Close

Form 8-K STERICYCLE INC For: Sep 08

September 8, 2015 4:54 PM EDT

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 8-K

 

 

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported) September 8, 2015

 

 

 

LOGO

STERICYCLE, INC.

(Exact name of registrant as specified in charter)

 

 

 

Delaware   0-21229   36-3640402

(State or other jurisdiction

of incorporation or organization)

 

(Commission

File Number)

 

(IRS Employer

Identification Number)

28161 North Keith Drive

Lake Forest, Illinois 60045

(Address of principal executive offices)

(847) 367-5910

(Registrant’s Telephone Number, Including Area Code)

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 


ITEM 8.01.   OTHER EVENTS.

As previously announced, on July 15, 2015 we entered into a securities purchase agreement (the “Securities Purchase Agreement”) with the equity holders of Shred-it International ULC, an Alberta unlimited liability corporation (“SII”), Shred-it JV LP, an Ontario limited partnership (“Shred-it JV”), Boost GP Corp., an Ontario corporation (“Boost GP”) and Boost Holdings LP, an Ontario limited partnership (together with SII, Shred-it JV and Boost GP, “Shred-it”), providing for the acquisition of Shred-it by us and certain of our subsidiaries (the “Acquisition”).

The combined financial statements of Shred-it Group (which includes Shred-it International Inc., Boost Holdings LP, Boost GP Corp, and Shred-it JV LP and its wholly owned subsidiaries including Shred-it International ULC) as of December 31, 2014 and 2013 and for the years ended December 31, 2014, 2013 and 2012 (collectively, the “Shred-it Annual Financial Statements”) are included herein as Exhibit 99.1. The Shred-it Annual Financial Statements have been audited by Ernst & Young LLP. The unaudited combined financial statements of Shred-it Group as of June 28, 2015 and December 31, 2014 and for the six month periods ended June 28, 2015 and June 29, 2014 are included herein as Exhibit 99.2. Unaudited pro forma condensed consolidated financial statements as of and for the six month period ended June 30, 2015 and for the twelve month period ended December 31, 2014 and the notes thereto with respect to the Acquisition are included herein as Exhibit 99.3.

Certain risk factors related to the business of Shred-it are included herein as Exhibit 99.4.

 

ITEM 9.01.   FINANCIAL STATEMENTS AND EXHIBITS.

 

(a) Financial Statements of Business Acquired. In accordance with Item 9.01(a), the audited consolidated financial statements of Shred-it as of December 31, 2014 and 2013 and for the years ended December 31, 2014, 2013 and 2012, and the notes thereto, and the unaudited consolidated financial statements of Shred-it as of June 28, 2015 and December 31, 2014 and for the six month periods ended June 28, 2015 and June 29, 2014 are included herein as Exhibits 99.1 and 99.2, respectively.

 

(b) Pro forma financial information. Unaudited pro forma condensed consolidated financial statements as of and for the six month period ended June 30, 2015 and for the twelve month period ended December 31, 2014 and the notes thereto with respect to the Acquisition are included herein as Exhibit 99.3.

 

(c) Not Applicable.

 

(d) Exhibits: See Exhibit Index following the signature page of this Report, which is incorporated by reference herein.

SPECIAL NOTICE REGARDING FORWARD-LOOKING STATEMENTS

This report contains statements concerning our future results and performance and other matters that are “forward-looking” statements within the meaning of Section 21E of the Securities Exchange Act of 1934.

These forward-looking statements involve risks and uncertainties, some of which are beyond our control (for example, general economic and market conditions). Our actual results could differ significantly from the results described in the forward-looking statements. Factors that could cause such differences include:

 

    changes in governmental regulation of the collection, transportation, treatment and disposal of regulated waste;

 

    increases in transportation and other operating costs;

 

    the level of governmental enforcement of regulations governing regulated waste collection and treatment;

 

2


    our ability to execute our acquisition strategy and to integrate acquired businesses, including, without limitation, the integration of Shred-it;

 

    competition and demand for services in the regulated waste industry;

 

    political, economic and currency risks related to our foreign operations;

 

    impairments of goodwill or other indefinite-lived intangibles;

 

    exposure to environmental liabilities;

 

    compliance with existing and future legal and regulatory requirements; and

 

    other factors described in our filings with the U.S. Securities and Exchange Commission, including our most recently filed Annual Report on Form 10-K.

As a result, past financial performance should not be considered a reliable indicator of future performance, and investors should not use historical trends to anticipate future results or trends. We make no commitment to disclose any subsequent revisions to forward-looking statements.

All statements, other than historical facts, including:

 

    statements regarding the expected timing of the closing of the Acquisition;

 

    the ability of the parties to complete the Acquisition considering the various closing conditions;

 

    the expected benefits and synergies of the Acquisition;

 

    the competitive ability and position of the Company; and

 

    any assumptions underlying any of the foregoing,

are forward-looking statements. Such statements are based upon current plans, estimates and expectations that are subject to risks, uncertainties and assumptions. The inclusion of such statements should not be regarded as a representation that such plans, estimates or expectations will be achieved. You should not place undue reliance on such statements. There can be no assurance that the Acquisition will be completed, or if it is completed, that it will close within the anticipated time period or that the expected benefits of the Acquisition will be realized.

 

3


SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

STERICYCLE, INC.

 

By:  

/s/ Daniel V. Ginnetti

  Name:   Daniel V. Ginnetti
  Title:   Executive Vice President and Chief Financial Officer

Date: September 8, 2015

 

4


EXHIBIT INDEX

 

Exhibit No.

  

Description

99.1    Audited consolidated financial statements of Shred-it as of December 31, 2014 and 2013 and for the years ended December 31, 2014, 2013 and 2012 and the notes thereto.
99.2    Unaudited consolidated financial statements of Shred-it as of June 28, 2015 and December 31, 2014 and for the six month periods ended June 28, 2015 and June 29, 2014 and the notes thereto.
99.3    Unaudited pro forma condensed consolidated financial statements as of and for the six month period ended June 30, 2015 and for the twelve month period ended December 31, 2014 and the notes thereto.
99.4    Risk factors related to the business of Shred-it.

 

5

Exhibit 99.1

Audited Combined Financial Statements

(In thousands of U.S. dollars, unless otherwise stated)

Shred-it Group

December 31, 2014


INDEPENDENT AUDITORS’ REPORT

To the Directors of

Shred-it International Inc.

We have audited the accompanying combined financial statements of Shred-it Group which comprise the combined statements of financial position as at December 31, 2014 and 2013, and the combined statements of income (loss) and comprehensive income (loss), changes in equity and cash flows for the years ended December 31, 2014, 2013 and 2012, and a summary of significant accounting policies and other explanatory information.

Management’s responsibility for the consolidated financial statements

Management is responsible for the preparation and fair presentation of these combined financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of combined financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ responsibility

Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with standards generally accepted in the United States. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the combined financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the combined financial statements present fairly, in all material respects, the financial position of Shred-it Group as at December 31, 2014 and 2013, and its financial performance and its cash flows for the years ended December 31, 2014, 2013 and 2012 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

 

Toronto, Canada

August 11, 2015

   LOGO

 

LOGO


Shred-it Group

COMBINED STATEMENTS OF FINANCIAL POSITION

(in thousands of U.S. dollars unless otherwise stated)

 

As at December 31,

   2014      2013  

ASSETS

     

Current

     

Cash and cash equivalents (note 5)

     56,211         13,423   

Accounts receivable

     97,792         50,813   

Due from Cintas Corporation (note 7a)

     6,208         —     

Due from joint venture

     —           43   

Current portion of shareholder loans receivable (note 7b)

     —           3,126   

Inventories (note 6)

     1,027         1,025   

Prepaid expenses and other assets

     8,886         4,484   

Income taxes recoverable

     3,111         665   
  

 

 

    

 

 

 

Total current assets

     173,235         73,579   

Investment in a joint venture (note 3)

     952         1,470   

Long-term prepaid expenses

     4,097         3,000   

Deferred financing fees (note 14c)

     1,732         —     

Shareholder loans receivable (note 7b)

     3,307         4,736   

Property, plant and equipment, net (note 8)

     221,838         96,221   

Goodwill (notes 9 and 11)

     407,436         125,039   

Intangible assets, net (note 10)

     372,356         202,668   
  

 

 

    

 

 

 

Total assets

     1,184,953         506,713   
  

 

 

    

 

 

 

LIABILITIES AND EQUITY

     

Current

     

Bank indebtedness (note 5)

     14,263         5,602   

Accounts payable and accrued liabilities (note 13)

     52,294         26,533   

Due to Cintas Corporation (note 7a)

     10,252         —     

Current portion of provisions (note 12)

     8,169         3,985   

Current portion of long-term debt (note 14)

     —           18,000   

Deferred revenue

     557         156   
  

 

 

    

 

 

 

Total current liabilities

     85,535         54,276   

Provisions (note 12)

     13,505         7,796   

Revolving credit facility (note 14)

     41,646         —     

Long-term debt (note 14)

     406,586         183,696   

Deferred tax liabilities (note 16)

     77,792         26,998   

Other liabilities

     1,476         1,425   

Due to shareholders (note 7c)

     —           287,020   
  

 

 

    

 

 

 

Total liabilities

     626,540         561,211   
  

 

 

    

 

 

 

Commitments and contingent liabilities (note 18)

     

Equity (deficiency)

     

Parent

     222,446         (54,498

Non-controlling interests

     335,967         —     
  

 

 

    

 

 

 

Total equity

     558,413         (54,498
  

 

 

    

 

 

 

Total liabilities and equity

     1,184,953         506,713   
  

 

 

    

 

 

 


Shred-it Group

COMBINED STATEMENT OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)

(in thousands of U.S. dollars unless otherwise stated)

 

For the years ended December 31,

   2014     2013     2012  

Revenue

     575,083        347,301        324,202   

Expenses

      

Operating expenses (note 23)

     445,609        281,410        275,370   

Depreciation and amortization (note 8, 10)

     79,829        46,657        45,145   

Loss on disposal of property, plant & equipment

     222        369        98   

Stock-based compensation (note 19b)

     914        241        407   

Loss (gain) on foreign exchange

     9,516        5,226        (1,443

Acquisition, transaction and integration costs (note 24)

     37,635        4,862        9,516   

Share of income of a joint venture (note 3)

     (511     (530     (339
  

 

 

   

 

 

   

 

 

 

Operating income (loss)

     1,869        9,066        (4,552

Interest expense, net (note 7c, 14)

     16,178        31,490        31,012   
  

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (14,309     (22,424     (35,564
  

 

 

   

 

 

   

 

 

 

Provision for (recovery of) income taxes (note 16)

      

Current

     6,723        2,029        (2,919

Deferred

     (2,139     (3,007     (6,423
  

 

 

   

 

 

   

 

 

 
     4,584        (978     (9,342
  

 

 

   

 

 

   

 

 

 

Loss from continuing operations

     (18,893     (21,446     (26,222
  

 

 

   

 

 

   

 

 

 

Attributable to:

      

Parent equity

     (20,778     (21,446     (26,222

Non-controlling interests

     1,885        —          —     
  

 

 

   

 

 

   

 

 

 
     (18,893     (21,446     (26,222
  

 

 

   

 

 

   

 

 

 

Discontinued operations (note 21)

      

Net income from discontinued operations

     4,345        4,619        2,763   

Gain on sale of discontinued operations

     20,879        —          —     
  

 

 

   

 

 

   

 

 

 

Net income (loss)

     6,331        (16,827     (23,459
  

 

 

   

 

 

   

 

 

 

Consolidated statement of other comprehensive income

      

Other comprehensive income (loss)

      

Foreign currency translation

     (7,730 )      23,306        677   
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) from continuing operations

     (7,730     23,306        677   

Other comprehensive loss from discontinued operations

     (353     (632     —     
  

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     (8,083     22,674        677   
  

 

 

   

 

 

   

 

 

 

Attributable to:

      

Parent equity from continuing operations

     (5,812     23,306        677   

Parent equity from discontinued operations

     (353     (632     —     

Non-controlling interests equity

     (1,918     —          —     
  

 

 

   

 

 

   

 

 

 
     (8,083     22,674        677   
  

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

     (1,752     5,847        (22,782
  

 

 

   

 

 

   

 

 

 


Shred-it Group

COMBINED STATEMENTS OF CHANGES IN EQUITY

(in thousands of U.S. dollars unless otherwise stated)

 

For the years ended

December 31,

   Capital     Contributed
surplus
     Foreign
currency
translation
    Deficit     Total
Parent
Equity
    Non-
controlling
interests
    Total
equity
 

As at December 31, 2011

     13,533        1,496         (18,919     (34,453     (38,343     —          (38,343

Loss from continuing operations

     —          —           —          (26,222     (26,222     —          (26,222

Income from discontinued operations

     —          —           —          2,763        2,763        —          2,763   

Other comprehensive income from continuing operations

     —          —           677        —          677        —          677   

Issuance of capital

     347        —           —          —          347        —          347   

Redemptions

     (35     —           —          (115     (150     —          (150

Stock-based compensation

     —          369         —          —          369        —          369   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As at December 31, 2012

     13,845        1,865         (18,242     (58,027     (60,559     —          (60,559

Loss from continuing operations

     —          —           —          (21,446     (21,446     —          (21,446

Income from discontinued operations

     —          —           —          4,619        4,619        —          4,619   

Other comprehensive income from continuing operations

     —          —           23,306        —          23,306        —          23,306   

Other comprehensive loss from discontinued operations

     —          —           (632     —          (632     —          (632

Issuance of capital

     96        —           —          —          96        —          96   

Redemptions

     (26     —           —          (47     (73     —          (73

Stock-based compensation

     —          191         —          —          191        —          191   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As at December 31, 2013

     13,915        2,056         4,432        (74,901     (54,498     —          (54,498

Loss from continuing operations

     —          —           —          (20,778     (20,778     1,885        (18,893

Income from discontinued operations

     —          —             4,345        4,345        —          4,345   

Gain on sale of discontinued operations

     —          —           1,021        20,879        21,900        —          21,900   

Other comprehensive loss from continuing operations

     —          —           (5,812     —          (5,812     (1,918     (7,730

Other comprehensive loss from discontinued operations

     —          —           (353     —          (353     —          (353

Issuance of capital

     283,393        —           —          —          283,393        —          283,393   

Shredding Transaction (note 4)

     —          —           —          —          —          336,000        336,000   

Redemptions

     (756     —           —          (379     (1,135     —          (1,135

Stock-based compensation

     —          196         —          (4,812     (4,616     —          (4,616
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As at December 31, 2014

     296,552        2,252         (712     (75,646     222,446        335,967        558,413   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


Shred-it Group

COMBINED STATEMENTS OF CASH FLOWS

(in thousands of U.S. dollars unless otherwise stated)

 

Years ended December 31

   2014     2013     2012  

OPERATING ACTIVITIES

      

Loss from continuing operations

     (18,893     (21,446     (26,222

Income from discontinued operations

     25,224        4,619        2,763   
  

 

 

   

 

 

   

 

 

 

Net income (loss)

     6,331        (16,827     (23,459

Add (deduct) non-cash items

      

Depreciation and amortization

     79,829        46,657        45,145   

Depreciation and amortization from discontinued operations (note 21)

     964        1,655        1,453   

Unrealized gain on interest rate swap

     —          —          (2,681

Gain on sale of discontinued operations

     (20,879     —          —     

Loss on disposal of property, plant, and equipment

     222        369        98   

Stock-based compensation

     3,092        241        407   

Unrealized foreign exchange loss (gain)

     6,973        5,099        (932

Non-cash interest

     5,127        23,295        22,144   

Share of income of a joint venture

     (511     (530     (339

Deferred income taxes

     (2,139     (3,007     (6,423
  

 

 

   

 

 

   

 

 

 
     79,009        56,952        35,413   

Net change in working capital balances related to operations (note 17)

     1,004        2,407        (17,199
  

 

 

   

 

 

   

 

 

 

Cash provided by operating activities

     80,013        59,359        18,214   
  

 

 

   

 

 

   

 

 

 

INVESTING ACTIVITIES

      

Purchases of property, plant, and equipment

     (34,620     (20,107     (29,985

Business acquisitions (net of cash of $979 (2013 — $1,652; 2012 — 1,266) (note 4)

     (281,305     (25,582     (51,966

Dividends received

     1,029        —          —     

Dividends received from discontinued operations

     9,468        —          —     

Proceeds from sale of discontinued operations

     28,223        —          —     

Capital contribution to discontinued operations

     (6,818     —          —     
  

 

 

   

 

 

   

 

 

 

Cash used in investing activities

     (284,023     (45,689     (81,951
  

 

 

   

 

 

   

 

 

 

FINANCING ACTIVITIES

      

Proceeds from long-term debt, net of deferred financing costs

     406,095        47,945        333,841   

Proceeds from revolver loan

     39,619        —          —     

Repayment of long-term debt

     (202,500     (82,385     —     

Share redemption

     —          (71     (257,245

Stock option cash settlement

     (826     —          —     

Issuance of Parent equity

     —          80        400   
  

 

 

   

 

 

   

 

 

 

Cash provided by (used in) financing activities

     242,388        (34,431     76,996   
  

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (4,251     5,220        (601
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents during the year

     34,127        (15,541     12,658   

Cash and cash equivalents, beginning of year

     7,821        23,362        10,704   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of year

     41,948        7,821        23,362   
  

 

 

   

 

 

   

 

 

 

Supplemental cash flow information

      

Interest paid

     10,546        7,033        9,700   

Income taxes paid

     7,027        1,149        (1,446
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents

     56,211        13,423        23,312   

Bank indebtedness

     (14,263     (5,602     50   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of year

     41,948        7,821        23,362   
  

 

 

   

 

 

   

 

 

 

See accompanying notes


Shred-it Group

NOTES TO COMBINED FINANCIAL STATEMENTS

(in thousands of U.S. dollars unless otherwise stated)

 

1. CORPORATE REORGANIZATION

Shred-it International Inc. (the “Company” or “Shred-it”), and prior to June 2, 2015 formerly known as Shred-it International GP Inc.(“SII GP”), is one of the entities within the group of entities which includes Boost Holdings LP (‘‘Boost Holdings’’), Boost GP Corp. (‘‘Boost GP’’) and Shred-it JV LP (the ‘‘Partnership’’), that comprises the ‘‘Shred-it Group’’, and which the Birch Hill Group collectively controls.

The combined financial statements have been prepared to include the financial results of SII GP, Boost Holdings, Boost GP and the Partnership (individually, the “Combined Entities”). Prior to a reorganization that took place in March 2014 (the “Reorganization”), the Shred-it Group operated through a predecessor entity, Shred-it International Inc. (now Shred-it International ULC) (“Predecessor SII”) and its wholly-owned subsidiaries. Accordingly, prior to the Reorganization, the combined financial statements include the consolidated results of Predecessor SII. SII GP, Boost Holdings, Boost GP and the Partnership were formed in connection with the Reorganization and Predecessor SII was transferred to the Partnership.

The Partnership provides secure information destruction services.

As part of the Reorganization, in April 2014, Secure-it Records Management Inc. (“RM”), a newly formed subsidiary of the Partnership, was distributed to Boost Holdings. RM was sold by Boost Holdings on December 1, 2014. RM is presented as discontinued operations as explained further in note 21.

These combined financial statements were approved by the Board of Directors of the Company and authorized for issue on August 11, 2015.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The combined financial statements of the Shred-it Group have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

The combined financial statements have been prepared on a historical cost basis. All amounts are expressed in U.S. dollars, unless otherwise specified, rounded to the nearest thousand.

As the former shareholders of Predecessor SII retained control over the Shred-it Group subsequent to the Reorganization, these combined financial statements are prepared on a continuity of interest basis, whereby the assets and liabilities of Predecessor SII that were transferred over to the Partnership are recorded at historical cost. The financial information of the Shred-it Group represents the consolidated financial results of SII prior to the Reorganization in March 2014 and the combined financial results of the Shred-it Group subsequent to the Reorganization.

Subsequent to the Reorganization, the Partnership acquired the document destruction, recycling, and ancillary services businesses of Cintas Corporation (“Cintas”) (the “Shredding transaction”) in exchange for cash and a 42% interest in the Partnership. This transaction has been recorded as an acquisition (note 4) with the acquired assets and liabilities assumed of the Cintas document shredding business recorded at fair value.

The accompanying combined financial statements of the Shred-it Group reflect only the assets, liabilities and results of operations of the entities being combined and their wholly-owned subsidiaries. They do not include any other assets, liabilities, revenue or expenses of the non-controlling equity partner. No provision has been made in the combined financial statements for interest on capital, fees or salaries unless otherwise noted. These combined financial statements do not provide for certain income tax amounts as they are the responsibility of the partners.


Basis of combination

Prior to the Reorganization, the consolidated financial statements included the accounts of Predecessor SII and its wholly-owned subsidiaries: Shred-it US, Inc., Artech USA Inc., Shred-it America Inc., Shred-it Limited, Artech Reduction Technologies Limited, Shred-it East of Scotland Ltd., Celb Ltd., Shred-it ROI Ltd., Shred-it ROI (Holdings) Ltd., Shred-it GmbH, Shred-it France SAS, Mobile Shredding Luxembourg SA, Shred-it LLC, Shred-it Singapore Pte. Ltd., Shred-it Belgium S.A., Shred-it South Africa Pty Ltd., Shred-it Insurance Ltd., Secure Shredding Limited, Shred- it Glasgow Limited, and, Document Destruction Co. Limited.

As a continuation under common control, subsequent to the Reorganization, the combined financial statements of Shred-it Group include the accounts of SII GP, Boost GP, Boost Holdings and the Partnership and its wholly-owned subsidiaries: Shred-it International ULC, Shred-it US Holdco Inc., Shred-it USA JV LLC, CDD LLC, Shred-it USA LLC, Artech USA LLC, Shred-it America LLC, Shred-it Limited, Artech Reduction Technologies Limited, Shred-it East of Scotland Ltd., Celb Ltd., Shred-it ROI Ltd., Shred-it ROI (Holdings) Ltd., Shred- it GmbH, Shred-it France SAS, Mobile Shredding Luxembourg SA, Shred-it Singapore Pte. Ltd., Shred-it Belgium S.A., Shred-it South Africa Pty Ltd., Shred-it Insurance Ltd., Secure Shredding Limited, Shred-it Glasgow Limited, CC Dutch Shredding BV, Shred- it LLC, Document Destruction Co. Limited and Shred-it Australia (PTY) Limited.

The combined financial statements include the financial results of these entities since incorporation or since their respective dates of acquisition by the controlling shareholders of the Company. All intercompany transactions, profits and balances have been eliminated.

The Combined Entities of the Shred-it Group control an investee if and only if the entity has:

 

    Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee);

 

    Exposure, or rights, to variable returns from its involvement with the investee; and

 

    The ability to use its power over the investee to affect its returns.

Shred-it Group reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when it obtains control over the subsidiary and ceases when it loses control of the subsidiary. Assets, liabilities, revenue and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statements of loss and comprehensive income (loss) from the date it gains control until the date it ceases to control the subsidiary.

Investment in joint venture

An affiliate is an entity over which the Shred-it Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies.

A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control.

The considerations made in determining significant influence or joint control, are similar to those necessary to determine control over subsidiaries.

Shred-it Group’s investment in its joint venture, Shred-it LLC, a limited liability company in accordance with the laws in force in the Emirate of Dubai, United Arab Emirates (“UAE”), is accounted for using the equity method.

Under the equity method, the investment in a joint venture is initially recognized at cost. The carrying amount of the investment is adjusted to recognize changes in the Company’s share of the net assets of the joint venture since the acquisition date.


The combined statements of income (loss) and comprehensive income (loss) reflect the Shred-it Group’s share of the results of operations of the joint venture. Any changes in other comprehensive income (“OCI”) of the joint venture are presented as part of the Shred-it Group’s OCI. In addition, when there has been a change recognized directly in the equity of the joint venture, the Shred-it Group recognizes its share of any changes, when applicable, in the combined statements of changes in equity. Unrealized gains and losses resulting from transactions between the Shred-it Group and the joint venture are eliminated to the extent of the interest in the joint venture. The aggregate of the Shred-it Group’s share of income of a joint venture is shown on the combined statements of income (loss) and comprehensive income (loss).

The financial statements of the joint venture are prepared for the same reporting period as the Shred-it Group.

After application of the equity method, the Shred-it Group determines whether it is necessary to recognize an impairment loss on its investment in the joint venture. At each reporting date, the Shred-it Group determines whether there is objective evidence that the investment in the joint venture is impaired. If there is such evidence, the Company calculates the amount of impairment as the difference between the recoverable amount of the joint venture and its carrying value, and then recognizes the loss as “Share of income of a joint venture” in the combined statements of income (loss) and comprehensive income (loss).

Cash and cash equivalents

Cash and cash equivalents in the combined statements of financial position comprise cash at banks and on hand and highly liquid temporary investments with maturities of three months or less as at the date of acquisition.

Inventories

Finished goods are valued at the lower of cost, determined on a first-in, first-out basis, and net realizable value. Parts and supplies inventories are valued at the lower of cost determined on a weighted average basis, and net realizable value.

Property, plant and equipment

Property, plant and equipment are recorded at cost less accumulated amortization.

Amortization is provided at the following rates and bases:

 

Equipment    10 years straight-line
Truck power train    25% declining balance
Truck body    25% declining balance
Truck chassis    25% declining balance
Truck shredder    25% declining balance
Consoles    3 years straight-line
Office equipment    30% declining balance
Leasehold improvements    Straight-line over the term of the lease plus one renewal period
Computer software and hardware    30% declining balance

Amortization of property, plant and equipment begins when assets are available for their intended use.

Internally developed computer software is carried at cost less any accumulated amortization. Amortization of the asset begins when development is complete and the asset is available for use.

Depreciation methods, rates and residual values are reviewed annually and revised if the current method, estimated useful life or residual value is different from that estimated previously. The effect of such changes is recognized prospectively in the combined statements of income (loss) and comprehensive income (loss).


Intangible assets

Intangible assets acquired in a business combination are recorded at their fair values. Intangible assets with finite useful lives are amortized over their estimated useful lives. Useful lives, residual values and amortization methods for intangible assets with finite useful lives are reviewed at least annually. Intangible assets having an indefinite life are not amortized but are tested for impairment on an annual basis, as described in note 11. The determination of these assets’ indefinite lives is based on an analysis of all relevant factors, including the expected usage of the asset, the typical life cycle of the asset and anticipated changes in the market demand for the products and services that the asset helps generate.

Intangible assets with finite useful lives are amortized on a straight- line basis over their estimated useful lives as follows:

 

Customer relationships    10 years straight-line
Brand name    Indefinite life
Non-competition agreements    Straight-line over the term of the agreement typically 3 to 5 years
Franchise rights    Straight-line over the remaining contractual term

Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the Shred-it Group’s share of the net identifiable assets of the acquired business or equity method investee at the date of acquisition. If purchase consideration is lower than the fair value of the net assets acquired, the difference is recognized in the combined statements of income (loss) and comprehensive income (loss). After initial recognition, goodwill is measured at cost less any accumulated impairment losses.

Goodwill acquired in a business combination is allocated to each of the Shred-it Group’s cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Any gain or loss on the disposal of goodwill is recognized in the combined statements of income (loss) and comprehensive income (loss).

Impairment

 

  (a) Intangible assets with indefinite life

Intangible assets with indefinite useful lives are not amortized but are tested for impairment annually, or when there is an indication that the asset may be impaired either individually or at the cash-generating unit (“CGU”) level. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable; if not, the change in useful life from indefinite to finite is made on a prospective basis. Gains or losses arising from the derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the assets and are recognized in the combined statements of income (loss) and comprehensive income (loss) when the asset is derecognized.

 

  (b) Impairment of non-financial assets

Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized at the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and its value-in-use. For the purposes of assessing impairment, assets are grouped into CGUs at the lowest levels for which there are separately identifiable independent cash flows. Non-financial assets, other than goodwill, that suffer impairment are reviewed for possible reversal of the impairment whenever reversal indicators exist.

 

  (c) Goodwill

Goodwill is deemed to have an indefinite life and is tested annually for impairment or when there is an indicator of impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. The recoverable amount of the CGU is the higher of the fair value less costs to sell and value in use. The recoverable amount is compared to the carrying amount of the CGU and an impairment loss is recorded at the amount that the carrying amount exceeds the recoverable amount.


Business combinations

Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. Acquisition costs incurred are expensed and included in other expenses in the combined statements of income (loss) and comprehensive income (loss). When the Shred-it Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions at the acquisition date. Any contingent consideration to be transferred by the acquirer will be recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability will be recognized in accordance with IAS 39, Financial Instruments: Recognition and Measurement in the combined statements of income (loss) and comprehensive income (loss). Reacquired rights, as an exception to fair value, in business combinations, are recognized as an intangible asset based on the remaining contractual term of the related contract regardless of whether market participants would consider potential contractual renewals when measuring its fair value.

Disposal of business

In general, when a disposal transaction causes the Shred-it Group to relinquish control over a business the Shred-it Group records a gain or loss on disposal at the disposal date. The gain or loss is calculated as the difference between the fair value of the consideration received and the carrying amounts of the derecognized net assets, adjusted by amounts previously recognized in OCI in relation to that business.

Discontinued operations

Discontinued operations are reported when a component of an entity being disposed of comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity, if the component either (1) represents a major line of business or geographical area of operations or (2) is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations. In the combined statements of income (loss) and comprehensive income (loss), results from discontinued operations are reported separately from revenue and expenses from continuing operations and prior periods are presented on a comparative basis. Cash flows for discontinued operations are presented separately in note 21. In order to present the financial effects of the continuing operations and discontinued operations, revenue and expenses from intercompany transactions have been eliminated, except for expenses that are considered to continue after the disposal of the discontinued operation.

Provisions

Provisions are recognized when a present obligation as a result of a past event will lead to a probable outflow of economic resources from the Shred-it Group and the amount of that outflow can be estimated reliably. The timing or amount of the outflow may still be uncertain. A present obligation arises from the presence of a legal or constructive obligation that has resulted from past events (for example, legal disputes or onerous contracts). Provisions are measured at the estimated expenditure required to settle the present obligation, based on the most reliable evidence available at the reporting date, including the risks and uncertainties associated with the present obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. When discounting is used, the increase in the provision due to the passage of time is recognized as a finance cost.

Revenue recognition

Shredding and records management revenue is recognized upon completion of service.

Recycling revenue is recognized upon the delivery of recycled materials to the customer.

Royalties are recognized as earned and are based on a percentage of the revenue of the franchisees.

Truck and container sales are recognized upon transfer of title to the customer.


Stock-based compensation

The Shred-it Group records compensation expense in the combined financial statements for stock options granted to employees and directors using an option valuation technique that is compliant with IFRS 2, Share-based Payments. The fair value of stock options classified as equity instruments that vest over time are recognized in stock-based compensation expense over the vesting period for each tranche of options.

Leases

The determination of whether an arrangement is (or contains) a lease is based on the substance of the arrangement at the inception of the lease. The arrangement is, or contains, a lease if fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset or assets, even if that right is not explicitly specified in an arrangement.

A lease is classified at the inception date as a finance lease or an operating lease. A lease that transfers substantially all the risks and rewards incidental to ownership to the Shred-it Group is classified as a finance lease.

Finance leases are capitalized at the commencement of the lease at the inception date fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognized in finance costs in the combined statements of income (loss) and comprehensive income (loss).

A leased asset is depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Shred-it Group will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term.

Operating lease payments are recognized as an operating expense in the combined statements of income (loss) and comprehensive income (loss) on a straight-line basis over the lease term.

Income taxes

Current tax assets and liabilities are measured at the amount expected to be paid to tax authorities, net of recoveries based on the tax rates and laws enacted or substantively enacted at the date of the combined statements of financial position. Management periodically evaluates positions taken in the tax returns for situations in which applicable tax regulations are subject to interpretation and establish provisions where appropriate. Current and deferred tax relating to items recognized directly in equity is also recognized in equity.

Deferred tax liabilities are provided for using the liability method on temporary differences between the tax bases and carrying amounts of assets and liabilities. Deferred tax assets are recognized for all deductible temporary differences and carry forward of unused tax losses, to the extent that it is probable that the deductions and tax losses can be utilized. The carrying amount of deferred tax assets is reviewed at each date of the combined statements of financial position and reduced to the extent it is no longer probable that the deferred or income tax assets will be recovered. Unrecognized deferred tax assets are reassessed at each reporting date and are recognized to the extent that it has become probable that future taxable income will allow the deferred tax asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to prevail in the period when the asset is realized or the liability settled, based on the tax rates and laws that have been enacted or substantively enacted at the dates of the combined statements of financial position.

Deferred tax liabilities are generally recognized for all taxable temporary differences, except in respect of taxable temporary differences associated with investments in subsidiaries and investments subject to significant influence, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets and they relate to income taxes levied by the same tax authority and on the same taxable entity.


Effective May 1, 2014, the 35.2% of the US-based taxable income is not taxed within the Shred-it Group due to the relevant entities electing to be disregarded for tax purposes.

Current and deferred income taxes are recorded based on the accounting records of the Combined Entities that are included within the Shred-it Group (note 1). No additional allocation of income taxes from parent entities was considered necessary.

Foreign currency translation

The combined financial statements are presented in U.S. dollars, the Combined Entities’ functional currency. Each subsidiary consolidated by the Shred-it Group determines its own functional currency based on the primary economic environment in which the subsidiary operates.

Foreign exchange gains/losses arising on transactions occurring in a currency other than an operation’s functional currency are included in income or loss for the period.

Assets and liabilities of subsidiaries with different functional currencies are translated into U.S. dollars at the year-end rates of exchange and revenue and expense items are translated at the average rate of exchange during the period where these approximate actual rates. Exchange gains or losses arising from the translation of these subsidiaries are included as part of OCI.

Financial and derivative instruments

Financial assets and liabilities

The Shred-it Group classifies its financial assets and liabilities into the following categories:

 

    Financial assets available for sale;

 

    Financial assets and liabilities at fair value through income or loss;

 

    Loans and receivables; and

 

    Other financial liabilities.

Appropriate classification of financial assets and liabilities is determined at the time of initial recognition or when reclassified on the combined statements of financial position. Financial instruments classified as fair value through income or loss are recognized on the trade date, which is the date that the Shred-it Group commits to purchase or sell the asset.

 

  (a) Financial assets available for sale

The Shred-it Group had no financial assets available for sale at December 31, 2014 and 2013.

 

  (b) Financial assets and liabilities at fair value through income or loss

The Shred-it Group had no financial assets or liabilities, other than cash, at fair value through income or loss at December 31, 2014 and 2013.

 

  (c) Loans and receivables

Loans and receivables are initially measured at fair value plus transaction costs directly attributable to the acquisition of the financial asset and subsequently carried at amortized cost using the effective interest method less any impairment, with changes recorded through combined statements of income (loss) and comprehensive income (loss). Assets in this category include receivables and are classified as current assets on the combined statements of financial position with the gains and losses impacting operations.


  (d) Other financial liabilities

All of the Shred-it Group’s non-derivative financial liabilities are classified as other financial liabilities and are initially measured at fair value less transaction costs that are directly attributable to the issue of the financial liability. Subsequent to the initial recognition and measurement, these non-derivative financial liabilities are measured at amortized cost using the effective interest method. Such liabilities include bank advances, accounts payable and accrued liabilities, long-term debt, promissory notes payable and Class A and B special shares of Predecessor SII.

 

  (e) Determination of fair value

The Shred-it Group categorizes its fair value measurements according to a three-level fair value hierarchy. The hierarchy prioritizes the inputs used by the Shred-it Group’s valuation techniques. A level is assigned to each fair value measurement based on the lowest level input significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are defined as follows:

Level 1 — Unadjusted quoted prices at the measurement date for identical assets or liabilities in active markets.

Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data.

Level 3 — Significant unobservable inputs which are supported by little or no market activity.

 

  (f) Impairment of financial assets

The Shred-it Group assesses at each reporting date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset (an incurred “loss event”) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the receivables or a group of receivables is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

For financial assets carried at amortized cost, the Shred-it Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Shred-it Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognized are not included in a collective assessment of impairment. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The present value of the estimated future cash flows is discounted at the financial asset’s original effective interest rate.

Summary of estimates, judgments and assumptions

The preparation of combined financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, revenue and expenses. Actual results could differ from these estimates. Key areas of estimation where management has made difficult, complex or subjective judgments, often as a result of matters that are inherently uncertain, are as follows:


  (a) Income taxes

Current and deferred tax liabilities must be estimated for the Shred-it Group, including an assessment of temporary differences. Any temporary differences will generally result in the recognition of deferred tax assets and liabilities in the combined financial statements. Based on management’s judgment, deferred tax assets are not set up in situations where it is not probable that taxable income will be available against which deductible temporary differences can be utilized. Management must also determine the manner in which deferred tax balances will be realized as well as the tax rate that will apply when the balance is expected to be utilized. Estimating the rate requires an assessment of the allocation of taxable income amongst jurisdictions within certain countries (state or provincial allocation factors).

 

  (b) Impairment of non-financial assets

The impairment test on CGUs is carried out by comparing the carrying amount of the CGU and its recoverable amount. The recoverable amount of a CGU is the higher of its fair value, less costs to sell and its value-in-use. The complex valuation process used to determine value-in-use considers discounted cash flows method, which includes significant assumptions relating to future cash flows, discount and terminal growth rates.

 

  (c) Provisions

Considerable judgment is used in measuring and recognizing provisions and the exposure to contingent liabilities.

 

  (i) Restoration costs

In the course of the Shred-it Group’s activities, it is expected to have costs associated with restoring the location where assets are situated upon ceasing their use on those premises. The associated cash outflows, which are long-term in nature, are generally expected to occur at the dates of exit of the assets to which they relate.

These restoration costs are calculated on the basis of the identified costs for the current financial year, extrapolated into the future based on management’s best estimates of future trends in prices, inflation and other factors, and are discounted to present value at a credit adjusted risk-free rate specifically applicable to the liability. Forecasts of estimated future provisions are revised in light of future changes in business conditions or technological requirements.

The Shred-it Group records these decommissioning and restoration costs as property, plant and equipment and subsequently allocates them to expenses using a systematic and rational method over the asset’s useful life, and records the accretion of the liability as a charge to finance costs.

 

  (ii) General insurance liabilities

General insurance liabilities represent the estimated ultimate cost of all asserted and unasserted claims incurred, primarily related to where the Shred-it Group is self-insured in the United States for workers’ compensation claims, medical claims, auto liability and other general liability exposure. Workers’ compensation, auto liability and general liability provisions are estimated through actuarial procedures of the insurance industry. The principal assumptions underlying the estimates are the past claims development experience and various industry sources to the extent that the Shred-it Group’s data is deemed insufficient.

 

  (d) Stock options, share units and share purchase plans

Assumptions, such as volatility, expected life of an award, risk-free interest rate, forfeiture rate vesting period, probability of reaching market conditions and dividend yield, are used in the underlying calculation of fair values of the Shred-it Group’s stock options. Details of the assumptions used are included in note 19. Significant changes in the assumptions, including those with respect to future business plans and cash flows, could materially change the recorded carrying amounts.


  (e) Determination of CGUs

The determination of CGUs was made through identifying the smallest group of assets that generates cash inflows largely independent of the cash flows from other assets or groups of assets. On this basis the CGUs were determined to be the countries in which the Shred-it Group operates given the Shred-it Group’s national customer base. This determination is also consistent with how the Shred-it Group operates and makes decisions about continuing or disposing of assets or operations.

Changes in accounting policies and disclosures

New and amended standards and interpretations

IFRIC Interpretation 21, Levies (“IFRIC 21”)

IFRIC 21 clarifies that an entity recognizes a liability for a levy when the activity that triggers payment, as identified by the relevant legislation, occurs. For a levy that is triggered upon reaching a minimum threshold, the interpretation clarifies that no liability should be anticipated before the specified minimum threshold is reached. IFRIC 21 is effective for annual periods beginning on or after January 1, 2014. Adoption of IFRIC 21 did not have a material financial impact on the combined financial statements.

Offsetting Financial Assets and Financial Liabilities — Amendments to IAS 32

These amendments clarify the meaning of “currently has a legally enforceable right to set-off” and the criteria for non-simultaneous settlement mechanisms of clearing houses to qualify for offsetting and are applied retrospectively. These amendments did not have a material impact on the combined financial statements.

Annual Improvements 2010 — 2012 Cycle

In the 2010-2012 annual improvements cycle, the IASB issued seven amendments to six standards, which included an amendment to Fair Value Measurement (IFRS 13). The amendment to IFRS 13 is effective immediately and, thus, for periods beginning on January 1, 2014, and it clarifies in the Basis for Conclusions that short-term receivables and payables with no stated interest rates can be measured at invoice amounts when the effect of discounting is immaterial. This amendment to IFRS 13 did not have a material financial impact on the combined financial statements.

Standards issued but not yet effective

The standards and interpretations that are issued, but not yet effective, up to the date of issuance of the combined financial statements are disclosed below. The Shred-it Group intends to adopt these standards when they become effective.

Financial Instruments

In November 2013, the IASB issued a revised version of Financial Instruments (IFRS 9), which introduces a new chapter on hedge accounting, putting in place a new hedge accounting model that is designed to be more closely aligned with how entities undertake risk management activities when hedging financial and non-financial risk exposures. The revised standard permits an entity to apply only the requirements introduced in IFRS 9 (2010) for the presentation of gains and losses on financial liabilities designated at fair value through profit or loss without applying the other requirements of IFRS 9, meaning the portion of the change in fair value related to changes in the entity’s own credit risk can be presented in OCI rather than within the combined statements of loss and comprehensive income (loss). The amendments to IFRS 9 remove the mandatory effective date of IFRS 9 (2013), IFRS 9 (2010) and IFRS 9 (2009), leaving the effective date open, pending the finalization of the impairment, classification and measurement requirements. Notwithstanding the removal of an effective date, each standard remains available for application. The Shred-it Group does not anticipate early adoption and plans to adopt the standard on its effective date, which the IASB has tentatively decided will be no earlier than January 1, 2018. The Shred-it Group is in the process of reviewing the standard to determine the impact on its combined financial statements.


Revenue Recognition

In May 2014, the IASB released IFRS 15, Revenue from contracts with customers, which supersedes existing revenue related guidance. The core principle of IFRS 15 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. IFRS 15 will also result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and improve guidance for multiple-element arrangements. IFRS 15 will be effective for the Shred-it Group’s fiscal year beginning on January 1, 2017, with earlier application permitted. The Shred-it Group has not yet assessed the impact of the adoption of this standard on its combined financial statements.

 

3. INTEREST IN A JOINT VENTURE

The Shred-it Group has a 49% interest (50% voting rights) in Shred-it LLC, a jointly controlled entity involved in document preservation and shredding activities in the UAE. As a result of its 50% voting rights the Shred-it Group is entitled to 50% of the income in Shred- it LLC. The Shred-it Group’s interest in Shred-it LLC is accounted for using the equity method in the combined financial statements. Summarized financial information of the joint venture, based on its IFRS financial statements, and reconciliation with the carrying amount of the investment in its combined financial statements are set out below:

 

     2014     2013  
     $     $  

Cash and cash equivalents

     1,182        1,816   

Accounts receivable

     536        727   

Prepaid expenses and other assets

     106        75   
  

 

 

   

 

 

 

Total current assets

     1,824        2,618   

Property, plant and equipment

     444        541   
  

 

 

   

 

 

 

Total assets

     2,268        3,159   
  

 

 

   

 

 

 

Accounts payable and current liabilities

     116        135   

Due to Shred-it International

     248        84   
  

 

 

   

 

 

 

Total liabilities

     364        219   
  

 

 

   

 

 

 

Shareholders’ equity

     1,904        2,940   
  

 

 

   

 

 

 

Proportion of the Shred-it Group’s ownership

     50     50

Carrying amount of the investment

     952        1,470   
  

 

 

   

 

 

 

Summarized statement of income of Shred-it LLC

 

     2014      2013      2012  
     $      $      $  

Revenue (shredding and recycling)

     2,560         2,350         2,296   

Expenses:

        

Employment costs

     768         717         708   

Transportation and maintenance

     154         137         123   

Rent and occupancy

     50         48         46   

Subcontractor and other expenses

     370         163         456   

Depreciation and amortization

     196         225         285   
  

 

 

    

 

 

    

 

 

 

Net income for the year

     1,022         1,060         678   
  

 

 

    

 

 

    

 

 

 

Shred-it Group’s share of net income for the year

     511         530         339   
  

 

 

    

 

 

    

 

 

 

The joint venture has no contingent liabilities or capital commitments as at December 31, 2014 and 2013. Shred-it LLC paid $1,029 in dividends to the Partnership during the year.


  4. ACQUISITIONS

 

  (a) 2014 business acquisitions

Cintas acquisition

On April 30, 2014, the Partnership acquired the Cintas document shredding business which has been accounted for as a business acquisition. As consideration, the Partnership issued 14,900 Class A Common LP units and 18,700 Class B Common LP Units, valued at $336,000, representing 42% of the Partnership’s units and $186,755 in cash. As part of the transaction, the Partnership and Cintas entered into an Investors Agreement which specifies that if a qualified monetizing event of the Partnership has not occurred within five years of the date of the agreement, i.e. April 30, 2014, Cintas has the right to sell all but not less than all of the Partnership units owned by it to the other investors at fair market value. The Partnership does not have a liability associated with this put option as they are not required to purchase the Cintas units. If the other investors reject the put offer the Partnership is responsible for initiating the sale process only and is under no obligation to acquire Cintas’s share in the event the put option is exercised.

Franchise acquisitions

The following franchise acquisitions were completed in 2014:

On June 16, 2014, the Partnership acquired 100% of the assets Virginia Shredders Inc. based in Norfolk and Richmond, Virginia.

On September 3, 2014, the Partnership acquired 100% of the assets of Prudence Corporation based in Baltimore, Maryland.

On September 22, 2014, the Partnership acquired 100% of the assets of Boyer-Kansas Inc. located in Kansas City and Springfield, Missouri.

On September 29, 2014, the Partnership acquired 100% of the assets of Charlotte Shredders based in Charlotte, North Carolina.

On October 6, 2014, the Partnership acquired 100% of the assets of Linden Data Industries, located in Las Vegas, Nevada.

On October 27, 2014, the Partnership acquired 100% of the assets of Rod Ben International Corp. located in the Commonwealth of Puerto Rico.

On December 15, 2014, the Partnership acquired 100% of the assets of Environmental Security Inc. located in Cheshire, Connecticut.

On December 30, 2014, the Partnership acquired 100% of the assets of North Florida Shredding Inc. located in Tallahassee, Florida.

Iron Mountain acquisition

On December 1, 2014, the Partnership acquired 100% of the shares of Iron Mountain Incorporated’s (“Iron Mountain”) shredding operations located in the United Kingdom, Ireland and Australia, in exchange for cash consideration.


Summary of acquisitions

The fair value of the assets acquired and liabilities assumed, relating to Cintas, franchise and Iron Mountain acquisition completed in 2014 are summarized as follows:

 

     Cintas      Franchises      Iron
Mountain
     Total  
     $      $      $      $  

Cash

     632         —           347         979   

Accounts receivable

     42,964         2,615         67         45,646   

Prepaid expenses

     930         91         97         1,118   

Property, plant and equipment

     130,994         7,018         10,104         148,116   

Customer lists

     171,000         21,439         8,675         201,114   

Franchise rights

     —           4,542         —           4,542   

Other intangibles

     —           —           2,622         2,622   

Goodwill

     253,040         32,226         8,048         293,314   

Brand name

     1,000         —           —           1,000   

Provisions and accrued liabilities

     (26,485      —           (1,286      (27,771

Deferred income taxes

     (51,320      —           (2,055      (53,375
  

 

 

    

 

 

    

 

 

    

 

 

 
     522,755         67,931         26,619         617,305   
  

 

 

    

 

 

    

 

 

    

 

 

 

All acquisitions were accounted for as business combinations using the acquisition method with the results of operations consolidated with those of the Partnership from the date of acquisition. The Partnership acquired these businesses as they provide similar document destruction and recycling services.

Allocation of the purchase price for the Iron Mountain acquisition was based on preliminary estimates of the fair value of net assets acquired and is subject to adjustment as additional information becomes available to the Partnership. The purchase price allocation of this acquisition is subject to finalization of the assessment of fair value of the intangible assets (primarily customer relationships intangible assets), property, plant and equipment, contingencies and income taxes (primarily deferred income taxes).

As at December 31, 2014, there was $185 of net contingent consideration receivable primarily related to customer retention with respect to the Iron Mountain acquisition completed on December 1, 2014.

An estimate at the acquisition date of acquired accounts receivable not expected to be collected is $2,778 (2013 — $48).

Goodwill represents the expected operational synergies with the acquiree and/or intangible assets that do not qualify for separate recognition. Generally goodwill arising from asset acquisitions is deductible for tax.

From the date of acquisition, the above acquisitions have contributed to revenue and income before income tax as follows:

 

     Cintas      Franchises      Iron Mountain  
     $      $      $  

Revenue

     190,047         9,964         1,421   

Income before income tax

     64,142         2,410         275   

If the business combinations had taken place at the beginning of the year, the above acquisitions would have contributed to revenue and income before income tax to the Partnership as follows:

 

     Cintas      Franchises      Iron Mountain  
     $      $      $  

Revenue

     285,070         39,596         17,054   

Income before income tax

     96,213         7,926         3,299   

 

  (b) 2013 business acquisitions

The following franchise acquisitions were completed in 2013:

 

  (i) On January 23, 2013, Predecessor SII acquired 100% of the shares of Legap Limited based in the Republic of Ireland.


  (ii) On January 23, 2013, Predecessor SII acquired 100% of the assets of DMG 2010 Limited based in Northern Ireland.

 

  (iii) On June 6, 2013, Predecessor SII acquired 100% of the shares of Shred-it (East of Scotland) Limited based in Edinburgh, Scotland.

 

  (iv) On July 19, 2013, Predecessor SII acquired 100% of the shares of CELB based in Bristol, United Kingdom.

The fair values of the assets acquired and liabilities assumed, relating to the acquisitions completed in 2013, are summarized as follows:

 

     $  

Accounts receivable

     2,405   

Prepaid expenses

     115   

Property, plant and equipment

     3,437   

Customer lists

     11,428   

Franchise rights

     3,771   

Goodwill

     9,637   

Accrued liabilities

     (2,314

Deferred income taxes

     (2,897
  

 

 

 
     25,582   
  

 

 

 

All acquisitions were accounted for as a business combination using the acquisition method with the results of operations consolidated with those of SII from the date of acquisition. Predecessor SII acquired these businesses as they provide similar document destruction and recycling services.

As at December 31, 2014, there was no contingent consideration with respect to acquisitions completed in 2013.

Goodwill represents the expected operational synergies with the acquiree and/or intangible assets that do not qualify for separate recognition and is tax deductible.

An estimate at the acquisition date of acquired accounts receivable not expected to be collected is $48.

From the date of acquisition, the above acquisitions contributed $9,780 of revenue and $2,707 of income before income tax to SII in 2013.

 

  (c) 2012 business acquisitions

 

  (i) On January 6, 2012, Predecessor SII acquired 100% of the shares of Confidential Destruction Services (Proprietary) Limited based in South Africa.

 

  (ii) On January 23, 2012, Predecessor SII acquired 100% of the assets of Home Locators, Inc. based in Jacksonville, Florida.

 

  (iii) On February 6, 2012, Predecessor SII acquired 100% of the shares of Security Shredders PTE LTD based in Singapore.

 

  (iv) On May 1, 2012, Predecessor SII acquired 100% of the assets of Inland Empire Shred-it, Inc. based in San Bernardino, California. Additional consideration can be payable over the 24 month period immediately following the acquisition date resulting from the actual selling price of recycled paper and tonnage of paper shredded over a certain pre-determined threshold.

 

  (v) On May 15, 2012, Predecessor SII acquired 100% of the shares of Shred-it Glasgow Limited based in Glasgow, Scotland.


  (vi) On August 23, 2012, Predecessor SII acquired 100% of the shares of Secure Shredding Limited located in London, United Kingdom.

 

  (vii) On September 10, 2012, Predecessor SII acquired 100% of the assets of Pacific Shredco, LLC, based in Seattle, Washington. Consideration can be payable over the 24 month period immediately following the acquisition date resulting from the actual selling price of recycled paper and tonnage of paper shredded over a certain pre-determined threshold. In addition, there is consideration contingently payable on the renewal of a specific customer contract.

 

  (viii) On September 11, 2012, Predecessor SII acquired 100% of the shares of Super Shred Mobile Record Destruction Inc. based in Toronto, Ontario. Additional consideration can be payable over the 12 month period immediately following the acquisition date relating to the revenue of specific customers as compared to a pre-determined threshold.

 

  (ix) On November 7, 2012, Predecessor SII acquired 100% of the shares of Document Destruction Company Limited located in West Yorkshire, United Kingdom.

The fair value of the assets acquired and liabilities assumed, relating to the acquisitions completed in 2012 are summarized as follows:

 

     $  

Accounts receivable

     2,918   

Prepaid expenses

     109   

Property, plant and equipment

     6,295   

Customer lists

     23,228   

Franchise rights

     3,861   

Non-competition agreements

     527   

Goodwill

     21,680   

Accrued liabilities

     (1,288

Deferred income taxes

     (4,331
  

 

 

 
     52,999   
  

 

 

 

All acquisitions were accounted for as a business combination using the acquisition method with the results of operations consolidated with those of Predecessor SII from the date of acquisition. Predecessor SII acquired these businesses as they provide similar document destruction and recycling services resulting in growth of the Shred-it Group.

From the date of acquisition, the above acquisitions contributed $12,040 of revenue and $1,381 of income before tax to Predecessor SII in 2012.

 

5. CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of the following:

 

     2014      2013  
     $      $  

Cash

     56,211         13,423   

Bank indebtedness

     (14,263      (5,602
  

 

 

    

 

 

 
     41,948         7,821   
  

 

 

    

 

 

 


6. INVENTORIES

Inventories consist of the following:

 

     2014      2013  
     $      $  

Finished goods

     233         180   

Parts and supplies

     794         845   
  

 

 

    

 

 

 
     1,027         1,025   
  

 

 

    

 

 

 

 

7. RELATED PARTY TRANSACTIONS

 

  (a) As previously noted, Cintas received 42% of the Partnership units as part of the Shredding transaction. During the course of 2014, the Partnership entered into certain transactions with Cintas, as part of the Transition Services Agreement (“TSA”) which expires July 3, 2015. These transactions are recorded at the exchange amounts as agreed upon with Cintas. The purpose of the TSA is for the Partnership to obtain Cintas’s support for integration of the acquired Cintas shredding business. The Partnership incurred TSA related costs of $12,562, which were recorded in employment costs, transportation and maintenance, rent and occupancy, administrative, subcontractor and other expenses. The amounts due to/due from Cintas are based on 30-day terms of repayment.

The Partnership provided shredding services to Cintas and earned revenue of $422 in 2014 (2013 — nil; 2012 — nil). Also, Cintas sold other products and services to the Partnership for $1,492.

As at December 31, 2014, amounts due from Cintas was $6,208 and amounts due to Cintas was $10,252 (2013 — nil; 2012 — nil).

 

  (b) As at December 31, 2013, shareholder loans receivable of $7,862 ($3,126 which is classified as current and $4,736 is classified as long-term) were comprised of share purchase financing made by Predecessor SII to certain employees and independent members of the Board of Directors of Predecessor SII, of which $3,050 was provided in Canadian funds and $4,812 in U.S. funds. The loans were collateralized by 1,380,875 common shares and 12,427,872 special shares of Predecessor SII and were bearing interest at the rate of 4.0% per annum, calculated monthly, with such interest added to the principal amount of the loans. The loans were due at the earlier of the disposition of all of the shares and five years from the date of issue. Interest of $338 was charged by Predecessor SII during the year ended December 31, 2013 (2012 — $329).

As part of the Reorganization, the special and common shares of Predecessor SII were exchanged for common units of the Partnership. As well, employees of Predecessor SII elected to receive a cash payment net of applicable withholding taxes and any outstanding Predecessor SII shareholder loans in exchange for the settlement of stock options.

As at December 31, 2014, shareholder loans receivable of $3,307 were outstanding. These loans were collateralized by 41,732 Boost Holdings common LP units and bearing interest at the rate of 4% per annum, calculated monthly, with such interest added to the principal amount of the loans. The loans are repayable on or before April 30, 2019. Interest income of $147 was recognized in 2014.

 

  (c) As at December 31, 2013, the line item titled due to shareholders included the entire amount of $193,154 of subordinated Class A promissory grid notes (promissory notes) due to shareholders and $93,866 of Class A and B special shares of Predecessor SII. The promissory notes were denominated in Canadian dollars, bearing interest at fixed rates ranging from non-interest bearing to 13.3% since inception, with an effective interest rate of 8.75% in 2013, and were to mature upon a liquidation event or in June 2024. Interest expense of $15,843 was recognized in 2013 (2012 — $15,058).

As part of the Reorganization, the promissory notes, and related interest, and special shares of Predecessor SII, were exchanged for common units of the Partnership. Interest expense of $5,127 was recognized in 2014.


  (d) During the year, the Partnership paid $180 (2013 — $471; 2012 — 479) as management fees to BHEPMI, which is a sole shareholder of Boost GP.

 

  (e) The compensation expense associated with key management and members of the Partnership’s Board of Directors for services was included in employee salaries and benefits as follows:

 

     2014      2013      2012  
     $      $      $  

Salaries and other short-term employee benefits

     6,254         2,932         2,654   

Stock-based compensation

     6,456         138         169   
  

 

 

    

 

 

    

 

 

 
     12,710         3,070         2,823   
  

 

 

    

 

 

    

 

 

 

 

8. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

 

     2014  
            Accumulated      Net book  
     Cost      amortization      value  
     $      $      $  

Equipment

     44,757         3,526         41,231   

Trucks

     198,285         92,515         105,770   

Consoles

     58,489         28,993         29,496   

Office equipment

     5,955         2,730         3,225   

Leasehold improvements

     21,205         7,071         14,134   

Computer software and hardware

     64,389         36,407         27,982   
  

 

 

    

 

 

    

 

 

 
     393,080         171,242         221,838   
  

 

 

    

 

 

    

 

 

 

 

     2013  
            Accumulated      Net book  
     Cost      amortization      value  
     $      $      $  

Equipment

     22,934         8,991         13,943   

Trucks

     115,084         66,501         48,583   

Consoles

     23,154         17,544         5,610   

Office equipment

     3,668         2,244         1,424   

Leasehold improvements

     14,334         8,660         5,674   

Computer software and hardware

     53,432         32,445         20,987   
  

 

 

    

 

 

    

 

 

 
     232,606         136,385         96,221   
  

 

 

    

 

 

    

 

 

 

Depreciation expense of property, plant and equipment from continuing operations for the year ended December 31, 2014 amounted to $48,094 (2013 — $29,756; 2012 — $31,057).

Additions from continuing operations excluding acquisitions, to property, plant and equipment for the year ended December 31, 2014 amounted to $34,425 (2013 — $19,738; 2012 — $26,970).


Changes in the net carrying amounts of property, plant and equipment can be summarized as follows:

 

     2013                                      2014  
     Net book                                Foreign     Net book  
     value      Additions      Acquisitions      Amortization     Disposals     exchange     value  
     $      $      $      $     $     $     $  

Equipment

     13,943         2,671         33,616         (4,252     (4,369     (378     41,231   

Trucks

     48,583         12,236         71,319         (24,467     (217     (1,684     105,770   

Consoles

     5,610         5,450         29,243         (10,425     (2     (380     29,496   

Office equipment

     1,424         357         2,399         (877     (24     (54     3,225   

Leasehold improvements

     5,674         1,262         8,252         (1,882     (410     1,238        14,134   

Computer software and hardware

     20,987         12,644         3,287         (7,155     (17     (1,764     27,982   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     96,221         34,620         148,116         (49,058     (5,039     (3,022     221,838   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

     2012                                      2013  
     Net book                                Foreign     Net book  
     value      Additions      Acquisitions      Amortization     Disposals     exchange     value  
     $      $      $      $     $     $     $  

Equipment

     14,783         1,554         364         (2,551     —          (207     13,943   

Trucks

     51,622         10,343         2,168         (14,501     (369     (680     48,583   

Consoles

     6,960         2,371         378         (4,213     —          114        5,610   

Office equipment

     1,678         112         164         (503     —          (27     1,424   

Leasehold improvements

     5,875         1,171         363         (1,577     —          (158     5,674   

Computer software and hardware

     25,504         4,556         —           (8,066     —          (1,007     20,987   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     106,422         20,107         3,437         (31,411     (369     (1,965     96,221   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

9. GOODWILL

Goodwill consists of the following:

 

     $  

Balance at December 31, 2012

     116,158   

Goodwill related to 2013 acquisitions (note 4(b))

     9,637   

Effect of change in currency translation rates

     (756
  

 

 

 

Balance, December 31, 2013

     125,039   

Goodwill related to 2014 acquisitions (note 4(a))

     293,314   

Sale of RM business (note 21)

     (2,866

Effect of change in currency translation rates

     (8,051
  

 

 

 

Balance, December 31, 2014

     407,436   
  

 

 

 

 

10. INTANGIBLE ASSETS

Intangible assets consist of the following:

 

     2014  
            Accumulated      Net book  
     Cost      amortization      value  
     $      $      $  

Customer relationships

     347,627         73,869         273,758   

Brand name

     84,357         —           84,357   

Brand name — Cintas

     1,000         667         333   

Franchise rights

     16,122         5,131         10,991   

Non-competition agreements

     3,712         795         2,917   
  

 

 

    

 

 

    

 

 

 
     452,818         80,462         372,356   
  

 

 

    

 

 

    

 

 

 


     2013  
            Accumulated      Net book  
     Cost      amortization      value  
     $      $      $  

Customer relationships

     153,444         50,420         103,024   

Brand name

     90,478         —           90,478   

Franchise rights

     11,822         3,249         8,573   

Non-competition agreements

     1,172         579         593   
  

 

 

    

 

 

    

 

 

 
     256,916         54,248         202,668   
  

 

 

    

 

 

    

 

 

 

Amortization expense on intangible assets for the year ended December 31, 2014 amounted to $30,244 (2013 — $16,733; 2012 — $14,057).

Additions to intangible assets are solely attributable to acquisitions.

 

     2013                         2014  
     Net book                   Foreign     Net book  
     value      Acquisitions      Amortization     exchange     value  
     $      $      $     $     $  

Customer relationships

     103,024         201,114         (23,001     (7,379     273,758   

Brand name

     90,478         —           —          (6,121     84,357   

Brand name — Cintas

     —           1,000         (667     —          333   

Franchise rights

     8,573         4,542         (6,312     4,188        10,991   

Non-competition agreements

     593         2,622         (264     (34     2,917   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     202,668         209,278         (30,244     (9,346     372,356   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

     2012                         2013  
     Net book                   Foreign     Net book  
     value      Acquisitions      Amortization     exchange     value  
     $      $      $     $     $  

Customer relationships

     106,447         11,428         (14,471     (380     103,024   

Brand name

     90,836         —           —          (358     90,478   

Franchise rights

     6,071         3,771         (2,023     754        8,573   

Non-competition agreements

     852         —           (239     (20     593   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     204,206         15,199         (16,733     (4     202,668   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

11. GOODWILL AND INDEFINITE LIFE INTANGIBLE ASSET IMPAIRMENT

The Shred-it Group tests CGUs with allocated goodwill and indefinite life intangible assets for impairment annually. In assessing whether or not there has been impairment, the Shred-it Group compares the higher of value-in-use or fair value less costs to sell to the carrying value of the CGU.

To calculate the value-in-use approach, the Shred-it Group estimates the discounted future cash flows for an initial period of four years. The future cash flows include consideration for expected future operating results, economic conditions and a general outlook for the industry. Value beyond the initial period is derived from applying a terminal value multiple to the final year of the initial projection period. The terminal value multiple is a function of the discount rate and the estimated terminal growth rate. The estimated terminal growth rate is not to exceed the long-term average growth rate (inflation rate) of the markets in which the CGUs operate.

The Shred-it Group has made certain assumptions for the discount and terminal growth rates to reflect variations in expected future cash flows. These assumptions may differ or change quickly depending on economic conditions or other events.

Based on impairment testing, the carrying amounts of goodwill in the CGUs were fully recoverable.


A summary of the goodwill allocation by CGU is presented as follows:

 

     2014      2013  
     $      $  

Canada

     34,957         28,428   

United States

     343,095         73,876   

United Kingdom

     15,077         15,608   

Other international countries

     14,307         7,127   
  

 

 

    

 

 

 
     407,436         125,039   
  

 

 

    

 

 

 

Brand with an indefinite life is tested for impairment at the consolidated Partnership level.

Key assumptions used in value-in-use calculations

The calculation of value-in-use for all CGUs is most sensitive to the following assumptions:

 

  (a) Revenue growth rates

 

  (b) Pre-tax discount rates

 

  (c) Terminal growth value

 

  (d) Gross margin

 

  (e) Capital expenditures

 

  (a) Revenue growth rates — Growth rates ranging from 5% to 8% were used for the periods covered in the financial projections and are based on historical results and expectations for the forecasted periods.

 

  (b) Pre-tax discount rates — Pre-tax discount rates represent the current market assessment of the risks specific to each CGU, taking into consideration the time value of money and individual risks of the underlying assets that have not been incorporated in the cash flow estimates. The pre- tax discount rate calculation is based on the specific circumstances of the CGU and range from 10% to 14%.

 

  (c) Terminal growth value — The cash flows beyond the initial period are extrapolated using a 2% growth rate. Rates are based on market and industry trends researched and identified by management.

 

  (d) Gross margin — Gross margin ranges from 61% to 68.3% and margins are based on average values achieved in historical results and expectations for the forecasted period specific to each CGU.

 

  (e) Capital expenditures — The cash flow forecasts for capital expenditures are based on past experience and include the ongoing capital expenditures required to build infrastructure in emerging markets. Capital expenditures include cash outflows for the purchase of property, plant and equipment.

Sensitivity to changes in assumptions

With regard to the assessment of value-in-use of the CGUs, management believes that no reasonably possible change in any of the above key assumptions would cause the carrying value of the CGU to exceed its recoverable amount.


12. PROVISIONS

 

            General         
     Restoration      insurance         
     costs(a)      liabilities(b)      Total  
     $      $      $  

Balance, December 31, 2012

     763         7,423         8,186   

Additions

     141         12,646         12,787   

Adjustments

     334         —           334   

Amounts used

     (1      (9,525      (9,526
  

 

 

    

 

 

    

 

 

 

Balance, December 31, 2013

     1,237         10,544         11,781   

Additions

     3         17,695         17,698   

Acquisitions

     1,346         10,469         11,815   

Adjustments

     (129      (1,078      (1,207

Amounts used

     31         (18,444      (18,413
  

 

 

    

 

 

    

 

 

 

Balance, December 31, 2014

     2,488         19,186         21,674   
  

 

 

    

 

 

    

 

 

 

Of the balance at December 31, 2014, $8,169 is considered to be current (2013 — $3,985) and $13,505 non-current (2013 — $7,796).

 

  (a) In the course of the Shred-it Group’s activities, a number of sites and other property, plant and equipment assets are utilized that are expected to have costs associated with exiting and cessation of use. The associated decommissioning and restoration obligation cash outflows are generally expected to occur at the date of exit of the asset to which they relate, which are long-term in nature. The extent of restoration work that will be ultimately required for these sites is uncertain.

 

  (b) General insurance liabilities represent the estimated ultimate cost of all asserted and unasserted claims incurred, primarily related to where the Shred-it Group is self-insured in the United States for workers’ compensation claims, medical claims, auto liability and other general liability exposure. Workers’ compensation, auto liability and general liability provisions are estimated through actuarial procedures of the insurance industry. The principal assumptions underlying the estimates are the past claims development experience and various industry sources to the extent that the Shred-it Group’s data is deemed insufficient. The Shred-it Group records an increase or decrease in employment costs related to development of prior claims, higher claims activity and other factors in the period in which it becomes known. These changes in estimates may be material to the combined financial statements.

 

13. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

  (a) Based on the agreement between the Shred-it Group and the franchisees, contributions are to be made to the advertising funds based on a proportion of the shredding and recycling revenue. Any surplus or deficit in the advertising funds is allocated to the Shred-it Group’s corporate branches and the franchisees in the proportion of the fees paid to the advertising funds. As at December 31, 2014 and 2013, there was no surplus.

 

  (b) Shred-it Insurance Ltd. is a captive insurance company established under the Insurance Act of Barbados. Effective April 1, 2008, all of the workers’ compensation, general liability automobile liability, and commercial general liability insurance contracts underwritten by Shred-it Insurance Ltd. were cancelled, and Shred-it Insurance Ltd. was put into run-off. As at December 31, 2014, Shred-it Insurance Ltd. had claims provisions of $1,261 (2013 — $1,460), determined by an actuary using a discount rate of 1.0%, and assets collected from premiums of $632 (2013 — $982).


Shred-it Group

NOTES TO COMBINED FINANCIAL STATEMENTS

(in thousands of U.S. dollars unless otherwise stated)

 

14. LONG-TERM DEBT

On April 30, 2014, to assist in the financing required to complete the Shredding transaction, the Partnership entered into a new senior secured credit agreement (the “New Credit Agreement”) and terminated the existing Predecessor SII syndicated senior secured credit agreement originally entered into on June 5, 2009 and subsequently amended on November 12, 2010, July 29, 2011, and September 28, 2012 (the “Old Credit Agreement”). The extinguishment of debt under the Old Credit Agreement resulted in $704 of deferred financing fees being expensed for the year ended December 31, 2014. Transaction costs of $6,286 were incurred as deferred financing fees related to the New Credit Agreement. The New Credit Agreement consists of a revolving credit facility (the “Revolving credit facility”) and a term credit facility (the “New term credit facility”).

 

     2014      2013  
     $      $  

New term credit facility due April 30, 2019 (net of deferred financing fees of $3,414)(a)(c))

     406,586         —     

Old term credit facility due September 28, 2017 (net of deferred financing fees of $274 on December 31, 2013)(d)(f)

     —           202,226   

Revolving credit facility (net of deferred financing fees of $354)(c)

     41,646         —     

Revolving credit commitment (net of deferred financing fees of $530 on December 31, 2013)(e)(f)

     —           (530
  

 

 

    

 

 

 
     448,232         201,696   

Less current portion

     —           18,000   
  

 

 

    

 

 

 
     448,232         183,696   
  

 

 

    

 

 

 

 

  (a) The New term credit facility of $410,000 is due April 30, 2019. The New term credit facility bears interest at LIBOR plus an applicable margin, ranging from 1.25% to 2.25%. As at December 31, 2014, the interest rate on the New term credit facility was 2.49% (the effective interest rate at inception was 2.70%).

The Partnership can designate the basis for the interest rate to be applied to the New term credit facility based on its Total Leverage Ratio.

As collateral, the Partnership has provided a general security agreement over all of its assets and pledged shares of all of its subsidiaries.

 

  (b) The New revolving credit facility has $250,000 of available credit that can be drawn on in U.S. dollars, revolving advances bearing interest at the Bankers’ Acceptance rates, Canadian prime rate, Eurodollar rate, Canadian base rate, Euro LIBOR rate, Sterling LIBOR rate plus a margin or U.S. dollar revolving advances bearing interest at the Eurodollar rate, Alternate base rate (greater of: the rate of interest for loans in U.S. dollars in the United States to U.S. borrowers; and, the Federal Funds Rate plus 50 basis points per annum), Euro LIBOR rate, Sterling LIBOR plus a margin.

 

  (c) At December 31, 2014, there was $2,381 of deferred financing costs, net of accumulated amortization of $296, related to the Revolving credit facility. As at December 31, 2014, there were deferred financing fees of $3,905, net of accumulated interest accretion of $491 related to the New term credit facility. Deferred financing fees of $354 have been presented as net against the drawn portion of the revolver loan and $1,732 has been presented as a deferred financing fees asset to represent the undrawn portion.

 

  (d) The Old Credit Agreement included a $225,000 old term credit facility that was subject to principal payments per year with the balance due on maturity on September 28, 2017. The Old term credit facility was bearing interest at LIBOR plus a margin. As at December 31, 2013, the interest rate on the Old term credit facility was 2.75%. The effective interest rate at inception was 3.18%. At the beginning of each quarter, Predecessor SII could designate the basis for the interest rate to be applied based on: (i) Canadian prime rate; (ii) Canadian base rate (defined as the greater of: the rate of interest for loans in U.S. dollars in


Canada to Canadian borrowers; and, the Federal Funds Rate plus 50 basis points per annum); (iii) Alternate base rate (defined as the greater of: the rate of interest for loans in U.S. dollars in the United States to U.S. borrowers; and, the Federal Funds Rate plus 50 basis points per annum); and (iv) LIBOR.

 

  (e) The Old Credit Agreement included a $150,000 revolving credit commitment, and was available in either Canadian dollar revolving loans bearing interest at the Canadian prime rate, Bankers’ Acceptance rates, Eurodollar rate, Base Rate (Canada), Euro LIBOR or Sterling LIBOR rate plus a margin or U.S. dollar revolving loans bearing interest at the Eurodollar rate, Alternate base rate, Euro LIBOR or Sterling LIBOR rate plus a margin. Principal amounts under the revolving credit commitment were due and payable in full at maturity.

 

  (f) During the normal course of business, standby letters of credit are provided to secure facilities from service providers. As at December 31, 2014, standby letters of credit amounting to approximately $14,722 (2013 — $11,927) had been provided reducing the revolving credit commitment availability.

 

  (g) Transaction costs as of December 31, 2013 related to the revolving credit commitment consisted of deferred financing costs of $530 which were net of accumulated amortization of $166. The net deferred financing fees were recorded against the revolving credit commitment. As at December 31, 2013, the transaction costs relating to the old term credit facility consisted of deferred financing fees of $274, net of accumulated amortization accretion of $122 which had been recorded against the old term credit facility and were accreted as interest expense using the effective interest rate method.

 

  (h) Interest expense includes $8,635 for the year ended December 31, 2014 (2013 — $8,039; 2012 — $10,534) relating to long-term debt.

 

  (i) As at December 31, 2014, fair value of the New term credit facility was $405,890 and revolving credit facility was $41,579. As at December 31, 2013, the fair values of the Old term credit facility and revolving term loan commitment approximated their carrying values.

Capital management

The Shred-it Group’s objectives when managing capital are to provide the Shred-it Group with the necessary capital to continue as a going concern, so that it can provide products and services to its customers and returns to its partners. The Shred-it Group defines capital that it manages as the aggregate of its equity and interest bearing debts net of cash and cash equivalents.

The Shred-it Group manages its capital in a manner to ensure that the Shred-it Group can make its required interest and principal payments. For the year ended December 31, 2014, the Shred-it Group’s cash on hand, cash flow and availability under its revolving credit facility were sufficient to enable it to make its required interest payments.

The Shred-it Group monitors capital using consolidated leverage and interest coverage ratios. Under the Partnership’s New Credit Agreement, the Partnership is required to maintain: (a) a consolidated leverage ratio of less than 4.0 for all quarters ending up to and including March 31, 2016 and less than 3.5 for all quarters ended thereafter; and, (b) a consolidated interest coverage ratio not less than 2.0.

The consolidated leverage ratio is the consolidated total debt of the Partnership divided by the last four quarters’ adjusted consolidated earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”). Consolidated total debt excludes the contingent debt related to letters of credit. Adjusted EBITDA is operating income before interest, depreciation, amortization and taxes adjusted to exclude non-recurring items, unusual items and include the pro-forma impact of acquisitions permitted in calculating covenant compliance under the term credit facility. The consolidated interest coverage ratio is the last four quarters’ Adjusted EBITDA divided by consolidated cash interest expense.

The Shred-it Group monitors capital using consolidated leverage and interest coverage ratios as part of the management of liquidity to sustain future development of the business and maintain these ratios under the New Credit Agreement.

As at December 31, 2014, the Shred-it Group is in compliance with these covenants.


15. FINANCIAL RISK MANAGEMENT AND FINANCIAL INSTRUMENTS

 

  (a) Financial instruments

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:

 

    In the principal market for the asset or liability, or

 

    In the absence of a principal market, in the most advantageous market for the asset or liability.

The principal or the most advantageous market must be accessible by the Shred-it Group.

The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.

The Shred-it Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.

For assets and liabilities that are recognized in the combined financial statements on a recurring basis, the Shred-it Group determines whether transfers have occurred between the levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.

For the purpose of fair value disclosures, the Shred-it Group has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained in note 2.

 

  (b) Risk overview

The Shred-it Group is exposed to credit risk, liquidity risk, interest rate risk and foreign currency rate risk. The Shred-it Group’s primary risk management objective is to protect its income and cash flows and, ultimately, shareholder value. Risk management strategies, as discussed below, are designed and implemented to ensure the Shred-it Group’s risks and the related exposures are consistent with its business objectives and risk tolerance.

 

  (i) Credit risk

Credit risk represents the financial loss that the Shred-it Group would experience if counterparty to a financial instrument, in which the Shred-it Group has an amount owing from the counterparty, failed to meet its obligations in accordance with the terms and conditions of its contracts with the Shred- it Group.

The Shred-it Group’s credit risk is primarily attributable to its accounts receivable. The amounts disclosed in the combined statements of financial position are net of allowances for doubtful accounts, estimated by the Shred-it Group’s management based on prior experience and their assessment of the current economic environment. The Shred-it Group establishes an allowance for doubtful accounts that represents its estimate of incurred losses in respect of accounts receivable. The main components of this allowance are a specific loss component that relates to individually significant exposures and an overall loss component established based on historical trends. As at December 31, 2014, the Shred-it Group had accounts receivable of $103,002 (2013 — $53,432) gross of an allowance for doubtful accounts of $5,210 (2013 — $2,619). As at December 31, 2014, $12,201 (2013 — $9,375) of accounts receivable are considered past due. The believes that its allowance for doubtful accounts is sufficient to reflect the related credit risk associated with the Shred-it Group’s accounts receivable.

The Shred-it Group believes that the concentration of credit risk of accounts receivable is limited due to its broad customer base, dispersed across varying industries and geographic locations.


The Shred-it Group has established various internal controls designed to mitigate credit risk and has also established procedures to suspend the availability of services when customers have fully utilized approved credit limits or have violated established payment terms.

While the Shred-it Group’s credit controls and processes have been effective in managing credit risk, these controls cannot eliminate credit risk and there can be no assurance that these controls will continue to be effective or that the Shred-it Group’s current credit loss experience will not continue.

 

  (ii) Liquidity risk

Liquidity risk is the risk that the Shred-it Group will not be able to meet its financial obligations as they fall due. The Shred-it Group manages liquidity risk through the management of its capital structure and financial leverage, as outlined in note 14 to the combined financial statements. It also manages liquidity risk by continuously monitoring actual and projected cash flows to ensure that it will have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Shred-it Group’s reputation. As at December 31, 2014, the undrawn portion of the Shred-it Group’s Revolving credit facility was approximately $208,000 (2013 — $138,028), excluding letters of credit of $14,722 (2013 — $11,927).

The table below summarizes the maturity profile of the Shred-it Group’s financial liabilities based on contractual undiscounted payments as at December 31, 2014:

 

     Contractual cash             2 to 3      4 to 5         
     flows      Year 1      years      years      Thereafter  
     $      $      $      $      $  

Bank indebtedness

     14,263         14,263         —           —           —     

Accounts payable and accrued liabilities .

     52,294         52,294         —           —           —     

New term credit facility

     410,000         —           —           410,000         —     

Revolving credit facility

     42,000         —           —           42,000         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     518,557         66,557         —           452,000         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (iii) Interest rate risk

The Shred-it Group’s interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the Shred-it Group to interest rate cash flow risk.

As at December 31, 2014, if interest rates decreased or increased by 1%, with all other variables held constant, loss before income taxes would be impacted by $2,733.

 

  (iv) Foreign currency rate risk

Foreign currency rate risk is the risk that the fair value of future cash flows will fluctuate due to changes in foreign exchange rates. The Shred-it Group’s exposure to the risk of changes in foreign exchange rates relates primarily to the Shred-it Group’s operating activities (when revenue or expenses are denominated in a different currency from the functional currency and the Shred-it Group’s net investments in foreign subsidiaries).

The Shred-it Group operates in the Canadian, U.S., U.K., Eurozone, South African, Singapore, Australian and UAE markets and is exposed to unpredictable foreign exchange rate changes.

The Shred-it Group does not employ a foreign currency derivative hedging program and, therefore, foreign currency translation can have a significant impact on total comprehensive income (loss) during periods of fluctuating exchange rates.


As at December 31, 2014, if the following foreign exchange relationships weakened or strengthened by 1% against the U.S. dollar, with all other variables held constant, total comprehensive income (loss) for the year would have been higher or lower as follows:

 

     $  

Canadian dollar

     2,260   

Pounds sterling

     73   

Euro

     93   

 

16. INCOME TAXES

 

  (a) The major components of income tax expense (recovery) is as follows:

 

     2014      2013      2012  
     $      $      $  

Current income tax expense (recovery)

        

Based on taxable income of the current year

     4,493         1,963         743   

Adjustments in respect of prior years

     1,779         (97      (4,049

Other

     451         163         387   
  

 

 

    

 

 

    

 

 

 
     6,723         2,029         (2,919
  

 

 

    

 

 

    

 

 

 

Deferred tax expense (recovery)

        

Origination and reversal of temporary differences

     (9,847      (2,046      (4,048

Impact of change in tax rates/new tax laws

     (227      63         62   

Adjustments in respect of prior years

     1,885         (1,181      (789

Changes to unrecognized tax benefits

     (1,242      157         (1,648

Change in outside basis of partnership interest

     7,292         —           —     
  

 

 

    

 

 

    

 

 

 
     (2,139      (3,007      (6,423
  

 

 

    

 

 

    

 

 

 

Income tax expense (recovery)

     4,584         (978      (9,342
  

 

 

    

 

 

    

 

 

 

 

  (b) Reconciliation of effective tax rate:

 

     2014     2013     2012  
     $     $     $  

Loss before income taxes

     (14,309     (22,424     (35,564

Combined statutory Canadian federal and provincial rate

     26.42     26.39     26.36
  

 

 

   

 

 

   

 

 

 

Income tax recovery based on statutory rate

     (3,781     (5,918     (9,375

Increase (decrease) in income taxes resulting from

      

Permanent differences

     382        776        (279

Foreign rate differential

     3,553        611        (960

Foreign exchange

     (308     (302     331   

Adjustments in respect of prior years

     3,402        (1,297     (698

Rate differences related to origination and reversal of temporary differences

     (81     87        348   

Recognition of deferred tax assets not previously recognized

     (433     4,893        939   

Income not subject to tax

     1,421        —          —     

Other

     429        172        352   
  

 

 

   

 

 

   

 

 

 

Income tax expense (recovery)

     4,584        (978     (9,342
  

 

 

   

 

 

   

 

 

 


  (c) Deferred taxes

 

  (i) Deferred taxes relate to the following:

 

     2014      2013  
     $      $  

Deferred tax assets

     

Property, plant and equipment

     348         462   

Accrued liabilities

     3,513         5,454   

Loss carryforwards

     8,146         6,929   

Other

     4,158         3,576   
  

 

 

    

 

 

 
     16,165         16,421   
  

 

 

    

 

 

 

Deferred tax liabilities

     

Property, plant and equipment

     (9,461      (7,970

Intangible assets

     (77,128      (35,449

Partnership outside basis

     (7,368      —     
  

 

 

    

 

 

 
     (93,957      (43,419
  

 

 

    

 

 

 

Net deferred tax liabilities

     (77,792      (26,998
  

 

 

    

 

 

 

Deferred tax movement in the combined statements of income (loss) and comprehensive income (loss) is as follows:

 

     2014      2013      2012  
     $      $      $  

Expense (recovery)

        

Property, plant and equipment

     (3,773      (871      (974

Accrued liabilities

     (289      (686      6   

Intangible assets

     (5,404      (5,660      (3,595

Loss carryforwards

     (2,063      2,517         (3,040

Outside basis — Partnership Interest

     7,310         —           —     

Other

     2,080         1,693         1,180   
  

 

 

    

 

 

    

 

 

 

Net deferred tax recovery

     (2,139      (3,007      (6,423
  

 

 

    

 

 

    

 

 

 

Effective from May 1, 2014, 35.2% of U.S. based taxable income is not taxed within the corporate group due to the relevant entities electing to be disregarded for US tax purposes. During the year, $53,375 of deferred tax liabilities were recognized in respect of business combinations.

 

  (ii) The following unused tax losses and temporary differences have not been recognized as it is not probable that taxable incomes will be available against which they can be utilized. The tax losses expire as follows:

 

     2014      2013      2012  
     $      $      $  

Loss carryforwards — Canada (expiry 2023 — 2032)

     3,567         31,487         38,636   

Loss carryforwards — Foreign subsidiaries (expiry — indefinite)

     36,681         42,611         34,986   

Deductible temporary differences

     14,425         11,575         3,555   
  

 

 

    

 

 

    

 

 

 
     54,673         85,673         77,177   
  

 

 

    

 

 

    

 

 

 

 

  (d) The taxable temporary differences associated with investments in subsidiaries, associates and joint ventures, for which a deferred tax liability has not been recognized, totaled $5,506 (2013 — $4,987).

 

  (e) The Shred-it Group has ongoing regular tax audits concerning open income tax years. Adequate provisions for all open tax years have been foreseen and are recorded in income taxes payable.


17. NET CHANGE IN WORKING CAPITAL BALANCES RELATED TO OPERATIONS

The net change in working capital balances related to operations consists of the following:

 

     2014      2013      2012  
     $      $      $  

Accounts receivable

     (2,216      3,351         (13,759

Due from Cintas

     (6,208      —           —     

Due from joint venture

     43         32         747   

Inventories

     (57      251         961   

Prepaid expenses and other assets

     (4,968      (408      (108

Income taxes recoverable

     (2,446      2,248         (2,474

Accounts payable and accrued liabilities

     9,706         (2,639      (2,833

Movements in provisions (note 12)

     (1,922      —           —     

Due to Cintas

     10,252         —           —     

Other

     (1,180      (428      267   
  

 

 

    

 

 

    

 

 

 
     1,004         2,407         (17,199
  

 

 

    

 

 

    

 

 

 

 

18. COMMITMENTS AND CONTINGENT LIABILITIES

 

  (a) Operating leases

The Shred-it Group has future minimum operating lease commitments related to its rental of facilities and premises leases with certain leases, including renewal options and escalation clauses. These future commitments, excluding certain operating costs for which it may be responsible, are as follows:

 

     $  

2015

     17,095   

2016

     14,317   

2017

     11,255   

2018

     8,678   

2019

     6,334   

Thereafter

     12,010   
  

 

 

 
     69,689   
  

 

 

 

 

  (b) Contingent liabilities

During the normal course of business, various proceedings and threats of claims are instituted by and against the Shred-it Group, primarily concerning employee termination, protection and defense of trademark rights and claims, enforcement of non-competition agreements with third parties and compliance with contract terms. No material accrual for the settlement of any likely claims has been made in these combined financial statements. If the Shred-it Group incurs any additional loss as a result of these claims, that loss would be recorded in the period it is probable and estimable.

The amount of loss, if any, for certain compliance with contract terms proceedings and threats of claims is indeterminable, but could have an adverse effect if the outcomes are unfavorable to the Shred-it Group.

 

19. STOCK-BASED COMPENSATION

 

  (a) Introduction:

This note describes in part (b) Stock-Based Compensation, plans that previously existed and were exercised in 2014, in Predecessor SII (“Original Plan” and “SII Director Option Plan”) and the New Option Plans created and issued in the Partnership and Boost GP.


  (b) Stock-Based Compensation

 

  (i) Predecessor SII

Original Plan

Predecessor SII had an employee stock option plan (the “Original Plan”) whereby eligible employees were granted options at fair value at the grant date over such number of Class C special shares of Predecessor SII. These stock options were to vest in equal annual amounts over five years on each anniversary of the date of grant. Each vested option exercised entitled the option holder to receive one Class C special share to be issued by Predecessor SII. The expense related to these options was recognized in income using a graded vesting approach over the vesting period. In addition, Predecessor SII Directors had the choice (under the “Director Option Plan”) to purchase Class A special shares and Class A common shares of Predecessor SII on a one- for-one basis. The term of each Director’s option was four to seven years and the options were 100% vested on the grant date. The exercise price for the Directors’ options were equal to the per share fair value of the Class A special shares and Class A common shares on the grant date. The shares were authorized when granted. The expense related to Directors’ options was recognized when granted.

As part of the Reorganization, Predecessor SII accelerated the vesting of all options then outstanding under the Original Plan and settled each option outstanding under the Original Plan. The option holders received consideration for their disposal of the options. The Board of Directors of Boost GP, approved two new stock option plans (the “New Option Plans”) whereby eligible employees, directors, managers and consultants of the Partnership or its affiliates, may be granted options (the “New Options”) at fair value over such number of Class C or Class D special shares of Boost GP, as the Board of Directors of Boost GP decides, and the Board of Directors of the Partnership and Boost GP approved two new management equity incentive plans (the “New ME Plans”) whereby eligible employees, directors, managers and consultants of the Partnership or its affiliates may be granted Class C or Class D units (the “MEP units”) of the Partnership as the Board of Directors of Boost GP decides. The New Options and the MEP units included an already vested component which was expensed in the year ended December 31, 2014. The expense related to the unvested component will be recognized using a graded vesting approach over the vesting period.

In September 2009, the Directors of Predecessor SII approved an employee stock option plan. Predecessor SII may grant to eligible employees options at fair value at the grant date over such number of Class C special shares as the Board of Directors of Predecessor SII decide. These stock options were to vest in equal annual amounts over five years on each anniversary date of the date of grant. Each vested option was exercisable upon a deemed qualifying event and entitled the option holder to receive one Class C special share to be issued by Predecessor SII. As part of the Reorganization, the Board of Directors of Predecessor SII immediately vested all unvested stock options, and all employees elected to receive a cash payment in exchange for their stock options (representing the in-the-money amount based on the implied transaction value, net of applicable withholdings and any outstanding shareholder loan indebtedness) as opposed to receiving shares in the capital of Predecessor SII.

The following tables summarize the stock option activity of Predecessor SII from January 1, 2012 with the weighted average exercise share prices stated in dollars:

 

     Class C      Weighted average  
     Special Shares      exercise price  

Outstanding at January 1, 2012

     887.5         1,118   

Granted

     25         2,581   

Forfeited

     (87.5      1,107   
  

 

 

    

 

 

 

Outstanding at December 31, 2012

     825         1,142   

Granted

     37.5         1,372   

Forfeited

     (47.5      2,509   
  

 

 

    

 

 

 

Outstanding at December 31, 2013

     815         1,088   

Granted

     151.5         7,363   

Exercised

     (966.5      2,074   
  

 

 

    

 

 

 

Outstanding at December 31, 2014

     —           —     
  

 

 

    

 

 

 


The fair value of each employee stock option was estimated on the date of grant using the Black-Scholes option-pricing model. The following is the range of assumptions that were used for employee stock options granted. As Predecessor SII was a non-public enterprise, the expected volatility was determined based on publicly traded competitors in similar industries.

The following assumptions were used for options granted during the years ended December 31, 2014, 2013 and 2012:

 

     2014    2013    2012

Risk-free rate

   1.8% — 2.72%    1.8% — 2.72%    1.8% — 2.72%

Expected dividend yield

   0%    0%    0%

Expected volatility (based on publicly traded competitors)

   20.75% — 23.4%    20.75% — 23.4%    20.75% — 23.4%

The compensation expense relating to employee stock options under the Original Plan during the year ended December 31, 2014 was $840 (2013 — $191; 2012 — $369).

SII Director Option Plan

Options to purchase Class A special shares and Class A common shares of Predecessor SII on a one-for-one basis were granted to the Directors of Predecessor SII. The term of each option was 4 to 7 years and the options were 100% vested on the grant date. The exercise price for the options was equal to the per share fair value of the Class A special shares and Class A common shares on the grant date. The expense related to Directors’ options was recognized when granted. As part of the Reorganization, Predecessor SII cash settled (representing the in-the-money amount based on the implied transaction value, net of applicable withholdings) the Directors’ options.

As at December 31, 2014, a summary of the SII Director Option Plan is as follows:

 

            Weighted             Weighted  
     Class A      average      Class A      average  
     Special      exercise price      Common      exercise price  
            $             $  

Outstanding at January 1, 2012

     469,080         1.04         52,120         3.48   

Granted

     116,262         1.1         12,918         5.92   
  

 

 

    

 

 

    

 

 

    

 

 

 

Outstanding at December 31, 2012

     585,342         1.05         65,038         3.96   

Granted

     193,096         1.17         21,454         0.01   
  

 

 

    

 

 

    

 

 

    

 

 

 

Outstanding at December 31, 2013

     778,438         1.08         86,492         2.98   

Exercised

     (778,438      1.08         (86,492      2.98   
  

 

 

    

 

 

    

 

 

    

 

 

 

Outstanding at December 31, 2014

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

The compensation expense relating to Directors’ options during the year ended December 31, 2014 was nil (2013 and 2012 — $50).

In addition, due to the settlement of stock options under the Original Plan and SII Director Option Plan, $4,812 was recognized as a reduction in equity (Deficit) for the year ended December 31, 2014, representing the excess of the payment upon exercise over the fair value of the grants.

 

  (ii) Partnership and Boost GP

New Option Plans

On September 5, 2014, Boost GP issued, under the New Option Plans, options to acquire 6,430 Class D special shares (“Options”) in Boost GP, and the Partnership issued, under the management equity incentive plans (the “MEP Plans”), 4,450 Class C and 3,535 Class D units of the Partnership (“Units”) to employees of the Partnership. The Options and the Units included an already vested component which was expensed in the year ended December 31, 2014. The expense related to the unvested component will be recognized as follows: (i) for 4,875 Options and 3,125 Class D units, over the vesting period; (ii) 500 Options and 4,450 Class C units, in annual amounts over five years on each anniversary date of April 30, 2014 using a


graded vesting approach; and (iii) for 1,055 Options and 410 Class D units, in annual amounts over five years on each anniversary date of May 1, 2014 using a graded vesting approach. Each vested Option is exercisable upon a deemed qualifying event and will entitle the holder to receive one Class D special share of Boost GP, which mirrors the fair value of a Class D unit of the Partnership at that date. Each vested Unit is exercisable upon a deemed qualifying event and will entitle the holder to receive one Class C or Class D unit of the Partnership, respectively.

The following table summarizes the activity of the New Option and MEP Plans with the share prices stated in dollars:

 

     Class D Options      Class C Units      Class D Units  
     for Special Shares of      of the      of the  
     Boost GP Corp.      Partnership      Partnership  

Outstanding at December 31, 2013

     —           —           —     

Granted

     6,430         4,450         3,535   
  

 

 

    

 

 

    

 

 

 

Outstanding at December 31, 2014

     6,430         4,450         3,535   
  

 

 

    

 

 

    

 

 

 

Exercisable at December 31, 2014

     4,372         293         2,469   
  

 

 

    

 

 

    

 

 

 

The fair value of each Option and Unit was estimated on the date of grant using the binomial option-pricing model.

The following table summarizes the assumptions that were used for Options and Units granted. As Boost GP and the Partnership were non-public enterprises, the expected volatility was determined based on publicly traded competitors in similar industries:

For Options and Units granted during the year ended December 31, 2014:

 

     Class D Options     Class C Units     Class D Units  
     for Special Shares of     of the     of the  
     Boost GP Corp.     Partnership     Partnership  

Risk-free rate

     0.52     0.52     0.52

Expected dividend yield

     0     0     0

Expected volatility (based on publicly traded competitors)

     18.6     18.6     18.6

Expected life (in years)

     2        2        2   

Fair value

   $ 237/share      $ 436/unit      $ 334/unit   

The compensation expense recorded relating to New Options and Units during the year ended December 31, 2014 was $2,252. In addition, due to the accelerated vesting and the exchange of stock options under the Original Plan and SII Director Option Plan as noted below, an additional $840 was recognized as an expense and $4,812 as a reduction in equity (deficit) for the year ended December 31, 2014.

Of the $840 and $2,252 of stock-based compensation expense under the Original Plan and New Option Plans, respectively, $914 is disclosed as Stock- based compensation and the balance of $2,178 is included in Acquisition, transaction and integration costs in the combined statement of income (loss) and comprehensive income (loss).

 

20. DEFINED CONTRIBUTION BENEFIT PLAN

The Shred-it Group has a defined contribution benefit plan covering substantially all employees. During the year ended December 31, 2014, contributions charged to income under the plan totaled approximately $1,898 (2013 — $1,520; 2012 — $1,437).

 

21. DISCONTINUED OPERATIONS

On March 14, 2014, Shred-it Group identified RM as an asset held for sale and sold RM to Iron Mountain Canada Operations ULC (the “buyer”) on December 1, 2014 for approximately $30,000, resulting in a Gain on sale of discontinued operations of $20,879. Approximately $1,300 of the proceeds have been placed into escrow until December 2, 2015 to address any indemnification claims made by the buyer and is included in prepaid expenses and other assets.


A summary of operational results of the RM business are presented below:

 

     2014      2013      2012  
     $      $      $  

Records management revenue

     14,249         15,578         15,045   

Operating expenses

     8,565         9,304         10,829   

Depreciation and amortization

     964         1,655         1,453   
  

 

 

    

 

 

    

 

 

 

Income from discontinued operations

     4,720         4,619         2,763   

Income tax expense

     375         —           —     
  

 

 

    

 

 

    

 

 

 

Net income from discontinued operations

     4,345         4,619         2,763   

Other comprehensive loss

     (353      (632      —     
  

 

 

    

 

 

    

 

 

 

Total comprehensive income from discontinued operations

     3,992         3,987         2,763   
  

 

 

    

 

 

    

 

 

 

Cash provided by operating activities

     5,264         6,274         4,216   

Cash used in investing activities

     (195      (369      (3,015

Cash provided by financing activities

     (2,454      —           —     

 

22. SEGMENT INFORMATION

The Company’s segment information is presented on the same basis as internal management reporting to the CEO (the chief operating decision maker) and reflects how Shred-it Group is organized and managed. Shred-it Group has two reportable segments: North America and Rest of World (“ROW”).

The North American business segment provides secure information destruction services throughout the United States and Canada.

The ROW business segment offers provides secure information destruction services throughout the United Kingdom, France, Germany, Netherlands, South Africa, Singapore, Australia, Belgium, Luxembourg, Republic of Ireland, Austria and United Arab Emirates.

The USA and Canada operating segments are combined into a single reportable segment (North America) because they show a similar long-term economic performance, have comparable services, delivery processes and customer industries, operate in similar regulatory environment, and are steered and monitored together. For similar reasons, the UK operating segment is combined with the ROW into a single reportable segment.

The reconciliation of adjustments and eliminations comprise expenses relating to centralized services, such as executive management, treasury, finance, information technology, human resources, marketing, national accounts administration, legal and risk management, which benefit the enterprise as a whole. It also includes the costs related to stock-based employee compensation associated with all stock options, restricted stock, restricted stock units, performance units and shares of stock issued under our employee stock purchase plan. Revenue shown in this reconciliation represents franchise royalties, fees and truck and container sales.

Discontinued operations were previously included in the North American operating segment.

Inter-segment revenue is eliminated on consolidation.


The following tables present the revenue and income of the Shred-it Group’s operating segments:

 

                   Adjustments         

2014

   North America      ROW      and Eliminations      Total  
     $      $      $      $  

Revenue from external customers

     470,200         98,817         6,066         575,083   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating expenses

     313,830         64,490         67,289         445,609   

Loss on disposal of property, plant & equipment

     —           —           222         222   

Stock-based compensation

     —           —           914         914   

Share of income from a joint venture

     —           (511      —           (511
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings before the undernoted

     156,370         34,838         (62,359      128,849   

Acquisition, transaction and integration costs

     —           —           37,635         37,635   

Loss/(gain) on foreign exchange

     —           —           9,516         9,516   
  

 

 

    

 

 

    

 

 

    

 

 

 
     156,370         34,838         (109,510      81,698   

Depreciation and amortization

     —           —           79,829         79,829   

Net interest expense

     —           —           16,178         16,178   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings before taxes and discontinued operations

     156,370         34,838         (205,517      (14,309
                   Adjustments         

2013

   North America      ROW      and Eliminations      Total  
     $      $      $      $  

Revenue from external customers

     258,430         80,932         7,939         347,301   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating expenses

     181,782         55,360         44,268         281,410   

Loss on disposal of property, plant & equipment

     —           —           369         369   

Stock-based compensation

     —           —           241         241   

Share of income from a joint venture

     —           (530      —           (530
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings before the undernoted

     76,648         26,102         (36,939      65,811   

Acquisition, transaction and integration costs

     —           —           4,862         4,862   

Loss/(gain) on foreign exchange

     —           —           5,226         5,226   
  

 

 

    

 

 

    

 

 

    

 

 

 
     76,648         26,102         (47,027      55,723   

Depreciation and amortization

     —           —           46,657         46,657   

Net interest expense

     —           —           31,490         31,490   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings before taxes and discontinued operations

     76,648         26,102         (125,174      (22,424
                   Adjustments         

2012

   North America      ROW      and Eliminations      Total  
     $      $      $      $  

Revenue from external customers

     247,102         67,593         9,507         324,202   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating expenses

     185,161         49,052         41,157         275,370   

Loss on disposal of property, plant & equipment

     —           —           98         98   

Stock-based compensation

     —           —           407         407   

Share of income from a joint venture

     —           (339      —           (339
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings before the undernoted

     61,941         18,880         (32,155      48,666   

Acquisition, transaction and integration costs

     —           —           9,516         9,516   

Loss/(gain) on foreign exchange

     —           —           (1,443      (1,443
  

 

 

    

 

 

    

 

 

    

 

 

 
     61,941         18,880         (40,228      40,593   

Depreciation and amortization

     —           —           45,145         45,145   

Net interest expense

     —           —           31,012         31,012   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings before taxes and discontinued operations

     61,941         18,880         (116,385      (35,564


Geographic information

Revenue from external customers

 

     2014      2013      2012  
     $      $      $  

Canada

     64,921         59,406         59,066   

USA

     405,875         199,024         188,037   

UK

     62,958         53,474         44,966   

Other international countries

     41,329         35,397         32,133   
  

 

 

    

 

 

    

 

 

 

Total

     575,083         347,301         324,202   
  

 

 

    

 

 

    

 

 

 

Non-current operating assets:

 

     2014      2013  
     $      $  

Canada

     251,519         215,610   

USA

     635,506         134,856   

UK

     64,972         59,970   

Other international countries

     53,730         16,492   
  

 

 

    

 

 

 

Total

     1,005,727         426,928   
  

 

 

    

 

 

 

 

23. OPERATING EXPENSES

 

     2014      2013      2012  
     $      $      $  

Employment costs

     275,541         175,844         176,957   

Transport costs

     75,262         47,487         42,882   

Rent and occupancy

     27,497         16,295         15,751   

General administrative and other expenses

     67,309         41,784         39,780   
  

 

 

    

 

 

    

 

 

 

Total operating expenses

     445,609         281,410         275,370   
  

 

 

    

 

 

    

 

 

 

 

24. ACQUISITION, TRANSACTION AND INTEGRATION COSTS

The Shred-it Group incurred legal, professional and other costs relating to various business acquisitions. In addition, the Shred-it Group incurred costs relating to the integration activities of the acquired businesses. The activities included the closure of redundant facilities, rebranding and marketing, legal and professional fees, and the conversion to the Shred-it Group’s financial information systems.

 

25. SUBSEQUENT EVENTS

On January 26, 2015, the Partnership acquired 100% of the assets of Southeastern New England Data Destruction LLC, located in Providence, Rhode Island.

On March 16, 2015, the Partnership acquired 100% of the assets of Rod Inc. and United Baling Inc., located in Burlington, North Carolina.

On April 27, 2015, the Partnership acquired 100% of the assets of Drake Wisconsin, LLC, based in Madison, Wisconsin.

On May 22, 2015, the Partnership amended the New credit agreement (“Amended and Restated Credit Agreement”) to increase the new term credit facility by $190,000 and to increase the consolidated leverage ratios. On May 27, 2015, the Partnership had drawn the full amount of the increase in the New term credit facility and had drawn an additional $80,000 from its existing New revolving credit facility. The proceeds of approximately $270,000 were used as a distribution to parent equity holders of the Shred-it Group. The terms of the Amended and Restated Credit Agreement are not substantially different from the New credit agreement. The Partnership will adjust the carrying


amount of the New term credit facility to adjust for the additional loan amount of $190,000 and fees and transaction costs incurred and no gain or loss will be recognized. Difference in present value arising as a result of the modification will be recognized as an adjustment to the effective interest rate and amortized over the remaining life of the modified New term credit facility.

On July 6, 2015, the Partnership acquired 100% of the assets of Seattle, Washington based franchise.

On July 15, 2015, the Shred-it Group entered into a definitive sale agreement to be acquired by Stericycle, Inc. for $2.3 billion. The transaction had been unanimously approved by the Boards of Directors of both companies. Upon closing, the entities within the Shred-it Group will become wholly owned subsidiaries of Stericycle. The acquisition is expected to close in the fourth quarter of 2015. Upon closing, the unvested options under the various stock based compensation plans will become fully vested. Subsequently, all options will be exercised and settled for an approximate $81,000 cash payment.

Exhibit 99.2

Unaudited Condensed Combined Interim Financial Statements

(In thousands of U.S. dollars, unless otherwise stated)

Shred-it Group

June 28, 2015


Shred-it Group

COMBINED STATEMENTS OF FINANCIAL POSITION

(in thousands of U.S. dollars unless otherwise stated)

 

     June 28,      December 31,  

As at

   2015      2014  
     (Unaudited)  

ASSETS

     

Current

     

Cash and cash equivalents

     26,369         56,211   

Accounts receivable

     124,027         97,792   

Due from Cintas Corporation

     2,151         6,208   

Inventories

     3,122         1,027   

Prepaid expenses and other assets (note 16)

     21,833         8,886   

Income taxes recoverable

     —           3,111   
  

 

 

    

 

 

 

Total current assets

     177,502         173,235   
  

 

 

    

 

 

 

Investment in a joint venture

     1,245         952   

Long-term prepaid expenses

     5,347         4,097   

Deferred financing fees

     710         1,732   

Shareholder loans receivable (note 6(b))

     2,625         3,307   

Property, plant and equipment, net

     213,759         221,838   

Goodwill (notes 7, 8)

     415,008         407,436   

Intangible assets, net

     357,107         372,356   
  

 

 

    

 

 

 

Total assets

     1,173,303         1,184,953   
  

 

 

    

 

 

 

LIABILITIES AND EQUITY

     

Current

     

Bank indebtedness (note 10)

     10,911         14,263   

Accounts payable and accrued liabilities

     74,966         52,294   

Due to Cintas Corporation

     543         10,252   

Income taxes payable

     3,048         —     

Current portion of provisions

     8,243         8,169   

Deferred revenue

     127         557   
  

 

 

    

 

 

 

Total current liabilities

     97,838         85,535   
  

 

 

    

 

 

 

Provisions

     14,099         13,505   

Revolving credit facility (note 9)

     152,398         41,646   

Long-term debt (note 9)

     595,010         406,586   

Deferred tax liabilities

     78,290         77,792   

Other liabilities

     1,584         1,476   
  

 

 

    

 

 

 

Total liabilities

     939,219         626,540   
  

 

 

    

 

 

 

Commitments and contingent liabilities

     

Equity

     

Parent equity

     13,938         222,446   

Non-controlling interests

     220,146         335,967   
  

 

 

    

 

 

 

Total equity

     234,084         558,413   
  

 

 

    

 

 

 

Total liabilities and equity

     1,173,303         1,184,953   
  

 

 

    

 

 

 

 

2


Shred-it Group

COMBINED STATEMENTS OF INCOME (LOSS)

AND COMPREHENSIVE INCOME (LOSS)

(in thousands of U.S. dollars unless otherwise stated)

 

     June 28,     June 29,  

For the six months ended

   2015     2014  
     (Unaudited)  

Revenues

     356,271        230,863   

Expenses

    

Operating expenses (note 14)

     269,369        181,612   

Depreciation and amortization

     48,081        26,321   

Loss on disposal of property, plant and equipment

     328        —     

Stock-based compensation

     477        242   

Loss on foreign exchange

     3,826        1,836   

Acquisition, transaction and integration costs (note 15)

     22,816        16,333   

Share of income of a joint venture

     (289     (250
  

 

 

   

 

 

 

Operating income

     11,663        4,769   

Interest expense, net

     8,675        9,846   
  

 

 

   

 

 

 

Income (loss) before income taxes

     2,988        (5,077
  

 

 

   

 

 

 

Provision for (recovery of) income taxes (note 11)

    

Current

     8,318        4,936   

Deferred

     876        (617
  

 

 

   

 

 

 
     9,194        4,319   
  

 

 

   

 

 

 

Loss from continuing operations

     (6,206     (9,396
  

 

 

   

 

 

 

Attributable to:

    

Parent equity

     (7,842     (14,117

Non-controlling interests

     1,636        4,721   
  

 

 

   

 

 

 
     (6,206     (9,396
  

 

 

   

 

 

 

Discontinued operations

    

Net income from discontinued operations

     —          2,411   

Loss on sale of discontinued operations

     (373     —     
  

 

 

   

 

 

 

Net loss

     (6,579     (6,985
  

 

 

   

 

 

 

Combined statement of other comprehensive income

    

Other comprehensive income (loss)

    

Foreign currency translation

     (9,764     17,338   
  

 

 

   

 

 

 

Other comprehensive income (loss) from continuing operations

     (9,764     17,338   

Other comprehensive loss from discontinued operations

     —          78   
  

 

 

   

 

 

 

Total other comprehensive income (loss)

     (9,764     17,416   
  

 

 

   

 

 

 

Attributable to:

    

Parent equity

     (5,707     18,077   

Discontinued operations

     —          78   

Non-controlling interests

     (4,057     (739
  

 

 

   

 

 

 
     (9,764     17,416   
  

 

 

   

 

 

 

Total comprehensive income (loss)

     (16,343     10,431   
  

 

 

   

 

 

 

 

3


Shred-it Group

COMBINED STATEMENTS OF CHANGES IN EQUITY

(in thousands of U.S. dollars unless otherwise stated)

 

For the six months ended                Foreign           Total     Non-        
June 29, 2014          Contributed     currency           Parent     controlling     Total  

and June 28, 2015

   Capital     surplus     translation     Deficit     Equity     interests     equity  
     (Unaudited)  

As at December 31, 2013

     13,915        2,056        4,432        (74,901     (54,498     —          (54,498

Income (loss) from continuing operations

     —          —          —          (14,117     (14,117     4,721        (9,396

Income from discontinued operations

     —          —          —          2,411        2,411        —          2,411   

Other comprehensive income (loss) from continuing operations

     —          —          18,077        —          18,077        (739     17,338   

Other comprehensive income from discontinued operations

     —          —          78        —          78        —          78   

Issuance of share capital

     283,393        —          —          —          283,393        —          283,393   

Shredding Transaction

     —          —          —          —          —          336,000        336,000   

Redemption

     (756     —          —          (379     (1,135     —          (1,135

Stock-based compensation

     —          (2,056     —          (4,812     (6,868     —          (6,868
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As at June 29, 2014

     296,552        —          22,587        (91,798     227,341        339,982        567,323   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As at December 31, 2014

     296,552        2,252        (712     (75,646     222,446        335,967        558,413   

Income (loss) from continuing operations

     —          —          —          (7,842     (7,842     1,636        (6,206

Loss on sale of discontinued operations

     —          —          —          (373     (373     —          (373

Other comprehensive loss from continuing operations

     —          —          (5,707     —          (5,707     (4,057     (9,764

Redemption

     (137     —          —          (111     (248     —          (248

Stock-based compensation

     —          477        —          —          477        —          477   

Cash distribution

     —          —          —          (194,815     (194,815     (113,400     (308,215
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As at June 28, 2015

     296,415        2,729        (6,419     (278,787     13,938        220,146        234,084   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

4


Shred-it Group

COMBINED STATEMENTS OF CASH FLOWS

(in thousands of U.S. dollars unless otherwise stated)

 

     June 28,     June 29,  

For the six months ended

   2015     2014  
     (Unaudited)  

OPERATING ACTIVITIES

    

Loss from continuing operations

     (6,579     (9,396

Income from discontinued operations

     —          2,411   
  

 

 

   

 

 

 

Net loss after tax

     (6,579     (6,985

Add (deduct) non-cash items

    

Depreciation and amortization

     48,081        26,321   

Depreciation and amortization from discontinued operations

     —          418   

Loss on disposal of property, plant and equipment

     328        —     

Stock-based compensation

     477        840   

Unrealized foreign exchange loss

     7,360        5,064   

Non-cash interest

     (55     5,150   

Share of income of a joint venture

     (289     (250

Deferred income taxes

     876        (617
  

 

 

   

 

 

 
     50,199        29,941   

Net change in non-cash working capital balances related to operations

     (24,482     18,012   
  

 

 

   

 

 

 

Cash provided by operating activities

     25,717        48,953   
  

 

 

   

 

 

 

INVESTING ACTIVITIES

    

Purchases of property, plant and equipment

     (22,491     (10,243

Proceeds on disposal of property, plant and equipment

     1,058        264   

Dividends received

     —          1,029   

Business acquisitions (note 4)

     (22,009     (199,856
  

 

 

   

 

 

 

Cash used in investing activities

     (43,442     (208,806
  

 

 

   

 

 

 

FINANCING ACTIVITIES

    

Proceeds from long-term debt

     188,424        406,095   

Proceeds from revolver loan

     110,752        —     

Repayment of long-term debt

     —          (202,500

Cash distribution to partners (note 9)

     (308,215     —     

Stock options settlement

     —          (826

Repayment of shareholder loans receivable

     682        —     

Redemptions

     (248     —     
  

 

 

   

 

 

 

Cash provided by (used in) financing activities

     (8,605     202,769   
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (160     (1,100

Net increase (decrease) in cash and cash equivalents during the period

     (26,490     40,816   

Cash and cash equivalents, beginning of period

     41,948        7,821   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

     15,458        48,637   
  

 

 

   

 

 

 

Supplemental cash flow information

    

Interest paid

     7,804        3,872   

Income taxes paid, net of refunds

     1,169        896   

Cash and cash equivalents

     26,369        52,184   

Bank indebtedness

     (10,911     (3,547
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

     15,458        48,637   
  

 

 

   

 

 

 

 

5


Shred-it Group

NOTES TO COMBINED FINANCIAL STATEMENTS

(in thousands of U.S. dollars unless otherwise stated)

 

1. CORPORATE REORGANIZATION

Shred-it International Inc. (the “Company” or “Shred-it”), and prior to June 2, 2015, formerly known as Shred-it International GP Inc.(“SII GP”), is one of the entities within the group of entities which includes Boost Holdings LP (‘‘Boost Holdings’’), Boost GP Corp. (‘‘Boost GP’’) and Shred-it JV LP (the ‘‘Partnership’’), that comprises the ‘‘Shred-it Group’’, and which the Birch Hill Group collectively controls.

The interim condensed combined financial statements have been prepared to include the financial results of SII GP, Boost Holdings, Boost GP and the Partnership (individually, the “Combined Entities”). Prior to a reorganization that took place in March 2014 (the “Reorganization”), the Shred-it Group operated through a predecessor entity, Shred-it International Inc. (now Shred-it International ULC) (“Predecessor SII”) and its wholly-owned subsidiaries. Accordingly, prior to the Reorganization, the combined financial statements include the consolidated results of Predecessor SII. SII GP, Boost Holdings, Boost GP and the Partnership were formed in connection with the Reorganization and Predecessor SII was transferred to the Partnership.

The Partnership provides secure information destruction services. The Partnership’s registered office is located at 2794 South Sheridan Way, Oakville, Ontario, L6J 7T4.

These combined financial statements were approved by the Board of Directors of the Company and authorized for issue on August 11, 2015.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The interim condensed combined financial statements for the six months ended June 28, 2015 and June 29, 2014 have been prepared in accordance with IAS 34 Interim Financial Reporting (“IAS 34”).

The interim condensed combined financial statements, notes and tabular amounts are presented in US dollars and all values are rounded to the nearest thousand (000s) unless otherwise indicated.

The interim condensed combined financial statements do not include all the information and disclosures required in the annual financial statements, and should be read in conjunction with the Shred-it Group’s annual financial statements for the year ended December 31, 2014.

Significant accounting policies

The accounting policies adopted in the preparation of the interim condensed combined financial statements are consistent with those followed in the preparation of the Shred-it Group’s annual combined financial statements for the year ended December 31, 2014.

In addition as noted in note 10(iv), the Shred-it Group has designated certain long-term debt as a hedge of its net investments in a foreign operation. The portion of gains or losses on the hedging instrument that is determined to be an effective hedge is recognized in other comprehensive loss, while the ineffective portion is recorded in net loss. The amounts recognized in other comprehensive loss are reclassified in net loss when corresponding exchange gains or losses arising from the translation of the foreign operations are recorded in net income.

 

3. SEGMENT REPORTING

The following tables present revenue and earnings information for the Shred-it Group’s operating segments for the six months ended June 28, 2015 and revenue and earnings information for the six month period June 29, 2014, respectively:

 

6


                   Adjustments         

2015

   North America      ROW      and Eliminations      Total  
     $      $      $      $  

Revenue from external customers

     298,445         56,690         1,136         356,271   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating expenses

     195,198         37,785         36,386         269,369   

Loss on disposal of property, plant & equipment

     —           —           328         328   

Stock based compensation

     —           —           477         477   

Income from a joint venture

     —           (289      —           (289
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings before the undernoted

     103,247         19,194         (36,055      86,386   

Acquisition, transaction and integration costs

     —           —           22,816         22,816   

Loss on foreign exchange

     —           —           3,826         3,826   
  

 

 

    

 

 

    

 

 

    

 

 

 
     103,247         19,194         (62,697      59,744   

Depreciation and amortization

     —           —           48,081         48,081   

Interest expense and other-net

     —           —           8,675         8,675   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings before taxes and discontinued operations

     103,247         19,194         (119,453      2,988   
  

 

 

    

 

 

    

 

 

    

 

 

 
                   Adjustments         

2014

   North America      ROW      and Eliminations      Total  
     $      $      $      $  

Revenue from external customers

     180,628         47,096         3,139         230,863   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating expenses

     122,812         31,268         27,532         181,612   

Stock based compensation

     —           —           242         242   

Income from a joint venture

     —           (250      —           (250
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings before the undernoted

     57,816         16,078         (24,635      49,259   

Acquisition, transaction and integration costs

     —           —           16,333         16,333   

Gain on foreign exchange

     —           —           1,836         1,836   
  

 

 

    

 

 

    

 

 

    

 

 

 
     57,816         16,078         (42,804      31,090   

Depreciation and amortization

     —           —           26,321         26,321   

Interest expense and other, net

     —           —           9,846         9,846   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings before taxes and discontinued operations

     57,816         16,078         (78,971      (5,077
  

 

 

    

 

 

    

 

 

    

 

 

 

 

4. ACQUISITIONS

(a) 2015 business acquisitions

Franchise acquisitions

The following franchise acquisitions were completed in the six months ended June 28, 2015:

On January 26, 2015, the Partnership acquired 100% of the assets of Southeastern New England Data Destruction, LLC. based in Providence, Rhode Island.

On March 16, 2015, the Partnership acquired 100% of the assets of Rod Inc. and United Baling, Inc. based in Burlington, North Carolina.

On April 27, 2015, the Partnership acquired 100% of the assets of Drake Wisconsin, LLC based in Madison, Wisconsin.

The preliminary fair value of the assets acquired and liabilities assumed, relating to the franchise acquisitions noted above are summarized as follows:

 

7


     $  

Accounts receivable

     909   

Prepaid expenses

     56   

Property, plant and equipment

     2,368   

Customer lists

     6,643   

Franchise rights

     897   

Goodwill

     11,136   
  

 

 

 
     22,009   
  

 

 

 

All acquisitions were accounted for as business combinations using the acquisition method with the results of operations consolidated with those of the Partnership from the date of acquisition. The Partnership acquired these businesses as they provide similar document destruction and recycling services.

Allocation of purchase price for the franchise acquisitions was based on preliminary estimates of the fair value of the net assets acquired and is subject to adjustment as additional information becomes available to the Partnership. The purchase price allocation of the franchises is subject to finalization of the assessment of the fair value of the intangible assets and Goodwill.

Goodwill represents the expected operational synergies with the acquiree and/or intangible assets that do not qualify for separate recognition. Generally, goodwill arising from asset acquisitions is deductible for tax purposes.

(b) 2014 business acquisitions

Cintas acquisition

On April 30, 2014, the Partnership acquired the Cintas document shredding business which has been accounted for as a business acquisition. As consideration, the Partnership issued 14,900 Class A Common LP units and 18,700 Class B Common LP Units, valued at $336,000, representing 42% of the Partnership’s units and $186,755 in cash. As part of the transaction, the Partnership and Cintas entered into an Investors Agreement which specifies that if a qualified monetizing event of the Partnership has not occurred within five years of the date of the agreement, i.e. April 30, 2014, Cintas has the right to sell all but not less than all of the Partnership Units owned by it to the other investors at fair market value. The Partnership does not have a liability associated with this put option as they are not required to purchase the Cintas’s Partnership Units. If the other investors reject the put offer the Partnership is responsible for initiating the sale process only and is under no obligation to acquire Cintas’s Partnership Units in the event the put option is exercised.

Franchise acquisitions

On June 16, 2014, the Partnership acquired 100% of the assets Virginia Shredders Inc. based in Norfolk and Richmond, Virginia.

The preliminary fair value of the assets acquired and liabilities assumed, relating to Cintas and franchise acquisitions noted above are summarized as follows:

 

     $  

Accounts receivable

     43,462   

Prepaid expenses

     935   

Property, plant and equipment

     105,494   

Goodwill

     401,960   

Accrued liabilities

     (15,995
  

 

 

 
     535,856   
  

 

 

 

 

8


5. PROPERTY, PLANT AND EQUIPMENT

During the six months ended June 28, 2015, the Shred-it Group acquired property, plant and equipment with a cost of $22,491, (six months ended June 29, 2014 — $10,243), excluding property, plant and equipment acquired through a business combination (note 4).

During the six months ended June 28, 2015, the Shred-it Group disposed of property, plant and equipment with net book value of $1,386 (six months ended June 29, 2014 — $264). There was no impairment charge recorded.

 

6. RELATED PARTY TRANSACTIONS

 

  (a) The Partnership entered into certain transactions with Cintas, as part of the Transition Services Agreement (“TSA”) which will expire on September 30, 2015. These transactions are at the exchange amounts, as agreed upon with Cintas. The purpose of the TSA is for the Partnership to obtain Cintas’s support for integration of the acquired Cintas shredding business. During the six months June 28, 2015, the Partnership incurred TSA related costs of $7,206 (six months ended June 29, 2014 — $1,765). The amounts due to Cintas are based on 30 day terms of repayment.

The Partnership provided shredding services to Cintas and earned revenue of $57 in the six months ended June 28, 2015 (six months ended June 29, 2014 — $116). Also, Cintas sold other products and services to the Partnership for $952 (six months ended June 29, 2014 — $334).

 

  (b) As at January 1, 2014, shareholder loans receivable were comprised of share purchase financing made by Predecessor SII to certain employees and independent members of the Board of Directors of Predecessor SII, which was provided in a mix of Canadian funds and U.S. funds. The loans were collateralized by common shares and special shares of Predecessor SII and were bearing interest at the rate of 4% per annum, calculated monthly, with such interest added to the principal amount of the loans. The loans were due at the earlier of the disposition of all of the shares and five years from the date of issue.

As part of the Reorganization, the special and common shares of Predecessor SII were ultimately exchanged for common units of the Partnership. As well, employees elected to receive a cash payment net of applicable withholding taxes and any outstanding Predecessor SII shareholder loans in exchange for the settlement of stock options.

As at June 28, 2015, shareholder loans receivable of $2,625 (December 31, 2014 — $3,307) were outstanding. These loans are collateralized by 30,089 Boost Holdings units (December 31, 2014 — 41,732) and bear interest at the rate of 4% per annum, calculated monthly, with such interest added to the principal amount of the loans. The loans are repayable on or before April 30, 2019. Interest income of $55 was recognized in the six months ended June 28, 2015 (six months ended June 29, 2014 — $103).

 

  (c) As at January 1, 2014, Predecessor SII had amounts Due to shareholders including subordinated Class A promissory grid notes (promissory notes) due to shareholders and Class A and B special shares of Predecessor SII. The promissory notes were denominated in Canadian dollars, bearing interest at fixed rates ranging from non-interest bearing to 13.3% since inception and were to mature upon a liquidation event or in June 2024.

As part of the Reorganization, the promissory notes, and related interest, and special shares of Predecessor SII, were ultimately exchanged for common units of the Partnership. Interest expense of $5,127 was recognized in the six months ended June 29, 2014.

 

  (d) For the six months ended June 28, 2015, the Partnership paid $102 ($175 for the six months ended June 28, 2014) as management fees to Birch Hill Equity Partners Management Inc.

 

  (e) The compensation expense associated with key management and members of the Board of Directors for services was included in employee salaries and benefits as follows:

 

9


     June 28,      June 29,  
     2015      2014  
     $      $  

Salaries and other short term employee benefits

     2,621         3,127   

Stock-based compensation

     333         5,023   
  

 

 

    

 

 

 
     2,954         8,150   
  

 

 

    

 

 

 

 

7. GOODWILL

Goodwill consists of the following:

 

     $  

Balance at December 31, 2014

     407,436   

Goodwill related to 2015 acquisitions (note 4)

     11,136   

Effect of change in currency translation rates

     (3,564
  

 

 

 

Balance at June 28, 2015

     415,008   
  

 

 

 

 

8. GOODWILL AND INDEFINITE LIFE INTANGIBLE ASSET IMPAIRMENT

The Partnership performed its annual impairment test in December and when circumstances indicate the carrying value may be impaired. The Partnership’s impairment test for goodwill and intangible assets with indefinite lives is based on value-in-use calculations. The key assumptions used to determine the recoverable amount for the different cash generating units were disclosed in the annual combined financial statements for the year ended December 31, 2014. There were no indicators of impairment since December 2014.

Sensitivity to changes in assumptions

With regard to the assessment of value-in-use there are no significant changes to the sensitivity information disclosed in the annual combined financial statements for the year ended December 31, 2014.

 

9. LONG-TERM DEBT

The following table presents the key components of long-term debt, net of deferred financing fees on the drawn portion of long-term debt:

 

     June 28,      December 31,  
     2015      2014  
     $      $  

New term credit facility, due April 30, 2019

     595,010         406,586   

Revolving credit facility

     152,398         41,646   
  

 

 

    

 

 

 
     747,408         448,232   
  

 

 

    

 

 

 

The following table presents the unamortized deferred financing fee on the drawn portion of long-term debt:

 

     June 28,      December 31,  
     2015      2014  
     $      $  

New term credit facility, due April 30, 2019

     4,990         3,414   

Revolving credit facility

     1,128         354   
  

 

 

    

 

 

 
     6,118         3,768   
  

 

 

    

 

 

 

 

10


On May 22, 2015, the Partnership amended the New term credit agreement (‘‘Amended and Restated Credit Agreement’’) to increase the New term credit facility by $190,000 and to increase the consolidated leverage ratios. The Partnership accounted for the amendment as a modification and accordingly, adjusted the carrying amount of the New term credit facility to adjust for the additional loan amount of $190,000 and fees and transaction costs of approximately $1,990 incurred and no gain or loss was recognized. Differences in present value arising as a result of the modification are recognized as an adjustment to the effective interest rate and amortized over the remaining life of the modified New term credit facility.

In addition, the Partnership had drawn $111,526 from its existing Revolving credit facility during the six months ended June 28, 2015.

The proceeds were used as a distribution to the equity holders of the Shred-it Group.

Capital management

The Shred-it Group monitors capital using consolidated leverage and interest coverage ratios. Under the Partnership’s Amended and Restated Credit Agreement, the Partnership is required to maintain: (a) a consolidated leverage ratio of less than 4.25 for all quarters ending up to and including March 31, 2017 and less than 4.0 for all quarters ended thereafter; and (b) a consolidated interest coverage ratio not less than 2.0.

 

10. FINANCIAL RISK MANAGEMENT

Risk overview

The Shred-it Group is exposed to credit risk, liquidity risk, interest rate risk and foreign currency rate risk. The Shred-it Group’s primary risk management objective is to protect its income and cash flows and, ultimately, shareholder value. Risk management strategies, as discussed below, are designed and implemented to ensure the Shred-it Group’s risks and the related exposures are consistent with its business objectives and risk tolerance.

 

  (i) Credit risk

Credit risk represents the financial loss that the Shred-it Group would experience if a counterparty to a financial instrument, in which the Shred-it Group has an amount owing from the counterparty, failed to meet its obligations in accordance with the terms and conditions of its contracts with the Shred- it Group.

The Shred-it Group’s credit risk is primarily attributable to its accounts receivable. The amounts disclosed in the combined statements of financial position are net of allowances for doubtful accounts, estimated by the Shred-it Group’s management based on prior experience and their assessment of the current economic environment. The Shred-it Group establishes an allowance for doubtful accounts that represents its estimate of incurred losses in respect of accounts receivable. The main components of this allowance are a specific loss component that relates to individually significant exposures and an overall loss component established based on historical trends. As at June 28, 2015, the Shred-it Group had accounts receivable of $131,086 (December 31, 2014 — $103,002) gross of an allowance for doubtful accounts of $7,059 (December 31, 2014 — $5,210). As at June 28, 2015, $16,671 (December 31, 2014 — $12,201) of accounts receivable are considered past due. The Shred-it Group believes that its allowance for doubtful accounts is sufficient to reflect the related credit risk associated with the Shred-it Group’s accounts receivable.

The Shred-it Group believes that the concentration of credit risk of accounts receivable is limited due to its broad customer base, dispersed across varying industries and geographic locations.

The Shred-it Group has established various internal controls designed to mitigate credit risk and has also established procedures to suspend the availability of services when customers have fully utilized approved credit limits or have violated established payment terms.

While the Shred-it Group’s credit controls and processes have been effective in managing credit risk, these controls cannot eliminate credit risk and there can be no assurance that these controls will continue to be effective or that the Shred-it Group’s current credit loss experience will not continue.

 

11


  (ii) Liquidity risk

Liquidity risk is the risk that the Shred-it Group will not be able to meet its financial obligations as they fall due. The Shred-it Group manages liquidity risk through the management of its capital structure and financial leverage. It also manages liquidity risk by continuously monitoring actual and projected cash flows to ensure that it will have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Shred-it Group’s reputation. As at June 28, 2015, the undrawn portion of the Shred-it Group’s Revolving credit facility was approximately $96,474 (December 31, 2014 — $208,000), excluding letters of credit of $14,722 (December 31, 2014 — $14,722).

The table below summarizes the maturity profile of the Shred-it Group’s financial liabilities based on contractual undiscounted payments as at June 28, 2015:

 

     Carrying      Contractual                              
     amount      cash flows      Yr 1      2-3 yrs      4-5 yrs      Thereafter  

Bank indebtedness

     10,911         10,911         10,911         —           —           —     

Accounts payable and accrued liabilities

     74,966         74,966         74,966         —           —           —     

New term credit facility

     600,000         600,000         —           —           600,000         —     

New revolving credit facility

     153,526         153,526         —           —           153,526      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     839,403         839,403         85,877         —           753,526         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (iii) Interest rate risk

The Shred-it Group’s interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the Shred-it Group to cash flow interest rate risk.

As at June 28, 2015, if interest rates decreased or increased by 1%, with all other variables held constant, income before income taxes would be impacted by $2,537.

 

  (iv) Foreign currency rate risk

Foreign currency rate risk is the risk that the fair value of future cash flows will fluctuate because of the changes in foreign exchange rates. The Shred-it Group’s exposure to the risk of changes in foreign exchange rates relates primarily to the Shred-it Group’s operating activities, specifically, when revenue or expense is denominated in a different currency from the functional currency and the Shred-it Group’s net investments in foreign subsidiaries.

The Shred-it Group operates in the Canadian, U.S., U.K., Eurozone, South African, Singapore, Australian and the United Arab Emirates markets and is exposed to unpredictable foreign exchange rate changes.

Effective January 1, 2015 management implemented a net investment hedge to minimize the foreign exchange translation impact in the income statement resulting from US dollar (“USD”) denominated bank indebtedness in Shred-it International ULC, which has a functional currency of Canadian dollars. Included in bank indebtedness in Shred-it International ULC, at June 28, 2015, was a borrowing of $55,929, which was designated as a hedge of the net investment in the US subsidiary, Shred-it USA JV LLC, which has the USD as its functional currency. During the six months ended June 28, 2015, a loss of $3,224 on the translation of this borrowing was transferred to other comprehensive income to offset the losses on translation.

As at June 28, 2015, if the following foreign exchange relationships weakened or strengthened by 1% against the U.S. dollar, with all other variables held constant, other comprehensive income (loss) for the six months ended June 28, 2015 would have been higher or lower as follows:

 

12


     $  

Canadian dollar

     2,735   

Pounds sterling

     160   

Euro

     370   

 

11. INCOME TAXES

The Shred-it Group calculates the income tax expense for the 6 months ended using the tax rate that would be applicable to the expected total annual earnings. The major components of income tax expense in the interim condensed statement of profit or loss are:

 

     June 28,      June 29,  
     2015      2014  
     $      $  

Current income tax expense:

     

Based on taxable income of the current year

     5,061         2,957   

Adjustments in respect of prior years

     —           1,835   

US branch tax

     3,201         —     

Other, if applicable

     56         144   
  

 

 

    

 

 

 
     8,318         4,936   
  

 

 

    

 

 

 

Deferred income tax expense (recovery):

     

Origination and reversal of temporary differences

     (4,951      (4,878

Impact of change in tax rates/new tax laws

     —           —     

Adjustments in respect of prior years

     —           1,712   

Change in realizability of deferred tax assets

     1,128         260   

Change in outside basis of partnership interest

     4,699         2,289   
  

 

 

    

 

 

 
     876         (617
  

 

 

    

 

 

 

Income tax expense

     9,194         4,319   
  

 

 

    

 

 

 

 

12. STOCK-BASED COMPENSATION

During the six months ended June 28, 2015, the Company recognized stock-based compensation expense of $477, which included two new grants of a total of 250 Options to acquire Class C Special Shares of Boost GP Corp (“2015 Grant”).

The key assumptions for the 2015 Grant were as follows:

 

Risk-free rate

     0.66

Expected dividend yield

     0.00

Expected volatility (based on publicly traded competitors)

     19.50

Fair value/option

   $ 531   

The table below summarizes the stock-based compensation activity during the six months ended June 28, 2015:

 

     Class C Options      Class D Options                
     Special Shares of      Special Shares of      Class C units of      Class D units of  
     Boost GP Corp.      Boost GP Corp.      the Partnership      the Partnership  

Outstanding at December 31, 2014

     —           6,430         4,450         3,535   

Granted

     250         —           —           —     

Exercised

     —           —           —           (118

Forfeited

     —           —           (300      (7
  

 

 

    

 

 

    

 

 

    

 

 

 

Outstanding at June 28, 2015

     250         6,430         4,150         3,410   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

13


During the six months ended June 28, 2014, the Company recognized approximately $840 of Stock-based compensation expense under the Original Plan ($598 presented under Acquisition, transaction and integration costs). In addition, due to the settlement of stock options under the Original Plan and SII Director Option Plan, $4,812 was recognized as a reduction in Equity (Deficit), representing the excess of the payment upon exercise over the fair value of the grants.

 

13. DISCONTINUED OPERATIONS

During the six months ended June 28, 2015, the Shred-it Group made a payment to Iron Mountain Canada Operations ULC as part of a working capital adjustment pursuant to the sale of the RM business on December 1, 2014.

 

14. OPERATING EXPENSES

 

     June 28,      June 29,  
     2015      2014  
     $      $  

Employment costs

     173,151         113,656   

Transport costs

     43,811         30,744   

Rent and occupancy

     16,528         10,890   

General administrative and other expenses

     35,879         26,322   
  

 

 

    

 

 

 

Total operating expenses

     269,369         181,612   
  

 

 

    

 

 

 

 

15. ACQUISITION, TRANSACTION AND INTEGRATION COSTS

The Shred-it Group incurred legal, professional and other costs relating to various business acquisitions. In addition, the Shred-it Group incurred costs relating to the integration activities of the acquired businesses. The activities included the closure of redundant facilities, rebranding and marketing, legal and professional fees, and the conversion to the Shred-it Group’s financial information systems.

 

16. PREPAIDS AND OTHER ASSETS

During the six months ended June 28, 2015, the partnership incurred $15,300 in costs related to an Initial Public Offering (the “IPO”). These costs were to be deferred on the statement of financial position until the equity instruments were issued at which point these costs were to be deducted from equity. On July 15, 2015, in connection with the definitive sale agreement (note 17), the IPO process was abandoned and these costs were subsequently expensed.

 

17. SUBSEQUENT EVENTS

On July 6, 2015, the Partnership acquired 100% of the assets of Seattle, Washington based franchise.

On July 15, 2015, the Shred-it Group entered into a definitive sale agreement to be acquired by Stericycle, Inc. for $2.3 billion. The transaction had been unanimously approved by the Boards of Directors of both companies. Upon closing, the entities within the Shred-it Group will become wholly owned subsidiaries of Stericycle. The acquisition is expected to close in the fourth quarter of 2015.

Upon closing, the unvested options under the various stock based compensation plans will become fully vested. Subsequently, all options will be exercised and settled for an approximate $81,000 cash payment.

 

14

Exhibit 99.3

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The following unaudited pro forma condensed combined financial information is based upon the historical consolidated financial information of Stericycle, Inc. (“Stericycle” or “the Company”) for the year ended December 31, 2014 and as of and for the six month periods ended June 30, 2015 and 2014, included in the Company’s annual report on Form 10-K for the year ended December 31, 2014 and the Company’s quarterly reports on Form 10-Q for the respective periods and of Shred-it (as defined below) included in this Current Report on Form 8-K.

The unaudited pro forma condensed combined financial information has been prepared to reflect the following:

 

    the sale of the depositary shares offered by us in the Mandatory Convertible Preferred Stock Offering (as defined below), after deducting the underwriting discounts and commissions and estimated offering expenses payable by us;

 

    the debt borrowed by us in the Debt Financing (as defined below), in each case, after deducting estimated expenses payable by us;

 

    the Acquisition (as defined below), including the payment of related fees and expenses; and

 

    in the case of the unaudited pro forma condensed combined statements of operations data for the year ended December 31, 2014 presented below, the merger of the document destruction business of Cintas Corporation (the “Cintas Merger”) with Shred-it as if the Cintas Merger had occurred on January 1, 2014.

In this Current Report on Form 8-K, unless otherwise specified or the context requires otherwise:

 

    “Shred-it” refers collectively to Shred-it International ULC, an Alberta unlimited liability corporation, Shred-it JV LP, an Ontario limited partnership, Boost GP Corp., an Ontario corporation and Boost Holdings LP, an Ontario limited partnership, and their respective subsidiaries;

 

    “Mandatory Convertible Preferred Stock Offering” means the offering of 7,000,000 depositary shares, each representing a 1/10th interest in a share of our Mandatory Convertible Preferred Stock, Series A, par value $0.01 per share, plus up to an additional 700,000 depositary shares that the underwriters have the option to purchase from us (the “depositary shares”) offered pursuant to the related prospectus and accompanying prospectus supplement, each dated September 8, 2015, filed with the Securities and Exchange Commission;

 

    “Debt Financing” means the senior unsecured debt financing consisting of (1) approximately $1.36 billion expected to be borrowed pursuant to our Term Loan Credit Facility (as defined herein), and (2) approximately $300 million aggregate principal amount of senior unsecured debt financing in the form of private placement notes expected to be issued, in each case, after the date of this Current Report on Form 8-K to finance a portion of the Acquisition;

 

    “Financing Transactions” means the Mandatory Convertible Preferred Stock Offering and the Debt Financing;

 

    “Acquisition” refers to the pending acquisition of Shred-it by us and certain of our subsidiaries;

 

    “Term Loan Credit Facility” means the Term Loan Credit Agreement, dated as of August 21, 2015, among Stericycle, as borrower, and Bank of America, N.A., as administrative agent and a lender thereunder, and the other lenders party thereto; and

 

    “Transactions” refers to the Acquisition and the Financing Transactions.


The unaudited pro forma condensed combined balance sheet as at June 30, 2015, is presented as if the Mandatory Convertible Preferred Stock Offering, the Financing Transactions and the Acquisition were completed on that date. The unaudited pro forma condensed combined statements of operations data for the six months ended June 30, 2015, and the year ended December 31, 2014, assume that the Mandatory Convertible Preferred Stock Offering, the Debt Financing and the Acquisition were each completed on January 1, 2014 and, in the case of the year ended December 31, 2014, provide further data that assumes that the Cintas Merger had occurred on January 1, 2014. The historical consolidated financial information has been adjusted to give effect to estimated pro forma events that are (1) directly attributable to the Mandatory Convertible Preferred Stock Offering, the Debt Financing, the Acquisition and the Cintas Merger, (2) factually supportable and (3) with respect to the statement of operations, expected to have a continuing impact on the combined results of operations.

The unaudited pro forma condensed combined financial information should be read in conjunction with the historical consolidated financial statements and accompanying notes of Stericycle, included in the Company’s annual report on Form 10-K/A for the year ended December 31, 2014 and its subsequent quarterly reports on Form 10-Q, and of Shred-it, each of which are included in this Current Report on Form 8-K.

The unaudited pro forma condensed combined financial information contained in this Current Report on Form 8-K is presented for illustrative purposes only, contains a variety of adjustments, assumptions and preliminary estimates, is subject to numerous other uncertainties and does not reflect necessarily what the combined financial position or results of operations will be going forward following the Acquisition. The pro forma adjustments are based on the preliminary information available at the time of the preparation of this document. For purposes of the unaudited pro forma condensed combined financial information, the estimated Acquisition consideration has been preliminarily allocated to the assets acquired and liabilities assumed based on limited information presently available to Stericycle to estimate fair values. The Acquisition consideration will be allocated among the relative fair values of the assets acquired and liabilities assumed based on their estimated fair values as of the date of the Acquisition. The final allocation is dependent upon certain valuations and other analyses that cannot be completed prior to the Acquisition and are required to make a definitive allocation. The actual amounts recorded at the completion of the Acquisition may differ materially from the information presented in the accompanying unaudited pro forma condensed combined financial information. Additionally, the unaudited pro forma condensed combined financial information does not reflect the cost of any integration activities or benefits from synergies that may be derived from any integration activities nor does it include any other items not expected to have a continuing impact on the consolidated results of operations. The unaudited pro forma condensed combined financial information has also been prepared on the assumption that the Acquisition and the Financing Transactions will be completed on the terms and in accordance with the assumptions set forth below. Any significant changes in the assumed interest rates associated with the Debt Financing or the cost of the Acquisition (whether as a result of contractual purchase price adjustments or otherwise) from those assumed for purposes of preparing the estimated pro forma financial information may cause a significant change in the estimated pro forma financial information. In addition, the pro forma adjustments for the Acquisition do not include any post-closing adjustments that may occur pursuant to the Securities Purchase Agreement, which may include adjustments of the purchase price, and any such post-closing adjustments may be material.

The unaudited pro forma condensed combined financial information contained in this Current Report on Form 8-K assumes that (1) the option we have granted to the underwriters in the Mandatory Convertible Preferred Stock Offering to purchase additional depositary shares is not exercised, (2) the depositary shares will not be redeemed if the Acquisition is not completed and (3) we elect to pay any and all dividends with respect to the Mandatory Convertible Preferred Stock in cash.

Certain amounts in the historical consolidated financial statements of Shred-it will be reclassified to conform to Stericycle’s financial statement presentation. Management will also continue to assess Shred-it’s accounting policies for adjustments in addition to those reflected in the pro forma condensed combined information that may be required to conform Shred-it’s accounting policies to those of Stericycle.


The Mandatory Convertible Preferred Stock Offering is not contingent upon completion of the Acquisition and we will have the option but not obligation to redeem the depositary shares sold in the Mandatory Convertible Preferred Stock Offering if the Acquisition does not occur. If the Acquisition is not completed and we do not elect to redeem the depositary shares, we will use the net proceeds from the Mandatory Convertible Preferred Stock Offering for general corporate purposes, which may include share repurchases and acquisitions. You should not place undue reliance on the pro forma and as adjusted information presented in this Current Report on Form 8-K.


Stericycle, Inc.

Unaudited Pro Forma Condensed Combined Balance Sheet

As of June 30, 2015

(In thousands, except share and per share data)

 

     Historical
Stericycle,
Inc.
    Historical
Shred-it

(Note 3)
    Pro Forma
Adjustments
(Note 5)
    Note
Reference
    Pro Forma
Combined
 

ASSETS

          

Current Assets:

          

Cash and cash equivalents

   $ 32,956      $ 26,369      $ —          5 (a)    $ 59,325   

Short-term investments

     103        —          —            103   

Accounts receivable, less allowance for doubtful accounts of $19,890

     524,134        124,027        —            648,161   

Deferred income taxes

     28,327        —          —            28,327   

Prepaid expenses

     33,202        21,833        (15,300     5 (b)      39,735   

Other current assets

     41,471        5,273        (921     5 (c)      45,823   
  

 

 

   

 

 

   

 

 

     

 

 

 

Total Current Assets

     660,193        177,502        (16,221       821,474   

Property, plant and equipment, less accumulated depreciation of $394,955

     468,960        213,759        9,047        5 (d)      691,766   

Goodwill

     2,454,092        415,008        897,220        5 (e)      3,766,320   

Intangible assets, less accumulated amortization of $129,881

     908,176        357,107        561,893        5 (f)      1,827,176   

Other assets

     35,523        9,927        1,755        5 (g)      47,205   
  

 

 

   

 

 

   

 

 

     

 

 

 

Total Assets

   $ 4,526,944      $ 1,173,303      $ 1,453,694        $ 7,153,941   
  

 

 

   

 

 

   

 

 

     

 

 

 

LIABILITIES AND EQUITY

          

Current Liabilities:

          

Current portion of long-term debt

   $ 129,270      $ —        $ 12,710        5 (h)    $ 141,980   

Accounts payable

     143,833        32,211        —            176,044   

Accrued liabilities

     151,310        42,755        —            194,065   

Deferred revenues

     18,560        127        —            18,687   

Other current liabilities

     66,762        31,682        (8,085     5 (i)      90,359   
  

 

 

   

 

 

   

 

 

     

 

 

 

Total Current Liabilities

     509,735        106,775        4,625          621,135   

Long-term debt, net of current portion

     1,538,736        747,408        899,882        5 (h)      3,186,026   

Deferred income taxes

     428,392        69,353        136,951        5 (j)      634,696   

Other liabilities

     68,060        15,683        —            83,743   

Equity:

          

Mandatory Convertible Preferred Stock, Series A (par value $0.01 per share, 1,000,000 shares authorized, 0 shares issued and outstanding historical, 700,000 shares issued and outstanding pro forma)

     —          —          7        5 (k)      7   

Common stock (par value $.01 per share, 120,000,000 shares authorized, 84,823,229 issued and outstanding)

     848        296,415        (296,415     5 (k)      848   

Additional paid-in capital

     354,639        2,729        676,264        5 (k)      1,033,632   

Accumulated other comprehensive loss

     (180,907     (6,419     6,419        5 (k)      (180,907

Retained earnings

     1,788,123        (278,787     246,107        5 (k)      1,755,443   
  

 

 

   

 

 

   

 

 

     

 

 

 

Total Stericycle, Inc.’s Equity

     1,962,703        13,938        632,382          2,609,023   

Noncontrolling interest

     19,318        220,146        (220,146     5 (l)      19,318   
  

 

 

   

 

 

   

 

 

     

 

 

 

Total Equity

     1,982,021        234,084        412,236          2,628,341   
  

 

 

   

 

 

   

 

 

     

 

 

 

Total Liabilities and Equity

   $ 4,526,944      $ 1,173,303      $ 1,453,694        $ 7,153,941   
  

 

 

   

 

 

   

 

 

     

 

 

 

The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements.


Stericycle, Inc.

Unaudited Pro Forma Condensed Combined Statement of Operations

For the Six Months Ended June 30, 2015

(In thousands, except share and per share data)

 

     Historical
Stericycle,
Inc.
    Historical
Shred-it

(Note 3)
    Pro Forma
Adjustments
(Note 6)
    Note
Reference
    Pro Forma
Combined
 

Revenues

   $ 1,379,008      $ 356,271      $ —          $ 1,735,279   

Costs and Expenses:

          

Cost of revenues (exclusive of depreciation shown below)

     764,133        136,285        —            900,418   

Depreciation – cost of revenues

     28,720        23,085        (2,920     6 (a)      48,885   

Selling, general and administrative expenses (exclusive of depreciation and amortization shown below)

     323,115        156,377        —            479,492   

Depreciation – selling, general and administrative expenses

     8,505        5,557        (96     6 (a)      13,966   

Amortization

     17,718        18,856        (3,956     6 (b)      32,618   
  

 

 

   

 

 

   

 

 

     

 

 

 

Total Costs and Expenses

     1,142,191        340,160        (6,972       1,475,379   
  

 

 

   

 

 

   

 

 

     

 

 

 

Income from Operations

     236,817        16,111        6,972          259,900   
  

 

 

   

 

 

   

 

 

     

 

 

 

Other Income (Expense):

          

Interest income

     74        55        —            129   

Interest expense

     (35,062     (8,730     (7,287     6 (c)      (51,079

Other expense, net

     (2,202     (4,448     —            (6,650
  

 

 

   

 

 

   

 

 

     

 

 

 

Total Other Expense

     (37,190     (13,123     (7,287       (57,600
  

 

 

   

 

 

   

 

 

     

 

 

 

Income Before Income Taxes

     199,627        2,988        (315       202,300   

Income Tax Expense

     62,921        9,194        1,712        6 (d)      73,827   
  

 

 

   

 

 

   

 

 

     

 

 

 

Net Income (Loss)

   $ 136,706      $ (6,206   $ (2,027     $ 128,473   

Less: Net Income Attributable to Noncontrolling Interests

     799        1,636        (1,636     6 (e)      799   
  

 

 

   

 

 

   

 

 

     

 

 

 

Net Income Attributable to Stericycle, Inc.

   $ 135,907      $ (7,842   $ (391     $ 127,674   
  

 

 

   

 

 

   

 

 

     

 

 

 

Earnings Per Common Share Attributable to Stericycle, Inc. Common Shareholders:

          

Basic

   $ 1.60            7      $ 1.30   
  

 

 

         

 

 

 

Diluted

   $ 1.57            7      $ 1.28   
  

 

 

         

 

 

 

Weighted Average Number of Common Shares Outstanding:

          

Basic

     85,000,723            7        85,000,723   

Diluted

     86,292,816            7        86,292,816   

The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements.


Stericycle, Inc.

Unaudited Pro Forma Condensed Combined Statement of Operations

For the Year Ended December 31, 2014

(In thousands, except share and per share data)

 

     Historical
Stericycle,
Inc.
    Historical
Shred-it
(Note 3)
    Historical
Cintas

Shredding
(Note 8)
    Pro Forma
Adjustments
(Note 6)
    Note
Reference
    Pro Forma
Combined
 

Revenues

   $ 2,555,601      $ 575,083      $ 104,411      $ —          $ 3,235,095   

Costs and Expenses:

            

Cost of revenues (exclusive of depreciation shown below)

     1,404,712        218,518        48,728        —            1,671,958   

Depreciation – cost of revenues

     56,478        38,263        9,797        (5,840     6 (a)      98,698   

Selling, general and administrative expenses (exclusive of depreciation and amortization shown below)

     489,937        265,640        40,267        —            795,844   

Depreciation – selling, general and administrative expenses

     15,446        10,249        363        (191     6 (a)      25,867   

Amortization

     32,692        30,244        1,311        (1,755     6 (b)      62,492   
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Total Costs and Expenses

     1,999,265        562,914        100,466        (7,786       2,654,859   
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Income from Operations

     556,336        12,169        3,945        7,786          580,236   
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Other Income (Expense):

            

Interest income

     120        147        —          —            267   

Interest expense

     (66,142     (16,325     (173     (15,484     6 (c)      (98,124

Other expense, net

     (2,746     (10,300     —          —            (13,046
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Total Other Expense

     (68,768     (26,478     (173     (15,484       (110,903
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Income Before Income Taxes

     487,568        (14,309     3,772        (7,698       469,333   

Income Tax Expense

     159,422        4,584        1,571        1,485        6 (d)      167,062   
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Net Income (Loss)

   $ 328,146      $ (18,893   $ 2,201      $ (9,183     $ 302,271   

Less: Net Income Attributable to Noncontrolling Interests

     1,690        1,885        —          (1,885     6 (e)      1,690   
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Net Income Attributable to Stericycle, Inc.

   $ 326,456      $ (20,778   $ 2,201      $ (7,298     $ 300,581   
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Earnings Per Common Share Attributable to Stericycle, Inc. Common Shareholders:

            

Basic

   $ 3.84              7      $ 3.13   
  

 

 

           

 

 

 

Diluted

   $ 3.79              7      $ 3.08   
  

 

 

           

 

 

 

Weighted Average Number of Common Shares Outstanding:

            

Basic

     84,932,792              7        84,932,792   

Diluted

     86,233,612              7        86,233,612   

The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements.


NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

 

  1. Description of Transaction

On July 15, 2015, we entered into the Securities Purchase Agreement to acquire, with cash, all of the equity interests in Shred-it for an aggregate purchase price of $2.3 billion, plus the total enterprise value of franchises acquired by Shred-it after July 15, 2015 and prior to the closing of the Acquisition as permitted by the Securities Purchase Agreement.

Shred-it is a Canadian-based company dedicated to secure information destruction services to customers around the world, who value the protection of their information, their reputation and the environment. Shred-it provides services to more than 400,000 customers in 15 countries and is the leading global provider in this service area.

 

  2. Basis of Presentation

The accompanying unaudited pro forma condensed combined financial statements were prepared in accordance with Article 11 of Regulation S-X and present the pro forma combined financial position and results of operations of Stericycle, Inc. based upon the historical financial statements of each of Stericycle and Shred-it, after giving effect to the Financing Transactions and the pending Acquisition, and are intended to reflect the impact of the Financing Transactions and the pending Acquisition, on Stericycle’s consolidated financial statements. The unaudited pro forma condensed combined statements of operations have been prepared assuming the Financing Transactions and the Acquisition occurred on January 1, 2014. The unaudited pro forma condensed combined balance sheet as of June 30, 2015 reflects the Financing Transactions and the Acquisition as if they had occurred on that date. Assumptions and estimates underlying the pro forma adjustments are described in these notes. Since the accompanying unaudited pro forma condensed combined financial statements have been prepared based upon preliminary estimates and assumptions, the final amounts recorded at the date of consummation of the Financing Transactions and the Acquisition may be different from that presented, and this difference may be material.

Shred-it’s consolidated financial statements as of and for the six months ended June 30, 2015 and the year ended December 31, 2014 have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the IASB, and use the U.S. Dollar as the reporting currency. For purposes of preparing the unaudited pro forma condensed combined financial information herein, Shred-it’s consolidated financial statement information has been converted from IFRS to U.S. GAAP.

In accordance with U.S. GAAP, the Acquisition is being accounted for using the purchase method of accounting. As a result, the unaudited pro forma combined balance sheet has been adjusted to reflect the preliminary allocation of the purchase price to the estimated fair value of net assets acquired based on information currently available, with the excess purchase price preliminarily assigned to goodwill. The Shred-it purchase price allocation in these unaudited pro forma combined financial statements is based upon a cash purchase price of $2.3 billion.

 

  3. Adjustments to Shred-it historical financial statements to conform to Stericycle

 

  (a) To reclassify amounts presented in the balance sheet of Shred-it to conform to Stericycle’s balance sheet presentation.


(In thousands)

   Shred-it
Presentation
June 30,
2015
          Stericycle
Presentation
June 30,
2015
 

Due from Cintas Corporation

     2,151         

Inventories

     3,122         
  

 

 

       
     5,273       Other current assets      5,273   
  

 

 

       

 

 

 

Investment in joint venture

     1,245         

Long-term prepaid expenses

     5,347         

Deferred financing fees

     710         

Shareholder loan receivable

     2,625         
  

 

 

       
     9,927       Other assets      9,927   
  

 

 

       

 

 

 

Bank indebtedness

     10,911         

Due to Cintas Corporation

     543         

Income tax payable

     3,048         

Current portion of provision

     8,243         
  

 

 

       
     22,745       Other current liabilities      22,745   
  

 

 

       

 

 

 
      Accounts payable      32,211   
      Accrued liabilities      42,755   
        

 

 

 

Accounts payable and accrued liabilities

     74,966            74,966   
  

 

 

       

 

 

 

Provisions

     14,099         

Other liabilities

     1,584         
  

 

 

       
     15,683       Other liabilities      15,683   
  

 

 

       

 

 

 
      Other current liabilities      8,937   
      Deferred income taxes      69,353   
        

 

 

 

Deferred tax liability

     78,290            78,290   
  

 

 

       

 

 

 

Revolving credit facility

     152,398         

Long-term debt

     595,010         
  

 

 

       
     747,408       Long-term debt, net of current portion      747,408   
  

 

 

       

 

 

 
      Common stock      296,415   
      Additional paid-in capital      2,729   
      Accumulated other comprehensive loss      (6,419
      Retained earnings      (278,787
        

 

 

 

Parent equity

     13,938       Total Shred-it’s Equity      13,938   
  

 

 

       

 

 

 

 

  (b) To reclassify amounts presented in the income statement of Shred-it to conform to Stericycle’s income statement presentation.

 

     Shred-it Presentation           Stericycle Presentation  

(In thousands)

   Six
Months
Ended
June 30,
2015
     Year
Ended
December

31, 2014
          Six
Months
Ended
June 30,
2015
     Year
Ended
December

31, 2014
 

Operating expenses

     269,369         445,609            

Stock-based compensation

     477         914       Cost of revenues (exclusive of depreciation shown below)      136,285         218,518   

Acquisition, transaction and integration costs

     22,816         37,635       Selling, general and administrative expenses (exclusive of depreciation and amortization shown below)      156,377         265,640   
  

 

 

    

 

 

       

 

 

    

 

 

 
     292,662         484,158            292,662         484,158   
  

 

 

    

 

 

       

 

 

    

 

 

 
         Depreciation – cost of revenues      23,085         38,263   
         Depreciation – selling, general and administrative expenses      5,557         10,249   
         Amortization      18,856         30,244   
         Other expense, net      583         1,073   
           

 

 

    

 

 

 

Depreciation and amortization

     48,081         79,829            48,081         79,829   
  

 

 

    

 

 

       

 

 

    

 

 

 


Loss on disposal of property, plant & equipment

     328        222          

Loss (gain) on foreign exchange

     3,826        9,516          

Share of income of a joint venture

     (289     (511       
  

 

 

   

 

 

        
     3,865        9,227      Other expense, net      3,865        9,227   
  

 

 

   

 

 

      

 

 

   

 

 

 
       Interest income      55        147   
       Interest expense      (8,730     (16,325
         

 

 

   

 

 

 

Interest expense, net

     (8,675     (16,178        (8,675     (16,178
  

 

 

   

 

 

      

 

 

   

 

 

 

Provision for (recovery of) income taxes

           

Current

     8,318        6,723          

Deferred

     876        (2,139       
  

 

 

   

 

 

        
     9,194        4,584      Income Tax Expense      9,194        4,584   
         

 

 

   

 

 

 

Loss from continuing operations

           

Attributable to:

Parent equity

     (7,842     (20,778   Net Income      (6,206     (18,893

Non-controlling interest

     1,636        1,885      Less: Net Income Attributable to Noncontrolling Interests      1,636        1,885   
  

 

 

   

 

 

      

 

 

   

 

 

 
     (6,206     (18,893   Net Income Attributable to Shred-it      (7,842     (20,778
  

 

 

   

 

 

      

 

 

   

 

 

 

 

  4. Purchase Accounting

Preliminary Purchase Price

The preliminary purchase price for the Acquisition is $2.3 billion cash consideration.

Preliminary Purchase Price Allocation

Purchase accounting requires us to recognize assets and liabilities at their fair values. The process of determining fair value requires time to complete therefore we have made certain estimates in preparing the preliminary purchase price allocation. These estimates are primarily for fixed assets, amortizable intangibles and, if appropriate, an associated deferred tax liability. These estimates are based on historical experience and allow us to estimate depreciation and amortization expense until the final valuation is completed. Purchase price in excess of amounts preliminarily assigned to identified tangible and intangible assets has been preliminarily assigned to goodwill.

The following table summarizes the preliminary purchase price allocation:

 

(In thousands)

   Amount  

Accounts receivable

   $ 124,027   

Net other assets/ (liabilities)

     26,933   

Fixed assets

     222,806   

Intangible assets

     919,000   

Goodwill

     1,312,228   

Current liabilities

     (98,690

Net deferred tax liabilities

     (206,304
  

 

 

 

Total purchase price allocation

   $ 2,300,000   


This purchase price allocation is preliminary, pending finalization of the closing balance sheet, completion of various asset valuations, and working capital adjustments that may affect the final purchase price. The final valuation of acquired assets and liabilities assumed will be determined at a later date and is dependent on a number of factors, including the determination of the fair values of Shred-it’s tangible and identifiable intangible assets acquired and liabilities assumed. The final purchase price allocation may be different than that reflected in the pro forma condensed combined financial statements presented herein, and this difference may be material.

 

  5. Unaudited Pro Forma Condensed Combined Balance Sheet Adjustments

The following are brief descriptions of each of the pro forma adjustments included in the unaudited pro forma combined balance sheet to reflect adjustments attributed to the Financing Transactions and the Acquisition:

 

  (a) To record the cash received from new indebtedness and the issuance of Mandatory Convertible Preferred Stock, less the acquisition purchase price, associated debt issuance costs and estimated acquisition-related transaction costs.

 

(In thousands)

   Amount  

New Term Loan Credit Facility (1)

   $ 1,360,000   

Private Placement borrowings (2)

     300,000   

Stericycle issuance of Mandatory Convertible Preferred Stock (3)

     679,000   

Cash payment to sellers

     (2,300,000

Debt issuance costs

     (6,320

Estimated acquisition-related transaction costs (4)

     (32,680
  

 

 

 

Total pro forma adjustment to cash and cash equivalents

   $ —     

 

(1) In connection with entering into the Securities Purchase Agreement, we entered into the Term Loan Credit Facility which provides for senior unsecured borrowing in an amount of up to $1.5 billion to provide financing for the Acquisition. We expect to draw $1.36 billion under the Term Loan Credit Facility in connection with the closing of the Acquisition. Borrowings under the Term Loan Credit Facility will bear interest, at Stericycle’s option, at a rate equal to the sum of (a) either (i) the “base rate,” which is the highest of (A) the federal funds rate plus one-half of one percent, (B) the rate of interest in effect for such day as publicly announced from time to time by Bank of America, N.A. as its “prime rate,” and (C) one-month LIBOR plus 1.00%, or (ii) the “eurodollar rate,” which is one-week, or one-, two-, three- or six-month LIBOR (which shall in no case be less than 0.00%), at our option, and (b) the applicable rate. The “applicable rate” for purposes of the foregoing will range from 0.00% to 1.00% per annum for loans at the base rate, and 1.00% to 2.00% per annum for loans at the eurodollar rate, and will be designated depending upon our consolidated leverage ratio, as measured under the terms of the Term Loan Credit Facility. Commencing with the date of our entry into the Term Loan Credit Facility, we will be required to pay a commitment fee at a rate equal to 0.15% per annum of the unused commitment amounts under the Term Loan Credit Facility until the date that the commitments of the lenders under the Term Loan Credit Facility are terminated, either because the term loan is drawn in connection with the closing of the Acquisition or the term loan is not drawn because the Acquisition is not consummated or the Acquisition is consummated without a borrowing under the Term Loan Credit Facility. The Term Loan Credit Facility will terminate on August 21, 2020.
(2) We expect to obtain approximately $300 million of senior unsecured debt financing in the form of private placement notes. The private placement notes will be the obligations of Stericycle, Inc. and will be guaranteed by certain of its subsidiaries.
(3) We expect to obtain approximately $679 million of proceeds from the sale of the depositary receipts representing fractional interests in our Mandatory Preferred Stock offered pursuant to this prospectus supplement and the accompanying prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, in order to finance a portion of the purchase price for the Acquisition.
(4) Reflects Stericycle’s future estimated acquisition-related transaction costs. The unaudited pro forma condensed combined balance sheet reflects $32.7 million of costs as a reduction of cash with a corresponding decrease in retained earnings.


  (b) To eliminate pre-existing $15.3 million deferred financing costs of Shred-it for which there is no purchase price allocation by Stericycle.

 

  (c) To reflect the current portion of debt issuance costs of an estimated $1.2 million of debt issuance costs, offset by the elimination of $2.2 million pre-existing Shred-it current assets that will not be included in the Acquisition.

 

  (d) To record the estimated change in fair value of fixed assets for financial reporting. Approximately 65% of the net book value of fixed assets were acquired in 2014 through either capital expenditure or business acquisition for which fair values were assigned. The $9.0 million fair value adjustment reflects the add back of over depreciation related to the use of the declining balance method by Shred-it, as compared to the straightline method used by Stericycle.

 

  (e) To record an estimated increase in goodwill due to the Acquisition.

 

(In thousands)

   Amount  

Goodwill attributed to the Acquisition

   $ 1,312,228   

Less: Elimination of pre-existing Shred-it goodwill

     (415,008
  

 

 

 

Total pro forma adjustment to increase goodwill

   $ 897,220   

 

  (f) To record an estimated increase in intangible assets.

 

(In thousands, except estimated useful lives)

   Estimated
Useful Life
     Amount  

Customer relationships

     15 years       $ 447,000   

Trade name attributed to the Acquisition

     Indefinite         472,000   

Less: Elimination of pre-existing Shred-it intangible assets

        (357,107
     

 

 

 

Total pro forma adjustments to increase intangible assets

      $ 561,893   

In determining the preliminary fair value of the contractual customer relationships, we will use the Multi-Period Excess Earnings Method (“MPEEM”), a form of income approach which incorporates estimates of expected future cash flows attributable to the asset being valued that are then discounted to a present value. The valuation model will incorporate significant estimates and assumptions related to future periods including; anticipated revenue growth rates, operating profit margin (EBIT), and an appropriate discount rate. These assumptions need to be determined based upon the historical results and forecast expectations of Shred-it, along with external market and industry indicators. In order to determine the useful life of customer relationships, we will perform an attrition calculation based on available historical billing data to determine a revenue loss rate.

The Trade name will be valued using the Relief from Royalty Method, a form of income approach. The Relief from Royalty Method under the Income Approach estimates the cost savings that accrue to a company for which it would otherwise have to pay royalties or license fees on revenues earned through the use of the asset. The discount rate used is determined at the time of measurement based on an analysis of the implied internal rate of return of the transaction, weighted average cost of capital, and weighted average return on assets. The valuation model will incorporate significant estimates and assumptions related to future periods including; anticipated revenue growth, hypothetical rent from use of the Trade name, and an appropriate discount rate.

 

  (g) To reflect $5.1 million of estimated debt issuance costs offset by the elimination of $0.7 million in pre-existing debt issuance costs of Shred-it and $2.6 million of pre-existing Shred-it assets that will not be included in the Acquisition.

 

  (h) To record an estimated increase in total debt.

 

(In thousands)

   Amount  

Current portion of new Term Loan Credit Facility

   $ 12,710   

Long-term portion of new Term Loan Credit Facility

     1,347,290   

Private Placement borrowings

     300,000   

Less: Elimination of pre-existing Shred-it debt

     (747,408
  

 

 

 

Total pro forma adjustment to cash and cash equivalents

   $ 912,592   


  (i) To remove pre-existing $7.6 million deferred tax liability related to Shred-it acquired intangibles, and to remove pre-existing $0.5 million of Shred-it liabilities that will not be included in the Acquisition.

 

  (j) To remove pre-existing $69.3 million deferred tax liability related to Shred-it acquired intangibles, and to record deferred tax liabilities of $206.3 million associated with the fair value adjustment for intangible assets, for the temporary differences arising from applying the purchase method of accounting.

 

  (k) To reflect an estimated increase in total Stericycle Inc.’s equity.

 

(In thousands)

   Elimination of
Pre-Merger
Shred-it
Equity
Balances
     Stericycle
Issuance of
Mandatory
Convertible
Preferred Stock
     Estimated
Acquisition-
Related
Transaction
Costs
     Total Pro Forma
Adjustments to
Stericycle Inc.’s
Equity
 

Mandatory Convertible Preferred Stock

   $ —         $ 7       $ —         $ 7   

Common Stock

     (296,415      —           —           (296,415

Additional Paid-in Capital

     (2,729      678,993         —           676,264   

Accumulated Other Comprehensive Income

     6,419         —           —           6,419   

Retained Earnings

     278,787         —           (32,680      246,107   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Stericycle, Inc.’s Equity

   $ (13,938    $ 679,000       $ (32,680    $ 632,382   

 

  (l) To eliminate pre-existing $220.1 million noncontrolling interest of Shred-it, in connection with the Acquisition.

 

  6. Unaudited Pro Forma Condensed Combined Statements of Operations

 

  (a) To reflect an estimated pro forma depreciation expense reduction of $3.0 million for the six months ended June 30, 2015 and $6.0 million for the year ended December 31, 2014 related to the fair value adjustment of fixed assets and conforming accounting policies as discussed in Note 5(d) above.

 

  (b) To reflect an estimated pro forma amortization expense reduction of $4.0 million for the six months ended June 30, 2015 and $1.8 million for the year ended December 31, 2014 related to the fair value of identified finite-lived intangible assets discussed in Note 5(f) above.

 

(In thousands, except estimated useful lives)

   Estimated
Fair Value
     Estimated
Useful Life
     Six Months
Ended

June 30,
2015
     Year Ended
December 31,
2014
 

Customer relationships

   $ 447,000         15 years       $ 14,900       $ 29,800   

Trade name

     472,000         indefinite         —           —     

Less: Elimination of historical Shred-it amortization

           (18,856      (31,555
        

 

 

    

 

 

 

Total pro forma adjustments to amortization expense

         $ (3,956    $ (1,755

 

  (c) To reflect an increase in estimated interest expense on the $1.36 billion of borrowings under the term loan and the $300 million of private placement notes expected to be incurred in connection with the Financing Transactions. Estimated interest expense on the term loan has been calculated based on an assumed interest rate of 1.53%. Estimated interest expense on the private placement offering has been calculated based on an assumed interest rate of 3.30%. An immediate change of 125 basis points in the interest rates assumed would cause a change in pro forma interest expense of approximately $2.0 million on an annual basis.

 

  (d) To reflect the tax effect on pro forma adjustments resulting in a total tax rate of 36.5% and 35.6% for the six months ended June 30, 2015 and for the year ended December 2014, respectively.


  (e) To eliminate pre-existing net income attributable to noncontrolling interests of Shred-it, in connection with the Acquisition.

 

  7. Pro Forma Earnings per Common Share

The following table sets forth the computation of basic and diluted pro forma earnings per share for the six months ended June 30, 2015 and for the year ended December 31, 2014. The calculation does not use the if-converted method to calculate the dilutive EPS as the impact of the conversion of the preferred shares would be anti-dilutive.

 

(In thousands, except share and per share data)

   Six Months
Ended

June 30, 2015
     Year Ended
December 31,
2014
 

Numerator:

     

Net Income Attributable to Stericycle, Inc.

   $ 127,674       $ 300,581   

Less: Preferred Dividends

     17,500         35,000   
  

 

 

    

 

 

 

Numerator for basic pro forma earnings per share net income attributable to Stericycle, Inc.

   $ 110,174       $ 265,581   
  

 

 

    

 

 

 

Denominator:

     

Denominator for basic earnings per share-weighted average shares

     85,000,723         84,932,792   

Effect of diluted securities:

     

Employee stock options

     1,292,093         1,300,820   
  

 

 

    

 

 

 

Denominator for diluted earnings per share-adjusted weighted average shares and after assumed exercises

     86,292,816         86,233,612   
  

 

 

    

 

 

 

Earnings per share – Basic

   $ 1.30       $ 3.13   
  

 

 

    

 

 

 

Earnings per share – Diluted

   $ 1.28       $ 3.08   
  

 

 

    

 

 

 

 

  8. Cintas Shredding Business

The pro forma condensed combined statement of operations for the year ended December 31, 2014, includes four months of historical results of the Cintas Shredding business, which was acquired by Shred-it on April 30, 2014. The inclusion of the historical operating results of the Cintas Shredding business for the four months ending April 30, 2014 provides a full year of results of operations on a pro forma basis reflecting the Acquisition as if the Cintas Shredding business had been acquired as of January 1, 2014.

Exhibit 99.4

Risk Factors Related to the Business of Shred-it

Described below are certain risks that are applicable to the business of Shred-it International ULC, an Alberta unlimited liability corporation, Shred-it JV LP, an Ontario limited partnership, Boost GP Corp., an Ontario corporation, and Boost Holdings LP, an Ontario limited partnership (collectively, “Shred-it”) and the secure information destruction industry in which Shred-it operates. There may be additional risks that are not presently material or known.

If any of the events described below occur, Shred-it’s business, financial condition, results of operations, cash flows or liquidity could be materially adversely affected. In addition, factors affecting the secure information destruction industry generally could intensify many of these risks.

Damage to Shred-it’s reputation could adversely affect its business, financial condition and results of operations.

Shred-it’s reputation for providing secure information destruction services is critical to the success of its business — existing and potential customers have a high expectation that Shred-it will adequately protect their confidential information. Shred-it’s reputation and, specifically, the trust its customers place in it, could be negatively affected in the event of perceived or actual failures by Shred-it to handle information securely. For example, events such as a security breach, could negatively affect Shred-it’s relationship with its customers and its reputation. A significant breach of customer, employee or company data could attract a substantial amount of media attention and/or damage Shred-it’s customer relationships and reputation, particularly if such incidents result in adverse publicity, governmental investigations, litigation or other proceedings. Damage to Shred-it’s reputation could make Shred-it less competitive, which could in turn adversely affect its business, financial condition and results of operations.

Failure by Shred-it to protect its customers’ information against security breaches could result in monetary damages against it and could otherwise damage its reputation, and adversely affect its business, financial condition and results of operations.

The protection of customer, employee, and company data is critical to Shred-it. The regulatory environment in Canada and the United States surrounding information security and privacy is increasingly demanding, with the frequent imposition of new and constantly changing requirements. Certain legislation, including the Fair and Accurate Credit Transactions Act, the Health Insurance Portability and Accountability Act, and the Economic Espionage Act in the United States and the Personal Information Protection and Electronic Documents Act in Canada, require documents to be securely destroyed to avoid identity theft and inadvertent leakage of confidential and sensitive information. A significant breach of customer, employee, or company data could attract a substantial amount of media attention, damage Shred-it’s customer relationships and reputation and result in lost sales, fines, regulatory investigations or lawsuits. In addition, an increasing number of countries have introduced and/or increased enforcement of comprehensive privacy laws, or are expected to do so. The continued emphasis on information security as well as increasing concerns about government surveillance may lead customers to request that Shred-it take additional measures to enhance security and/or assume higher liability under its contracts. As a result of legislative initiatives and customer demands, Shred-it may have to frequently modify its operations to further improve data security. Any such modifications may divert management’s attention away from other matters, result in increased expenses and operational complexity, and adversely affect Shred-it’s business, financial condition and results of operations.

Customer cost sensitivities could adversely affect Shred-it’s business, financial condition and results of operations.

Shred-it has experienced pricing pressure in recent years as both of its large and small customers have becoming increasingly cost conscious with respect to their expenditures on secure information destruction services in an effort to reduce overall costs. Furthermore, the inability of Shred-it to increase pricing over time or to sustain its current level of annual price increases, particularly in the small and medium business (“SMB”) market, could adversely affect its business, financial condition and results of operations.


Changes in customer behavior with respect to information destruction could adversely affect Shred-it’s business, financial condition and results of operations.

Shred-it competes with its current and potential customers’ internal destruction capabilities, such as a desk side shredder. Shred-it can provide no assurance that customers will continue to use a third party service provider for their future information destruction service needs or that they will use Shred-it to provide these services. Some customers have taken actions designed to reduce costs associated with the retention of documents, including reducing the volume of paper used, the volume of documents they store and adopting less secure information destruction practices. A change in customer behavior with respect to information destruction could adversely affect Shred-it’s business, financial condition and results of operations.

Competitive pressures could adversely affect Shred-it’s business, financial condition and results of operations.

Shred-it operates in a highly competitive industry and competes with national, regional and local service providers on various elements, including quality of services, security standards, efficiency, innovation and price. In situations where local or regional competitors are considered to be at parity with national competitors for reliability and quality of service, price is often a critical factor in winning and retaining customers. The secure information destruction industry has a low entry barrier for new market entrants given the limited capital requirements and opportunities for a positive return. There are thus limited barriers to entry for competitors. If existing or future competitors seek to gain or retain market share, including by reducing prices, Shred-it may be required to lower prices or make other concessions, which would adversely affect its results of operations. All of the above competitive pressures could adversely affect Shred-it’s business, financial condition and results of operations.

Fluctuations in the price Shred-it receives for the sale of paper may adversely affect its operating revenues and results of operations.

Sorted office paper is marketed as a commodity and is subject to significant price fluctuations beyond the control of Shred-it. A portion of Shred-it’s revenue is derived from the sale of shredded paper and a reduction in the market price for this shredded material may negatively impact Shred-it’s revenue, profitability and cash flow. Shred-it’s results of operations may be affected by fluctuations in the price of shredded paper.

Demand for Shred-it’s services is susceptible to long-term decline in use of paper by its current and prospective customers.

The demand for Shred-it’s services is dependent on the use of paper by its current and prospective customers. The use of paper competes with various forms of electronic and digital document storage alternatives. As the use of these alternatives grows, the use of paper is likely to decrease. Any declines in the use of paper by Shred-it’s customers may adversely affect Shred-it’s business, results of operations and financial position.

A portion of Shred-it’s revenues are dependent on demand for recycled paper which is based on general market conditions in the pulp and paper industry.

Shred-it sells almost all of the shredded paper to paper companies and recycled paper brokers. Shred-it’s results of operations may be affected by fluctuating demand for recycled paper and general market conditions of the pulp and paper industry. Historically, economic and market shifts, fluctuations in capacity and changes in foreign currency exchange rates have created cyclical changes in prices, sales volume and margins for pulp and paper products. The length and magnitude of industry cycles have varied over time and by product, but generally reflect changes in macroeconomic conditions and levels of industry capacity. The overall levels of demand for the pulp and paper products, and consequently its sales and profitability, reflect fluctuations in levels of end-user demand, which depend in part on general macroeconomic conditions in North America and worldwide, as well as the threat of digitization. As a result, the market demand for recycled paper can be volatile due to factors beyond Shred-it’s control. Lack of demand for Shred-it’s shredded material could adversely affect its business, financial condition and results of operations.

 

2


Fluctuations in fuel and energy costs may adversely affect Shred-it’s financial condition and results of operations.

The price of fuel needed to run Shred-it’s fleet of trucks and equipment is unpredictable and fluctuates based on events beyond Shred-it’s control, including geopolitical developments, supply and demand for oil and gas, actions by OPEC and other oil and gas producers, war and unrest in oil producing countries, regional production patterns, limits on refining capacities, natural disasters and environmental concerns. While Shred-it attempts to mitigate its exposure to fluctuating fuel and energy costs through fuel surcharges, it may not be able to pass through all of the increased costs to its customers due to limitations under the terms of its customer contracts and prevailing market conditions. Increases in fuel and energy costs could adversely affect Shred-it’s business, financial condition and results of operations.

Shred-it may not realize the synergies and growth opportunities that are anticipated from the businesses it has merged with or acquired.

The benefits Shred-it expects to achieve as a result of the merger of Shred-it with the document destruction business of Cintas Corporation (the “Cintas Merger”) or other acquisitions that Shred-it has completed will depend, in part, on its ability to realize targeted synergies and anticipated growth opportunities. Shred-it’s success in realizing these synergies and growth opportunities, and the timing of this realization, depends on the successful integration of other business and operations (including the business formerly owned by Cintas) with Shred-it’s pre-existing business and operations. For example, it is necessary to convert the Cintas branch network onto the Shred-it systems, applications and product (“SAP”) system in order to realize the cost savings arising from the Cintas Merger and there is no assurance that the integration will be successful and/or completed within the expected timeframe. Even if Shred-it is able to integrate these businesses and operations successfully, this integration may not result in the realization of the full benefits of the synergies and growth opportunities Shred-it currently expects within the anticipated time frame or at all. While Shred-it anticipates that certain expenses will be incurred, such expenses are difficult to estimate accurately, and may exceed current estimates. Accordingly, the benefits from the Cintas Merger or other acquisitions may be offset by unexpected costs incurred or delays in integrating the companies, which could cause Shred-it’s financial estimates to be inaccurate.

Failure by Shred-it to manage its growth may impact its operating results.

If Shred-it succeeds in expanding its existing businesses, or in moving into new areas of business, that expansion may place increased demands on its management, operating systems, internal controls and financial and physical resources. If not managed effectively, these increased demands may adversely affect the services Shred-it provides to customers. In addition, Shred-it’s personnel, systems, procedures and controls may be inadequate to support its future operations, particularly with respect to operations in countries outside of North America or in new lines of business. Consequently, in order to manage growth effectively, Shred-it may be required to increase expenditures to increase its physical resources, expand, train and manage its employee base, improve management, financial and information systems and controls, or make other capital expenditures. Shred-it’s results of operations and financial condition could be harmed if it encounters difficulties in effectively managing the budgeting, forecasting and other process control issues presented by future growth.

If Shred-it is unable to attract and retain qualified and skilled employees, its ability to implement its growth strategies may be impaired which could adversely affect its business, financial condition and results of operations.

Shred-it’s business depends on attracting and retaining a large number of qualified and skilled employees who reflect its reputation and culture. A significant portion of Shred-it’s workforce consists of roles that are entry level or physically demanding and historically have high turnover rates. If Shred-it is unable to hire, train and retain employees capable of consistently providing quality service to its customers, Shred-it may not be able to maintain its competitive strength as a secure information destruction service provider, which could lead to decreased sales, as well as to increased costs associated with hiring and training new employees.

In addition, Shred-it’s ability to meet its labor needs while controlling the costs associated with hiring and training new employees is subject to external factors such as unemployment levels, prevailing wage rates,

 

3


minimum wage legislation and changing demographics. Changes that adversely impact Shred-it’s ability to attract and retain quality employees could adversely affect its business, financial condition and results of operations.

Shred-it may not be able to successfully implement its growth and business strategy.

Shred-it may not be able to fully implement its business strategies or realize, in whole or in part within the expected timeframes, the anticipated benefits of its various growth or other initiatives. Shred-it’s various business strategies and initiatives, including growth from new customers, growth from existing customers, growth through adding complementary services and growth through acquisitions, are subject to significant business, economic, regulatory and competitive uncertainties and contingencies, many of which are beyond Shred-it’s control. If Shred-it is unable to successfully implement its business strategy, this could adversely affect its business, results of operations or financial condition.

In addition, Shred-it may incur certain costs to achieve efficiency improvements and growth in its business and may not meet anticipated implementation timetables or stay within budgeted costs. As these efficiency improvements and growth initiatives are undertaken, Shred-it may not fully achieve its expected cost savings and efficiency improvements or growth rates, or these initiatives could adversely impact its customer retention or operations. Also, Shred-it’s business strategies may change from time to time in light of its ability to implement its new business initiatives, competitive pressures, economic uncertainties or developments, or other factors, which in turn could adversely affect Shred-it’s business, results of operations or financial condition.

Shred-it may encounter a slowdown in acquisition activity and/or the price for acquisitions may increase.

A significant portion of Shred-it’s historical growth has been through acquisitions and it expects to continue to acquire companies in the future. A slowdown in acquisitions could lead to a slower growth rate. Also, there can be no assurance that (i) future acquisitions will take place on acceptable terms; (ii) newly acquired companies will be successfully integrated into Shred-it’s operations; (iii) Shred-it will fully realize the synergies anticipated from an acquisition; or (iv) the acquired companies will reach a level of operational efficiency similar to Shred-it. Shred-it’s inability to accomplish any of these goals following an acquisition could adversely affect its business, results of operations or financial condition. Additionally, Shred-it’s failure to continue to implement its growth strategy through future acquisitions may result in excess, underutilized capacity at its plants and the loss of value of past capital expenditures.

Shred-it competes with its competitors for acquisition targets, which can increase the price of acquisitions and reduce the number of available acquisition targets. If Shred-it completes acquisitions at higher purchase prices, this could adversely affect its business, results of operations or financial condition.

Failure to successfully integrate acquired operations could negatively impact Shred-it’s balance sheet and results of operations.

Acquisitions are an important element of Shred-it’s growth strategy and the success of any acquisition it makes depends in part on its ability to integrate the acquired company and realize targeted synergies. The process of integrating acquired businesses, particularly in new markets, may involve unforeseen difficulties, such as loss of key employees, and may require a disproportionate amount of the attention of Shred-it’s management’s resources as well as financial and other resources. Shred-it can give no assurance that it will ultimately be able to effectively integrate and manage the operations of any acquired business or realize anticipated synergies. The failure to successfully integrate the cultures, operating systems, procedures and information technologies of an acquired business could have an adverse effect on Shred-it’s balance sheet and results of operations.

Shred-it may be unable to continue its international expansion.

An important part of Shred-it’s growth strategy involves expanding operations in international markets, including in markets where Shred-it currently does not operate. Europe and Asia have been Shred-it’s primary areas of focus for international expansion, and Shred-it has expanded into Australia to a lesser extent. Shred-it may also expand into new countries/markets where it currently does not operate.

 

4


This growth strategy involves risks. Shred-it may be unable to pursue this strategy in the future at the desired pace or at all. For example, Shred-it may be unable to:

 

    identify suitable companies to acquire or invest in;

 

    complete acquisitions on satisfactory terms;

 

    successfully expand its infrastructure and sales force to support growth;

 

    achieve satisfactory returns on acquired companies, particularly in countries where it does not currently operate;

 

    incur additional debt necessary to acquire suitable companies if its unable to pay the purchase price out of working capital or equity securities; or

 

    enter into successful business arrangements for technical assistance or management expertise outside of North America.

Shred-it also competes with other service providers in the physical information management industry for companies to acquire. Some of Shred-it’s competitors may possess substantial financial and other resources. If any such competitor were to devote additional resources to pursue such acquisition candidates or focus its strategy on international markets into which Shred-it would want to expand, the purchase price for potential acquisitions or investments could rise, competition in such international markets could increase and Shred-it’s results of operations could be adversely affected.

Risks from Shred-it’s international operations could impair its ability to expand in certain international markets and adversely affect its business, financial condition and results of operations.

Shred-it has over 200 facilities in 18 countries in North America, Europe, the Middle East, Africa, Asia and Australia. As part of its growth strategy, Shred-it expects to continue to expand its geographic footprint by acquiring or investing in secure information destruction businesses in foreign markets, including countries where it does not currently operate. International operations are subject to numerous risks, including:

 

    economic trends in such international markets;

 

    cultural differences and differences in business practices and operating standards;

 

    legal and regulatory changes, and Shred-it’s costs of compliance with such laws;

 

    compliance with ethical and safe business practices;

 

    foreign currency fluctuations;

 

    political unrest, terrorism and economic instability;

 

    unforeseen liabilities, particularly within acquired businesses;

 

    increase and volatility in labor costs;

 

    the risk that business partners upon whom Shred-it depends for technical assistance or management and acquisition expertise will not perform as expected; and

 

    difficulties attracting and retaining local management and key employees to operate Shred-it’s business in certain countries.

 

5


Any of the foregoing or other factors associated with doing business abroad could adversely affect Shred-it’s business, financial condition and results of operations.

Inability to open new, cost effective operating facilities may adversely affect Shred-it’s expansion efforts.

Shred-it intends to expand its presence in existing markets and enter new markets. The opening of new operating facilities is necessary to gain the capacity required for this expansion. Shred-it’s ability to open new operating facilities depends on its ability to identify attractive locations, negotiate leases or real estate purchase agreements on acceptable terms, identify and obtain adequate utility and water sources and comply with environmental regulations, zoning laws and other similar factors. Any inability to effectively identify and manage these items may adversely affect Shred-it’s expansion efforts, and, consequently, adversely affect its financial performance.

Shred-it depends on a limited number of key personnel who would be difficult to replace.

Shred-it’s committed and experienced management team has been crucial to the growth and ongoing expansion of its business. Shred-it believes its continued success and the execution of its strategic initiatives will depend, in part, on the continued service of its management team. The loss of the technical knowledge, management expertise and knowledge of Shred-it’s operations of one or more members of the Shred-it team could result in a diversion of management resources and negatively affect Shred-it’s ability to develop and pursue its growth strategy, which could adversely affect its business, financial condition and results of operations.

Shred-it’s customer contracts may not always adequately protect its liability, may be terminated by its customers and may contain terms that could lead to disputes in contract interpretation.

Shred-it’s SMB customers generally have standard contracts. A standard contract is typically for a term of three or five years and contains provisions limiting Shred-it’s liability with respect to a data breach. There is no guarantee that the limitation of liability provisions will be enforceable in all instances or, if enforceable, that they would otherwise protect Shred-it from liability. Even though Shred-it has a diversified customer base, a significant number of contract terminations, failure to renew existing contracts or failure to find new customers in a timely manner could adversely affect Shred-it’s business, financial condition and results of operations. In addition, Shred-it’s customers may dispute the interpretation of various provisions in their contracts, introducing uncertainty in the contractual relationship. In the past, Shred-it has had relatively few disputes with its customers regarding the terms of their contracts, and most disputes to date have not been material, but there is no assurance that it will not have material disputes in the future. Although Shred-it maintains a comprehensive insurance program, there is no assurance that it will be able to maintain insurance policies on acceptable terms in order to cover losses arising from customer contract disputes.

Parties with whom Shred-it does business may be subject to insolvency risks or may otherwise become unable or unwilling to fulfill their obligations to Shred-it.

Shred-it is a party to contracts, transactions and business relationships with various third parties, including customers, suppliers, service providers, lenders and participants in joint ventures, strategic alliances and other commercial relationships, pursuant to which such third parties have performance, payment and other obligations to Shred-it. Current economic, industry and market conditions could result in increased risks to Shred-it associated with the potential financial distress or insolvency of such third parties. If any of these third parties were to become subject to bankruptcy, receivership or similar proceedings, the rights and benefits of Shred-it in relation to its contracts, transactions and business relationships with such third parties could be terminated, modified in a manner adverse to Shred-it, or otherwise impaired. There is no assurance that Shred-it would be able to arrange for alternate or replacement contracts, transactions or business relationships on terms as favorable as Shred-it’s existing contracts, transactions or business relationships, if at all. Any inability on Shred-it’s part to do so could adversely affect its business, financial condition and results of operations.

 

6


Fluctuations in foreign exchange rates could adversely affect Shred-it’s financial condition and results of operations.

Shred-it’s functional and reporting currency is the U.S. dollar. Shred-it conducts business operations in many jurisdictions which report results of operations in their respective local currencies. Those local currencies are translated into U.S. dollars at the applicable exchange rates for inclusion in Shred-it’s consolidated financial statements. Shred-it does not currently employ any foreign exchange hedging programs. The results of operations, and certain of Shred-it’s intercompany balances, are exposed to foreign exchange rate fluctuations, and as Shred-it continue to expand its international operations, its exposure to exchange rate fluctuations will likely increase. Upon translation, operating results may differ materially from expectations, and significant shifts in foreign currencies can adversely impact Shred-it’s short-term results, as well as its long-term forecasts and targets.

Unexpected events could disrupt Shred-it’s operations and adversely affect its reputation and results of operations.

Unexpected events beyond Shred-it’s control, including fires or explosions at its facilities, natural disasters such as hurricanes and earthquakes, war or terrorist activities, unplanned power outages, supply disruptions and failure of equipment or information systems, could adversely affect Shred-it’s reputation and results of operations. Shred-it’s customers rely on it to securely destroy their critical information, and these unexpected events could result in customer service disruptions which could negatively impact Shred-it’s reputation and results of operations.

Shred-it faces risks relating to its size and scale.

Shred-it has over 200 facilities in 18 countries. The sheer size of Shred-it’s operations exposes it to the risk that systems and practices will not be implemented uniformly throughout Shred-it and that information will not be shared across the locations and countries in a timely and appropriate manner. Any misalignment in strategic initiatives and/or difficulties or delays in transmission of information could adversely affect Shred-it’s business, financial condition and results of operations.

Inability to innovate and take advantage of technological advancements could adversely affect Shred-it’s business, financial condition and results of operations.

Shred-it is subject to the risk of not being able to optimize innovations in its services, processes and commercial solutions, which may adversely affect its ability to exploit growth opportunities and its business, financial condition and results of operations. In particular, technology continues to evolve rapidly, leading to alternative methods for document and electronic data destruction. Failure to respond to and develop new customer solutions to leverage technological advancements could adversely affect Shred-it’s business, financial condition and results of operations.

Deterioration in labor relations could disrupt Shred-it’s business operations and increase costs, which could decrease liquidity and profitability.

The maintenance of a productive and efficient labor environment and, in the event of unionization of Shred-it’s employees, the successful negotiation of collective bargaining agreements, cannot be assured. Unionization campaigns, protracted and extensive work stoppages or labor disruptions such as strikes or lockouts could have an adverse effect on Shred-it’s business and results of operations.

Change in workers’ compensation rates could lead to higher than expected labor insurance costs.

In order to ensure that its insurance reserves are appropriate, Shred-it uses both internal and external assessments to assess estimated claim costs and liabilities in regard to its workers’ compensation programs on a regular basis. Shred-it’s workers’ compensation rates and costs are positively correlated with historic employee claims. In Canada, workers’ compensation rates and costs are generally determined provincially, while in the U.S. they are privately insured and rates are generally determined by state rating agencies and modified based on actual claims experience. Because Shred-it bases its pricing in part on its estimated labor insurance costs, Shred-it’s

 

7


margins in existing contracts could be higher or lower than they otherwise might be depending on workers’ compensation claims filed by its employees, and could result in reduced margins or unprofitable contracts if the number of workers’ compensation claims results in the labor insurance costs being higher than estimated by Shred-it, which could adversely affect Shred-it’s business, results of operations or financial condition.

Failure to comply with federal, state and provincial regulations to which Shred-it is subject could result in penalties or costs that could adversely affect Shred-it’s results of operations.

Shred-it’s business is subject to complex and stringent state, provincial and/or federal regulations, including employment laws and regulations, minimum wage requirements, overtime requirements, working condition requirements, citizenship requirements, transportation and other laws and regulations. Shred-it has incurred, and will continue to incur, capital and operating expenditures and other costs in the ordinary course of its business in complying with such laws and regulations to which it is subject. Changes in laws, regulations and related interpretations may alter the landscape in which Shred-it does business and may affect Shred-it’s costs of doing business. The impact of new laws and regulations cannot be predicted. Compliance with new laws and regulations may increase Shred-it’s operating costs or require significant capital expenditures. Any failure to comply with applicable laws or regulations could result in substantial fines by government authorities, payment of damages to private litigants, or possible revocation of Shred-it’s authority to conduct its business and operations, which could adversely affect its ability to service customers and its consolidated results of operations.

Compliance with U.S. federal health care reform legislation could result in increased costs.

In March 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 were signed into law in the U.S. (collectively, the “Health Care Reform Laws” or “HCRL”). The HCRL include a number of health-related provisions, including requiring most individuals to have health insurance and establishing new regulations on health plans. Although the HCRL do not mandate that employers offer health insurance, beginning in 2015, penalties will be assessed on employers which do not offer health insurance that meets certain affordability or benefit requirements. Providing such additional health insurance benefits to Shred-it’s employees, or the payment of penalties if such coverage is not provided, would increase Shred-it’s expenses. If Shred-it is unable to raise the rates it charges to its clients to cover this expense, such increases in expense could reduce Shred-it’s profitability. In addition, under the HCRL, employers will have to file a significant amount of additional information with the Internal Revenue Service. These requirements as well as other requirements related to compliance under the HCRL could result in increased costs, expansion of liability exposure and other changes in the way Shred-it provides healthcare and other benefits to its employees.

Failure to comply with certain regulatory and contractual requirements under Shred-it’s government contracts could adversely affect its revenues, operating results and financial position.

Selling services to government customers subjects Shred-it to certain regulatory and contractual requirements. Failure to comply with these requirements could subject Shred-it to investigations, price reductions, up to treble damages, and civil penalties. Non-compliance with certain regulatory and contractual requirements could also result in Shred-it being suspended or barred from future government contracting.

Shred-it may not be able to enforce its intellectual property rights.

The ability of Shred-it to maintain or increase its revenue may depend on its ability to maintain “brand equity,” including through the use of Shred-it’s trademarks. If Shred-it fails to enforce or maintain any of its intellectual property rights, Shred-it may be unable to capitalize on its efforts to establish brand equity. All of Shred-it’s registered trademarks can be challenged pursuant to provisions of applicable laws governing trademarks. If any of Shred-it’s trademarks are ever successfully challenged, this could have an adverse impact on Shred-it.

Shred-it owns a number of trademarks in the jurisdictions in which it operates. However, Shred-it may not own identical and similar trademarks in other jurisdictions or there may be similar or competing trademarks owned by third parties in the jurisdictions in which Shred-it operates or in other jurisdictions. The use of trademarks similar to Shred-it’s trademarks in the jurisdictions in which Shred-it operates or in other jurisdiction could dilute, tarnish or

 

8


diminish the value of its trademarks. If this were to occur, the value of Shred-it’s trademarks may suffer and the results of operations of Shred-it could be adversely impacted. Similarly, negative publicity or events associated with Shred-it may negatively affect the image and reputation of Shred-it in Canada or the other jurisdictions in which it operates, resulting in an adverse effect on Shred-it.

Shred-it may be subject to claims that its technology violates the intellectual property rights of a third party.

Third parties may have legal rights (including ownership of patents, trade secrets, trademarks and copyrights) to ideas, materials, processes, names or original works that are the same or similar to those Shred-it uses. Third parties may bring claims, or threaten to bring claims, against Shred-it that allege that their intellectual property rights have been violated by Shred-it. Litigation, threatened litigation, or other proceedings could be costly and distract management from operating Shred-it’s business. If Shred-it cannot establish its right or obtain the right to license or use the intellectual property on reasonable terms, it may be required to pay licensing fees or design and develop alternative intellectual property at its own expense to mitigate potential harm.

Disruptions in or attacks on Shred-it’s information technology systems could damage its reputation, harm its businesses and adversely affect its results of operations.

Shred-it’s reputation for secure handling of customer information is critical to the success of its business. Shred-it relies heavily on information systems, including SAP, automated route planning software and point-of-sale systems. Although Shred-it has implemented safeguards and taken steps to prevent potential security breaches, its information technology and network infrastructure may be vulnerable to attacks by hackers or breaches due to human error, malfeasance, cyber-attacks, computer viruses, power outages, natural disasters, acts of terrorism or other disruptions. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, Shred-it may be unable to prevent these techniques or to implement adequate preventative measures. A successful breach of the security of Shred-it‘s information systems could lead to theft or misuse of Shred-it’s customers’ proprietary, confidential or sensitive information and result in third party claims against Shred-it or its customers, as well as reputational harm, all of which could adversely affect Shred-it’s businesses, financial condition or results of operations. Further, an actual or perceived security breach affecting one of Shred-it’s competitors even if no confidential information of Shred-it’s customers is compromised, may adversely affect the market perception of Shred-it’s security measures and Shred-it could lose potential sales and existing customers.

Shred-it’s management depends on relevant and reliable information for decision making purposes, including key performance indicators and financial reporting. A lack of relevant and reliable information could preclude Shred-it from optimizing its overall performance. Any significant loss of data, failure to maintain reliable data, disruptions affecting Shred-it’s information systems, or delays or difficulties in transitioning to new systems could adversely affect Shred-it’s business, financial condition and results of operations. In addition, Shred-it’s businesses rely on its computer systems to provide customer information, process customer transactions and provide other general information necessary to manage our businesses. Shred-it‘s ability to continue to operate its businesses without significant interruption in the event of a disaster or other disruption depends in part on the ability of Shred-it’s information systems to operate in accordance with its disaster recovery and business continuity plans. If Shred-it’s information systems fail and its redundant systems or disaster recovery plans are not adequate to address such failures, or if Shred-it’s business interruption insurance does not sufficiently compensate Shred-it for any losses that it may incur, Shred-it’s revenues and profits could be reduced and the reputation of its brands and its business could be adversely affected. In addition, remediation of such problems could result in significant, unplanned capital investments.

Shred-it is subject to litigation risks that could adversely affect its business, financial condition and results of operations.

In the normal course of Shred-it’s operations, Shred-it may become involved in, whether directly or indirectly, named as a party to or the subject of various legal proceedings, including regulatory proceedings, tax proceedings and legal actions relating to its franchisees, personal injuries, property damage, property taxes, land rights, the environment and contract disputes. The outcome with respect to outstanding, pending or future proceedings cannot be predicted with certainty and may be determined in a manner adverse to Shred-it and, as a

 

9


result, could have an adverse impact on its reputation, business and results of operations. Even if Shred-it prevails in any such legal proceeding, the proceedings could be costly which could have an adverse effect on its business, financial condition and results of operations.

Changing fire and safety standards may result in significant expenses in certain jurisdictions.

Shred-it operates over 200 facilities including 57 with plant-based shredding facilities globally. Many of these facilities were built and outfitted by third parties and added to Shred-it’s portfolio as a result of various acquisitions. Some of these facilities may contain fire suppression and safety features that are different from Shred-it’s current specifications and standards for new facilities even though Shred-it believe that all of its facilities were constructed, in all material respects, in compliance with applicable laws and regulations. Nevertheless, local authorities may take the position that the fire suppression and safety features in a particular facility are insufficient and require additional measures to be installed. If additional fire safety and suppression measures beyond Shred-it’s current operating plan were required at a large number of its facilities, the expense required for compliance could adversely affect Shred-it’s business, financial condition or results of operations.

There are potential environmental liabilities relating to Shred-it’s leased real property.

As an operator of leasehold real property, Shred-it faces certain risks, including: uninsured losses or damage to its facilities due to an inability to obtain full insurance coverage on a cost-effective basis for some casualties, such as fires, earthquakes, or any coverage for certain losses, such as losses from riots or terrorist activities; inability to use its facilities effectively and costs associated with vacating or consolidating facilities if the demand for secure information destruction were to diminish because Shred-it’s customers choose other options or because competitors attract Shred-it’s customers; and liability under environmental laws for the costs of investigation and cleanup of contaminated real estate leased by Shred-it, whether or not it knows of, or was responsible for, the contamination, or the contamination occurred while it leased the property. The failure to remove or remediate such substances could result in claims against Shred-it.

Unfavorable changes in taxation laws could adversely affect Shred-it’s financial position

Variation in the taxation laws in the jurisdictions in which Shred-it operates or is otherwise subject to taxation laws could materially affect its financial performance. The interpretation of taxation laws could also change, leading to a change in taxation treatment of investments or activities. Consistent with other companies of comparable size, financing complexity and diversity, Shred-it may be the subject of periodic information requests, investigations and audit activities by tax or revenue collection authorities.

Challenges to tax filing positions could have an adverse effect on Shred-it’s business.

The business and operations of Shred-it and its predecessors are complex and the predecessors have, over the course of their history, undertaken a number of significant financings, reorganizations, acquisitions and other material transactions. In addition, Shred-it’s business and operations are expected to continue in this manner. The computation of taxes payable as a result of these operations and transactions involves many complex factors including the interpretation of relevant tax legislation and regulations. While Shred-it’s management team believes that its provision for taxes is adequate, tax filing positions are subject to review and adjustment by the tax authorities who may challenge Shred-it’s interpretation of the applicable tax legislation and regulations. If any challenge to such tax filing positions were to succeed, it could result in a reassessment of taxes or otherwise have an adverse effect on Shred-it’s tax position.

Shred-it may recognize impairment charges, which could adversely affect its financial condition and results of operations.

Shred-it assesses its goodwill and other intangible assets and its long-lived assets for impairment when required by applicable accounting principles. These accounting principles require that Shred-it record an impairment charge if circumstances indicate that the asset carrying values exceed their estimated fair values. The estimated fair value of these assets is impacted by general economic conditions in the locations in which Shred-it operates.

 

10


Deterioration in these general economic conditions may result in: declining revenue which can lead to excess capacity and declining operating cash flow; reductions in management’s estimates for future revenue and operating cash flow growth; and increases in borrowing rates and other deterioration in factors that impact Shred-it’s weighted average cost of capital. If Shred-it’s assessment of goodwill, other intangible assets or long-lived assets indicates an impairment of the carrying value for which it recognizes an impairment charge, this may adversely affect Shred-it’s consolidated financial condition and consolidated results of operations.

The limits imposed by Shred-it’s insurance policies may adversely affect its business and results of operations.

Shred-it maintains directors and officers insurance, liability insurance, business interruption and property insurance and its insurance coverage reflects deductibles, self-insured retentions, limits of liability and similar provisions. However, there is no guarantee that Shred-it’s insurance coverage will be sufficient, or that insurance proceeds will be paid in a timely manner to Shred-it. In addition, there are types of losses Shred-it may incur which it cannot be insured against or which it believes are not economically feasible to insure against, such as losses due to acts of war and certain natural disasters. If Shred-it incurs these losses, and they are material, they could materially and adversely affect its business, financial condition and results of operations.

Shred-it may have insufficient insurance coverage.

Shred-it will maintain insurance at levels that it believes are reasonable and that are typical for its industry. However, Shred-it cannot give any assurances that its insurance coverage is adequate for any given risk or liability, that such insurance will continue to be available on commercially reasonable terms, that all events that could give rise to a loss or liability are insured or reasonably insurable or that its insurers would be capable of honoring their commitments if an unusually high number of claims were made against their policies. Certain losses, including certain environmental liabilities and business interruption losses, are not covered by insurance. If any such losses occur, they could adversely affect its business, financial condition and results of operations.

 

11



Serious News for Serious Traders! Try StreetInsider.com Premium Free!

You May Also Be Interested In





Related Categories

SEC Filings