FAQ

Dividends declared by Alaris Royalty Corp will be considered and designated as "eligible dividends" for Canadian tax purposes. Generally, when an individual investor receives a dividend from a taxable Canadian corporation, he must include in his income a "grossed-up" amount of that dividend, and may then claim a credit of the grossed-up dividend. From the individual investor's point of view and depending upon the investor's province of residence and applicable income tax bracket, eligible dividends are generally taxed more favourably than non-eligible dividends because the amount of the gross-up percentage and offsetting dividend tax credit are higher than for non-eligible dividends. In 2008, for example, assuming the individual investor is taxed at the highest marginal tax rate, eligible dividends received by that investor are generally taxed at combined federal and provincial rates ranging from 16.0% to 29.7% (the tax rates applicable to non-eligible dividends vary from 26.5% to 37.4%).

Alaris distributions from its investee companies are reset annually upon completion of audited financial statements. The percentage change in that company's top-line performance is then applied to the previous year's distribution to create the distribution for the next 12 months. This creates unprecedented visibility of revenue for Alaris shareholders as we know 12 months in advance what our revenue will be from each of our investments.

Each of Alaris' investments are governed by a series of covenants and consent items. Material breach of these items would result in Alaris taking over 100% voting control of the businesses and would also trigger a forced repurchase of our investment. Covenants and consent items include financial reporting, basic financial ratios, taking on any additional debt, material acquisitions, divestitures or capital expenditures as well as ownership changes.

At the current time, Alaris' debt facility is approved for 1.5 times our annual earnings before interest, taxes, depreciation and amortization (EBITDA). As a conservative, defensive investment vehicle, it is not anticipated that Alaris will ever have a highly levered balance sheet.

Alaris looks for companies with low leverage in order to protect our annual distributions. At the current time, our portfolio has only an average of 0.7 times EBITDA of debt based on historical earnings.

Similar to dividends that Alaris pays to its investors, Alaris receives distributions on a monthly basis from our portfolio companies.

In order to ensure a large buffer on future volatility as well as enhancing management's interests are fully aligned with our shareholders, Alaris typically buys a minority of the EBITDA of an investee company. At the present time, Alaris distributions represent an average of only 40% of the historical EBITDA of our investees.

Based on our investment criteria of stable cash flow streams, Alaris looks for investments in companies with strong free cashflow. This means that the companies have low debt as well as low requirements for ongoing capital expenditures. Our current portfolio companies have more than $250 million in combined sales; however, capital expenditures for the group last year were only $2.4 million over the last twelve months.

Dividends are declared with a record date of the last business day of each month and are paid out on the 15th day of the following month.

When Alaris makes a new investment, the distribution for the next twelve months is already known at the time of closing. The yield that we are acquiring from these investments will always be higher than the blended cost of capital (cost of equity combined with our cost of senior debt) that Alaris has to fund them. As such, each new investment that Alaris makes not only lessens an investor's risk by providing further diversification, it also increases Alaris' earnings on a per share basis.

The market for non-control private equity investments is significant. Many private business owners who are looking to realize some liquidity on their business would prefer to keep their company in their family rather than sell all of their business to a third party. The Alaris structure is one of the few options available in the marketplace to allow the business owners to effect a "partial" liquidity of their businesses. Demographically, baby boomers are coming to an age where providing retirement wealth or effecting a generational transfer is a very prevalent issue. Alaris' unique investment structure is ideally suited to satisfy this growing market.

In the event of a sale, Alaris would be just like any other equity partner. Alaris could be bought out along with the other equity holders or Alaris could potentially transfer its investment on a tax-deferred basis into the new entity if both parties agree to do so. Either way, Alaris' structure would not hinder a future sale any more than any other equity investment would.

As a passive equity investor, Alaris puts in covenants that protect its investment on events outside of the normal course of business. Standard covenants include regular reporting of financial information, payment of monthly distributions and required consent for items such as material acquisitions, divestitures, additional debt and abnormal capital expenditures. These covenants are much less onerous than those that exist in a typical senior debt facility.

Each Alaris investment is required to report internal monthly financials as well as audited annual financial statements. Typically this does not add any additional burden on a company's finance staff as Alaris will receive information already prepared for senior creditors and/or board of directors.

As an equity investment, the funds that Alaris injects into a company are shown as equity on a company's balance sheet. On the income statement, the payments made to Alaris are distributions made out of a limited partnership before taxes are paid, thus reducing the taxes paid by the partnership's common unitholders.

Typically, Alaris structures its investments as a purchase of preferred equity in a newly formed limited partnership. There are no immediate tax implications in the formation and asset transfer into the LP. Proceeds from Alaris' investment can be taken out at effectively capital gains rates and profits of the limited partnership are taxed at the LP unit holder level

The Alaris distributions are equity distributions. They track the performance of the company similar to other equity investments do, the only difference is that Alaris tracks top line performance while traditional equity investors track bottom line performance. So if sales decline at some point in the future, the Alaris distribution will decline along with it.

Alaris distributions track organic growth only. Growth by acquisition or, in the case of a multi-locational business, growth by additional locations are not included in our distribution adjustments. This provides a material economic advantage to Alaris' structure versus traditional private equity for growing private companies.

Once a company's audited financial statements are finalized, the percentage change in top-line performance is reflected in the Alaris distribution for the next year and a new monthly schedule is created. Distributions are only adjusted annually, giving companies as well as our shareholders tremendous visibility.