Toronto Stock Exchange Symbol: CLC.UN
MISSISSAUGA, ON, March 15 /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, 2005.
2005 Highlights
- Revenue increased to $272.6 million from $271.4 million for the
12 months ended December 31, 2004
- EBITDA(xx) totaled $108.3 million compared to $113.0 million for the
12 months ended December 31, 2004
- The Fund generated distributable cash(x) of $97.1 million and
declared distributions (including payments to non-controlling
interest and Part VI.1 tax paid) totaling $82.0 million,
representing a payout ratio of 84.4%
- Appointment of Paul Bristow as President and Chief Operating Officer
- Appointment of Tom Weber as Chief Financial Officer
"We are pleased to report continued steady revenue growth and strong
EBITDA margins of approximately 40% for 2005, while operating under terms of
the existing funding agreement for our lab services business. We expect a
decision from the Ontario Ministry of Health concerning a new funding
agreement for lab services in the near term and will announce any developments
as soon as possible," said Dr. John Mull, Chairman and CEO of CML Healthcare
Income Fund. "Looking ahead, our growth strategy will continue to focus on
expanding our laboratory services and medical imaging businesses, and on
opportunities to broaden our diagnostic testing services, while maintaining
our strong operating margins. At the core of our growth strategy are
fundamental value drivers that we are well positioned to capitalize on; these
include: leveraging our core assets, improving business processes, and
maximizing capacity utilization. We look forward to pursuing our growth
strategy supported by our recently strengthened senior management team and our
strong balance sheet."
Financial Results
Concurrent with the Plan of Arrangement which resulted in the creation of
the Fund on February 23, 2004, the Fund's fiscal year-end was changed from
September 30 to December 31. As a result, the Fund's 2004 fiscal year included
five quarters from October 1, 2003 to December 31, 2004. Due to the change in
its fiscal year-end, the Fund's 2005 fourth quarter financial results are
presented in comparison to the corresponding three-month period ended
December 31, 2004, and the Fund's financial results for the twelve months
ended December 31, 2005 are presented in comparison to the Fund's financial
results for the fifteen months ended December 31, 2004 ("fiscal 2004").
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 company 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 financial statements to reclassify
the exchangeable shares from unitholders' equity to non-controlling interest
and apply fair value accounting to the conversions of exchangeable shares to
units of the Fund. There is no cash impact on the Fund resulting from the
adoption of EIC 151 provisions.
During the fourth quarter, the Fund generated distributable cash(x) of
$23.8 million, and declared distributions (including payments to non-
controlling interest and Part VI.1 tax paid) totaling $20.5 million,
representing 85.9% of normalized cash available for distributions. The Fund
paid distributions to unitholders totaling $18.8 million and dividends to
non-controlling interest (exchangeable shareholders) and Part VI.1 tax thereon
totaling $1.6 million, during the fourth quarter of 2005.
The Fund generated distributable cash totaling $97.1 million in 2005, of
which it has declared total distributions to unitholders of $75.4 million and
total dividends to non-controlling interest and Part VI.1 tax thereon of
$6.6 million, representing 84.4% of normalized cash available for
distributions.
<<
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October 1, January 1,
2005 to 2005 to
Distributable cash(x) ($000s) December 31, December 31,
(unaudited) 2005 2005
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Cash flow from operating activities from
continuing operations 25,146 102,532
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Add: normalizing items in working capital(1) 1,201 471
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Less: non-recurring revenue(2) (1,422) (1,971)
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Add: non-recurring expenses(3) 0 378
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Part VI.1 tax adjustment(4) 549 2,198
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Less: capital expenditures
Cash (2,411) (3,913)
Capital lease payments (271) (1,147)
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Normalized cash from operations before reserves 22,792 98,548
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Less: change in capital expenditure reserve 1,057 (1,440)
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Normalized cash available for distributions 23,849 97,108
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Distributions to unitholders 18,846 75,413
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Payments to non-controlling interest 1,098 4,394
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Part VI.1 tax paid 549 2,198
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Total distributions/payments to non-controlling
interest and Part VI.1 tax paid 20,493 82,005
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Total payouts as a percentage of cash available
for distribution 85.9% 84.4%
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--------------------------------
(1) Comprised primarily of timing differences related to interest
payments on long term debt and MOH holdbacks.
(2) Non-recurring revenue from MOH recorded in Q2 2005 as a result of
2% price increase retroactive to April 1, 2004 and in Q4 2005 as a
result of one time funding entitlements.
(3) Retroactive increase in professional fee expenses as a result of
MOH 2% price increase recorded in Q2 2005.
(4) Adjustment to normalize income tax expense which would not be payable
if the Exchangeable Shares were converted to Trust units. Refer to
the following table for corresponding inclusion of Part VI.1 tax paid
in total distributions/payments to non-controlling interest.
Included in distributable cash is $5.8 million of tax refunds pertaining
to fiscal 2004 received during the third quarter of fiscal 2005. Excluding the
net impact of these tax refunds, the Fund's total payout as a percentage of
cash available for distribution would have been 89.8% for the twelve-month
period ended December 31, 2005.
For the fourth quarter of 2005, revenue for the Fund decreased to
$69.1 million from revenue of $72.9 million in the three months ended
December, 2004. The Fund's decrease in revenue in the fourth quarter of 2005
resulted primarily from non-recurring funding entitlements that were
recognized in the fourth quarter of 2004. For the twelve months ended
December 31, 2005 revenue for the Fund totaled $272.6 million, compared to
$335.7 million for fiscal 2004 and $271.4 million for the twelve months ended
December 31, 2004. Increased revenue in 2005 compared to the twelve month
period ended December 31, 2004 resulted from growth in non-cap revenue, an
increase in cap revenue based on the Ontario Ministry of Health ("MOH") fiscal
2004 final reconciliation, and a 2% price increase in certain professional fee
codes effective April 1, 2005, largely offset by $5.8 million of non-recurring
funding entitlements which were recognized by CML in fiscal 2004.
Operating, general and administrative expenses for the fourth quarter of
2005 were $43.1 million, or 62.4% of revenue, compared to operating, general
and administrative expenses of $41.2 million, or 56.5% of revenue, for the
comparable period in the prior year. Increased operating, general and
administrative expenses for the three months ended December 31, 2005 resulted
from a provision associated with a legal dispute and an incremental, non-cash
LTIP (Long Term Incentive Plan) expense recognized in the fourth quarter of
2005. Operating, general and administrative expenses for the twelve months
ended December 31, 2005 totaled $164.3 million or 60.3% of revenue, compared
to operating, general and administrative expenses of $198.6 million or 59.2%
of revenue for fiscal 2004 and $158.4 million or 58.4% of revenue for the
twelve months ended December 31, 2004. Increased operating, general and
administrative expenses in 2005 compared to the twelve month period ended
December 31, 2004 resulted from an incremental non-cash LTIP expense in 2005
and increased operating expenses in line with increased billings.
Earnings Before Interest, Taxes, Depreciation, Amortization, Other
Expenses and Provisions (EBITDA)(xx) in the fourth quarter of 2005 totaled
$26.0 million, or 37.6% of revenue, compared to EBITDA of $31.7 million, or
43.5% of revenue, for the three months ended December 31, 2004. EBITDA and
EBITDA margin declined slightly in the fourth quarter of 2005 consistent with
the decrease in revenue and as a result of a provision associated with a legal
dispute and an incremental non-cash LTIP expense in 2005. For the twelve
months ended December 31, 2005 EBITDA for the Fund totaled $108.3 million or
39.7% of revenue, compared to EBITDA of $137.0 million or 40.8% of revenue,
for fiscal 2004 and $113.0 million or 41.6% of revenue, for the twelve months
ended December 31, 2004. Decreased EBITDA and EBITDA margin in 2005 compared
to the twelve month period ended December 31, 2004 resulted from items
discussed in the revenue and operating, general and administrative paragraphs
above.
As at December 31, 2005, the Fund had working capital of $68.6 million
including cash and cash equivalents of $68.2 million, compared to working
capital of $61.8 million including cash and cash equivalents of $51.2 million
as at December 31, 2004. Long-term debt of the Fund, including the current
portion, was $193.4 million as at December 31, 2005, compared to
$194.6 million as at December 31, 2004.
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Comparative Quarterly Financial Summary Q4/05 Q5/04
($ millions, except three-months three-months
per unit amounts) ended Dec.31, ended Dec.31,
(unaudited) 2005 2004
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Revenue 69.1 72.9
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Operating, general and administrative 43.1 41.2
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EBITDA(xx) 26.0 31.7
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Amortization 0.5 0.8
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Provision for impairment of investments and
other assets 1.7 0.0
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Interest 3.0 2.8
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Provision for income taxes 1.8 4.2
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Earnings before the following 19.0 23.9
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Non-controlling interest 1.6 1.8
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Net earnings for the period 17.4 22.1
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Basic and diluted earnings per unit 0.22 0.28
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Notice of Conference Call
Dr. John Mull, Chairman and CEO of CML Healthcare Income Fund will host a
conference call on March 15, 2006 at 10:30 am (EST) to discuss the Fund's 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 call will be archived for 90 days.
(x) Distributable Cash is not a recognized measure under Canadian
generally accepted accounting principles ("GAAP"); however, the Fund
believes that distributable cash is a useful measure as it provides
investors with an indication of cash available for distribution. The
Fund's method of calculating distributable cash may differ from that
of other issuers and, accordingly, distributable cash may not be
comparable to measures used by other issuers. Investors are
cautioned that distributable cash should not be construed as an
alternative to the statement of cash flows as a measure of liquidity
and cash flows of the Fund.
(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.
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 (assuming the exchange for units of all of the outstanding
exchangeable shares of CML Healthcare Inc., excluding those held by the Fund
or its affiliates). To reach CML Healthcare Income Fund via the worldwide web
log on to www.cmlhealthcare.com.
Caution concerning forward-looking statements
----------------------------------------------
Statements made in this news release, other than those concerning
historical financial information, should be considered forward-looking and
subject to various risks and uncertainties. Such forward-looking statements
are based on management's beliefs and assumptions regarding the information
currently available. The Company's actual results could differ materially from
those expressed in the forward-looking statements. Factors that could cause
results to vary include, among other things, those expressed in the Company's
filings with Canadian securities regulatory authorities. All information
presented herein should be read in conjunction with such filings.
CML Healthcare Income Fund
Consolidated Balance Sheets
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(in thousands of dollars) December 31, December 31,
2005 2004
$ $
(see note 3)
ASSETS (note 8)
Current assets
Cash and cash equivalents 68,178 51,198
Accounts receivable 27,590 28,169
Income taxes receivable 2,487 6,677
Other current assets 1,778 1,878
Future income taxes (note 13) 1,113 3,237
Due from related parties (note 15) 56 829
-----------------------
101,202 91,988
Property and equipment (note 6) 19,375 18,292
Licences (note 3) 430,538 429,729
Goodwill (note 3) 153,678 153,300
Investments and other assets (note 7) 1,261 3,356
Restricted cash (note 8) 912 912
-----------------------
706,966 697,577
-----------------------
-----------------------
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities (note 9) 25,231 22,716
Distributions payable (note 11) 6,284 6,283
Current portion of long-term debt (note 8) 1,122 1,148
-----------------------
32,637 30,147
Long-term debt (note 8) 192,318 193,439
Future income taxes (note 13) 60,994 59,840
-----------------------
285,949 283,426
-----------------------
Non-controlling interest (notes 3 and 4) 9,622 7,113
UNITHOLDERS' EQUITY
Trust units (note 9) 407,654 407,492
Retained earnings (deficit) (note 9) 3,741 (454)
-----------------------
411,395 407,038
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-----------------------
706,966 697,577
-----------------------
-----------------------
Contingencies and commitments (note 12)
The accompanying notes are an integral part of these consolidated
financial statements.
CML Healthcare Income Fund
Consolidated Statements of Retained Earnings (Deficit)
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(in thousands of dollars) Fifteen-month
Year ended period ended
December 31 December 31,
2005 2004
$ $
Retained earnings - Beginning of period as
previously reported 1,321 166,594
Change in accounting policy (note 3) (1,775) -
-----------------------
(Deficit)/retained earnings - Beginning of period
as restated (454) 166,594
Excess of purchase price of common shares of
CML Healthcare Inc. over book value - (62)
Transfer of investment in Cipher
Pharmaceuticals Inc. to shareholders (note 1) - (37,403)
Payment to former common shareholders of
CML Healthcare Inc. (note 1) - (146,667)
Distributions declared during the period to
unitholders (note 11) (75,413) (63,636)
Net earnings for the period 79,608 80,720
-----------------------
Retained earnings (deficit) - End of period 3,741 (454)
-----------------------
-----------------------
The accompanying notes are an integral part of these consolidated
financial statements.
CML Healthcare Income Fund
Consolidated Statements of Cash Flows
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(in thousands of dollars) Fifteen-month
Year ended period ended
December 31, December 31,
2005 2004
$ $
Cash provided by (used in)
Operating activities
Earnings from continuing operations 79,608 84,834
Items not affecting cash
Amortization of property and equipment 2,830 3,899
Long-term incentive plan expense 1,648 388
Non-cash interest expense 210 88
Provision for impairment of investments and
other assets 1,733 2,750
Future income taxes 3,194 8,404
Non-controlling interest 6,947 6,023
-----------------------
96,170 106,386
Net change in non-cash working capital
items (note 16) 6,362 (8,033)
Discontinued operations - 393
-----------------------
102,532 98,746
-----------------------
Investing activities
Purchase of property and equipment (3,913) (1,583)
Decrease in investments and other assets 152 829
Acquisition of licences (361) -
Discontinued operations - (898)
Contribution to discontinued operations - (30,000)
-----------------------
(4,122) (31,652)
-----------------------
Financing activities
Principal repayment of long-term debt (1,147) (211,128)
Proceeds from issuance of long-term debt - 380,000
Increase in restricted cash - (912)
Increase in deferred financing fees - (1,472)
Proceeds from exercise of stock options - 9,674
Distributions paid (75,412) (204,020)
Payments to non-controlling interest (note 11) (4,394) (3,879)
Treasury units acquired (notes 2 and 9) (1,250) -
Decrease (increase) in due from related
parties - net 773 (375)
Repurchase of share capital - (68)
Discontinued operations - (1,790)
-----------------------
(81,430) (33,970)
-----------------------
Increase in cash and cash equivalents 16,980 33,124
Cash and cash equivalents, beginning of period 51,198 18,074
-----------------------
Cash and cash equivalents, end of period 68,178 51,198
-----------------------
-----------------------
Supplementary information
Interest paid 11,193 4,959
Income taxes paid 5,648 19,842
The accompanying notes are an integral part of these consolidated
financial statements.
CML Healthcare Income Fund
Consolidated Statements of Earnings
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(in thousands of dollars, Fifteen-month
except for per unit amounts) Year ended period ended
December 31, December 31,
2005 2004
$ $
(see note 3)
Revenue (notes 2, 17 and 18) 272,605 335,652
-----------------------
Expenses
Operating, general and administrative (note 15) 164,345 198,616
Amortization of property and equipment 2,830 3,899
-----------------------
167,175 202,515
-----------------------
105,430 133,137
Other expenses (note 1) - 7,893
Provision for impairment of investments and
other assets (note 7) 1,733 2,750
Interest expense
Long-term 11,414 9,514
-----------------------
Earnings from continuing operations before
income taxes 92,283 112,980
-----------------------
Provision for income taxes (note 13)
Current taxes 2,534 13,719
Future taxes 3,194 8,404
-----------------------
5,728 22,123
Earnings before the following 86,555 90,857
Non-controlling interest (notes 3 and 4) 6,947 6,023
-----------------------
Earnings from continuing operations 79,608 84,834
Loss from discontinued operations (note 5) - 4,114
-----------------------
Net earnings for the period 79,608 80,720
-----------------------
-----------------------
Basic and diluted earnings (loss) per unit
(note 10)
Continuing operations 1.00 1.06
Discontinued operations - (0.05)
-----------------------
1.00 1.01
The accompanying notes are an integral part of these consolidated
financial statements.
CML Healthcare Income Fund
Notes to Consolidated Financial Statements
December 31, 2005 and December 31, 2004
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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 $630,446,000 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.
On February 23, 2004, a Plan of Arrangement (the "Arrangement") to
re-organize CML into (a) the Fund, an income trust and (b) Cipher
Pharmaceuticals Inc. ("Cipher"), a public entity, was completed. In
accordance with the Arrangement, the Fund issued to former CML common
shareholders one Series A note and four exchangeable shares and
related ancillary rights or one Series B note and four units of the
Fund for each CML common share transferred. Each Series A note and
Series B note was redeemed for one common share of Cipher and a cash
payment of $7. As part of the arrangement, the Fund provided a
capital contribution of $30,000,000 to Cipher. The transfer of the
common shares of CML to the Fund was recorded at the carrying values
of CML's assets and liabilities on February 22, 2004 in accordance
with the continuity of interest method of accounting, as the Fund is
considered to be a continuation of CML. The transfer of the common
shares of Cipher in exchange for the Series A and Series B notes has
been accounted for as a distribution and a discontinued operation.
Upon completion of the Arrangement, the Fund changed its fiscal year
end from September 30 to December 31. Accordingly, the fiscal 2004
period is composed of the period from October 1, 2003 to December 31,
2004.
During the 15-month period ended December 31, 2004, CML incurred and
expensed professional fees of $7,684,000 in respect of the creation
of the Fund.
2 Summary of significant accounting policies
The consolidated financial statements have been prepared in
accordance with Canadian generally accepted accounting principles.
Basis of consolidation
The consolidated financial statements include the accounts of the
Fund and its subsidiaries from their date of acquisition. All
intercompany accounts and transactions with subsidiaries have been
eliminated.
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"). On July 26, 2005, the Fund funded $1,250,000 to the trust
for exceeding certain 2004 defined distributable cash threshold
amounts, subsequent to which the trustee acquired 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. On December 1, 2005, 43,631 units of the LTIP 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 paid.
Translation of foreign currencies
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 at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting periods presented. Actual results could differ
from the estimates.
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:
Laboratory and diagnostic equipment 7% to 20%
Computer equipment 20%
Computer software 33.3%
Furniture and fixtures 10%
Leasehold improvements 20%
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 writedown 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 writedown 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. Notes receivable are reviewed for impairment on an
individual basis and are reduced to estimated receivable amounts
measured by expected future cash flows. When the amounts and timing
of future cash flows cannot be estimated with reasonable reliability,
the notes receivable are measured at the fair value of the underlying
security net of expected costs of realization. The accrual of
interest is suspended if collection becomes doubtful.
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) or 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.
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.
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.
No stock options have been issued since January 1, 2002, accordingly
no stock option compensation expense has been recorded. As at
December 31, 2005 and 2004, there are no options outstanding.
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 December 31, 2004 was as follows:
Balance as
previously Balance as
reported Adjustment restated
(in thousands of dollars) $ $ $
Licences 196,618 233,111 429,729
Goodwill 5,027 148,273 153,300
Accounts payable and accrued
liabilities 22,347 369 22,716
Distributions payable 6,652 (369) 6,283
Future income tax liability 17,740 42,100 59,840
Non-controlling interest - 7,113 7,113
Trust units 68,204 339,288 407,492
Exchangeable shares 5,342 (5,342) -
Retained earnings (deficit) 1,321 (1,775) (454)
The effect of this change in accounting policy on the consolidated
statement of earnings for the 15-month period ended December 31, 2004
was as follows:
Balance as
previously Balance as
reported Adjustment restated
(in thousands of dollars) $ $ $
Non-controlling interest - 6,023 6,023
Net earnings for the period 86,743 (6,023) 80,720
4 Acquisition of non-controlling interest
During the period ended December 31, 2005, 57,600 (fifteen-month
period ended December 31, 2004 - 30,034,000) exchangeable shares of
CML Healthcare Inc. were converted to 57,600 (fifteen-month period
ended December 31, 2004 - 30,034,000) units of the Fund. 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 57,600 (December 31, 2004 - 30,034,000)
units of the Fund were valued at $786,000 (December 31, 2004 -
$362,175,000). The excess of the purchase price over the carrying
value of the non-controlling interest of $44,000 (December 31, 2004 -
$22,891) was allocated as follows:
Fifteen-month
Year ended period ended
December 31, December 31,
2005 2004
(in thousands of dollars) $ $
Licences 448 233,111
Goodwill 378 148,273
Future tax liability (84) (42,100)
-----------------------
742 339,284
-----------------------
-----------------------
As at December 31, 2005, 6,949,588 (December 31, 2004 - 7,007,188)
exchangeable shares of CML Healthcare Inc. are issued and outstanding
(excluding those held by the Fund and its affiliates).
5 Discontinued operations
On February 22, 2004, CML completed the Arrangement which resulted in
CML's Healthcare and Diagnostic Division being converted into an
income trust and the Pharmaceutical Division, which included Cipher,
being transferred to a separate public company (see note 1). The
results of the operations of the Pharmaceutical Division have been
reported as discontinued operations and previously reported financial
statements have been reclassified.
In 2002, the Board authorized the disposition of the Site Management
Organization Division. Substantially all of the net assets of the
division were disposed of in 2003 except for certain retained
obligations and transaction costs. These obligations and transaction
costs were settled during 2004, resulting in a recovery of $298,000.
The summarized statements of operations for the discontinued
businesses are as follows:
15-month
Year ended period ended
December 31, December 31,
2005 2004
(in thousands of dollars) $ $
Revenue - 10,126
Operating, general and administrative expenses - 5,989
Research and development - 6,017
Amortization of property, plant and equipment - 1,081
-----------------------
- (2,961)
Interest income - 307
Gain on sale of discontinued operations - 298
-----------------------
Loss before income taxes - (2,356)
Provision for income taxes - 1,758
-----------------------
Loss from discontinued operations - (4,114)
-----------------------
-----------------------
6 Property and equipment
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
-------------------------------------
-------------------------------------
December 31,
2004
-------------------------------------
Accumulated
Cost Amortization Net
(in thousands of dollars) $ $ $
Laboratory and diagnostic
equipment 28,596 14,915 13,681
Computer equipment 6,381 5,094 1,287
Computer software 1,582 1,468 114
Furniture and fixtures 2,075 1,580 495
Leasehold improvements 6,868 4,153 2,715
-------------------------------------
45,502 27,210 18,292
-------------------------------------
-------------------------------------
Included in laboratory and diagnostic equipment is equipment under
capital lease with a cost of $9,874,000 (2004 - $9,874,000) and a net
book value of $4,357,000 (2004 - $5,427,000).
7 Investments and other assets
December 31, December 31,
2005 2004
(in thousands of dollars) $ $
Deferred financing fees (net of accumulated
amortization of $298 (December 31, 2004
- $88 )) (note 8) 1,174 1,384
Note receivable (US$1,486 (December 31, 2004
- US$1,566))(a) - 1,885
Other assets 87 87
-----------------------
1,261 3,356
-----------------------
-----------------------
a) The note receivable bears interest at 6.0% per annum, is repayable
through quarterly payments of principal and interest of $112,000
(US$96,000) and is 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.
The Fund holds 1,900,000 common shares of Genetic Diagnostic Inc. at
December 31, 2005 and 2004. 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.
8 Long-term debt
December 31, December 31,
2005 2004
(in thousands of dollars) $ $
Senior secured notes(a) 190,000 190,000
Obligations under capital lease due in
monthly payments through 2008 3,440 4,587
-----------------------
193,440 194,587
Less current portion of long-term debt 1,122 1,148
-----------------------
192,318 193,439
-----------------------
-----------------------
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 proceeds from the senior secured notes were used
to replace the Fund's previous credit facilities and to fund the
$7 per share payment called for by the Arrangement (note 1).
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 2005 was 5.74% (2004 - 5.45%).
The minimum principal repayments required in the next five years and
thereafter are as follows:
(in thousands of dollars) $
2006 1,122
2007 1,180
2008 1,138
2009 -
2010 -
2011 and thereafter 190,000
---------
193,440
---------
---------
9 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 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
October 1, 2003 to December 31, 2005:
Common Shares Trust Units
(in thousands) Number $ Number $
September 30, 2003 20,954 63,878
Common shares purchased and
cancelled during the period (2) (6)
Common shares exchanged for
trust units (11,692) (35,643) 46,768 35,643
Trust units issued on exercise
of stock options 2,833 9,674
Common shares exchanged for
exchangeable shares (9,260) (28,229) - -
Exchangeable shares exchanged
for trust units (notes 3
and 4) - - 30,034 362,175
---------------------------------------
December 31, 2004 - - 79,635 407,492
Exchangeable shares exchanged
for trust units (note 4) - - 58 786
Treasury units acquired
(note 2) - - (44) (624)
---------------------------------------
December 31, 2005 - - 79,649 407,654
---------------------------------------
---------------------------------------
During the 12-month period ended December 31, 2005, 57,600 (15-month
period ended December 31, 2004 - 30,034,000) exchangeable shares of
CML were exchanged for 57,600 (15-month period ended December 31,
2004 - 30,034,000) trust units.
During the 15-month period ended December 31, 2004, CML repurchased
for cancellation 2,000 common shares for total cash consideration of
$68,000 of which $62,000 representing the excess of the purchase
price over the average book value of the common shares, has been
charged to retained earnings.
Stock options
On November 14, 1996, the Board of Directors of CML approved a stock
option plan and reserved 1,700,000 shares in respect of this plan. On
February 23, 2004, in accordance with the Arrangement, 708,149 common
stock options of CML were converted into 2,832,596 unit stock options
of the Fund.
The following is an analysis of the outstanding stock options:
Weighted
average
Number of exercise
options price
(in thousands) $
Common stock options outstanding as at
September 30, 2003 and February 22, 2004 708 22
-----------------------
Unit stock options outstanding as at
February 23, 2004 (based on a conversion
rate of 1 to 4) 2,833 3.42
Unit stock options exercised during the
period from February 23, 2004 to
December 31, 2004 (2,833) 3.42
-----------------------
Unit stock options outstanding as at
December 31, 2004 and 2005 - -
-----------------------
-----------------------
Employee stock options granted by CML contained exercise prices,
which were equivalent to the share price on the grant date.
Consideration paid by employees on exercise of the stock options was
credited to share capital.
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 $0.947 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 26, 2005, the Fund funded $1,250,000 to the Trust for
exceeding certain 2004 defined distributable cash threshold amounts
as defined in the LTIP, subsequent to which 87,254 units of the Fund
were acquired on the open market. On December 1, 2005, 43,631 units
of the Fund that had vested were distributed to the eligible
employees.
Pursuant to the LTIP, the Fund is required to pay $2,242,000 in
respect of the fiscal 2005 excess of distributable cash over the base
distribution to the Trust.
As at December 31, 2005, the Fund has recorded a liability of
$1,410,000 (December 31, 2004 - $388,000) and during the year ended
December 31, 2005 the Fund recorded a compensation expense of
$1,648,000 (15-month period ended December 31, 2004 - $388,000) in
respect of this LTIP.
Retained earnings (deficit)
The following is a summary of the accumulated earnings and
accumulated distributions:
December 31, December 31,
2005 2004
(in thousands of dollars) $ $
Accumulated earnings 326,860 247,252
Accumulated distributions (323,119) (247,706)
-----------------------
Retained earnings (deficit) 3,741 (454)
-----------------------
-----------------------
10 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 12-month period ended
December 31, 2005 was 79,677,719 (15-month period ended December 31,
2004 - 79,765,688).
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
(loss) 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
Twelve months ended December 31, 2005
Net earnings for the period $ 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
Fifteen months ended December 31, 2004
Earnings from continuing
operations $ 84,834 $ 6,023 $ 90,857
Loss from discontinued
operations $ (4,114) $ - $ (4,114)
-----------------------------------------
-----------------------------------------
Net earnings for the period $ 80,720 $ 6,023 $ 86,743
Earnings per Fund unit:
Continuing operations $ 1.06 $ 1.06
Discontinued operations $ (0.05) $ (0.05)
------------- -------------
Earnings per Fund unit $ 1.01 $ 1.01
Weighted average number of
Fund units outstanding 79,765,688 7,007,188 86,772,876
11 Distributions and payments to non-controlling interest declared
During the 12-month period 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
---------------------------------------------------------------------
---------------------------------------------------------------------
During the 15-month period ended December 31, 2004, the Fund declared
total distributions to unitholders of $63,636,000 and total dividends
to non-controlling interest of $4,248,000. 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
---------------------------------------------------------------------
March 31, 2004 7,651 0.0979 554 0.0653
April 30, 2004 6,168 0.0789 447 0.0526
May 31, 2004 6,171 0.0789 443 0.0526
June 30, 2004 6,171 0.0789 443 0.0526
July 30, 2004 6,171 0.0789 443 0.0526
August 31, 2004 6,172 0.0789 442 0.0526
September 30, 2004 6,283 0.0789 369 0.0526
October 31, 2004 6,283 0.0789 369 0.0526
November 30, 2004 6,283 0.0789 369 0.0526
December 31, 2004 6,283 0.0789 369 0.0526
---------------------------------------------------------------------
63,636 0.8080 4,248 0.5387
---------------------------------------------------------------------
---------------------------------------------------------------------
12 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) $
2006 17,870
2007 14,159
2008 9,503
2009 5,672
2010 1,828
Thereafter 3,045
---------
52,077
---------
---------
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.
13 Income taxes
The effective income tax rate on consolidated earnings is influenced
by items such as non-taxable income and non-deductible expenses:
12-month 15-month
period ended period ended
December 31, December 31,
2005 2004
(in thousands of dollars) $ $
Combined Canadian federal and provincial
income tax at statutory rate of 36.12% 33,333 40,808
Increase (decrease) in statutory income tax
resulting from the following:
Fund income not taxable (26,975) (22,007)
Increase in future income taxes resulting
from increases in enacted income tax rate - 2,688
Non-deductible expenses and other (630) 634
-----------------------
Provision for income taxes 5,728 22,123
-----------------------
-----------------------
Future income tax assets (liabilities) of the Fund are as follows:
December 31, December 31,
2005 2004
(in thousands of dollars) $ $
Differences in property and equipment and
licences asset basis (64,246) (62,015)
Capital leases 1,242 1,546
Accounting reserves not deducted for tax 1,059 810
Capital and non-capital loss carryforwards 5,147 5,732
Other 1,537 821
-----------------------
(55,261) (53,106)
Valuation allowance (4,620) (3,497)
-----------------------
(59,881) (56,603)
-----------------------
-----------------------
Future income tax asset 1,113 3,237
Future income tax liability (60,994) (59,840)
-----------------------
(59,881) (56,603)
-----------------------
-----------------------
The Fund has $12,874,000 in non-capital loss carryforwards as at
December 31, 2005, which are available to reduce future years'
taxable income. These loss carryforwards expire in varying amounts
from 2006 to 2015. The Fund also has $2,750,000 of capital losses,
which can be used to offset future capital gains and which do not
expire.
A valuation allowance of $4,620,000 has been recorded to reduce the
net benefit recorded in the financial statements relating to the
future tax assets. The valuation allowance is deemed necessary as a
result of the uncertainty associated with the ultimate realization of
certain of these future tax assets. Of this amount, approximately
$3,160,000 relates to pre-acquisition non-capital loss carryforwards
of a prior acquisition. The realization in the future of any of these
losses will result in a reduction of the licences of the acquired
company.
14 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 note receivable and capital lease obligations
approximate their carrying values.
The fair value of long-term debt is estimated to be $193,000,000
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.
15 Related party balances and transactions
Due from related parties balance comprises the following:
December 31, December 31,
2005 2004
(in thousands of dollars) $ $
Trade receivables(a) - 145
Other advances - Cipher(b) 56 288
Due from an officer and related company - net - 396
-----------------------
56 829
-----------------------
-----------------------
a) The trade receivables were amounts due from Pharma Medica
Research Inc., previously a wholly-owned subsidiary of Cipher, for
laboratory services provided by CML and certain other reimbursements.
On February 28, 2005, Pharma Medica Research Inc. was sold by Cipher.
b) The other advances are amounts due from Cipher and its wholly-
owned subsidiaries, in respect of the provision of management
services by CML and certain other reimbursements to CML. During the
period ended December 31, 2005, CML charged Cipher $171,000
(15-month period ended December 31, 2004 - $350,000) in accordance
with the administration agreement between CML and Cipher.
In the normal course of business, the Fund leases facilities from a
company that is controlled by a unitholder and officer of the Fund.
Rent expense for the year ended December 31, 2005 of $1,328,000
(15-month period ended December 31, 2004 - $1,687,000) 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.
16 Statement of cash flows
December 31, December 31,
2005 2004
(in thousands of dollars) $ $
Net change in non-cash working capital items
comprises
Accounts receivable 579 (6,462)
Other current assets 100 193
Accounts payable and accrued liabilities 1,493 3,207
Income taxes receivable 4,190 (4,971)
-----------------------
6,362 (8,033)
-----------------------
-----------------------
17 Revenue
For the period ended December 31, 2005, revenue from a major customer
accounted for 90% (December 31, 2004 - 87%) of the Fund's total
revenues.
18 Industry cap agreement
The industry cap agreement, that provides funding for the provision
of community-based services in Ontario, expired on March 31, 2005 and
no subsequent agreement has been reached. The MOH has informed the
industry that the current funding arrangement will stay in place
until a new agreement has been reached, at which time any changes
will be made retroactive to April 1, 2005. It is not possible to
estimate the potential financial impact of the new agreement, if any,
to the Fund.
19 Comparative figures
Certain comparative figures have been reclassified to conform to the
current period's financial statement presentation.
>>
%SEDAR: 00020333E
