Business Radar | Cardinal Health, Inc.

Page 1

Page 2

Page 3

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2016 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission File Number: 1-11373 Cardinal Health, Inc. (Exact name of registrant as specified in its charter) Ohio 31-0958666 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 7000 Cardinal Place, Dublin, Ohio 43017 (Address of principal executive offices) (Zip Code) (614) 757-5000 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of class Name of each exchange on which registered Common shares (without par value) New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer Accelerated filer Non-accelerated filer (Do not check if a smaller reporting company) Smaller reporting company Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No The aggregate market value of voting stock held by non-affiliates or registrant on December 31, 2015, was the following: $29,344,021,222. The number of the registrant’s common shares, without par value, outstanding as of July 29, 2016, was the following: 318,588,961. Documents Incorporated by Reference: Portions of the registrant’s Definitive Proxy Statement to be filed for its 2016 Annual Meeting of Shareholders are incorporated by reference into the sections of this Form 10-K addressing the requirements of Part III of Form 10-K.

Page 4

Page 5

Table of contents Key Highlights............................................................................................................................................................................................................3 Management’s Discussion and Analysis of Financial Condition and Results of Operations ...................................................8 Explanation and Reconciliation of Non-GAAP Financial Measures ....................................................................................................23 Selected Financial Data .........................................................................................................................................................................................26 Quantitative and Qualitative Disclosures about Market Risk ................................................................................................................27 Business ........................................................................................................................................................................................................................29 Risk Factors .................................................................................................................................................................................................................35 Properties ....................................................................................................................................................................................................................39 Legal Proceedings ...................................................................................................................................................................................................39 Market for Registrant’s Common Equity ........................................................................................................................................................40 Reports .........................................................................................................................................................................................................................42 Financial Statements and Supplementary Data .........................................................................................................................................45 Directors, Executive Officers, and Corporate Governance .....................................................................................................................74 Exhibits .........................................................................................................................................................................................................................75 Form 10-K Cross Reference Index .....................................................................................................................................................................79 Signatures....................................................................................................................................................................................................................80 Additional Information ..........................................................................................................................................................................................81 Introduction This “Key Highlights” section provides a brief Non-GAAP Financial Measures overview of Cardinal Health, Inc. and does In this “Key Highlights” section and the “Fiscal 2016 Overview” section of not contain all of the information you should Management’s Discussion and Analysis of Financial Condition and Results consider. Please read the entire Form 10-K of Operations (“MD&A”), we use financial measures that are derived from carefully before voting or making an investment consolidated financial data but are not presented in our financial statements decision. As used in this report, “we,” “our,” “us” that are prepared in accordance with U.S. generally accepted accounting and similar pronouns refer to Cardinal Health, principles (“GAAP”). These measures are considered “non-GAAP financial Inc. and its subsidiaries, unless the context measures” under the Securities and Exchange Commission (“SEC”) rules. The requires otherwise. reasons we use these non-GAAP financial measures and the reconciliations to their most directly comparable GAAP financial measures are included in the References to Fiscal Years “Explanation and Reconciliation of Non-GAAP Financial Measures” section Our fiscal year ends on June 30. References to following MD&A in this Form 10-K. fiscal 2016, 2015, 2014, 2013 and 2012 and to FY16, FY15, FY14, FY13 and FY12 are to the fiscal Important Information Regarding Forward-Looking Statements years ended June 30, 2016, 2015, 2014, 2013 This Form 10-K (including information incorporated by reference) includes and 2012, respectively. Except as otherwise forward-looking statements addressing expectations, prospects, estimates and specified, information in this Form 10-K is other matters that are dependent upon future events or developments. Many provided as of June 30, 2016. forward-looking statements appear in MD&A, but there are others throughout this document, which may be identified by words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “will,” “should,” “could,” “would,” “project,” “continue,” “likely,” and similar expressions, and include statements reflecting future results or guidance, statements of outlook and expense accruals. These matters are subject to risks and uncertainties that could cause actual results to diﬀer materially from those projected, anticipated or implied. The most significant of these risks and uncertainties are described in “Risk Factors” and in Exhibit 99.1 to this Form 10-K. Forward-looking statements in this document speak only as of the date of this document. Except to the extent required by applicable law, we undertake no obligation to update or revise any forward-looking statement.

Page 6

Key Highlights Rx We serve more than We deliver nearly We support more than 25,000 pharmacies. 10,000,000 time-critical 70% of U.S. hospitals. radiopharmaceutical doses annually. We serve 2 million We manufacture or source We have more than 37,000 patients with nearly nearly 2.8 billion individual employees worldwide. 40,000 home consumer healthcare, home healthcare products. medical equipment, and over-the-counter products each year. 3

Page 7

For those tasked with navigating the complexities of healthcare, Cardinal Health brings scaled solutions that help our customers thrive in a changing world. We apply our nearly 100 years of experience and expertise to reduce the total cost of healthcare and to improve the lives of patients. Our scale and experience lead to solutions across the entire care continuum — from hospital to home and everywhere in between — through logistics, business, product and patient solutions. 4

Page 8

KEY Highlights Key HIGHLIGHTS Financial summary GAAP Basis ($M) Non-GAAP1 Basis ($M) FY16 FY15 FY14 FY13 FY12 FY16 FY15 FY14 FY13 FY12 Revenue $121,546 $102,531 $91,084 $101,093 $107,552 % change 19% 13% (10)% (6)% 5% Operating earnings $2,459 $2,161 $1,885 $996 $1,792 $2,895 $2,472 $2,133 $2,046 $1,866 % change 14% 15% 89% (44)% 18% 17% 16% 4% 10% 13% Ratio to revenue (operating margin) 2.02% 2.11% 2.07% 0.99% 1.67% 2.38% 2.41% 2.34% 2.02% 1.73% Net earnings from continuing operations2 $1,427 $1,212 $1,163 $335 $1,070 $1,732 $1,469 $1,324 $1,284 $1,119 % change 18% 4% 247% (69)% 11% 18% 11% 3% 15% 13% Diluted EPS 3 $4.32 $3.61 $3.37 $0.97 $3.06 $5.24 $4.38 $3.84 $3.73 $3.21 % change 20% 7% 247% (68)% 12% 20% 14% 3% 16% 15% Sustained strong ﬁnancial performance over ﬁve years The growth presented below reflects fiscal 2011 compared to fiscal 2016. GAAP Non-GAAP1 Diluted EPS from continuing operations growth 9.5% 13.4% CAGR CAGR Total shareholder return4 90.4% GAAP Non-GAAP1 Operating earnings growth 10.2% 12.0% CAGR CAGR Dividend per share growth 14.7% CAGR 1 Non-GAAP financial measures. See “Explanation and Reconciliation of Non-GAAP Financial Measures” section following MD&A for definitions and reconciling information. 2 Attributable to Cardinal Health, Inc. 3 Diluted earnings per share from continuing operations attributable to Cardinal Health, Inc. 4 Total shareholder return is the total return of our shares expressed as a percentage (calculated based on changes in stock price over the measurement period and assuming reinvestment of dividends). 5

Page 9

Capital deployment for ﬁve years Fiscal 2012 through fiscal 2016 Dividends $2.0B $8.5B cumulatively Acquisitions, net of divestitures Share repurchases $5.3B cumulatively invested in our $7.0B returned to $3.3B businesses shareholders Capital expenditures $1.5B Corporate citizenship We challenge ourselves to best utilize our assets, expertise and influence to make our communities stronger and our world more sustainable, while governing our activities as a good corporate citizen and with a belief that doing “the right thing” serves everyone. corporate and Cardinal Health Foundation $92M charitable and product donations worldwide from fiscal 2012 through fiscal 2016 10 years included on the Dow Jones Sustainability Index Over 1⁄3 of our Board of Directors is gender or ethnically diverse 6

Page 10

Key KEY Highlights HIGHLIGHTS Board of directors David J. Anderson (A) Patricia A. Hemingway Hall (A,N) Retired Senior Vice President and Retired President and Chief Executive Oﬃcer, Chief Financial Oﬃcer, Honeywell International Inc. Health Care Service Corp. Colleen F. Arnold (N) Clayton M. Jones (E,A) Retired Senior Vice President, Sales and Distribution, Retired Chairman, President and Chief Executive Oﬃcer, International Business Machines Corp. Rockwell Collins, Inc. George S. Barrett (E) Gregory B. Kenny (E,I,N) Chairman and Chief Executive Oﬃcer, Retired President and Chief Executive Oﬃcer, Cardinal Health, Inc. General Cable Corp. Carrie S. Cox (H) Nancy Killefer (H) Chairman and Chief Executive Oﬃcer, Retired Senior Partner, Humacyte, Inc. Public Sector Practice, McKinsey & Company, Inc. Former Executive Vice President and President, Global Pharmaceuticals, Schering-Plough Corp. David P. King (E,H) Chairman, President and Chief Executive Oﬃcer, Calvin Darden (H) Laboratory Corp. of America Holdings Retired Senior Vice President, U.S. Operations, United Parcel Service, Inc. Bruce L. Downey (A) A: Audit Committee member Partner, New Spring Health Capital II, LP E: Executive Committee member H: Human Resources and Compensation Committee member Retired Chairman and Chief Executive Oﬃcer, N: Nominating and Governance Committee member Barr Pharmaceuticals, Inc. I: Independent Lead Director Executive team George S. Barrett Pamela O. Kimmet Chairman and Chief Executive Oﬃcer Chief Human Resources Oﬃcer Donald M. Casey Jr. Craig S. Morford Chief Executive Oﬃcer, Medical Segment Chief Legal and Compliance Oﬃcer Jon L. Giacomin Patricia B. Morrison Chief Executive Oﬃcer, Pharmaceutical Segment Executive Vice President, Customer Support Services Michael C. Kaufmann and Chief Information Oﬃcer Chief Financial Oﬃcer 7

Page 11

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³([SODQDWLRQDQG5HFRQFLOLDWLRQRI1RQ*$$3 )LQDQFLDO0HDVXUHV´VHFWLRQIROORZLQJ0' $7KHUHPDLQLQJVHFWLRQVRI0' $ UHIHUWR*$$3 PHDVXUHVRQO\ &DUGLQDO+HDOWK_)LVFDO)RUP.

Page 12

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Ȅ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

Page 13

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¶VJHQHULFVSURJUDPDQGWKHORVVRIDODUJHSKDUPDFHXWLFDO GLVWULEXWLRQ FXVWRPHU EHJLQQLQJ$SULO FRPELQHG ZLWK WKH DGYHUVHLPSDFWRIFXVWRPHUSULFLQJFKDQJHVVLPLODUWRWKRVHLQILVFDO :KLOHZHH[SHFWWKDWWKHVHJPHQW¶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

Page 14

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

Page 15

0' $ 5HVXOWVRI2SHUDWLRQV *URVV0DUJLQ &RQVROLGDWHG*URVV0DUJLQ &KDQJH LQPLOOLRQV *URVVPDUJLQ )LVFDO&RPSDUHGWR)LVFDO )LVFDO&RPSDUHGWR)LVFDO )LVFDO FRQVROLGDWHGJURVVPDUJLQLQFUHDVHGPLOOLRQ )LVFDO FRQVROLGDWHGJURVVPDUJLQLQFUHDVHGPLOOLRQ SHUFHQW DQGZDVIDYRUDEO\LPSDFWHGE\VDOHVJURZWKIURPH[LVWLQJ SHUFHQW DQGZDVIDYRUDEO\LPSDFWHGE\VDOHVJURZWKIURPH[LVWLQJ DQGQHZSKDUPDFHXWLFDOGLVWULEXWLRQFXVWRPHUV PLOOLRQ DQG DQGQHZSKDUPDFHXWLFDOGLVWULEXWLRQFXVWRPHUVRIIVHWLQSDUWE\WKH DFTXLVLWLRQVQHWRIGLYHVWLWXUHV PLOOLRQ :DOJUHHQV FRQWUDFW H[SLUDWLRQ LQ WKH SULRU \HDU7KH QHW LPSDFW RI *URVV PDUJLQ UDWH FRQWUDFWHG GXULQJ ILVFDO SULPDULO\ GXH WR WKHVHIDFWRUVLQFUHDVHGFRQVROLGDWHGJURVVPDUJLQE\PLOOLRQ FKDQJHVLQSURGXFWPL[GULYHQE\WKHRQERDUGLQJRIDQHZPDLORUGHU ,QDGGLWLRQDFTXLVLWLRQVIDYRUDEO\LPSDFWHGJURVVPDUJLQE\ FXVWRPHUVWDUWLQJLQ2FWREHUDQGDOVRGXHWRWKHDGYHUVHLPSDFW PLOOLRQ RIFXVWRPHUSULFLQJFKDQJHV2XUJURVVPDUJLQUDWHZDVIDYRUDEO\ *URVVPDUJLQUDWHFRQWUDFWHGVOLJKWO\GXULQJILVFDOUHIOHFWLQJWKH LPSDFWHG E\ SHUIRUPDQFH XQGHU RXU 3KDUPDFHXWLFDO VHJPHQW DGYHUVHLPSDFWRIFXVWRPHUSULFLQJFKDQJHVWKHORZHUPDUJLQUDWH JHQHULFVSURJUDP2XUJHQHULFVSURJUDPKDGVWURQJ\HDURYHU\HDU LPSDFWRIQHZO\ODXQFKHGKHSDWLWLV&SKDUPDFHXWLFDOSURGXFWVDQG SHUIRUPDQFHIURP5HG2DN6RXUFLQJ QHZ FXVWRPHU PL[ ODUJHO\ RIIVHW E\ VWURQJ SHUIRUPDQFH IURP RXU 3KDUPDFHXWLFDOVHJPHQWJHQHULFVSURJUDPLQFOXGLQJEHQHILWVIURP 5HG2DN6RXUFLQJ 'LVWULEXWLRQ6HOOLQJ*HQHUDODQG$GPLQLVWUDWLYH 6* $ ([SHQVHV 6* $([SHQVHV &KDQJH LQPLOOLRQV 6* $H[SHQVHV )LVFDO&RPSDUHGWR)LVFDO )LVFDO&RPSDUHGWR)LVFDO )LVFDO 6* $ H[SHQVHVLQFUHDVHGSULPDULO\GXHWRDFTXLVLWLRQV )LVFDO 6* $ H[SHQVHVLQFUHDVHGSULPDULO\GXHWRDFTXLVLWLRQV QHWRIGLYHVWLWXUHV PLOOLRQ PLOOLRQ DQGDQRYHUDOOLQFUHDVHLQYROXPHRIVDOHVWRH[LVWLQJ DQGQHZFXVWRPHUV &DUGLQDO+HDOWK_)LVFDO)RUP.

Page 16

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

Page 17

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Ȅ ² 10 10 2WKHU,QFRPH1HW /RVVRQ([WLQJXLVKPHQWRI'HEW 2WKHULQFRPHQHWIRUILVFDO LQFOXGHGDPLOOLRQSUHWD[JDLQ ,Q'HFHPEHUZHUHGHHPHGFHUWDLQGHEWUHVXOWLQJLQDORVVRQ UHODWHGWRWKHVDOHRIRXUPLQRULW\LQWHUHVWLQWZRLQYHVWPHQWV WKHH[WLQJXLVKPHQWRIGHEWRIPLOOLRQ PLOOLRQQHWRIWD[ ,QWHUHVW([SHQVH1HW )LVFDO LQWHUHVWH[SHQVHLQFUHDVHGSULPDULO\DVDUHVXOWRIWKH DGGLWLRQDOELOOLRQRIGHEWLVVXHGLQ-XQHWRIXQGWKH+DUYDUG 'UXJDQG&RUGLVDFTXLVLWLRQV &DUGLQDO+HDOWK_)LVFDO)RUP.

Page 18

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

Page 19

0' $ /LTXLGLW\DQG&DSLWDO5HVRXUFHV /LTXLGLW\DQG&DSLWDO5HVRXUFHV :HFXUUHQWO\EHOLHYHWKDWEDVHGRQDYDLODEOHFDSLWDOUHVRXUFHV FDVKRQKDQGDQGFRPPLWWHGFUHGLWIDFLOLWLHV DQGSURMHFWHGRSHUDWLQJFDVK IORZZHKDYHDGHTXDWHFDSLWDOUHVRXUFHVWRIXQGZRUNLQJFDSLWDOQHHGVFXUUHQWO\DQWLFLSDWHGFDSLWDOH[SHQGLWXUHVFXUUHQWO\DQWLFLSDWHG EXVLQHVVJURZWKDQGH[SDQVLRQFRQWUDFWXDOREOLJDWLRQVWD[SD\PHQWVDQGFXUUHQWDQGSURMHFWHGGHEWVHUYLFHUHTXLUHPHQWVGLYLGHQGVDQG VKDUHUHSXUFKDVHV,IZHGHFLGHWRHQJDJHLQRQHRUPRUHDGGLWLRQDODFTXLVLWLRQVGHSHQGLQJRQWKHVL]HDQGWLPLQJRIVXFKWUDQVDFWLRQVZH PD\QHHGWRDFFHVVFDSLWDOPDUNHWVIRUDGGLWLRQDOILQDQFLQJ &DVKDQG(TXLYDOHQWV 2XUFDVKDQGHTXLYDOHQWVEDODQFHZDVELOOLRQ DW-XQH 'XULQJILVFDOQHWFDVKSURYLGHGE\RSHUDWLQJDFWLYLWLHVRI FRPSDUHGWRELOOLRQ DW-XQH7KHGHFUHDVHLQFDVKDQG ELOOLRQZDV SRVLWLYHO\ LPSDFWHG E\ ZRUNLQJ FDSLWDO LPSURYHPHQWV HTXLYDOHQWVGXULQJILVFDO ZDVGULYHQE\ELOOLRQ GHSOR\HG 7KHVHIXQGVZHUHGHSOR\HGIRUELOOLRQ RIVKDUHUHSXUFKDVHV IRUDFTXLVLWLRQVPLOOLRQ SDLGLQGLYLGHQGVPLOOLRQ SDLGIRU PLOOLRQ RIDFTXLVLWLRQVDQGPLOOLRQ RIFDVKGLYLGHQGV,Q VKDUHUHSXUFKDVHVDQGPLOOLRQ LQFDSLWDOH[SHQGLWXUHVSDUWLDOO\ DGGLWLRQGXULQJWKHVHFRQGTXDUWHURIILVFDOZHUHILQDQFHG RIIVHWE\ELOOLRQ LQFDVKSURYLGHGE\RSHUDWLQJDFWLYLWLHV1HWFDVK ELOOLRQRIORQJWHUPGHEWDWORZHULQWHUHVWUDWHVDQGORQJHUPDWXULWLHV SURYLGHGE\RSHUDWLQJDFWLYLWLHVZDVSRVLWLYHO\LPSDFWHGE\LQFUHDVHG DQGGXULQJWKHIRXUWKTXDUWHURIILVFDO ZHUHFHLYHGSURFHHGV QHWHDUQLQJVDQGZRUNLQJFDSLWDOLPSURYHPHQWV$W-XQH IURPWKHLVVXDQFHRIDGGLWLRQDOORQJWHUPGHEWRIELOOLRQWRIXQG RXUFDVKDQGHTXLYDOHQWVZHUHKHOGLQFDVKGHSRVLWRU\DFFRXQWVZLWK WKH+DUYDUG'UXJDQG&RUGLVDFTXLVLWLRQV PDMRUEDQNVRULQYHVWHGLQKLJKTXDOLW\VKRUWWHUPOLTXLGLQYHVWPHQWV 'XULQJ ILVFDO ZH GHSOR\HG PLOOLRQ RI FDVK RQ VKDUH 7KHFDVKDQGHTXLYDOHQWVEDODQFHDW-XQH LQFOXGHG UHSXUFKDVHV PLOOLRQ RQ DFTXLVLWLRQV DQG PLOOLRQ RQ PLOOLRQ RI FDVK KHOG E\ VXEVLGLDULHV RXWVLGH RI WKH 8QLWHG 6WDWHV GLYLGHQGV1HWFDVKSURYLGHGE\RSHUDWLQJDFWLYLWLHVRIELOOLRQ $OWKRXJK WKH YDVW PDMRULW\ RI FDVK LV DYDLODEOH IRU UHSDWULDWLRQ EHQHILWHG IURP D QHW ZRUNLQJ FDSLWDO GHFUHDVH LQ H[FHVV RI EULQJLQJWKHFDVKLQWRWKH8QLWHG6WDWHVFRXOGWULJJHU86IHGHUDO PLOOLRQDVDUHVXOWRIWKH:DOJUHHQVFRQWUDFWH[SLUDWLRQ VWDWHDQGORFDOLQFRPHWD[REOLJDWLRQV%HFDXVHWKHHDUQLQJVDUH &KDQJHVLQZRUNLQJFDSLWDOZKLFKLPSDFWRSHUDWLQJFDVKIORZFDQ FRQVLGHUHGSHUPDQHQWO\UHLQYHVWHGQR86WD[SURYLVLRQKDVEHHQ YDU\VLJQLILFDQWO\GHSHQGLQJRQIDFWRUVVXFKDVWKHWLPLQJRIFXVWRPHU DFFUXHG UHODWHG WR WKH UHSDWULDWLRQ RI WKHVH HDUQLQJV ,W LV QRW SD\PHQWV LQYHQWRU\ SXUFKDVHV DQG SD\PHQWV WR YHQGRUV LQ WKH SUDFWLFDEOHWRHYDOXDWHWKHDPRXQWRI86WD[WKDWPLJKWEHSD\DEOH UHJXODU FRXUVH RI EXVLQHVV DV ZHOO DV IOXFWXDWLQJ ZRUNLQJ FDSLWDO RQWKHHYHQWXDOUHPLWWDQFHRIVXFKHDUQLQJV QHHGVGULYHQE\FXVWRPHUDQGSURGXFWPL[ 2WKHU)LQDQFLQJ$UUDQJHPHQWVDQG)LQDQFLDO,QVWUXPHQWV &UHGLW)DFLOLWLHVDQG&RPPHUFLDO3DSHU $YDLODEOHIRU6DOH6HFXULWLHV ,QDGGLWLRQWRFDVKDQGHTXLYDOHQWVDQGRSHUDWLQJFDVKIORZRWKHU $W-XQH DQGZHKHOGPLOOLRQ DQGPLOOLRQ VRXUFHVRIOLTXLGLW\DW-XQH LQFOXGHDELOOLRQ UHYROYLQJ UHVSHFWLYHO\ RI PDUNHWDEOH VHFXULWLHV ZKLFK DUH FODVVLILHG DV FUHGLWIDFLOLW\DQGDPLOOLRQ FRPPLWWHGUHFHLYDEOHVVDOHVIDFLOLW\ DYDLODEOHIRUVDOH SURJUDP ,Q-XQHZHLQFUHDVHGRXUUHYROYLQJFUHGLWIDFLOLW\ /RQJ7HUP2EOLJDWLRQV IURP ELOOLRQ WR ELOOLRQ DQG GHFUHDVHG RXU FRPPLWWHG UHFHLYDEOHVIDFLOLW\SURJUDPIURPPLOOLRQ WRPLOOLRQ:H $W-XQHZHKDGWRWDOORQJWHUPREOLJDWLRQVRIELOOLRQ DOVRKDYHDFRPPHUFLDOSDSHUSURJUDPRIXSWRELOOLRQEDFNHG 5LVN0DQDJHPHQW E\WKHUHYROYLQJFUHGLWIDFLOLW\$W-XQHZHKDGQRDPRXQWV RXWVWDQGLQJ XQGHU WKH UHYROYLQJ FUHGLW IDFLOLW\$YDLODELOLW\ RQ WKH :H XVH LQWHUHVW UDWH VZDSV IRUHLJQ FXUUHQF\ FRQWUDFWV DQG UHYROYLQJFUHGLWIDFLOLW\ZDVUHGXFHGE\RXWVWDQGLQJOHWWHUVRIFUHGLW FRPPRGLW\FRQWUDFWVWRPDQDJHRXUH[SRVXUHWRFDVKIORZYDULDELOLW\ RIPLOOLRQ DW-XQH:HDOVRKDGVWDQGE\OHWWHUVRIFUHGLW :HDOVRXVHLQWHUHVWUDWHVZDSVWRSURWHFWWKHYDOXHRIRXUGHEWDQG RIPLOOLRQ LVVXHGXQGHUWKHFRPPLWWHGUHFHLYDEOHVVDOHVIDFLOLW\ XVHIRUHLJQFXUUHQF\IRUZDUGFRQWUDFWVWRSURWHFWWKHYDOXHRIRXU SURJUDPDW-XQH H[LVWLQJDQGIRUHFDVWHGIRUHLJQFXUUHQF\DVVHWVDQGOLDELOLWLHV6HH WKH 4XDQWLWDWLYH DQG 4XDOLWDWLYH 'LVFORVXUHV$ERXW 0DUNHW 5LVN 2XUUHYROYLQJFUHGLWIDFLOLW\DQGFRPPLWWHGUHFHLYDEOHVVDOHVIDFLOLW\ VHFWLRQ DV ZHOO DV 1RWHV DQG RI WKH ³1RWHV WR &RQVROLGDWHG SURJUDPUHTXLUHXVWRPDLQWDLQDFRQVROLGDWHGOHYHUDJHUDWLRRIQR )LQDQFLDO6WDWHPHQWV´IRULQIRUPDWLRQUHJDUGLQJWKHXVHRIILQDQFLDO PRUHWKDQWR DQGRXUFRPPLWWHGUHFHLYDEOHVVDOHVIDFLOLW\DOVR LQVWUXPHQWVDQGGHULYDWLYHVDVZHOODVIRUHLJQFXUUHQF\LQWHUHVWUDWH UHTXLUHVXVWRPDLQWDLQDFRQVROLGDWHGLQWHUHVWFRYHUDJHUDWLRDVRI DQGFRPPRGLW\H[SRVXUHV WKHHQGRIDQ\FDOHQGDUTXDUWHURIDWOHDVWWR$VRI-XQH ZHZHUHLQFRPSOLDQFHZLWKWKHVHILQDQFLDOFRYHQDQWV &DUGLQDO+HDOWK_)LVFDO)RUP.

Page 20

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

Page 21

0' $ 2WKHU &RQWUDFWXDO2EOLJDWLRQV $W-XQHRXUFRQWUDFWXDOREOLJDWLRQVLQFOXGLQJHVWLPDWHG 6HH 1RWH RI WKH ³1RWHV WR &RQVROLGDWHG )LQDQFLDO 6WDWHPHQWV´ IRU IXUWKHU GLVFXVVLRQ RI LQFRPH WD[HV $GGLWLRQDOO\ WKH FDUU\LQJ YDOXH RI UHGHHPDEOH SD\PHQWVGXHE\SHULRGDUHDVIROORZV QRQFRQWUROOLQJLQWHUHVWVDUHH[FOXGHGIURPWKHWDEOHDVWKHXOWLPDWHDPRXQWDQG WLPLQJ RI DQ\ IXWXUH FDVK SD\PHQWV UHODWHG WR WKH UHGHPSWLRQ DPRXQW DUH WR WR 7KHUH XQFHUWDLQ6HH1RWH DQG1RWH RIWKH³1RWHVWR&RQVROLGDWHG)LQDQFLDO LQPLOOLRQV DIWHU 7RWDO 6WDWHPHQWV´IRUIRUDGGLWLRQDOLQIRUPDWLRQUHJDUGLQJUHGHHPDEOHQRQFRQWUROOLQJ LQWHUHVWV /RQJWHUPGHEWDQGVKRUW WHUPERUURZLQJV 5HSUHVHQWV PLQLPXP UHQWDO SD\PHQWV IRU RSHUDWLQJ OHDVHV KDYLQJ LQLWLDO RU UHPDLQLQJQRQFDQFHODEOHOHDVHWHUPVDVGHVFULEHGLQ1RWH RIWKH³1RWHVWR &RQVROLGDWHG)LQDQFLDO6WDWHPHQWV´ ,QWHUHVWRQORQJWHUPGHEW $SXUFKDVHREOLJDWLRQLVGHILQHGDVDQDJUHHPHQWWRSXUFKDVHJRRGVRUVHUYLFHV &DSLWDOOHDVHREOLJDWLRQV WKDWLVOHJDOO\HQIRUFHDEOHDQGVSHFLILHVDOOVLJQLILFDQWWHUPVLQFOXGLQJIL[HGRU PLQLPXP TXDQWLWLHV WR EH SXUFKDVHG IL[HG PLQLPXP RU YDULDEOH SULFH 2WKHUOLDELOLWLHV ² ² ² SURYLVLRQVDQGDSSUR[LPDWHWLPLQJRIWKHWUDQVDFWLRQ7KHSXUFKDVHREOLJDWLRQ 2SHUDWLQJOHDVHV DPRXQWVGLVFORVHGDERYHUHSUHVHQWHVWLPDWHVRIWKHPLQLPXPIRUZKLFKZHDUH REOLJDWHGDQGWKHWLPHSHULRGLQZKLFKFDVKRXWIORZVZLOORFFXU3XUFKDVHRUGHUV 3XUFKDVHREOLJDWLRQVDQG DQGDXWKRUL]DWLRQVWRSXUFKDVHWKDWLQYROYHQRILUPFRPPLWPHQWIURPHLWKHU RWKHUSD\PHQWV SDUW\ DUH H[FOXGHG IURP WKH DERYH WDEOH ,Q DGGLWLRQ FRQWUDFWV WKDW FDQ EH XQLODWHUDOO\FDQFHOHGZLWKQRWHUPLQDWLRQIHHRUZLWKSURSHUQRWLFHDUHH[FOXGHG 7RWDOFRQWUDFWXDO REOLJDWLRQV IURPRXUWRWDOSXUFKDVHREOLJDWLRQVH[FHSWIRUWKHDPRXQWRIWKHWHUPLQDWLRQIHH RUWKHPLQLPXPDPRXQWRIJRRGVWKDWPXVWEHSXUFKDVHGGXULQJWKHUHTXLVLWH 5HSUHVHQWVPDWXULWLHVRIRXUORQJWHUPGHEWREOLJDWLRQVDQGRWKHUVKRUWWHUP QRWLFHSHULRG3XUFKDVHREOLJDWLRQVDQGRWKHUSD\PHQWVDOVRLQFOXGHVTXDUWHUO\ ERUURZLQJVH[FOXGLQJFDSLWDOOHDVHREOLJDWLRQVGHVFULEHGEHORZ6HH1RWH RI SD\PHQWVRIPLOOLRQWKDWZHDUHUHTXLUHGWRSD\&96+HDOWK&RUSRUDWLRQ WKH³1RWHVWR&RQVROLGDWHG)LQDQFLDO6WDWHPHQWV´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³1RWHV WR &RQVROLGDWHG )LQDQFLDO WDEOHDERYHEHFDXVHRIWKHLQKHUHQWXQFHUWDLQW\RIWKHXQGHUO\LQJWD[SRVLWLRQV 6WDWHPHQWV´IRUDGGLWLRQDOLQIRUPDWLRQ RUEHFDXVHRIWKHLQDELOLW\WRUHDVRQDEO\HVWLPDWHWKHWLPLQJRIDQ\FDVKRXWIORZV 2II%DODQFH6KHHW$UUDQJHPHQWV :HKDGQRVLJQLILFDQWRIIEDODQFHVKHHWDUUDQJHPHQWVDW-XQHDVWKDWWHUPLVGHILQHGLQWKH6(&UXOHV 5HFHQW)LQDQFLDO$FFRXQWLQJ6WDQGDUGV 6HH1RWH RIWKH³1RWHVWR&RQVROLGDWHG)LQDQFLDO6WDWHPHQWV´IRUDGLVFXVVLRQRIUHFHQWILQDQFLDODFFRXQWLQJVWDQGDUGV &DUGLQDO+HDOWK_)LVFDO)RUP.

Page 22

0' $ &ULWLFDO$FFRXQWLQJ3ROLFLHVDQG6HQVLWLYH$FFRXQWLQJ(VWLPDWHV &ULWLFDO$FFRXQWLQJ3ROLFLHVDQG6HQVLWLYH$FFRXQWLQJ(VWLPDWHV &ULWLFDODFFRXQWLQJSROLFLHVDUHWKRVHDFFRXQWLQJSROLFLHVWKDW L FDQKDYHDVLJQLILFDQWLPSDFWRQRXUILQDQFLDOFRQGLWLRQDQGUHVXOWVRIRSHUDWLRQV DQG LL UHTXLUHWKHXVHRIFRPSOH[DQGVXEMHFWLYHHVWLPDWHVEDVHGXSRQSDVWH[SHULHQFHDQGPDQDJHPHQW¶VMXGJPHQW2WKHUSHRSOHDSSO\LQJ UHDVRQDEOHMXGJPHQWWRWKHVDPHIDFWVDQGFLUFXPVWDQFHVFRXOGGHYHORSGLIIHUHQWHVWLPDWHV%HFDXVHHVWLPDWHVDUHLQKHUHQWO\XQFHUWDLQ DFWXDOUHVXOWVPD\GLIIHU,QWKLVVHFWLRQZHGHVFULEHWKHVLJQLILFDQWSROLFLHVDSSOLHGLQSUHSDULQJRXUFRQVROLGDWHGILQDQFLDOVWDWHPHQWVWKDW PDQDJHPHQWEHOLHYHVDUHWKHPRVWGHSHQGHQWRQHVWLPDWHVDQGDVVXPSWLRQV)RUIXUWKHUGLVFXVVLRQRIDFFRXQWLQJSROLFLHVIRULWHPVZLWKLQ WKLVVHFWLRQDQGRIDGGLWLRQDODFFRXQWLQJSROLFLHVVHH1RWH RIWKH³1RWHVWR&RQVROLGDWHG)LQDQFLDO6WDWHPHQWV´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¶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

Page 23

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³1RWHVWR&RQVROLGDWHG RILGHQWLILDEOHLQWDQJLEOHDVVHWVRQGHWDLOHGYDOXDWLRQVWKDWUHTXLUH )LQDQFLDO 6WDWHPHQWV´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

Page 24

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³1RWHV WR WKHVH PDWWHUV DUH LQKHUHQWO\ XQSUHGLFWDEOH DQG XQIDYRUDEOH &RQVROLGDWHG )LQDQFLDO 6WDWHPHQWV´ IRU DGGLWLRQDO LQIRUPDWLRQ GHYHORSPHQWVRUUHVROXWLRQVFDQRFFXUDVVHVVLQJFRQWLQJHQFLHVLV UHJDUGLQJORVVFRQWLQJHQFLHV KLJKO\VXEMHFWLYHDQGUHTXLUHVMXGJPHQWVDERXWIXWXUHHYHQWV 3URYLVLRQIRU,QFRPH7D[HV 2XULQFRPHWD[H[SHQVHGHIHUUHGLQFRPHWD[DVVHWVDQGOLDELOLWLHV DOORZDQFHVZHGRQRWDQWLFLSDWHDQ\OLPLWDWLRQVRQRXUXVHRIDQ\RI DQGXQUHFRJQL]HGWD[EHQHILWVUHIOHFWPDQDJHPHQW¶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³1RWHV WR &RQVROLGDWHG )LQDQFLDO 6WDWHPHQWV´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

Page 25

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

Page 26

([SODQDWLRQDQG5HFRQFLOLDWLRQRI1RQ*$$3)LQDQFLDO0HDVXUHV ([SODQDWLRQDQG5HFRQFLOLDWLRQRI1RQ*$$3 )LQDQFLDO0HDVXUHV 7KH.H\+LJKOLJKWVVHFWLRQDQG)LVFDO2YHUYLHZVHFWLRQZLWKLQ0' $ LQWKLV)RUP.FRQWDLQVILQDQFLDOPHDVXUHVWKDWDUHQRW FDOFXODWHGLQDFFRUGDQFHZLWK*$$3 ,QDGGLWLRQWRDQDO\]LQJRXUEXVLQHVVEDVHGRQILQDQFLDOLQIRUPDWLRQSUHSDUHGLQDFFRUGDQFHZLWK*$$3ZHXVHWKHVHQRQ*$$3 ILQDQFLDO PHDVXUHVLQWHUQDOO\WRHYDOXDWHRXUSHUIRUPDQFHHYDOXDWHWKHEDODQFHVKHHWHQJDJHLQILQDQFLDODQGRSHUDWLRQDOSODQQLQJDQGGHWHUPLQH LQFHQWLYHFRPSHQVDWLRQEHFDXVHZHEHOLHYHWKDWWKHVHPHDVXUHVSURYLGHDGGLWLRQDOSHUVSHFWLYHRQDQGLQVRPHFLUFXPVWDQFHVDUHPRUH FORVHO\FRUUHODWHGWRWKHSHUIRUPDQFHRIRXUXQGHUO\LQJRQJRLQJEXVLQHVV:HSURYLGHWKHVHQRQ*$$3 ILQDQFLDOPHDVXUHVWRLQYHVWRUVDV VXSSOHPHQWDOPHWULFVWRDVVLVWUHDGHUVLQDVVHVVLQJWKHHIIHFWVRILWHPVDQGHYHQWVRQRXUILQDQFLDODQGRSHUDWLQJUHVXOWVRQD\HDURYHU\HDU EDVLVDQGLQFRPSDULQJRXUSHUIRUPDQFHWRWKDWRIRXUFRPSHWLWRUV+RZHYHUWKHQRQ*$$3 ILQDQFLDOPHDVXUHVWKDWZHXVHPD\EHFDOFXODWHG GLIIHUHQWO\IURPDQGWKHUHIRUHPD\QRWEHFRPSDUDEOHWRVLPLODUO\WLWOHGPHDVXUHVXVHGE\RWKHUFRPSDQLHV7KHQRQ*$$3 ILQDQFLDOPHDVXUHV GLVFORVHGE\XVVKRXOGQRWEHFRQVLGHUHGDVXEVWLWXWHIRURUVXSHULRUWRILQDQFLDOPHDVXUHVFDOFXODWHGLQDFFRUGDQFHZLWK*$$3DQGWKH ILQDQFLDOUHVXOWVFDOFXODWHGLQDFFRUGDQFHZLWK*$$3 DQGUHFRQFLOLDWLRQVWRWKRVHILQDQFLDOVWDWHPHQWVVHWIRUWKEHORZVKRXOGEHFDUHIXOO\ HYDOXDWHG ([FOXVLRQVIURP1RQ*$$3)LQDQFLDO0HDVXUHV 7KH GLIIHUHQFHV EHWZHHQ WKH QRQ*$$3 PHDVXUHV SUHVHQWHG LQ WKLV )RUP . DQG WKH PRVW GLUHFWO\ FRPSDUDEOH *$$3 PHDVXUH DUH UHSUHVHQWHGE\WKHIROORZLQJLWHPVZKLFKPDQDJHPHQWEHOLHYHVDUHXVHIXOWRH[FOXGHIRULWVRZQDQGIRULQYHVWRUV¶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¶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

Page 27

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

Page 28

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²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² 1RQ*$$3 IURPFRQWLQXLQJRSHUDWLRQV DWWULEXWDEOHWR&DUGLQDO+HDOWK,QF 7KHVXPRIWKHFRPSRQHQWVPD\QRWHTXDOWKHWRWDOGXHWRURXQGLQJ :HDSSO\YDU\LQJWD[UDWHVGHSHQGLQJRQWKHLWHP VQDWXUHDQGWD[MXULVGLFWLRQZKHUHLWLVLQFXUUHG &DUGLQDO+HDOWK_)LVFDO)RUP.

Page 29

6HOHFWHG)LQDQFLDO'DWD 6HOHFWHG)LQDQFLDO'DWD 7KHFRQVROLGDWHGILQDQFLDOGDWDEHORZLQFOXGHVDOOEXVLQHVVFRPELQDWLRQVDVRIWKHGDWHRIDFTXLVLWLRQWKDWRFFXUUHGGXULQJWKHVHSHULRGV 7KHIROORZLQJVHOHFWHGFRQVROLGDWHGILQDQFLDOGDWDVKRXOGEHUHDGLQFRQMXQFWLRQZLWKWKHFRQVROLGDWHGILQDQFLDOVWDWHPHQWVDQGUHODWHG QRWHVDQG0' $ LQPLOOLRQVH[FHSWSHUFRPPRQVKDUHDPRXQWV (DUQLQJV'DWD 5HYHQXH 2SHUDWLQJHDUQLQJV (DUQLQJVIURPFRQWLQXLQJRSHUDWLRQV (DUQLQJV ORVV IURPGLVFRQWLQXHGRSHUDWLRQVQHWRIWD[ Ȅ 1HWHDUQLQJV /HVV1HWHDUQLQJVDWWULEXWDEOHWRQRQFRQWUROOLQJLQWHUHVWV ² ² ² ² 1HWHDUQLQJVDWWULEXWDEOHWR&DUGLQDO+HDOWK,QF %DVLFHDUQLQJVSHUFRPPRQVKDUHDWWULEXWDEOHWR&DUGLQDO+HDOWK,QF &RQWLQXLQJRSHUDWLRQV 'LVFRQWLQXHGRSHUDWLRQV Ȅ ² ² 1HWEDVLFHDUQLQJVSHUFRPPRQVKDUHDWWULEXWDEOHWR&DUGLQDO+HDOWK,QF 'LOXWHGHDUQLQJVSHUFRPPRQVKDUHDWWULEXWDEOHWR&DUGLQDO+HDOWK,QF &RQWLQXLQJRSHUDWLRQV 'LVFRQWLQXHGRSHUDWLRQV Ȅ ² ² 1HWGLOXWHGHDUQLQJVSHUFRPPRQVKDUHDWWULEXWDEOHWR&DUGLQDO+HDOWK,QF &DVKGLYLGHQGVGHFODUHGSHUFRPPRQVKDUH %DODQFH6KHHW'DWD 7RWDODVVHWV /RQJWHUPREOLJDWLRQVOHVVFXUUHQWSRUWLRQ 7RWDO&DUGLQDO+HDOWK,QFVKDUHKROGHUV HTXLW\ 'XULQJILVFDOZHUHFRJQL]HGDQRQFDVKJRRGZLOOLPSDLUPHQWFKDUJHRIPLOOLRQ PLOOLRQQHWRIWD[ UHODWHGWRRXU1XFOHDU3KDUPDF\6HUYLFHVGLYLVLRQ &DUGLQDO+HDOWK_)LVFDO)RUP.

Page 30

'LVFORVXUHVDERXW0DUNHW5LVN 4XDQWLWDWLYHDQG4XDOLWDWLYH'LVFORVXUHV$ERXW0DUNHW5LVN :HDUHH[SRVHGWRFDVKIORZDQGHDUQLQJVIOXFWXDWLRQVDVDUHVXOWRIFHUWDLQPDUNHWULVNV7KHVHPDUNHWULVNVSULPDULO\UHODWHWRIRUHLJQ H[FKDQJHLQWHUHVWUDWHDQGFRPPRGLW\SULFHUHODWHGFKDQJHV:HPDLQWDLQDKHGJLQJSURJUDPWRPDQDJHYRODWLOLW\UHODWHGWRWKHVHPDUNHW H[SRVXUHVZKLFKHPSOR\VRSHUDWLRQDOHFRQRPLFDQGGHULYDWLYHILQDQFLDOLQVWUXPHQWVLQRUGHUWRPLWLJDWHULVN6HH1RWH DQG1RWH RIWKH ³1RWHVWR&RQVROLGDWHG)LQDQFLDO6WDWHPHQWV´IRUIXUWKHUGLVFXVVLRQUHJDUGLQJRXUXVHRIGHULYDWLYHLQVWUXPHQWV )RUHLJQ([FKDQJH5DWH6HQVLWLYLW\ %\QDWXUHRIRXUJOREDORSHUDWLRQVZHDUHH[SRVHGWRFDVKIORZDQGHDUQLQJVIOXFWXDWLRQVUHVXOWLQJIURPIRUHLJQH[FKDQJHUDWHYDULDWLRQ 7KHVHH[SRVXUHVDUHWUDQVDFWLRQDODQGWUDQVODWLRQDOLQQDWXUH3ULQFLSDOGULYHUVRIWKLVIRUHLJQH[FKDQJHH[SRVXUHLQFOXGHWKH&DQDGLDQGROODU HXUR7KDLEDKW&KLQHVHUHQPLQEL-DSDQHVH\HQ0H[LFDQSHVR%ULWLVKSRXQG6LQJDSRUHGROODU$XVWUDOLDQGROODU0DOD\VLDQULQJJLW 7UDQVDFWLRQDO([SRVXUH 7UDQVODWLRQDO([SRVXUH 7UDQVDFWLRQDOH[SRVXUHDULVHVIURPWKHSXUFKDVHDQGVDOHRIJRRGV :HKDYHH[SRVXUHUHODWHGWRWKHWUDQVODWLRQRIILQDQFLDOVWDWHPHQWV DQGVHUYLFHVLQFXUUHQFLHVRWKHUWKDQRXUIXQFWLRQDOFXUUHQF\RUWKH RIRXUIRUHLJQRSHUDWLRQVLQWR86GROODUVRXUIXQFWLRQDOFXUUHQF\ IXQFWLRQDO FXUUHQF\ RI RXU VXEVLGLDULHV $V SDUW RI RXU ULVN :HSHUIRUPDVLPLODUDQDO\VLVWRWKDWSUHYLRXVO\GHVFULEHGUHODWHGWR PDQDJHPHQWSURJUDPDWWKHHQGRIHDFKILVFDO\HDUZHSHUIRUPD WKLVWUDQVODWLRQDOH[SRVXUH2XUIRUHFDVWHGWUDQVODWLRQDOH[SRVXUHDW VHQVLWLYLW\DQDO\VLVRQRXUIRUHFDVWHGWUDQVDFWLRQDOH[SRVXUHIRUWKH -XQH LQFUHDVHGIURPWKHSULRU\HDUSULPDULO\DVDUHVXOWRI XSFRPLQJILVFDO\HDU7KHVHDQDO\VHVLQFOXGHWKHHVWLPDWHGLPSDFW FKDQJHVLQWKHQXPEHURIILQDQFLDOVWDWHPHQWVWUDQVODWHGIURPIRUHLJQ RIRXUKHGJLQJSURJUDPZKLFKLVGHVLJQHGWRPLWLJDWHWUDQVDFWLRQDO FXUUHQFLHVGXHWRWKHDFTXLVLWLRQRI&RUGLV:HGRQRWW\SLFDOO\KHGJH H[SRVXUH2XUIRUHFDVWHGWUDQVDFWLRQDOH[SRVXUHDW-XQH DQ\RIRXUWUDQVODWLRQDOH[SRVXUHDQGQRKHGJLQJLPSDFWZDVLQFOXGHG LQFUHDVHGIURPWKHSULRU\HDUSULPDULO\DVDUHVXOWRIFKDQJHVLQWKH LQRXUDQDO\VLVDW-XQH DQG YROXPHRIWUDQVDFWLRQVLQIRUHLJQFXUUHQFLHVGXHWRWKHDFTXLVLWLRQRI 7KH IROORZLQJ WDEOH VXPPDUL]HV WUDQVODWLRQDO H[SRVXUH DQG WKH &RUGLV$W-XQH DQGZHKDGKHGJHGDSSUR[LPDWHO\ LPSDFWRIDK\SRWKHWLFDOSHUFHQWVWUHQJWKHQLQJRUZHDNHQLQJLQ DQGSHUFHQWRIWUDQVDFWLRQDOH[SRVXUHVUHVSHFWLYHO\ WKH86GROODUDVVXPLQJUDWHVFROOHFWLYHO\VKLIWLQWKHVDPHGLUHFWLRQ 7KH IROORZLQJ WDEOH VXPPDUL]HV WKH DQDO\VLV DV LW UHODWHV WR IRUWKHXSFRPLQJILVFDO\HDU WUDQVDFWLRQDOH[SRVXUHDQGWKHLPSDFWRIDK\SRWKHWLFDOSHUFHQW IOXFWXDWLRQLQIRUHLJQFXUUHQFLHVDVVXPLQJUDWHVFROOHFWLYHO\VKLIWLQ -XQH WKHVDPHGLUHFWLRQDQGZHDUHXQDEOHWRFKDQJHFXVWRPHUSULFLQJLQ LQPLOOLRQV UHVSRQVHWRWKRVHVKLIWVIRUWKHXSFRPLQJILVFDO\HDU 1HWK\SRWKHWLFDOWUDQVODWLRQDOH[SRVXUH 6HQVLWLYLW\JDLQORVV -XQH LQPLOOLRQV 1HWK\SRWKHWLFDOWUDQVDFWLRQDOH[SRVXUH 6HQVLWLYLW\JDLQORVV (VWLPDWHGRIIVHWWLQJLPSDFWRIKHGJHV +\SRWKHWLFDO QHWJDLQORVV &DUGLQDO+HDOWK_)LVFDO)RUP.

Page 31

'LVFORVXUHVDERXW0DUNHW5LVN ,QWHUHVW5DWH6HQVLWLYLW\ :HDUHH[SRVHGWRFKDQJHVLQLQWHUHVWUDWHVSULPDULO\DVDUHVXOWRI SHUFHQWFKDQJHLQLQWHUHVWUDWHV$W-XQH DQGWKH RXUERUURZLQJDQGLQYHVWLQJDFWLYLWLHVWRPDLQWDLQOLTXLGLW\DQGIXQG SRWHQWLDOLQFUHDVHRUGHFUHDVHLQDQQXDOLQWHUHVWH[SHQVHXQGHUWKLV RSHUDWLRQV7KHQDWXUHDQGDPRXQWRIRXUORQJWHUPDQGVKRUWWHUP DQDO\VLVDVDUHVXOWRIWKLVK\SRWKHWLFDOFKDQJHZDVPLOOLRQIRU GHEW FDQ EH H[SHFWHG WR IOXFWXDWH DV D UHVXOW RI EXVLQHVV ERWKSHULRGV UHTXLUHPHQWVPDUNHWFRQGLWLRQVDQGRWKHUIDFWRUV2XUSROLF\LVWR 'XULQJILVFDO DQGZHKHOGPDUNHWDEOHVHFXULWLHVZKLFK PDQDJHH[SRVXUHVWRLQWHUHVWUDWHVXVLQJDPL[RIIL[HGDQGIORDWLQJ DUHFODVVLILHGDVDYDLODEOHIRUVDOHDQGDUHFDUULHGDWIDLUYDOXHLQWKH UDWHGHEWDVGHHPHGDSSURSULDWHE\PDQDJHPHQW:HXWLOL]HLQWHUHVW FRQVROLGDWHG EDODQFH VKHHWV7KH IDLU YDOXH LV VXEMHFW WR FKDQJH UDWH VZDS LQVWUXPHQWV WR PLWLJDWH RXU H[SRVXUH WR LQWHUHVW UDWH SULPDULO\ DV D UHVXOW RI FKDQJHV LQ PDUNHW LQWHUHVW UDWHV DQG PRYHPHQWV LQYHVWPHQW ULVN UHODWHG WR WKH LVVXHUV FUHGLW ZRUWKLQHVV$W ERWK $V SDUW RI RXU ULVN PDQDJHPHQW SURJUDP ZH SHUIRUP DQ DQQXDO -XQH DQGDK\SRWKHWLFDOLQFUHDVHRUGHFUHDVHRIRQH VHQVLWLYLW\DQDO\VLVRQRXUIRUHFDVWHGH[SRVXUHWRLQWHUHVWUDWHVIRU SHUFHQWDJHSRLQWLQLQWHUHVWUDWHVZRXOGFDXVHDSRWHQWLDOLQFUHDVH WKHXSFRPLQJILVFDO\HDU7KLVDQDO\VLVDVVXPHVDK\SRWKHWLFDO RUGHFUHDVHRIXSWRPLOOLRQLQWKHHVWLPDWHGIDLUYDOXH &RPPRGLW\3ULFH6HQVLWLYLW\ :H DUH GLUHFWO\ H[SRVHG WR PDUNHW SULFH FKDQJHV IRU FHUWDLQ 7KHWDEOHEHORZVXPPDUL]HVRXUDQDO\VLVRIWKHVHIRUHFDVWHGGLUHFW FRPPRGLWLHVLQFOXGLQJRLOEDVHGUHVLQVQLWULOHFRWWRQGLHVHOIXHODQG DQGLQGLUHFWFRPPRGLW\H[SRVXUHVDQGWKHSRWHQWLDOJDLQORVVJLYHQ ODWH[:HW\SLFDOO\SXUFKDVHUDZPDWHULDOVDWHLWKHUPDUNHWSULFHVRU DK\SRWKHWLFDOSHUFHQWIOXFWXDWLRQLQFRPPRGLW\SULFHVDVVXPLQJ SULFHVWLHGWRDFRPPRGLW\LQGH[DQGVRPHILQLVKHGJRRGVDWSULFHV SULFLQJFROOHFWLYHO\VKLIWVLQWKHVDPHGLUHFWLRQDQGZHDUHXQDEOHWR EDVHGLQSDUWRQDFRPPRGLW\SULFHLQGH[:HDOVRDUHLQGLUHFWO\ FKDQJHFXVWRPHUSULFLQJLQUHVSRQVHWRWKRVHVKLIWVIRUWKHXSFRPLQJ H[SRVHG WR IOXFWXDWLRQV LQ FHUWDLQ FRPPRGLW\ SULFHV WKURXJK WKH ILVFDO\HDU SXUFKDVHRIILQLVKHGJRRGVDQGYDULRXVHQHUJ\UHODWHGFRPPRGLWLHV LQFOXGLQJQDWXUDOJDVDQGHOHFWULFLW\WKURXJKRXUQRUPDOFRXUVHRI -XQH EXVLQHVVZKHUHRXUFRQWUDFWVDUHQRWGLUHFWO\WLHGWRDFRPPRGLW\ LQPLOOLRQV LQGH[ $V SDUW RI RXU ULVN PDQDJHPHQW SURJUDP ZH SHUIRUP +\SRWKHWLFDOFRPPRGLW\H[SRVXUH VHQVLWLYLW\DQDO\VLVRQRXUIRUHFDVWHGFRPPRGLW\H[SRVXUHIRUWKH XSFRPLQJ ILVFDO \HDU 2XU IRUHFDVWHG FRPPRGLW\ H[SRVXUH DW 6HQVLWLYLW\JDLQORVV -XQH LQFUHDVHGIURPWKHSULRU\HDUSULPDULO\DVDUHVXOWRI +\SRWKHWLFDORIIVHWWLQJLPSDFWRIKHGJHV FKDQJHVLQSXUFKDVLQJYROXPHVDQGFRPPRGLW\SULFLQJ$W-XQH +\SRWKHWLFDOQHWJDLQORVV DQGZHKDGKHGJHGDSRUWLRQRIWKHVHGLUHFWFRPPRGLW\ H[SRVXUHV VHH 1RWH RI WKH ³1RWHV WR &RQVROLGDWHG )LQDQFLDO :HEHOLHYHRXUWRWDOJURVVUDQJHRIGLUHFWDQGLQGLUHFWH[SRVXUHWR 6WDWHPHQWV´IRUIXUWKHUGLVFXVVLRQ FRPPRGLWLHVLVPLOOLRQWRPLOOLRQIRUILVFDO &DUGLQDO+HDOWK_)LVFDO)RUP.

Page 32

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³1RWHVWR&RQVROLGDWHG)LQDQFLDO6WDWHPHQWV´IRU GLVWULEXWHVEUDQGHGDQGJHQHULFSKDUPDFHXWLFDORYHUWKHFRXQWHU 3KDUPDFHXWLFDOVHJPHQWUHYHQXHSURILWDQGDVVHWVIRUILVFDO KHDOWKFDUH DQG FRQVXPHU SURGXFWV WKURXJK LWV 3KDUPDFHXWLFDO DQG 'LVWULEXWLRQGLYLVLRQWRUHWDLOHUV LQFOXGLQJFKDLQDQGLQGHSHQGHQW 3KDUPDFHXWLFDO'LVWULEXWLRQ GUXJVWRUHVDQGSKDUPDF\GHSDUWPHQWVRIVXSHUPDUNHWVDQGPDVV PHUFKDQGLVHUV KRVSLWDOV DQG RWKHU KHDOWKFDUH SURYLGHUV7KLV 2XU3KDUPDFHXWLFDO'LVWULEXWLRQGLYLVLRQ¶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³VSHFLDOW\SKDUPDFHXWLFDOSURGXFWVDQGVHUYLFHV´7KH DQG RSHUDWHV GLUHFWWRSDWLHQW VSHFLDOW\ SKDUPDFLHV WKURXJK 6SHFLDOW\ 6ROXWLRQV GLYLVLRQ GLVWULEXWHV RQFRORJ\ UKHXPDWRORJ\ &DUGLQDO+HDOWK&KLQD XURORJ\QHSKURORJ\DQGRWKHUSKDUPDFHXWLFDOSURGXFWV VSHFLDOW\ SKDUPDFHXWLFDOSURGXFWV DQGKXPDQGHULYHGSODVPDSURGXFWVWR KRVSLWDOV GLDO\VLV FOLQLFV SK\VLFLDQ RIILFHV DQG RWKHU KHDOWKFDUH &DUGLQDO+HDOWK_)LVFDO)RUP.

Page 33

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³SRVWDFXWHFDUH´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³1RWHVWR&RQVROLGDWHG)LQDQFLDO6WDWHPHQWV´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

Page 34

%XVLQHVV &XVWRPHUV 2XUODUJHVWFXVWRPHU&96+HDOWKDFFRXQWHGIRUSHUFHQW RIRXU RI WKHLU PHPEHUV 2XU WZR ODUJHVW *32 UHODWLRQVKLSV LQ WHUPV RI ILVFDO UHYHQXH,QWKHDJJUHJDWHRXUILYHODUJHVWFXVWRPHUV PHPEHU UHYHQXH DUH ZLWK 9L]LHQW IRUPHUO\ 1RYDWLRQ //& DQG LQFOXGLQJ&96+HDOWKDFFRXQWHGIRUSHUFHQW RIRXUILVFDO 3UHPLHU,QF6DOHVWRPHPEHUVRIWKHVHWZR*32VXQGHUQXPHURXV UHYHQXH 2XU SKDUPDFHXWLFDO GLVWULEXWLRQ DJUHHPHQWV ZLWK &96 FRQWUDFWVDFURVVDOORIRXUEXVLQHVVHVFROOHFWLYHO\DFFRXQWHGIRU +HDOWKH[WHQGWKURXJK-XQH SHUFHQW RIRXUUHYHQXHLQILVFDO ,QDGGLWLRQZHKDYHDJUHHPHQWVZLWKJURXSSXUFKDVLQJRUJDQL]DWLRQV ³*32V´ WKDWDFWDVDJHQWVWRQHJRWLDWHYHQGRUFRQWUDFWVRQEHKDOI 6XSSOLHUV :HUHO\RQPDQ\GLIIHUHQWVXSSOLHUV3URGXFWVREWDLQHGIURPRXUILYH ODUJHVWVXSSOLHUVDFFRXQWHGIRUDQDJJUHJDWHRISHUFHQW RIRXU UHYHQXH GXULQJ ILVFDO EXW QR VLQJOH VXSSOLHU¶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¶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

Page 35

%XVLQHVV 5HJXODWRU\0DWWHUV 2XUEXVLQHVVLVKLJKO\UHJXODWHGLQWKH8QLWHG6WDWHVDWERWKWKH ,QWKH8QLWHG6WDWHVDXWKRUL]DWLRQWRFRPPHUFLDOO\GLVWULEXWHDQHZ IHGHUDODQGVWDWHOHYHODQGLQIRUHLJQFRXQWULHV'HSHQGLQJXSRQ PHGLFDOGHYLFHLVJHQHUDOO\UHFHLYHGLQRQHRIWZRZD\V7KHILUVW WKHLUVSHFLILFEXVLQHVVRXUVXEVLGLDULHVPD\EHVXEMHFWWRUHJXODWLRQ NQRZQDVSUHPDUNHWQRWLILFDWLRQRUWKH N SURFHVVUHTXLUHVXV E\JRYHUQPHQWHQWLWLHVLQFOXGLQJ WR GHPRQVWUDWH WKDW RXU QHZ PHGLFDO GHYLFH LV VXEVWDQWLDOO\ WKH86'UXJ(QIRUFHPHQW$GPLQLVWUDWLRQ WKH³'($´ HTXLYDOHQWWRDOHJDOO\PDUNHWHGPHGLFDOGHYLFH7KHVHFRQGPRUH FHUWDLQDJHQFLHVZLWKLQWKH86'HSDUWPHQWRI+HDOWKDQG+XPDQ ULJRURXVSURFHVVNQRZQDVSUHPDUNHWDSSURYDO ³30$´ UHTXLUHV 6HUYLFHVLQFOXGLQJWKH86)RRGDQG'UXJ$GPLQLVWUDWLRQ WKH XVWRLQGHSHQGHQWO\GHPRQVWUDWHWKDWWKHQHZPHGLFDOGHYLFHLVVDIH ³)'$´ WKH&HQWHUVIRU0HGLFDUHDQG0HGLFDLG6HUYLFHVWKH2IILFH DQGHIIHFWLYHDQGLVPXFKPRUHGHWDLOHGWKDQWKH N SURFHVV RI,QVSHFWRU*HQHUDODQGWKH2IILFHIRU&LYLO5LJKWV 0DQ\RIRXU0HGLFDOVHJPHQWSURGXFWVDUHFOHDUHGWKURXJKWKH N SURFHVVDQGFHUWDLQ&RUGLVSURGXFWVPXVWEHDSSURYHGWKURXJK WKH861XFOHDU5HJXODWRU\&RPPLVVLRQ WKH³15&´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³'46$´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

Page 36

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³(8´ GDWD SURWHFWLRQUHJXODWLRQVLQFOXGLQJWKH(8'LUHFWLYHRQ'DWD3URWHFWLRQ ZKLFKUHTXLUHVPHPEHUVWDWHVWRLPSRVHPLQLPXPUHVWULFWLRQVRQWKH FROOHFWLRQXVHDQGWUDQVIHURISHUVRQDOGDWDWKDWLQVRPHUHVSHFWV DUHPRUHVWULQJHQWDQGLPSRVHPRUHVLJQLILFDQWEXUGHQVRQVXEMHFW EXVLQHVVHVWKDQFXUUHQWSULYDF\VWDQGDUGVLQWKH8QLWHG6WDWHV$ QHZ(8*HQHUDO'DWD3URWHFWLRQ5HJXODWLRQWKDWZLOODSSO\XQLIRUPO\ &DUGLQDO+HDOWK_)LVFDO)RUP.

Page 37

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³1RWHVWR&RQVROLGDWHG)LQDQFLDO6WDWHPHQWV´IRUUHYHQXHDQGORQJOLYHGDVVHWVE\JHRJUDSKLFDUHD $YDLODEOH,QIRUPDWLRQ 2XU$QQXDO5HSRUWRQ)RUP.4XDUWHUO\5HSRUWVRQ)RUP4 <RXPD\REWDLQLQIRUPDWLRQRQWKHRSHUDWLRQRIWKH3XEOLF &XUUHQW5HSRUWVRQ)RUP.DQGDPHQGPHQWVWRWKRVHUHSRUWVDUH 5HIHUHQFH5RRPE\FDOOLQJWKH6(&DW6(&7KH6(& DYDLODEOHIUHHRIFKDUJHRQRXUZHEVLWH ZZZFDUGLQDOKHDOWKFRP DOVRPDLQWDLQVDZHEVLWH ZZZVHFJRY ZKHUH\RXFDQVHDUFKIRU XQGHUWKH³,QYHVWRUV²)LQDQFLDO5HSRUWLQJ²6(&)LOLQJV´FDSWLRQ DQQXDO TXDUWHUO\ DQG FXUUHQW UHSRUWV SUR[\ DQG LQIRUPDWLRQ DVVRRQDVUHDVRQDEO\SUDFWLFDEOHDIWHUZHHOHFWURQLFDOO\ILOHWKHP VWDWHPHQWV DQG RWKHU LQIRUPDWLRQ UHJDUGLQJ XV DQG RWKHU SXEOLF ZLWKRUIXUQLVKWKHPWRWKH6(& FRPSDQLHV <RXPD\UHDGDQGFRS\DQ\PDWHULDOVZHILOHZLWKWKH6(&DWWKH 6(&¶V3XEOLF5HIHUHQFH5RRPDW)6WUHHW1(:DVKLQJWRQ'& &DUGLQDO+HDOWK_)LVFDO)RUP.

Page 38

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Ȉ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Ȉ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

Page 39

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¶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¶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

Page 40

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¶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¶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

Page 41

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

Page 42

3URSHUWLHVDQG/HJDO3URFHHGLQJV 3URSHUWLHV ,QWKH8QLWHG6WDWHVDW-XQHWKH3KDUPDFHXWLFDOVHJPHQW VHJPHQWV XWLOL]HG YDULRXV GLVWULEXWLRQ DQG SKDUPDF\ IDFLOLWLHV LQ RSHUDWHGSULPDU\SKDUPDFHXWLFDOGLVWULEXWLRQIDFLOLWLHVDQGRQH &KLQD QDWLRQDOORJLVWLFVFHQWHUVL[VSHFLDOW\GLVWULEXWLRQIDFLOLWLHV DQGPRUH $W-XQHZHRZQHGPRUHWKDQRSHUDWLQJIDFLOLWLHVDQG WKDQ QXFOHDU SKDUPDF\ DQG F\FORWURQ IDFLOLWLHV 7KH 0HGLFDO OHDVHG PRUH WKDQ RSHUDWLQJ IDFLOLWLHV DURXQG WKH ZRUOG 2XU VHJPHQW RSHUDWHG PRUH WKDQ PHGLFDOVXUJLFDO GLVWULEXWLRQ SULQFLSDOH[HFXWLYHRIILFHVDUHKHDGTXDUWHUHGLQDQRZQHGEXLOGLQJ DVVHPEO\ PDQXIDFWXULQJ DQG RWKHU RSHUDWLQJ IDFLOLWLHV 2XU 86 ORFDWHGDW&DUGLQDO3ODFHLQ'XEOLQ2KLR RSHUDWLQJIDFLOLWLHVDUHORFDWHGLQVWDWHVDQGLQ3XHUWR5LFR :HFRQVLGHURXURSHUDWLQJSURSHUWLHVWREHLQVDWLVIDFWRU\FRQGLWLRQ 2XWVLGHWKH8QLWHG6WDWHVDW-XQHRXU0HGLFDOVHJPHQW DQG DGHTXDWH WR PHHW RXU SUHVHQW QHHGV +RZHYHU ZH UHJXODUO\ RSHUDWHGPRUHWKDQIDFLOLWLHVLQ&DQDGDWKH'RPLQLFDQ5HSXEOLF HYDOXDWHRSHUDWLQJSURSHUWLHVDQGPD\PDNHIXUWKHUDGGLWLRQVDQG 0DOD\VLD0DOWD0H[LFRDQG7KDLODQGWKDWHQJDJHLQPDQXIDFWXULQJ LPSURYHPHQWVRUFRQVROLGDWHORFDWLRQVDVZHVHHNRSSRUWXQLWLHVWR GLVWULEXWLRQRUUHVHDUFK,QDGGLWLRQRXU 3KDUPDFHXWLFDODQG0HGLFDO H[SDQGRUHQKDQFHWKHHIILFLHQF\RIRXUEXVLQHVV /HJDO3URFHHGLQJV 7KHOHJDOSURFHHGLQJVGHVFULEHGLQ1RWH RIWKH1RWHVWR&RQVROLGDWHG)LQDQFLDO6WDWHPHQWVDUHLQFRUSRUDWHGLQWKLV/HJDO3URFHHGLQJV VHFWLRQE\UHIHUHQFH &DUGLQDO+HDOWK_)LVFDO)RUP.

Page 43

0DUNHWIRU5HJLVWUDQW V&RPPRQ(TXLW\ 0DUNHWIRU5HJLVWUDQW V&RPPRQ(TXLW\5HODWHG6WRFNKROGHU 0DWWHUVDQG,VVXHU3XUFKDVHVRI(TXLW\6HFXULWLHV 2XUFRPPRQVKDUHVDUHOLVWHGRQWKH1HZ<RUN6WRFN([FKDQJHXQGHUWKHV\PERO³&$+´7KHIROORZLQJWDEOHUHIOHFWVWKHUDQJHRIWKHUHSRUWHG KLJKDQGORZFORVLQJSULFHVRIRXUFRPPRQVKDUHVDVUHSRUWHGRQWKH1HZ<RUN6WRFN([FKDQJH&RPSRVLWH7DSHDQGWKHSHUVKDUHGLYLGHQGV GHFODUHGIRUWKHILVFDO\HDUVHQGHG-XQH DQGDQGSDLGTXDUWHUO\,WDOVRUHIOHFWVWKHUDQJHRIWKHUHSRUWHGKLJKDQGORZFORVLQJ SULFHVRIRXUFRPPRQVKDUHVIURP-XO\ WKURXJKWKHSHULRGHQGHGRQ-XO\DQGWKHSHUVKDUHGLYLGHQGVGHFODUHGIURP-XO\ WKURXJKWKHSHULRGHQGHGRQ$XJXVW +LJK /RZ 'LYLGHQGV'HFODUHG )LVFDO 4XDUWHU(QGHG 6HSWHPEHU 'HFHPEHU 0DUFK -XQH )LVFDO 4XDUWHU(QGHG 6HSWHPEHU 'HFHPEHU 0DUFK -XQH )LVFDO $W-XO\WKHUHZHUHDSSUR[LPDWHO\ VKDUHKROGHUVRIUHFRUGRIRXUFRPPRQVKDUHV :HDQWLFLSDWHWKDWZHZLOOFRQWLQXHWRSD\TXDUWHUO\FDVKGLYLGHQGVLQWKHIXWXUH7KHSD\PHQWDQGDPRXQWRIIXWXUHGLYLGHQGVUHPDLQKRZHYHU ZLWKLQWKHGLVFUHWLRQRIRXU%RDUGRI'LUHFWRUVDQGZLOOGHSHQGXSRQRXUIXWXUHHDUQLQJVILQDQFLDOFRQGLWLRQFDSLWDOUHTXLUHPHQWVDQGRWKHU IDFWRUV ,VVXHU3XUFKDVHVRI(TXLW\6HFXULWLHV $SSUR[LPDWH 'ROODU9DOXHRI 7RWDO1XPEHURI6KDUHV 6KDUHV7KDW0D\ 7RWDO1XPEHU 3XUFKDVHG <HWEH3XUFKDVHG RI6KDUHV $YHUDJH3ULFH3DLGSHU DV3DUWRI3XEOLFO\ 8QGHUWKH3URJUDPV 3HULRG 3XUFKDVHG 6KDUH $QQRXQFHG3URJUDPV LQPLOOLRQV $SULO ²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

Page 44

0DUNHWIRU5HJLVWUDQW V&RPPRQ(TXLW\ )LYH<HDU3HUIRUPDQFH*UDSK 7KHIROORZLQJOLQHJUDSKFRPSDUHVWKHFXPXODWLYHWRWDOUHWXUQRIRXUFRPPRQVKDUHVZLWKWKHFXPXODWLYHWRWDOUHWXUQRIWKH6WDQGDUG 3RRU¶V &RPSRVLWH²6WRFN,QGH[ WKH6 3 ,QGH[ DQGWKH6WDQGDUG 3RRU V&RPSRVLWH²+HDOWKFDUH,QGH[ WKH6 3 +HDOWKFDUH ,QGH[ 7KHOLQHJUDSKDVVXPHVLQHDFKFDVHDQLQLWLDOLQYHVWPHQWRIRQ-XQHEDVHGRQWKHPDUNHWSULFHVDWWKHHQGRIHDFK ILVFDO\HDUWKURXJKDQGLQFOXGLQJ-XQHDQGUHLQYHVWPHQWRIGLYLGHQGV7KH6 3 ,QGH[DQG6 3 +HDOWKFDUH,QGH[LQYHVWPHQWV DUHZHLJKWHGRQWKHEDVLVRIPDUNHWFDSLWDOL]DWLRQDWWKHEHJLQQLQJRIHDFKSHULRG -XQH &DUGLQDO+HDOWK,QF 6 3,QGH[ 6 3+HDOWKFDUH,QGH[ &DUGLQDO+HDOWK_)LVFDO)RUP.

Page 45

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ȈV5HSRUWRQ,QWHUQDO&RQWURO2YHU)LQDQFLDO5HSRUWLQJ 0DQDJHPHQWLVUHVSRQVLEOHIRUHVWDEOLVKLQJDQGPDLQWDLQLQJDGHTXDWHLQWHUQDOFRQWURORYHUILQDQFLDOUHSRUWLQJDVGHILQHGLQ5XOH D I XQGHUWKH([FKDQJH$FW2XULQWHUQDOFRQWUROV\VWHPLVGHVLJQHGWRSURYLGHUHDVRQDEOHDVVXUDQFHUHJDUGLQJWKHUHOLDELOLW\ RIILQDQFLDOUHSRUWLQJDQGWKHSUHSDUDWLRQRIILQDQFLDOVWDWHPHQWVIRUH[WHUQDOSXUSRVHVLQDFFRUGDQFHZLWKJHQHUDOO\DFFHSWHGDFFRXQWLQJ SULQFLSOHV%HFDXVHRILWVLQKHUHQWOLPLWDWLRQVLQWHUQDOFRQWURORYHUILQDQFLDOUHSRUWLQJPD\QRWSUHYHQWRUGHWHFWPLVVWDWHPHQWV$OVR FRQWUROVGHHPHGHIIHFWLYHQRZPD\EHFRPHLQDGHTXDWHLQWKHIXWXUHEHFDXVHRIFKDQJHVLQFRQGLWLRQVRUEHFDXVHFRPSOLDQFHZLWK SROLFLHVRUSURFHGXUHVKDVGHWHULRUDWHGRUEHHQFLUFXPYHQWHG 0DQDJHPHQWDVVHVVHGWKHHIIHFWLYHQHVVRIRXULQWHUQDOFRQWURORYHUILQDQFLDOUHSRUWLQJDVRI-XQH,QPDNLQJWKLVDVVHVVPHQW PDQDJHPHQW XVHG WKH FULWHULD HVWDEOLVKHG LQ WKH ,QWHUQDO &RQWURO,QWHJUDWHG )UDPHZRUN LVVXHG E\ WKH &RPPLWWHH RI 6SRQVRULQJ 2UJDQL]DWLRQVRIWKH7UHDGZD\&RPPLVVLRQ IUDPHZRUN WKH³&262FULWHULD´ %DVHGRQPDQDJHPHQW¶VDVVHVVPHQWDQGWKH &262FULWHULDPDQDJHPHQWEHOLHYHVWKDWRXULQWHUQDOFRQWURORYHUILQDQFLDOUHSRUWLQJZDVHIIHFWLYHDVRI-XQH 2XULQGHSHQGHQWUHJLVWHUHGSXEOLFDFFRXQWLQJILUP(UQVW <RXQJ//3KDVLVVXHGDUHSRUWRQRXULQWHUQDOFRQWURORYHUILQDQFLDO UHSRUWLQJ(UQVW <RXQJ//3¶VUHSRUWDSSHDUVIROORZLQJWKLV0DQDJHPHQW5HSRUWVVHFWLRQDQGH[SUHVVHVDQXQTXDOLILHGRSLQLRQRQ WKHHIIHFWLYHQHVVRIRXULQWHUQDOFRQWURORYHUILQDQFLDOUHSRUWLQJ 2Q2FWREHUZHFRPSOHWHGWKHDFTXLVLWLRQRI&RUGLV$VSHUPLWWHGE\JXLGHOLQHVHVWDEOLVKHGE\WKH6(&PDQDJHPHQWH[FOXGHG &RUGLVIURPWKHVFRSHRILWVDVVHVVPHQWRIWKHHIIHFWLYHQHVVRILQWHUQDOFRQWURORYHUILQDQFLDOUHSRUWLQJDVRI-XQH&RUGLV FRQVWLWXWHGSHUFHQWDQGSHUFHQWRIRXUWRWDODQGQHWDVVHWVUHVSHFWLYHO\DVRI-XQH DQGOHVVWKDQSHUFHQWRIERWKRXU UHYHQXHDQGRSHUDWLQJHDUQLQJVIRUWKHILVFDO\HDUWKHQHQGHG &KDQJHVLQ,QWHUQDO&RQWURO2YHU)LQDQFLDO5HSRUWLQJ 7KHUHZHUHQRFKDQJHVLQRXULQWHUQDOFRQWURORYHUILQDQFLDOUHSRUWLQJGXULQJWKHTXDUWHUHQGHG-XQH WKDWKDYHPDWHULDOO\ DIIHFWHGRUDUHUHDVRQDEO\OLNHO\WRPDWHULDOO\DIIHFWRXULQWHUQDOFRQWURORYHUILQDQFLDOUHSRUWLQJ ,PSOHPHQWDWLRQRI1HZ6RIWZDUH6\VWHPV 7KH 3KDUPDFHXWLFDO VHJPHQW LV LQ D PXOWL\HDU SURMHFW LPSOHPHQWLQJ D UHSODFHPHQW RI FHUWDLQ ILQDQFH DQG RSHUDWLQJ LQIRUPDWLRQ V\VWHPVZKLFKLVH[SHFWHGWRDIIHFWLQWHUQDOFRQWURORYHUILQDQFLDOUHSRUWLQJ7KLVSURMHFWGLGQRWLPSDFWLQWHUQDOFRQWURORYHUILQDQFLDO UHSRUWLQJGXULQJILVFDO,IWKHVHQHZV\VWHPVDUHQRWHIIHFWLYHO\LPSOHPHQWHGRUIDLOWRRSHUDWHDVLQWHQGHGLWFRXOGDGYHUVHO\ DIIHFWRXULQWHUQDOFRQWURORYHUILQDQFLDOUHSRUWLQJ &DUGLQDO+HDOWK_)LVFDO)RUP.

Page 46

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³0DQDJHPHQW V 5HSRUWRQ,QWHUQDO&RQWURO2YHU)LQDQFLDO5HSRUWLQJ´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³0DQDJHPHQW¶V5HSRUWRQ,QWHUQDO&RQWURO2YHU)LQDQFLDO5HSRUWLQJ´PDQDJHPHQW¶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

Page 47

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

Page 48

)LQDQFLDO6WDWHPHQWV )LQDQFLDO6WDWHPHQWVDQG6XSSOHPHQWDU\'DWD 3DJH &RQVROLGDWHG)LQDQFLDO6WDWHPHQWVDQG6FKHGXOH &RQVROLGDWHG6WDWHPHQWVRI(DUQLQJVIRUWKH)LVFDO<HDUV(QGHG-XQHDQG &RQVROLGDWHG6WDWHPHQWVRI&RPSUHKHQVLYH,QFRPHIRUWKH)LVFDO<HDUV(QGHG-XQHDQG &RQVROLGDWHG%DODQFH6KHHWVDW-XQHDQG &RQVROLGDWHG6WDWHPHQWVRI6KDUHKROGHUV¶(TXLW\IRUWKH)LVFDO<HDUV(QGHG-XQHDQG &RQVROLGDWHG6WDWHPHQWVRI&DVK)ORZVIRUWKH)LVFDO<HDUV(QGHG-XQHDQG 1RWHVWR&RQVROLGDWHG)LQDQFLDO6WDWHPHQWV &DUGLQDO+HDOWK_)LVFDO)RUP.

Page 49

)LQDQFLDO6WDWHPHQWV &RQVROLGDWHG6WDWHPHQWVRI(DUQLQJV LQPLOOLRQVH[FHSWSHUFRPPRQVKDUHDPRXQWV 5HYHQXH &RVWRISURGXFWVVROG *URVVPDUJLQ 2SHUDWLQJH[SHQVHV 'LVWULEXWLRQVHOOLQJJHQHUDODQGDGPLQLVWUDWLYHH[SHQVHV 5HVWUXFWXULQJDQGHPSOR\HHVHYHUDQFH $PRUWL]DWLRQDQGRWKHUDFTXLVLWLRQUHODWHGFRVWV ,PSDLUPHQWVDQG JDLQ ORVVRQGLVSRVDORIDVVHWVQHW /LWLJDWLRQ UHFRYHULHV FKDUJHVQHW 2SHUDWLQJHDUQLQJV 2WKHU LQFRPH H[SHQVHQHW ,QWHUHVWH[SHQVHQHW /RVVRQH[WLQJXLVKPHQWRIGHEW Ȅ ² (DUQLQJVIURPFRQWLQXLQJRSHUDWLRQVEHIRUHLQFRPHWD[HV 3URYLVLRQIRULQFRPHWD[HV (DUQLQJVIURPFRQWLQXLQJRSHUDWLRQV (DUQLQJVIURPGLVFRQWLQXHGRSHUDWLRQVQHWRIWD[ Ȅ 1HWHDUQLQJV /HVV1HWHDUQLQJVDWWULEXWDEOHWRQRQFRQWUROOLQJLQWHUHVWV ² ² 1HWHDUQLQJVDWWULEXWDEOHWR&DUGLQDO+HDOWK,QF %DVLFHDUQLQJVSHUFRPPRQVKDUHDWWULEXWDEOHWR&DUGLQDO+HDOWK,QF &RQWLQXLQJRSHUDWLRQV 'LVFRQWLQXHGRSHUDWLRQV Ȅ 1HWEDVLFHDUQLQJVSHUFRPPRQVKDUHDWWULEXWDEOHWR&DUGLQDO+HDOWK,QF 'LOXWHGHDUQLQJVSHUFRPPRQVKDUHDWWULEXWDEOHWR&DUGLQDO+HDOWK,QF &RQWLQXLQJRSHUDWLRQV 'LVFRQWLQXHGRSHUDWLRQV Ȅ 1HWGLOXWHGHDUQLQJVSHUFRPPRQVKDUHDWWULEXWDEOHWR&DUGLQDO+HDOWK,QF :HLJKWHGDYHUDJHQXPEHURIFRPPRQVKDUHVRXWVWDQGLQJ %DVLF 'LOXWHG 7KHDFFRPSDQ\LQJQRWHVDUHDQLQWHJUDOSDUWRIWKHVHFRQVROLGDWHGVWDWHPHQWV &DUGLQDO+HDOWK_)LVFDO)RUP.

Page 50

)LQDQFLDO6WDWHPHQWV &RQVROLGDWHG6WDWHPHQWVRI&RPSUHKHQVLYH,QFRPH LQPLOOLRQV 1HWHDUQLQJV 2WKHUFRPSUHKHQVLYHLQFRPH ORVV )RUHLJQFXUUHQF\WUDQVODWLRQDGMXVWPHQWVDQGRWKHU 1HWXQUHDOL]HGJDLQ ORVV RQGHULYDWLYHLQVWUXPHQWVQHWRIWD[ 7RWDORWKHUFRPSUHKHQVLYHLQFRPH ORVV QHWRIWD[ 7RWDOFRPSUHKHQVLYHLQFRPH /HVVFRPSUHKHQVLYHLQFRPHDWWULEXWDEOHWRQRQFRQWUROOLQJLQWHUHVWV Ȅ Ȅ 7RWDOFRPSUHKHQVLYHLQFRPHDWWULEXWDEOHWR&DUGLQDO+HDOWK,QF 7KHDFFRPSDQ\LQJQRWHVDUHDQLQWHJUDOSDUWRIWKHVHFRQVROLGDWHGVWDWHPHQWV &DUGLQDO+HDOWK_)LVFDO)RUP.

By industry

By Role

Comprehensive

Relevant

Easy to use

Pages