Annual Report  2013  Management Discussion & Analysis 18  Quetico  Labstat  In November 2011, the Corporation announced the purchase of preferred LLC units in Quetico, LLC for an aggregate acquisition cost  of $26.9 million USD. Annual growth in Quetico’s distributions to Alaris is capped at 10% and is based on the change in gross revenues.  Maximum decline in the annual distribution is capped at 20%.  Quetico is a provider of wholesale textiles, inventory management and third party logistic services predominantly for the textile business  segments of big box retailers. Coming off a record setting year in 2012 in which the Corporation received the maximum 10% upwards  adjustment to the annual distribution Quetico fell short of repeating these results. The business remains highly profitable and 2013  results were still ahead of those achieved in 2011. Quetico’s year end is December 31 st  and based on unaudited internal financial statements for the fiscal year, revenues and EBITDA  are behind the prior year results. As a result distributions from Quetico will decrease by approximately 15% effective January 1, 2014  and are scheduled at approximately $4.2 million in Canadian dollars for 2014. The Corporation has purchased monthly forward  contracts locking in the foreign exchange rate for all of 2014 and 70% of 2015 and the new rates on the forward contracts offset  approximately half of the decrease in annual distributions.  The fair value of the Quetico units will fluctuate each quarter with foreign exchange rates but the underlying valuation of the Quetico  units remains unchanged. The Corporation was expecting a modest decline in performance levels during 2013, and believes the  business remains in excellent shape. The earnings coverage ratio for Quetico remains greater than 2.0x but has declined in 2013.  In June 2012, the Corporation announced the purchase of partnership units in Labstat International, ULC for an aggregate acquisition  cost of $41.2 million. Labstat is a global leader in regulation-driven analysis of tobacco smoke and products. Annual growth and decline  in Labstat’s distributions to Alaris are capped at 6% and is based on the change in gross revenues. Labstat’s year end is December 31 st and based on unaudited information provided by management, revenues were down  approximately 15% and EBITDA was down over 30% compared to the prior year thus triggering the maximum decline of 6% to the  annual distribution, effective January 1, 2014. Many US tobacco importers have stopped regulatory pre-testing of products as they  await the expected launch of new regulations under the Tobacco Control Act, previously expected to be in place by April 2013. That  launch has been delayed and while it is still expected, Alaris and Labstat’s lenders needed a capital structure that was not dependant  on the future work from the FDA regulations. As previously announced Alaris agreed to contribute $6 million in preferred equity alongside $1 million from Labstat to deleverage the  business, bringing Alaris’ total preferred equity investment to $47.2 million. These contributions took place on February 28, 2014. Alaris  also agreed to temporarily restructure the form of its distributions, reducing the fixed portion to 7.25% on all preferred equity contributed  with a variable portion in the form of a cash sweep up to the maximum that would have been paid under the original agreement, which  is $6.67 million in 2014, provided certain financial covenants and performance targets are met. While the Corporation doesn’t expect  it will be required, Alaris has agreed to a further deleveraging in August 2014 if certain covenants are over predetermined levels.  During 2013, the Corporation created a short-term credit facility of $5.6 million to ensure Labstat had sufficient working capital  throughout the year. No further loans are anticipated at this time. Taking into consideration the contribution in February 2014, fixed  distributions are currently scheduled at $3.36 million for 2014. A variable portion in the form of a cash sweep is also scheduled bringing  the maximum possible distribution up to $6.67 million, which equals the original $6.18 million adjusted for the 6% decline from the  reset effective January 1, 2014, plus the distribution on the $6 million contributed in February 2014.  Due to the challenges described above, the earnings coverage ratio for Labstat fell below 1.0x for 2013 but as a result of working  capital loans provided by the Corporation, they remained on covenant with their senior lenders. Given the changes made to the  distribution going forward, the reduced fixed amount and the variable cash sweep, the ratio is expected to be in the 1.0x to 1.5x range  for 2014.  While the specifics of the measures taken were not known at September 31, 2013, there was sufficient information to support a $2  million decrease in the fair value of the Labstat units to $39.7 million. As expected, the details Alaris agreed to with Labstat’s lenders  were substantially similar to the inputs used in that analysis and thus the fair value remains unchanged at December 31, 2013. 