Assets held for sale and liabilities related to assets held for sale comprised: As at As at January 31 October 31 2007 2006 ------------------------------------------------------------------------- Assets held for sale Accounts receivable $ 28 $ 31 Inventories 3 3 Prepaid expenses and other 5 3 Property, plant and equipment 24 28 Future tax asset 55 63 Long-term investments and other 13 13 Goodwill 52 54 Intangibles 1 1 ------------------------------------------------------------------------- Total assets held for sale 181 196 Less: Current assets held for sale(1) (181) (196) ------------------------------------------------------------------------- Long-term assets held for sale $ - $ - ------------------------------------------------------------------------- ------------------------------------------------------------------------- Liabilities related to assets held for sale Accounts payable and accrued liabilities $ 24 $ 33 Income taxes payable 1 - Long-term debt 3 4 Other long-term obligations 6 6 Future tax liabilities 48 55 Minority interest 16 16 ------------------------------------------------------------------------- Total liabilities related to assets held for sale 98 114 Less: Current liabilities related to assets held for sale(1) (98) (114) ------------------------------------------------------------------------- Long-term liabilities related to assets held for sale $ - $ - ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Assets held for sale and liabilities related to assets held for sale have been classified as current if the Company has signed agreements where such assets are expected to be disposed of within one year. 8. Research and Development Three months ended January 31 ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Gross expenditures $ 13 $ 13 Investment tax credits (1) (1) Recoveries from partners (5) (6) Development costs deferred (2) (1) ------------------------------------------------------------------------- Research and development expense $ 5 $ 5 ------------------------------------------------------------------------- ------------------------------------------------------------------------- For the three months ended January 31, 2007, depreciation and amortization includes $1 million (2006 - $1 million) related to equipment used for research and development. 9. Restructuring Charges An analysis of the activity in the provision through January 31, 2007 is as follows: Cumulative drawdowns Provision --------------------- Balance at Restructuring January 31, Charge Cash Non-cash 2007 ------------------------------------------------------------------------- 2005: Workforce reductions $ 34 $ (30) $ (1) $ 3 Equipment and other asset write-downs - adjustment 7 - (7) - Contract cancellation charges 10 (2) (8) - ------------------------------------------------------------------------- $ 51 $ (32) $ (16) $ 3 ------------------------------------------------------------------------- 2006: Workforce reductions $ 1 $ (1) $ - $ - Contract cancellation charges (8) (1) 9 - ------------------------------------------------------------------------- $ (7) $ (2) $ 9 $ - ------------------------------------------------------------------------- 2007: Workforce reductions $ 3 $ (2) $ - $ 1 Contract cancellation charges 5 (5) - - Other 5 (1) - 4 ------------------------------------------------------------------------- $ 13 $ (8) $ - $ 5 ------------------------------------------------------------------------- $ 8 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The Company has continued to utilize the reserves established in prior years relating to change initiatives affecting support services, senior management reductions, and system implementations. 10. Earnings Per Share a) Dilution Three months ended January 31 ------------------------------------------------------------------------- (number of shares in millions) 2007 2006 ------------------------------------------------------------------------- Weighted average number of Common shares outstanding - basic 145 143 Impact of stock options assumed exercised - 1 ------------------------------------------------------------------------- Weighted average number of Common shares outstanding - diluted 145 144 ------------------------------------------------------------------------- ------------------------------------------------------------------------- b) Pro-Forma Impact of Stock-Based Compensation Compensation expense related to the fair value of stock options granted prior to November 1, 2003 is excluded from the determination of net income and is, instead, calculated and disclosed on a pro-forma basis in the notes to the consolidated financial statements. Compensation expense for purposes of these pro-forma disclosures is determined in accordance with a methodology prescribed in CICA Handbook Section 3870 "Stock-Based Compensation and Other Stock-Based Payments". The Company used the Black-Scholes option valuation model to estimate the fair value of options granted. For purposes of these pro-forma disclosures, the Company's net income and basic and diluted earnings per share would have been: Three months ended January 31 ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Net income $ 14 $ 47 Compensation expense for options granted prior to November 1, 2003 - (1) ------------------------------------------------------------------------- Net income - pro-forma $ 14 $ 46 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Pro-forma basic earnings per share $ 0.10 $ 0.32 Pro-forma diluted earnings per share $ 0.10 $ 0.32 ------------------------------------------------------------------------- ------------------------------------------------------------------------- During the quarter, the Company granted 59,000 options (2006 - 934,450) at an average exercise price of C$20.71 (2006 - C$19.98). These options have a fair value determined using the Black-Scholes model of C$4.40 per share (2006 - C$4.13) based on the following assumptions: 2007 2006 ------------------------------------------------------------------------- Risk-free interest rate 4.0% 3.9% Expected dividend yield 0.0% 0.7% Expected volatility 0.22 0.23 Expected time to exercise (years) 3.25 3.25 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 11. Other Income (Expense) - Net Three months ended January 31 ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Write-down of other long-term assets $ - $ (1) Gain on sale of investment 2 - Unrealized loss on interest rate swaps (1) - ------------------------------------------------------------------------- Other income (expense) - net $ 1 $ (1) ------------------------------------------------------------------------- ------------------------------------------------------------------------- 12. Post Employment Obligations The Company sponsors various post-employment benefit plans including defined benefit and contribution pension plans, retirement compensation arrangements, and plans that provide extended health care coverage to retired employees. All defined benefit pension plans sponsored by the Company are funded plans. Other post-employment benefits are unfunded. During 2005, the Company amended the terms of certain post-employment plans such that effective January 1, 2008, and subject to certain transitional conditions, newly retired employees will no longer be entitled to extended health care benefits. The post employment obligation expense for the quarter was $1 million (2006 - $1 million). 13. Supplementary Cash Flow Information Non-cash items affecting net income comprise: Three months ended January 31 ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Depreciation and amortization $ 17 $ 13 Stock option compensation 1 2 Deferred revenue (2) (3) Future income taxes (2) (2) Gain on sale of investment (2) - Unrealized loss on interest rate swaps 1 - Other - 2 ------------------------------------------------------------------------- $ 13 $ 12 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Changes in non-cash working capital balances relating to operations include: Three months ended January 31 ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Accounts receivable $ 16 $ 36 Unbilled revenue (16) 8 Inventories (4) (2) Prepaid expenses and other (26) (13) Accounts payable and deferred revenue (10) (77) Income taxes 12 5 ------------------------------------------------------------------------- $ (28) $ (43) ------------------------------------------------------------------------- ------------------------------------------------------------------------- 14. Segmented Information Three months to January 31, 2007 ------------------------------------------------------------------------- MDS Pharma MDS MDS Corporate Services Nordion Sciex and Other Total ------------------------------------------------------------------------- Net revenues $ 121 $ 67 $ 62 $ - $ 250 Cost of revenues (88) (34) (38) - (160) Selling, general and administration (32) (11) (5) (5) (53) Research and development - (1) (4) - (5) Depreciation and amortization (9) (3) (5) - (17) Restructuring charges - net (8) - - (5) (13) Other income (expense) - net - - - 1 1 Equity earnings (loss) - - - - - ------------------------------------------------------------------------- Operating income (loss) $ (16) $ 18 $ 10 $ (9) $ 3 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Total assets $ 865 $ 602 $ 162 $ 473 $ 2,102 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Capital expenditures $ 2 $ 1 $ 3 $ 2 $ 8 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Three months to January 31, 2006 ------------------------------------------------------------------------- MDS Pharma MDS MDS Corporate Services Nordion Sciex and Other Total ------------------------------------------------------------------------- Net revenues $ 111 $ 70 $ 61 $ - $ 242 Cost of revenues (80) (34) (38) - (152) Selling, general and administration (28) (11) (3) (6) (48) Research and development - (1) (4) - (5) Depreciation and amortization (7) (3) (3) - (13) Restructuring charges - net 1 - - (2) (1) Other income (expense) - net - - - (1) (1) Equity earnings (loss) - - - 1 1 ------------------------------------------------------------------------- Operating income (loss) $ (3) $ 21 $ 13 $ (8) $ 23 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Total assets $ 732 $ 692 $ 161 $ 448 $ 2,033 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Capital expenditures $ 7 $ 10 $ 1 $ 4 $ 22 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 15. Financial Instruments The carrying amounts and fair values for all derivative financial instruments are as follows: As at January 31 As at January 31 ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------------------------------------------------------------------- Asset (liability) position: Currency forward and option - asset $ - $ - $ 2 $ 5 Currency forward and option - liabilities $ (4) $ (4) $ - $ - Interest rate swap and option contracts $ (3) $ (3) $ (2) $ (2) ------------------------------------------------------------------------- ------------------------------------------------------------------------- As of January 31, 2007, the Company had outstanding foreign exchange contracts and options in place to sell up to US$178 million at a weighted average exchange rate of C$1.1468 maturing over the next 12 months. The Company also had interest rate swap contracts that economically convert a notional amount of US$80 million of debt from a fixed to a floating interest rate. Foreign exchange options and interest rate swaps not eligible for hedge accounting are included in accounts payable and are marked to market each period. 16. Income Taxes A reconciliation of expected income taxes to reported income tax expense is provided below. Income before taxes for continuing operations for the quarter ended January 31, 2007 include losses incurred in foreign jurisdictions for which no tax effect has been recorded. As a result, income tax expense for the quarter of $3 million exceeded the amount expected based on statutory rates. Three months ended January 31 ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Expected income taxes expense at MDS's 35% (2006 - 35%) statutory rate $ - $ 8 Increase (decrease) to tax expense as a result of: Impact of tax rate changes on future tax balances - 2 Foreign tax losses not recognized 4 - Other (1) (2) ------------------------------------------------------------------------- Reported income tax expense $ 3 $ 8 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 17. Differences Between Canadian and United States Generally Accepted Accounting Principles The consolidated financial statements have been prepared in accordance with Canadian GAAP. The principles adopted in these financial statements conform in all material respects to those of US GAAP except as summarized below. Significant differences between Canadian and US GAAP would have the following effect on net income of the Company: Three months ended January 31 ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Net income (loss) from continuing operations in accordance with Canadian GAAP $ (2) $ 14 US GAAP adjustments: Deferred development costs (1) - Reduction in income tax expense arising from GAAP adjustments 1 - ------------------------------------------------------------------------- Net income (loss) from continuing operations in accordance with US GAAP (2) 14 Income from discontinued operations in accordance with Canadian and US GAAP - net of tax 16 33 ------------------------------------------------------------------------- Net income in accordance with US GAAP $ 14 $ 47 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Basic and diluted earnings (loss) per share in accordance with US GAAP - from continuing operations $ (0.02) $ 0.10 - from discontinued operations 0.12 0.23 ------------------------------------------------------------------------- $ 0.10 $ 0.33 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 18. Subsequent Events a) On February 26, 2007, MDS announced that it has finalized the sale of its Canadian laboratory services business, MDS Diagnostic Services, to Borealis Infrastructure Management Inc. in a C$1.325 billion transaction. From the total transaction price of C$1.325 billion, MDS will realize net proceeds of approximately C$1.052 billion, comprised of C$977 million in cash and C$75 million in an unconditional note, payable in March 2009, after provision for taxes, expenses and amounts attributable to minority interests. Also on February 26, 2007 and coinciding with the completion of the sale of the diagnostics business, MDS announced the launch of a substantial issuer's bid. Under the bid, the Company proposes to repurchase up to C$500 million of the Company's outstanding Common shares (US$425 million). The Company expects this bid to close in early April. b) On February 6, 2007, the Company drew C$500 million from its five-year committed revolving credit facility. 19. Comparative Figures All comparative financial information has been restated to reflect the Company's results as if they had been historically reported in US dollars. Certain figures for the previous year have been reclassified to conform to the current year's financial statement presentation. In addition, segmented information for 2006 has been revised to reflect the discontinued operations reported. DATASOURCE: MDS Inc. CONTACT: PRNewswire - - 03/08/2007

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