CALGARY, ALBERTA--(Marketwire - Nov. 21, 2011) - Alaris Royalty Corp. (TSX:AD) ("Alaris" or the "Corporation") is pleased to announce that its wholly owned subsidiary, Alaris USA Inc. ("Alaris USA") intends to enter into an operating agreement and subscription agreement (collectively, the "Agreements") with Quetico LLC ("Quetico") which will result in Alaris USA contributing $26,900,000 U.S. dollars ("USD") to Quetico in exchange for securities of Quetico that pay a pre-tax annual preferred distribution of USD $4,250,000 in the first full year after the contribution (collectively, the "Quetico Transaction"). Quetico will be Alaris' seventh partner company and its third contribution in 2011 for a total contributed capital in fiscal 2011 in excess of $77,000,000 Canadian dollars ("CDN"). The new partnership will be funded with the Corporation's senior revolving credit facility (the "Facility"), which was recently increased to $42,000,000 from $30,000,000 prior to the Quetico Transaction. The Corporation currently anticipates that the Quetico Transaction will be completed on or about Tuesday, November 22, 2011.
"The specialized wholesale and inventory management services Quetico provides, as well as the robust customers it provides these services to, have made it a recession resistant business. This has been proven by consistency and profitability Quetico has displayed over the past 17 years, and especially since 2007. These were the major factors that drove our decision to partner with them. The ability of the company to adapt and prosper over nearly two decades is a testament to the management skills of the founders, who will continue to own and operate the company following this transaction" said Steve King, President and Chief Executive Officer, Alaris.
"We anticipate that the U.S. market will be an important growth engine for Alaris due to its broader selection of non-resources based, well-run, profitable companies to choose from. The Alaris model offers an excellent platform for growth in the U.S. since we are simply taking a minority, top-line based interest in existing successful businesses. Our unique structure gives us the same advantages in the U.S. that we have in Canada, which is being a provider of non-control, low cost, low growth private equity capital to successful entrepreneurs who want to continue to run their businesses. We are very fortunate to have found that opportunity with the owners of Quetico."
Founded in 1994, Quetico has created a highly specialized and proprietary wholesale and inventory management niche within the logistics industry. Quetico provides specialized wholesale, inventory management and third party logistics services of consumer products to big box retailers and brand name manufacturers in North America and abroad. Based in Chino, California, Quetico operates approximately 400,000 square feet of warehouse space and employs approximately 400 people at its peak output. Quetico management has indicated that the company has been profitable over the past 17 years. Based on Alaris' review, Quetico has been able to achieve this by having a well-capitalized balance sheet, a focus on customer service and cost savings, as well as by having robust customers in the big box retail segment. Alaris, based on its review, believes that Quetico's efficient business model has helped Quetico's "big box" customers grow their businesses through the global economic recession. In aligning itself with these retailers, Quetico has encouraged growing demand for its services during both economic downturns and expansion.
"The Quetico 'family' is pleased to join forces with Alaris. This new partnership will allow us the flexibility to take advantage of the many exciting opportunities we envision on the horizon. We believe the Alaris management team and the Quetico management team share common values and aspirations, and we look forward to a long and fruitful relationship", said Tom Fenchel, Co-Founder, Quetico.
$35,002,500 Bought Deal Financing
The Corporation is also pleased to announce that it has reached an agreement with a syndicate of underwriters (the "Underwriters") led by Acumen Capital Finance Partners Limited, pursuant to which the Corporation will sell, on a "bought-deal" basis, subject to regulatory approval, 2,154,000 shares of the Corporation (the "Common Shares") at a price of $16.25 per Common Share for total gross proceeds of $35,002,500 (the "Offering"). The Corporation has also granted to the Underwriters an over-allotment option (the "Over-Allotment Option") to purchase up to an additional 310,800 Common Shares at the same price, exercisable in whole or in part at any time for a period of up to 30 days following closing of the Offering, to cover over-allotments. The closing of the Offering is conditional on the closing of the Quetico Transaction.
The net proceeds of the Offering will be used to reduce the Corporation's indebtedness under the Facility. With the net proceeds from the Offering, Alaris is expecting to carry approximately $10,000,000 of debt or $5,500,000 if the Overallotment Option is exercised.
The Common Shares will be offered in each of the provinces of Canada, other than the province of Québec, by way of a short form prospectus and in the United States on a private placement basis pursuant to exemptions from the registration requirements of the 1933 Act (as defined herein). The Offering is expected to close on or about December 12, 2011. Completion of the Offering is subject to certain conditions including, without limitation, the receipt of all necessary regulatory approval, including the approval of the Toronto Stock Exchange, and the closing of the Quetico Transaction.
The securities offered have not been registered under the United States Securities Act of 1933, as amended (the "1933 Act"), and may not be offered or sold within the United States absent registration or an exemption from the applicable registration requirements. This release does not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of the offered securities, in any jurisdiction in which such offer, solicitation or sale would be unlawful.
"Maintaining a strong balance sheet is an important aspect of our corporate philosophy and provides us with greater flexibility to fund potential future partnerships", said Steve King, President and CEO, Alaris.
Details From Today's Announcements and Their Impact to Alaris
- Continued diversification of revenue – The Transaction with Quetico continues to meet Alaris' revenue diversification goals. With seven (7) current sources of revenue after the anticipated closing of the Quetico Transaction, Alaris will not have a single source account for more than 25% of its total revenue, with Quetico accounting for 13% of the total. As Alaris continues to add new accretive partnerships to its revenue base, the impact of a single source of revenue will be much less material to its distributable cash and as such, will result in a more stable dividend to its shareholders.
- US dollar denominated transaction – The Quetico Transaction will be Alaris' first U.S. contribution and as such, will be closed in USD. The anticipated first year USD Distribution will be fully hedged in order to mitigate any foreign exchange risks on the USD income.
- Opens the door to additional transaction flow – The United States offers more potential for Alaris to grow its revenue base. Completing the Quetico Transaction opens the door to a larger and broader category of private companies for Alaris to partner with as it proves our structure can be applied in the United States. However, Alaris will continue to focus on high quality Canadian companies and will continue its conservative approach with respect to U.S. companies moving forward.
- Low levels of fixed payments ahead of the Alaris Distribution – Based on Alaris' review and information provided by Quetico, Quetico does not have major annual capital expenditures, or term debt which requires principal repayment, and operates with a large variable cost component to its business. This provides for significant coverage on the Distribution to Alaris.
- Performance metric - The "top-line" performance metric that was chosen as the annual adjustment mechanism on the Distribution to Alaris is the dollar change in gross profit of Quetico (the "Metric").
- Collar on Distribution – Under the terms of the Agreement, the Distribution to Alaris cannot increase by more than 10% per year, or decrease by more than (-20%) per year.
For more information about today's announcement, please refer to an updated copy of Alaris' corporate presentation on its website at www.alarisroyalty.com.
About the Corporation:
Alaris provides alternative financing to the Private Company Partners in exchange for royalties or distributions with the principal objective of generating stable and predictable cash flows for dividend payments to its shareholders. Royalties or distributions from the Private Company Partners are structured as a percentage of a "top line" financial performance measure such as gross margin and same-store sales and rank in priority to the owners' common equity position.
The terms distributable cash is a financial measure used in this news release that is not a standard measures under International Financial Reporting Standards ("IFRS"). The Corporation's method of calculating distributable cash may differ from the methods used by other issuers. Therefore, the Corporation's distributable cash may not be comparable to similar measures presented by other issuers.
Distributable cash per share means Alaris' net income prepared in accordance with IFRS excluding non-cash items that include stock-based compensation expense, future income taxes, and depreciation and amortization.
The terms distributable cash should only be used in conjunction with the Corporation's annual audited and quarterly reviewed financial statements, excerpts of which are available below, while complete versions are available on SEDAR at www.sedar.com.
This news release contains forward-looking statements under applicable securities laws. Statements other than statements of historical fact contained in this news release are forward-looking statements, including, without limitation, management's expectations, intentions and beliefs concerning the growth, results of operations, performance of the Corporation and the Private Company Partners, the, the future financial position or results of the Corporation, business strategy, and plans and objectives of or involving the Corporation or the Private Company Partners. Many of these statements can be identified by looking for words such as "believe", "expects", "will", "intends", "projects", "anticipates", "estimates", "continues" or similar words or the negative thereof. In particular, this news release contains forward-looking statements regarding the revenues to be received by Alaris, the impact on the Corporation's distributable cash, the future performance and growth prospects of Quetico, the use of proceeds of the Offering, receipt of regulatory approvals, the jurisdictions in which the Offering will be sold, the method of the offering, the closing of the Offering and the Quetico Transaction, the execution of the Agreements, the indebtedness under the Facility after giving effect to the Quetico Transcaction and the Offering (including the Over-Allotment Option), the market potential for Alaris in the U.S., the expected addition of new Private Company Partners, and the anticipated tax rates and impact of hedging to the Distribution.
By their nature, forward-looking statements require Alaris to make assumptions and are subject to inherent risks and uncertainties. Assumptions about the performance of the Canadian and U.S. economies in 2011 and 2012 and how that will affect Alaris' business and that of its Private Company Partners are material factors considered by Alaris management when setting the outlook for Alaris. Key assumptions include, but are not limited to, assumptions that the Canadian and U.S. economies will grow moderately in the balance of 2011 and 2012, that interest rates will remain low, that the Private Company Partners will continue to make distributions to Alaris as and when required, that the businesses of the Private Company Partners will continue to grow, that the Corporation will experience positive resets to its annual royalties and distributions from its Private Company Partners in 2011, that tax rates will not change significantly in the U.S. or Canada, that the Distribution from Quetico can be hedged effectively on an ongoing basis, the Corporation will obtain any required regulatory approvals for the Offering and Quetico Transaction on a timely basis, and that Alaris will have the ability to raise required equity and/or debt financing on acceptable terms. Management of Alaris has also assumed that capital markets will continue to improve and that the Canadian dollar will strengthen modestly relative to the U.S. dollar. In determining expectations for economic growth, management of Alaris primarily considers historical economic data provided by the Canadian and U.S. governments and their agencies.
There can be no assurance that the assumptions, plans, intentions or expectations upon which these forward-looking statements are based will occur. Forward-looking statements are subject to risks, uncertainties and assumptions and should not be read as guarantees or assurances of future performance. The actual results of the Corporation and the Private Company Partners could materially differ from those anticipated in the forward-looking statements contained herein as a result of certain risk factors, including, but not limited to, the following: the dependence of Alaris on the Private Company Partners; reliance on key personnel; general economic conditions; failure to complete or realize the anticipated benefit of Alaris' financing arrangements with the Private Company Partners; government regulations; and risks relating to the Private Company Partners and their businesses. Additional risks that may cause actual results to vary from those indicated are discussed under the heading "Risk Factors" in the Corporation's Annual Information Form for the year ended December 31, 2010, which is filed under the Corporation's profile at www.sedar.com. Accordingly, readers are cautioned not to place undue reliance on any forward-looking information contained in this news release. Statements containing forward-looking information reflect management's current beliefs and assumptions based on information in its possession on the date of this news release. Although management believes that the expectations represented in such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct.