(b) Financial Assets and Financial Liabilities Under the new standards, all financial instruments are classified into one of the following five categories: held-for-trading, held-to-maturity investments, loans and receivables, available-for-sale financial assets or other financial liabilities. All financial instruments, including derivatives, are included on the consolidated statement of financial position and are measured at fair value except for loans and receivables, held-to-maturity investments and other financial liabilities which are measured at amortized cost. Held for trading financial investments are recorded at cost as they are initiated and are subsequently measured at fair value and all gains and losses are included in net income in the period in which they arise. Available-for-sale financial instruments are also initially recorded at cost and are subsequently measured at fair value with revaluation gains and losses included in other comprehensive income until the instrument is disposed, derecognized, or impaired. As a result of the adoption of these standards, the Company has classified its cash and cash equivalents as held-for-trading. Short-term investments are classified as available-for-sale investments. Accounts receivable, and long-term note receivables are classified as loans and receivables. The financial instrument pledged as security on long-term debt is classified as a held-to-maturity investment. Accounts payable, long-term debt and capital lease obligations have been classified as other financial liabilities, all of which are measured at amortized cost. (c) Derivatives and Hedge Accounting Derivatives ----------- All derivative instruments, including embedded derivatives, are recorded in the statement of financial position at fair value unless exempted from derivative treatment as a normal purchase and sale. All changes in their fair value are recorded in income unless cash flow hedge accounting is used, in which case changes in fair value are recorded in other comprehensive income. The Company has elected to apply this accounting treatment for all embedded derivatives in host contracts entered into on or after November 1, 2003. The impact of the change in the accounting policy related to embedded derivatives was not material. Hedge Accounting ---------------- At the inception of a hedging relationship, the Company documents the relationship between the hedging instrument and the hedged item, as well as the risk management objectives and strategy for undertaking various hedge transactions. This process includes linking all derivatives to specific assets and liabilities on the consolidated statement of financial position or to specific firm commitments or forecasted transactions. The Company also assesses, both at the inception of the hedge and on an ongoing basis, whether the derivatives that are used are effective in offsetting changes in fair values or cash flows of hedged items. Under the previous standards, derivatives that met the requirements for hedge accounting were generally accounted for on an accrual basis. Under the new standards, all derivatives are recorded at fair value. All gains and losses from changes in the fair value of derivatives not designated as a part of a hedging relationship are recognized in the statement of income. These gains and losses are reported in other income (expense). When derivatives are designated as hedges, the Company classifies them either as: (i) hedges in the change in fair value of recognized assets or liabilities or firm commitments (fair value hedges); (ii) hedges of the variability in highly probable future cash flows attributable to a recognized asset or liability, or a forecasted transaction (cash flow hedges); or (iii) hedges of net investments in a foreign operation (net investment hedges). Cash flow hedge --------------- The Company operates globally, which gives rise to risks that its earnings and cash flows may be adversely impacted by fluctuations in foreign exchange rates. The Company enters into foreign currency forward contracts and foreign currency option contracts to hedge foreign exchange exposures on anticipated sales. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in other comprehensive income. Any gain or loss in fair value relating to the ineffective portion is recognized immediately in the statement of income in other income (expense). Amounts accumulated in other comprehensive income are reclassified to the statement of income in the period in which the hedged item affects income. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in other comprehensive income at that time remains in other comprehensive income as long as the forecasted transaction is still probable of occurring and would be recognized in the statement of income in the period the hedged transaction impacts income. When a forecasted transaction is no longer expected to occur, the cumulative gain or loss that was reported in other comprehensive income is immediately transferred to the statement of income. Upon adoption of the new standards, the Company recorded a net increase in derivatives assets included in accounts receivables of $1 million designated as cash flow hedges and an increase of $1 million pre-tax in accumulated other comprehensive income. Net investment hedges --------------------- Hedges of net investments in foreign operations are accounted for similar to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognized in other comprehensive income. The gain or loss relating to the ineffective portion is recognized immediately in the statement of income. Gains and losses accumulated in other comprehensive income are included in the statement of income upon the repatriation, reduction or disposal of the investment in the foreign operation. The adoption of the new standards resulted in the reclassification of $347 million previously recorded in the foreign currency translation adjustment account to opening accumulated comprehensive income. Carrying value and fair value of financial assets and liabilities as at April 30, 2007 are summarized as follows: ------------------------------------------------------------------------- Classification ------------------------------------------------------------------------- Held-for-trading $ 301 Held-to-maturity 39 Loans and receivables 358 Available-for-sale 21 Other liabilities $ 806 ------------------------------------------------------------------------- (d) Measurement Uncertainty To determine the assets held for sale related to those operations classified as discontinued operations, we are required to make estimates and assumptions that affect the reported amounts of these assets and liabilities and, therefore, these amounts are subject to measurement uncertainty. (e) Future Changes in Accounting Policies Capital Disclosures The CICA issued a new accounting standard, Section 1535 - Capital Disclosures, which requires the disclosure of both qualitative and quantitative information that enables users of financial statements to evaluate the entity's objectives, policies and processes for managing capital. This new standard is effective for the Company beginning November 1, 2007. Financial Instruments The CICA issued two new accounting standards, Section 3862 - Financial Instruments - Disclosures, and Section 3863, Financial Instruments - Presentation, which apply to interim and annual financial statements relating to fiscal years beginning on or after October 1, 2007. The Company intends to adopt these new standards effective November 1, 2007. 4. Accumulated Other Comprehensive Income The accumulated balances related to each component of other comprehensive income (loss), net of income taxes are as follows: ------------------------------------------------------------------------- Accumulated other comprehensive income, net of income taxes ------------------------------------------------------------------------- As at April 30, 2007 ------------------------------------------------------------------------- Unrealized gains on derivatives designated as cash flow hedges $ 2 Unrealized gains on translation of debt designated as a hedge 119 Foreign currency translation (losses) on self-sustaining foreign operations (162) Unrealized gain on translation resulting from the application of US dollar reporting 378 ------------------------------------------------------------------------- Accumulated other comprehensive income balance as at April 30, 2007 $ 337 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Income taxes liability (asset) related to the above components of accumulated other comprehensive income (loss) for unrealized gains (losses) on derivatives designated as cash flow hedges and unrealized gains (losses) on translation of debt designated as a hedge are $1 million and $21 million respectively. 5. Share Capital and Stock Options The following table summarizes information on share capital and stock options and related matters as at April 30, 2007: (number of shares in thousands) Number Amount ------------------------------------------------------------------------- Common shares Balance as at October 31, 2006 144,319 $ 572 Issued during the period 800 13 Repurchased during the period (22,831) (123) ------------------------------------------------------------------------- Balance as at April 30, 2007 122,288 $ 462 ------------------------------------------------------------------------- ------------------------------------------------------------------------- During the quarter, the Company repurchased and cancelled 22,831 Common shares, under the terms of a substantial issuer bid. Average Exercise (number of shares in thousands) Number Price ------------------------------------------------------------------------- Stock options Balance as at October 31, 2006 5,850 $ 18.76 Activity during the period: Granted 340 21.64 Exercised (710) 15.66 Cancelled or forfeited (163) 20.10 ------------------------------------------------------------------------- Balance as at April 30, 2007 5,317 $ 19.31 ------------------------------------------------------------------------- ------------------------------------------------------------------------- There were 3,661 stock options exercisable as at April 30, 2007. 6. Acquisition of Molecular Devices Corporation On March 20, 2007, the Company completed a tender offer which resulted in MDS acquiring 100% of the shares of Molecular Devices Corporation (MD), a California-based company with global operations. MD designs, develops, manufactures, sells and services bioanalytical measurement systems that accelerate and improve drug discovery and other life sciences research. The Company acquired MD primarily to add their leading-edge products to those of MDS Sciex to strengthen MDS's position as one of the top global providers of analytical instrumentation and related products marketed to life sciences customers. The operations for this acquisition are reported within the results of the Company's newly formed MDS Analytical Technologies segment (which combines MD with the previous Instruments segment) in the consolidated financial statements from the acquisition date. The aggregate purchase consideration (net of cash acquired of $21 million) was approximately $603 million paid in cash from existing cash on hand. Included in the consideration is the cash cost of $27 million to settle all outstanding in-the-money options of MD at the closing date of the acquisition. Direct and incremental third party acquisition costs associated with the acquisition were approximately $8 million. The acquisition has been accounted for as a purchase in accordance with CICA Handbook Section 1581 "Business Combinations" and the Company has accordingly allocated the purchase price of the acquisition based upon the preliminary fair values of the assets acquired and liabilities assumed. The purchase price and related allocations have not been finalized and may be revised as a result of adjustments made to the purchase price as additional information regarding liabilities incurred and revisions are made to preliminary estimates of fair values made at the acquisition date. In connection with determining the fair value of the assets acquired and liabilities assumed, management, assisted by valuation consultants, performed assessments of intangible assets using customary valuation procedures and techniques. The components of the preliminary purchase price allocation for the acquisition cost of MD are as follows: ------------------------------------------------------------------------- Consideration and acquisition costs: Cash and payments, net of cash acquired $ 595 Transaction costs 8 ------------------------------------------------------------------------- Net consideration and acquisition costs $ 603 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Allocation of purchase price Net tangible assets acquired $ 50 Intangible assets acquired: Developed technology 111 In process research and development 11 Brands 60 Goodwill (non-tax deductible) 371 ------------------------------------------------------------------------- Total purchase price $ 603 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The following table summarizes the components of the tangible assets acquired at fair value: ------------------------------------------------------------------------- Inventories $ 60 Property, plant and equipment 12 Other assets and liabilities, net (22) ------------------------------------------------------------------------- Net tangible assets acquired $ 50 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Other assets and liabilities includes $23 million of net future tax liabilities. Net tangible assets acquired include a charge of $4 million to eliminate redundant positions at MD over the course of the next year. The developed technology and in-process research and development will be amortized over their estimated lives, which are between five and seven years while the brands have an indefinite life and are not amortized. 7. Sale of Canadian Diagnostics Business and Discontinued Operations In 2005, The Board of Directors of the Company approved a strategic plan to focus the Company on its life sciences businesses and to close or divest of businesses that were not strategic to this plan. As a result, the Company had reclassified its Canadian diagnostics business as discontinued operations. On February 26, 2007, the Company completed the sale of its Canadian diagnostic services business to Borealis Infrastructure Management Inc. for gross proceeds of C$1.325 billion. The sale was structured as an asset purchase transaction and after provision for taxes, expenses and amounts attributable to minority interests, resulted in net proceeds of US$988 million comprising $929 million in cash and $65 million in an unconditional non-interest bearing note payable in March 2009. This note was recorded at an effective interest rate of 4.4% and had a book value of $59 million. Included in income from discontinued operations, the Company recorded a net gain of US$792 million on the transaction in the quarter. As a result of the sale, MDS sold $82 million in net assets consisting of: ------------------------------------------------------------------------- Accounts receivable $ 31 Property, plant and equipment 27 Long-term investments and other 18 Goodwill 57 Accounts payable and accrued liabilities (27) Long-term debt and other long-term obligations (24) ------------------------------------------------------------------------- Net assets $ 82 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The results of discontinued operations in the quarter and the six-months ended April 30 were as follows: Three months Six months to April 30 to April 30 ------------------------------------------------------------------------- 2007 2006 2007 2006 ------------------------------------------------------------------------- Net revenues $ 20 $ 98 $ 95 $ 198 Cost of revenues (12) (63) (58) (131) Selling, general and administration (5) (12) (14) (27) Depreciation and amortization - (2) - (5) Restructuring charges - - - (1) Equity earnings - - 1 1 ------------------------------------------------------------------------- Operating income 3 21 24 35 Gain on sale of discontinued operations 905 - 905 24 Dividend and interest income - 1 1 1 Income taxes (114) (3) (117) (6) Minority interest - net of tax (1) (3) (4) (5) ------------------------------------------------------------------------- Income from discontinued operations - net of tax $ 793 $ 16 $ 809 $ 49 ------------------------------------------------------------------------- Basic earnings per share $ 5.77 $ 0.11 $ 5.74 $ 0.34 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Diluted earnings per share $ 5.75 $ 0.11 $ 5.73 $ 0.34 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The results from discontinued operations for 2007 reflect only the Canadian diagnostic services business. The results from discontinued operations for 2006 include results from the Canadian diagnostic services business and certain small MDS Pharma Services businesses discontinued in 2005. In accordance with Section 3475 of the CICA Handbook, long-lived assets classified as held for sale are measured at the lower of carrying value and fair value less costs to sell. Assets held for sale and liabilities related to assets held for sale comprised: As at As at April 30 October 31 2007 2006 ------------------------------------------------------------------------- Assets held for sale Accounts receivable $ - $ 31 Inventories - 3 Prepaid expenses and other - 3 Property, plant and equipment - 28 Future tax asset - 63 Long-term investments and other 1 13 Goodwill - 54 Intangibles - 1 ------------------------------------------------------------------------- Total assets held for sale 1 196 Less: Current assets held for sale(1) (1) (196) ------------------------------------------------------------------------- Long-term assets held for sale $ - $ - ------------------------------------------------------------------------- ------------------------------------------------------------------------- Liabilities related to assets held for sale Accounts payable and accrued liabilities $ - $ 33 Income taxes payable - - Long-term debt - 4 Other long-term obligations - 6 Future tax liabilities - 55 Minority interest - 16 ------------------------------------------------------------------------- Total liabilities related to assets held for sale - 114 Less: Current liabilities related to assets held for sale(1) - (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 Six months to April 30 to April 30 ------------------------------------------------------------------------- 2007 2006 2007 2006 ------------------------------------------------------------------------- Gross expenditures $ 16 $ 12 $ 29 $ 25 Investment tax credits (1) (4) (2) (5) Recoveries from partners (6) (6) (11) (12) Development costs deferred (2) (1) (4) (2) ------------------------------------------------------------------------- Research and development expense $ 7 $ 1 $ 12 $ 6 ------------------------------------------------------------------------- ------------------------------------------------------------------------- For the three months ended April 30, 2007 depreciation and amortization includes $1 million (2006 - $2 million) related to equipment used for research and development, and $3 million from amortization of deferred development costs (2006 - $3 million). 9. Restructuring Charges An analysis of the activity in the provision through April 30, 2007 is as follows: Cumulative drawdowns Provision ------------------------ Balance at Restructuring April 30, Charge Cash Non-cash 2007 ------------------------------------------------------------------------- 2005: Workforce reductions $ 34 $ (32) $ (1) $ 1 Equipment and other asset write-downs - adjustment 7 - (7) - Contract cancellation charges 10 (2) (8) - ------------------------------------------------------------------------- $ 51 $ (34) $ (16) $ 1 ------------------------------------------------------------------------- 2006: Workforce reductions $ 1 $ (1) $ - $ - Contract cancellation charges (8) (1) 9 - ------------------------------------------------------------------------- $ (7) $ (2) $ 9 $ - ------------------------------------------------------------------------- 2007: Workforce reductions $ 19 $ (3) $ - $ 16 Equipment and other asset write-downs 5 - (3) 2 Contract cancellation charges 5 (5) - - Other 12 (5) (2) 5 ------------------------------------------------------------------------- $ 41 $ (13) $ (5) $ 23 ------------------------------------------------------------------------- $ 24 ------------------------------------------------------------------------- ------------------------------------------------------------------------- During the quarter ended April 30, 2007, management of the Company approved a restructuring plan designed principally to improve the profitability of MDS Pharma Services. The Company recorded a restructuring provision of $28 million in the quarter including $17 million for severance, $5 million to reduce the carrying value of certain assets and $6 million for other costs. 10. Earnings Per Share a) Dilution Three months to Six months to April 30 April 30 ------------------------------------------------------------------------- (number of shares in millions) 2007 2006 2007 2006 ------------------------------------------------------------------------- Weighted average number of Common shares outstanding - basic 137 143 141 143 Impact of stock options assumed exercised 1 1 - 1 ------------------------------------------------------------------------- Weighted average number of Common shares outstanding - diluted 138 144 141 144 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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 to Six months to April 30 April 30 ------------------------------------------------------------------------- 2007 2006 2007 2006 ------------------------------------------------------------------------- Net income $ 736 $ 14 $ 750 $ 61 Compensation expense for options granted prior to November 1, 2003 (1) - (1) (1) ------------------------------------------------------------------------- Net income - pro-forma $ 735 $ 14 $ 749 $ 60 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Pro-forma basic earnings per share $ 5.35 $ 0.10 $ 5.32 $ 0.43 Pro-forma diluted earnings per share $ 5.34 $ 0.10 $ 5.30 $ 0.43 ------------------------------------------------------------------------- ------------------------------------------------------------------------- c) Stock Options During the quarter, the Company granted 280,500 options (2006 - 49,700) at an average exercise price of C$21.84 (2006 - C$19.72). These options have a fair value determined using the Black-Scholes model of C$4.62 per share (2006 - C$4.39) based on the following assumptions: 2007 2006 ------------------------------------------------------------------------- Risk-free interest rate 3.9 % 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 to Six months to April 30 April 30 ------------------------------------------------------------------------- 2007 2006 2007 2006 ------------------------------------------------------------------------- Write-down of other long-term assets $ - $ - $ - $ (1) Write-down of investments (6) - (6) - Gain on sale of investment - - 2 - Loss on sale of Hamburg clinic (4) - (4) - Gain on sale of business 1 - 1 - Acquisition integration costs (1) - (1) - FDA Provision (61) - (61) - Unrealized gain (loss) on interest rate swaps 1 (2) - (2) MAPLE settlement 3 (9) 3 (9) ------------------------------------------------------------------------- Other income (expense) - net $ (67) $ (11) $ (66) $ (12) ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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 to Six months to April 30 April 30 ------------------------------------------------------------------------- 2007 2006 2007 2006 ------------------------------------------------------------------------- Depreciation and amor- tization $ 20 $ 16 $ 37 $ 29 Stock option compensation - 1 1 3 Deferred revenue - (2) (2) (5) Future income taxes 48 (7) 46 (9) Equity earnings - net of distribution - 7 - 7 Write-down of MAPLE assets - 9 - 9 Write-down of investments 6 - 6 - Loss on sale of Hamburg clinic 4 - 4 - Equipment and other asset write-downs 5 - 5 - Gain on dilution of investment - - (2) - Other (1) (4) - (2) ------------------------------------------------------------------------- $ 82 $ 20 $ 95 $ 32 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Changes in non-cash working capital balances relating to operations include: Three months to Six months to April 30 April 30 ------------------------------------------------------------------------- 2007 2006 2007 2006 ------------------------------------------------------------------------- Accounts receivable $ (1) $ (40) $ 15 $ (4) Unbilled revenue 27 (37) 11 (29) Inventories (2) 40 (6) 38 Prepaid expenses and other 37 8 10 (5) Accounts payable and deferred revenue 59 23 49 (54) Income taxes (22) (4) (9) 1 ------------------------------------------------------------------------- $ 98 $ (10) $ 70 $ (53) ------------------------------------------------------------------------- ------------------------------------------------------------------------- 14. Segmented Information Three months to April 30, 2007 ------------------------------------------------------------------------- MDS MDS Pharma MDS Analytical Corporate Services Nordion Technologies and Other Total ------------------------------------------------------------------------- Net revenues $ 115 $ 70 $ 88 $ - $ 273 Cost of revenues (78) (37) (49) - (164) Selling, general and administration (34) (12) (14) (7) (67) Research and development - - (7) - (7) Depreciation and amortization (9) (3) (7) (1) (20) Restructuring charges - net (26) - - (2) (28) Other income (expense) - net (65) 4 (1) (5) (67) Equity earnings (loss) - - - - - ------------------------------------------------------------------------- Operating income (loss) $ (97) $ 22 $ 10 $ (15) $ (80) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Total assets $ 827 $ 659 $ 851 $ 435 $ 2,772 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Capital expenditures $ 5 $ 1 $ 2 $ 1 $ 9 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Three months to April 30, 2006 ------------------------------------------------------------------------- MDS MDS Pharma MDS Analytical Corporate Services Nordion Technologies and Other Total ------------------------------------------------------------------------- Net revenues $ 113 $ 72 $ 57 $ - $ 242 Cost of revenues (80) (37) (33) - (150) Selling, general and administration (29) (13) (4) (10) (56) Research and development - - (1) - (1) Depreciation and amortization (7) (4) (5) - (16) Restructuring charges - net (1) - - - (1) Other income (expense) - net - (9) - (2) (11) Equity earnings (loss) (1) - - (4) (5) ------------------------------------------------------------------------- Operating income (loss) $ (5) $ 9 $ 14 $ (16) $ 2 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Total assets $ 790 $ 661 $ 168 $ 499 $ 2,118 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Capital expenditures $ 7 $ (10) $ 2 $ 1 $ - ------------------------------------------------------------------------- ------------------------------------------------------------------------- Six months to April 30, 2007 ------------------------------------------------------------------------- MDS MDS Pharma MDS Analytical Corporate Services Nordion Technologies and Other Total ------------------------------------------------------------------------- Net revenues $ 236 $ 137 $ 150 $ - $ 523 Cost of revenues (166) (71) (87) - (324) Selling, general and administration (66) (23) (19) (12) (120) Research and development - (1) (11) - (12) Depreciation and amortization (18) (6) (12) (1) (37) Restructuring charges - net (34) - - (7) (41) Other income (expense) - net (65) 4 (1) (4) (66) Equity earnings (loss) - - - - - ------------------------------------------------------------------------- Operating income (loss) $ (113) $ 40 $ 20 $ (24) $ (77) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Capital expenditures $ 7 $ 2 $ 5 $ 3 $ 17 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Six months to April 30, 2006 ------------------------------------------------------------------------- MDS MDS Pharma MDS Analytical Corporate Services Nordion Technologies and Other Total ------------------------------------------------------------------------- Net revenues $ 224 $ 142 $ 118 $ - $ 484 Cost of revenues (159) (71) (71) - (301) Selling, general and administration (58) (24) (7) (16) (105) Research and development - (1) (5) - (6) Depreciation and amortization (14) (7) (8) - (29) Restructuring charges - net - - - (2) (2) Other income (expense) - net - (9) - (3) (12) Equity earnings (loss) (1) - - (3) (4) ------------------------------------------------------------------------- Operating income (loss) $ (8) $ 30 $ 27 $ (24) $ 25 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Capital expenditures $ 14 $ - $ 3 $ 5 $ 22 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 15. Financial Instruments The carrying amounts and fair values for all derivative financial instruments are as follows: As at April 30 As at April 30 ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------------------------------------------------------------------- Asset (liability) position: Currency forward and option - asset $ 4 $ 4 $ 2 $ 8 Currency forward and option - liabilities $ - $ - $ - $ (1) Interest rate swap and option contracts $ (2) $ (2) $ (4) $ (4) ------------------------------------------------------------------------- ------------------------------------------------------------------------- As of April 30, 2007, the Company had outstanding foreign exchange contracts in place to sell US$90 million at a weighted average exchange rate of C$1.1541 maturing over the next ten months. The Company also had interest rate swap contracts that 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 the reported income tax recovery is provided below. The Company's tax recovery for the quarter was lower than expected as portions of the restructuring charge related to foreign jurisdictions where full valuation allowances have been recorded against existing tax assets. In addition, the Company was unable to recognize any tax benefit on the Hamburg clinic loss or valuation provision recorded this quarter. Three months to April 30 ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Expected income tax expense (recovery) at MDS's 35% (2006 - 35%) statutory rate $ (27) $ - Increase (decrease) to taxes expense as a result of: Foreign tax losses not recognized 4 - Valuation provision on MDS Capital Corp. 2 - Loss on sale of Hamburg clinic 1 - Other (1) 1 ------------------------------------------------------------------------- Reported income tax expense (recovery) $ (21) $ 1 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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 to Six months to April 30 April 30 ------------------------------------------------------------------------- 2007 2006 2007 2006 ------------------------------------------------------------------------- Net income (loss) from continuing operations in accordance with Canadian GAAP $ (57) $ (2) $ (59) $ 12 US GAAP adjustments: - Deferred development costs (1) (1) (2) (1) Deferred development costs written off 3 - 3 - In-process research and development (11) - (11) - Reduction in income tax expense arising from GAAP adjustments 5 - 5 ------------------------------------------------------------------------- Net income (loss) from continuing operations in accordance with US GAAP (61) (3) (64) 11 Income from discontinued operations in accordance with Canadian and US GAAP - net of tax 793 16 809 49 ------------------------------------------------------------------------- Net income in accordance with US GAAP $ 732 $ 13 $ 745 $ 60 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Basic earnings (loss) per share in accordance with US GAAP - from continuing operations $ (0.45) $ (0.02) $ (0.45) $ 0.08 - from discontinued operations 5.77 0.11 5.74 0.34 ------------------------------------------------------------------------- Basic earnings per share $ 5.32 $ 0.09 $ 5.29 $ 0.42 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Diluted earnings (loss) per share in accordance with US GAAP - from continuing operations $ (0.44) $ (0.02) $ (0.45) $ 0.08 - from discontinued operations 5.75 0.11 5.73 0.34 ------------------------------------------------------------------------- Diluted earnings per share $ 5.31 $ 0.09 $ 5.28 $ 0.42 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 18. 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 - - 06/07/2007

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