc. "Cipher". Under this
agreement, CML is to provide certain general and administrative
services to Cipher including investor relations services,
securities compliance, and certain administrative services. The
other advances are amounts due from Cipher and its wholly-owned
subsidiaries, in respect of the provision of administrative
services by CML and certain other reimbursements to CML. During
2006, CML charged Cipher $125,000 (12-month period ended
December 31, 2005 - $171,000) in accordance with the
administration agreement between CML and Cipher.
b) In the normal course of business, the Fund leases facilities at
market rates from companies that are subject to significant
influence or are controlled by a unitholder and trustee of the
Fund. Rent expense for the year ended December 31, 2006 of
$1,151,000 (2005 - $1,328,000) relating to these leased
facilities, measured at the exchange amount, as agreed to between
the parties, has been included in operating, general and
administrative expenses.
c) On October 2, 2006, at the request of CML, the former CEO caused
the exercise of retraction rights with respect to the Exchangeable
Shares that were held by his personal holding company. The Fund
exercised its right to purchase the 5,973,196 Exchangeable Shares
held by this company in consideration for 5,973,196 Units.
In addition, during the year, the Fund paid a retirement bonus of
$450,000 to the former CEO.
15 Statement of cash flows
December 31, December 31,
2006 2005
(in thousands of dollars) $ $
Net change in non-cash working capital
items comprises
Accounts receivable (1,963) 579
Other current assets (319) 100
Accounts payable and accrued liabilities (737) 1,493
Income taxes receivable (601) 4,190
--------------------------
(3,620) 6,362
--------------------------
--------------------------
16 Revenue
For the period ended December 31, 2006, revenue from a major customer
accounted for 87% (December 31, 2005 -90%) of the Fund's total
revenues.
17 Other Expenses
During the year, the fund incurred and expensed professional fees of
$2,113,000 in in respect of a potential acquisition that was not
completed.
18 Industry cap agreement
On March 29, 2006, a new industry cap agreement was signed with the
Ministry of Health and Long-Term Care ("MOH") which provides for an
increase in the Fund's share of the funding of approximately
$2,500,000 for the period of April 1, 2005 to December 31, 2005. This
revenue has been recognized in the three-month period ended March 31,
2006. In addition to base cap increases, the agreement provides
additional funding if the industry meets certain conditions. The
industry has met these conditions for the MOH fiscal year ended
March 31, 2006 and accordingly the Fund has recorded the maximum
amount of available additional revenue of $1,400,000, of which
$1,100,000 relates to the year-ended December 31, 2005.
During the fiscal year-ended December 31, 2006, the Fund recognized
revenue of $1,100,000 in respect of the $4,800,000 additional funding
available for the MOH year ending March 31, 2007. Due to the inherent
uncertainties and the limited information on industry conditions
available at the time these financial statements were prepared,
further additional funding has not been recorded during the fiscal
year-ended December 31, 2006. Revenue recognized during the year
ended December 31, 2006 is based on management's best estimate of its
share of the additional funding earned in the period based on
information currently available.
19 Business Acquisitions
On July 11, 2006, CML acquired GTA Nuclear Cardiology Limited
("GTA"), a nuclear medicine imaging clinic in Toronto, Ontario. GTA
is a nuclear medicine facility located in central Toronto. On
October 2, 2006, CML acquired First Medical X-Ray and UltraSound Ltd
("First Medical"), a multi-modality medical imaging clinic in
Ontario. First Medical operates a multi-modality clinic consisting of
x-ray, ultrasound, mammography, fluoroscopy and bone densitometry. On
December 4, 2006, CML purchased certain assets of Westminster Imaging
and Associates Inc ("Westminster"), a multi-modality clinic based in
Ontario. On December 21, 2006, CML acquired four Ontario-based
medical clinics from Belex Management Limited.
The total cash consideration paid for these acquisitions was
$4,666,000. The purchase price relating to these acquisition was
allocated as follows:
Total for the Year-ended
December 31, 2006
(in thousands of dollars) $
Licences 3,443
Goodwill 1,011
Future tax liabilities (449)
Future tax assets 123
Property and equipment 1,102
Working capital items (769)
Cash 205
---------------------------------------------------------------------
Net assets acquired and cash consideration paid 4,666
---------------------------------------------------------------------
---------------------------------------------------------------------
Each of the acquisitions have been accounted for by the purchase
method, with results from operations included in earnings from the
date of acquisition. The purchase price has been allocated to the
assets acquired and liabilities assumed based on management's best
estimate of the fair values.
In addition, during 2006, the Fund has made a deposit on one business
acquisition in the amount of $500,000, which is expected to be
completed in early 2007.
20 Comparative figures
Certain comparative figures have been reclassified to conform to the
current year's financial statement presentation.
21 Subsequent Events
Subsequent to year end, the 961,392 of outstanding Exchangeable
Shares were exchanged for Units on a one-for-one basis as required by
the Exchangeable Share provisions. The conversion of the Exchangeable
Shares will be accounted for as a step acquisition and will result in
a reduction of non-controlling interest. The excess of the purchase
price over the carrying value of the non-controlling interest will be
allocated to licences, goodwill and future tax liability. The fair
value of the 961,392 units of the Fund is approximately $13,728,000.
%SEDAR: 00020333E
