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Press release from Marketwire

DirectCash Payments Inc. Announces Results of Operations for the Three Months Ended March 31, 2012

Thursday, May 10, 2012

DirectCash Payments Inc. Announces Results of Operations for the Three Months Ended March 31, 201207:30 EDT Thursday, May 10, 2012CALGARY, ALBERTA--(Marketwire - May 10, 2012) - DirectCash Payments Inc. ("DirectCash" or the "Corporation") (TSX:DCI) today announced consolidated financial results for the three months ended March 31, 2012. DCPayments's consolidated financial statements for the three months ended March 31, 2012 and Management's Discussion & Analysis, as well as additional information about the Corporation are available on SEDAR (www.sedar.com). Financial and Operational Highlights: Canadian business continues to generate solid financial results with Funds from Operations payout ratio of 60% Strong balance sheet Ongoing due diligence on Customers Limited ("Customers") On April 1, 2012 DCPayments entered into an agreement to acquire all of the outstanding shares of Customers for $1.27 Australian dollars per share in cash On April 27, 2012 DCPayments delivered a Binding Commitment from the Bank of Montreal to Customers' Board of Directors and therefore has satisfied the financing condition in the Scheme Implementation Deed Subsequent to the quarter, DirectCash acquired certain assets of a number of privately held corporations engaged in the ATM business for consideration of $711 thousand Management's Commentary"We are excited about our opportunity to leverage our experience and expertise with the potential acquisition of Customers in Australia" said Jeffrey Smith, DirectCash's President and Chief Executive Officer.DirectCash will continue to pursue growth through additional accretive acquisitions as opportunities arise. DirectCash's stable, contracted revenue stream and dominant market positions will continue to provide consistent cash dividends to DirectCash's Shareholders. DirectCash continues to focus on its Canadian and Mexican operations, as well as new geographic markets, such as Australia, to add to recurring services revenue growth and gross profit margins, as demonstrated by the Customers acquisition.Customers Limited AcquisitionOn April 1, 2012 DCPayments announced it entered into an agreement ("Scheme Implementation Deed" or "SID") with Customers (ASX: CUS) whereby DirectCash has agreed to acquire all of the outstanding shares of Customers for $1.27 Australian dollars per share in cash. The total consideration for the purchase of 100% of the fully diluted shares of Customers is approximately $173 million Australian dollars plus debt, which was expected to be $37 million Australian dollars as at the signing of the SID.The acquisition will be implemented through a court-approved Scheme of Arrangement under Australian law and is subject to the approval of Customers' shareholders, relevant Australian court approvals and certain closing conditions contained within the SID.DirectCash announced on April 27, 2012 that it had delivered a Binding Commitment from the Bank of Montreal to Customers' Board of Directors and therefore has satisfied the financing condition in the SID. For additional transaction details, next steps and indicative transaction timetable please refer to the DirectCash press release dated April 1, 2012 and the full text of the SID which can be found under the DirectCash profile on SEDAR at www.SEDAR.com.As a result of the acquisition of Customers, the largest deployer of ATMs in Australia, a total of approximately 6,300 ATM sites and related contracts will be acquired by DirectCash in Australia and New Zealand. The acquisition provides the opportunity to grow the Customers ATM business platform in Australia and capitalize on the less mature Australian market, where transactions and gross profits per ATM are significantly greater than in the mature Canadian ATM market.The transaction is expected to close early in the third quarter of calendar 2012 and is expected to be significantly accretive to DirectCash's funds from operations per share in the first fiscal year following the transaction. DirectCash expects to fund the transaction through a combination of debt and equity financing. Please refer to the full press release available for download from www.SEDAR.com for more details.Subsequent to the quarter, DirectCash entered into a number of forward currency contracts in order to hedge the Australian dollar purchase price related to the acquisition of Customers. As at this date, DirectCash has committed to a number of forward contracts in the amount of AUD $70 million, with settlement dates between June 28, 2012 and July 31, 2012 and forward rates between CAD $1.0090 and CAD $1.0145.Results of Operations for the three months ended March 31, 2012:Three months endedMarch 3120122011Number of machinesATM terminals - active17,6247,671Debit terminals - active13,4013,236Number of transactionsATM transactions7,946,4068,214,126Debit terminal transactions2,666,5632,607,737Prepaid cash card activations756,764814,830Prepaid cash card transactions1,958,2322,121,4391DirectCash has included statistics only for sites that recorded a transaction in the last calendar month of the period indicated.Compared to the prior year, the number of active ATMs decreased by 47. The net decrease can be attributed to the expiry of the contract of one of DirectCash's ATM customers in the first quarter of 2012, which impacted 175 ATM terminal sites partially offset by terminals added due to an acquisition in the fourth quarter of 2011.ATM transactions declined during the period ended March 31, 2012 compared to the prior year period as a result of transactions per ATM in Canada declining in line with industry trends and in Mexico due to declining tourism. Based on statistics provided by Interac, ATM transactions in the Canadian industry as a whole continued their historical decline on a per ATM basis (this results from a combination of a decrease in total transactions and an increase in the number of ATMs deployed). On an industry wide basis, as more ATMs have been added to the Canadian marketplace there has been no corresponding increase in overall industry transactions. DirectCash's prepaid products business and entrance into new geographic markets are offsetting this effect on DirectCash's business.DirectCash's goal in the ATM business is to continue to maintain existing customer relationships, add sites and grow aggregate transactions through accretive acquisitions and to maximize site profitability through cost and quality control. In addition, DirectCash is considering new geographic markets and adding new products and services, to add to recurring services revenue growth and gross profit margins.On a year over year basis, the number of active debit terminals has increased by 165 due primarily to organic growth. Debit terminal transactions are relatively flat for the three months ended March 31, 2012 as compared to the prior year periods. DirectCash continues to pursue organic growth in this business segment and to grow market share by providing retailers with unique products and services to enhance the business viability of the debit terminal for the retailer.Prepaid card activations declined by 7% for the period ended March 31, 2012 compared to the prior year period. Gross profit increased in this line of business due to the addition of new products, including the bank account product offered through DirectCash's strategic alliance with DC Bank and one of DirectCash's significant customers. The MasterCard prepaid card program continues to find traction and displace some debit card activations.The decline in prepaid card transactions for the three months ended March 31, 2012 is due to a promotion held by one of DirectCash's significant customers during the prior year period that was not repeated. Also contributing to the decline was a significant customer in the payday loan industry which has experienced regulatory changes that limit the number of consecutive loans issued and fees that may be collected, as well as the requirement to offer alternatives to prepaid cards. DirectCash is in the process of developing an alternative product that its customers in the payday loan industry may offer its clients. Provincial regulations on fees collected on payday loans may result in a limited number of stores to be closed by a significant customer in one province. Further contributing to the decline was a regulatory change during the period in the tax rebate business in Ontario, in which DirectCash has a customer. This decrease is being offset by growth within existing customer relationships and Australian operations, as prepaid products continue to gain customer acceptance and confidence. Activation and transaction volume figures include both prepaid debit and prepaid credit cards.The following table presents a summary of the DCPayments' selected consolidated financial information for the three months ended March 31, 2012 and 2011:Financial HighlightsThree Months Ended(thousands)March 3120122011RevenuesRecurring services revenue23,90323,042Products revenue3,9345,534Interest income4575Total revenue$27,882$28,651Gross ProfitRecurring services and interest13,57313,347Gross profit margin56.7%57.7%Products232741Gross profit margin5.9%13.4%Total gross profit$13,805$14,088Total gross profit margin49.5%49.2%Operating Expenses & Net Finance costs:Personnel expenses2,7592,682Employee profit sharing plan / Long-term incentive plan520432Other expenses2,0431,787Depreciation of property and equipment1,1711,144Amortization of intangible assets2,6602,876Finance costs344389Unrealized loss (gain) on foreign exchange7-9,5049,310Net income before income taxes$4,301$4,778Income taxes - Current9193Deferred income tax9901,184Net Income$3,220$3,501Net income per share, basic0.230.25Net income per share, diluted0.230.25Add back:Finance costs344389Depreciation of equipment1,1711,144Amortization of intangible assets2,6602,876Income taxes - Current9193Deferred income tax9901,184EBITDA$8,476$9,187EBITDA margin30.4%32.1%Total assets$151,086$157,941Total debt34,50246,245Total debt net of cash(8,485)2,971RevenueTotal revenue decreased by 3% for the three months ended March 31, 2012, as compared to the prior year period. Revenue by line of business, which includes both recurring services and products revenue, is as follows:Revenue by Line of BusinessThree months ended(thousands)March 3120122011ATM Business$13,696$13,081Prepaid products business13,70415,066Debit terminal business482504Total Revenue$27,882$28,651Revenue by typeRecurring services$23,903$23,042Products3,9345,534Interest4575Total Revenue$27,882$28,651Revenue - Recurring ServicesRecurring services revenue relates to revenue earned from transaction processing activities, including DirectCash's ATM, debit terminal and prepaid product lines of business.The increase of 4% over 2011 in recurring services revenue is primarily attributable to the ATM line of business. The increase in ATM recurring services revenue can be attributed to the revenues generated from ancillary revenue as well as acquisitions made in the fourth quarter of 2011. This increase emerges despite reduced transactions in both Canada and Mexico, in line with industry trends. ATM revenues include the revenue from the sale of ATM machines and parts, processing ATM transactions as well as miscellaneous revenues and interest received.The decrease in prepaid products revenue is primarily due to a decline in the sale of prepaid cash cards and a decline in the sale of telephone cards. Additionally contributing to the decrease was the decline in prepaid card activations, which can be attributed to regulations in the payday loan industry, in which DirectCash has a significant customer, that restrict the number of consecutive loans a customer can be issued. Further contributing to the decline was a regulatory change during the period in the tax rebate business in Ontario, in which DirectCash has a customer. Notwithstanding the decline in activations, gross profit increased in this line of business due to the addition of new banking products and services offered through DirectCash's strategic alliance with DC Bank.The 4% decrease in debit terminal revenue for the period ended March 31, 2012 is a result of lower debit terminal sales during the first quarter of 2012.There is historic seasonality in processing transaction volumes, with the highest ATM transaction activity in Canada typically occurring in the second and third quarters of the year. The first and fourth quarters are traditionally DirectCash's weakest quarters in terms of processing transactions and gross profitability. In Mexico, seasonality in the ATM business is the opposite of what is seen from DirectCash's Canadian operations. DirectCash has eliminated the impact of seasonal fluctuations in cash flows to shareholders by equalizing monthly cash dividends.Revenue - ProductsProduct revenue includes sales of ATM machines, debit terminals and related parts, as well as prepaid products, consisting of (a) prepaid cash cards (debit and credit) and (b) prepaid telephone cards (both physical ("hard cards") and electronic ("virtual vouchers")).For the three months ended March 31, 2012 revenue from product sales decreased by 29% compared to the prior year period. The decrease is primarily due to a decline in the sale of prepaid cash cards and a decline in the sale of telephone cards. The decrease in the sale of prepaid cash cards is a result of timing of sales, as customers order intermittently in large quantities to benefit from volume discounts.Gross ProfitsOn an aggregate basis, gross profits have decreased by 2% for the period ended March 31, 2012, as compared to the prior year period. Gross profit by line of business, which includes both recurring services and products revenue, is as follows:Gross profit by Line of BusinessThree months ended(thousands)March 3120122011ATM Business$6,929$7,189gross profit margin50.6%55.0%Prepaid products business6,4886,502gross profit margin47.3%43.2%Debit terminal business388397gross profit margin80.4%78.8%Total Gross Profit$13,805$14,088gross profit margin49.5%49.2%Gross profit by typeRecurring services and interest$13,573$13,347gross profit margin56.7%57.7%Products232741gross profit margin5.9%13.4%Total Gross Profit$13,805$14,088gross profit margin49.5%49.2%Gross Profitability - Recurring ServicesTotal gross profits from recurring services revenue and interest income for the three months ended March 31, 2012 increased by 2% over the prior year period.The increase in gross profits during the period ended March 31, 2012 for recurring services can be attributed to the following factors:(a)fees associated with bank accounts and related products offered by DirectCash Bank to prepaid customers;(b)the impact of the ATM acquisitions made during 2011;(c)settlement on a number of outstanding legal claimsThe debit terminal gross margins increased slightly during the period ended March 31, 2012 as compared to the prior year period as a result of higher per transaction revenues collected during the first quarter of 2012.Gross Profitability - ProductsGross profit from the sale of products for the three months ended March 31, 2012 decreased by 69% from 2011 levels. The decrease can be explained primarily by lower margin contributions on the sale of prepaid cash cards and ATMs as compared to the prior year period. The decrease in the sale of prepaid cash cards is a result of timing of sales, as customers order intermittently in large quantities to benefit from volume discounts.DirectCash has a strategic goal of keeping ATM and debit terminal purchase prices as low as possible for the DirectCash customer in order to maximize the number of machines that can be placed. DirectCash also introduced financing options that enables customers to pay for machines and security upgrades over a period of time. DirectCash believes that this strategy will result in additional long-term revenue generating services contracts.Selling, General & Administrative Expenses ("SG&A")SG&A is made up of personnel and other expenses. For the three months ended March 31, 2012 SG&A expenses increased by 7% over the prior year period.The increase is primarily the result of increased costs related to ongoing acquisition due diligence costs on the acquisition of Customers in Australia, higher salaries and benefits incurred from the addition of employees brought on to assist in DirectCash's growth and implementation of network ATM chip upgrades required to be completed by the end of 2012, additional fees associated with compliance related to Anti-Money Laundering and to the bank account product offered through DirectCash's strategic alliance with DirectCash Bank. Additionally, DirectCash has incurred additional costs associated with ATM security and chip compliance during the period of approximately $500 thousand. Increased sales expenses were incurred as DirectCash moves to regain its presence within northern Canada in the ATM business, with the expiry of the contract of an ATM customer in the first quarter of 2012 that impacted 175 ATMs, and increase its presence within this geographic location in the prepaid products business, which DirectCash believes is a strategic revenue opportunity.As a percentage of gross profits, SG&A was 35% during the three months ended March 31, 2012 compared to 32% for the same period last year.Employee Profit Sharing Plan ("EPSP")Details of the Employee Profit Sharing Plan can be found in the notes to the 2011 Year End Financial Statements.During the 2011 year DirectCash established an EPSP plan under which it receives services from employees as consideration for cash payments paid to the EPSP plan trustee (which in turn are later used by the trustee to purchase shares of DCPayments or to make tax remittances on behalf of the employees). For 2011 and subsequent years, share-based payment plan awards are made pursuant to the EPSP plan.Finance CostsFor the period ended March 31, 2012 finance costs decreased by 12% over the prior year period. The decrease is primarily due to a decrease in interest rates.All DirectCash debt is currently on floating interest rates. A one percent change in interest rates would result in an approximate $107 thousand change in finance costs for the period.Net IncomeNet income for the three months ended March 31, 2012 decreased by 8% compared to the prior year period.The decrease in net income during the quarter ended March 31, 2012 compared to the prior year period is primarily attributable to a decrease in gross profits.The disparity between net income and cash dividends is primarily due to amortization of intangible assets related to ATM, debit terminal and prepaid product contracts. Typically, these contracts include automatic renewals for a further 5-7 year period, and a right of first refusal to match a competitor's bona fide offer on renewal unless the customer terminates the contract within a specified time period. Thus, while a contract acquired by DirectCash may have a fixed initial term (which is the time period over which amortization of this intangible asset occurs) DirectCash's experience is that DirectCash is usually able to keep the applicable ATMs attached to the DirectCash network with no or little capital expenditure. Also, any ATM added by organic growth (i.e. through the DirectCash sales force) has a much lower capital cost than ATM locations added through acquisition.EBITDAFor the period ended March 31, 2012, EBITDA decreased by 8% over prior year levels, which is greater than the respective 2% decrease in gross profits. This reflects the higher SG&A costs, as DirectCash has incurred increased costs related to ongoing acquisition due diligence costs on the acquisition of Customers in Australia. In addition, DirectCash had increased sales expenses as DirectCash moves to regain its presence within northern Canada, with the expiry of the contract of an ATM customer in the first quarter of 2012 that impacted 175 ATMs, and expand DirectCash's presence within this geographic location in the prepaid products business, which DirectCash believes is a strategic revenue opportunity. As a percentage of revenue, EBITDA was 30% during the periods ended March 31, 2012 (2011: 32%).Capital ExpendituresDirectCash incurred the following expenditures of a capital nature:Capital ExpendituresThree months endedMarch 3120122011Per consolidated financial statements:Equipment$1,001$1,346Intangible assets933Acquisitions--$1,010$1,379Split between growth and maintenance:Growth capital$422$669Maintenance capital588710$1,010$1,379Growth capital expenditures relate to acquisitions and other expenditures that increase DirectCash's productive capacity, while maintenance capital expenditures maintain productive capacity at existing levels.Productive capital maintenance expenditures for the period are lower as compared to the prior year period due to increased security infrastructure and ATM hardware upgrade expenditures during 2011. Growth capital expenditures can vary widely between reporting periods due to the intermittent nature and varying size of acquisitions.Liquidity and Capital ResourcesDirectCash believes that the funds generated from operations will be sufficient to allow DirectCash to meet ongoing requirements for working capital, maintenance capital expenditures including investments in technology capital, interest expense, and cash dividends to shareholders.DirectCash's actual cash generated from operations will be dependent upon future financial performance, which in turn will be subject to financial, tax, business and other factors.As of March 31, 2012, DirectCash utilized approximately $34.5 million of total available credit facilities of $100 million. A summary of DirectCash's available credit at March 31, 2012 is as follows: Credit facilities(thousands)UtilizedLimitAvailableRevolving credit facility$1,998$60,000$58,002Acquisition credit facility32,50440,0007,496$34,502$100,000$65,498The revolving credit facility is used for ATM cash loading, working capital requirements and commercial letters of credit. In addition, DirectCash has an outstanding letter of credit in favour of MasterCard International of US$ 2.5 million (CDN$ 2.5 million) relating to DCPayments' prepaid MasterCard program. This credit facility is demand in nature and since October 2011 bears interest at the Bank's prime lending rate plus 0.25%. The rate was reduced from prime plus 0.375%.The acquisition credit facility is demand in nature and is utilized for the acquisition of additional ATM and Debit Terminal network and Prepaid Product assets, and general corporate acquisitions in complimentary business lines. The facility bears interest at the Bank's prime lending rate plus 0.25% or at banker's acceptance rates plus 1.75% per annum. The rate was reduced from prime plus 0.375% in October 2011.Notwithstanding the demand nature of the facilities, there are no scheduled principal repayments.DirectCash is subject to the following primary lending covenants:Lending covenantsMarch 31, 2012Covenant LimitFunded Debt to Recurring Quarterly Revenue1.8:1<10:1Fixed Charge Cover Ratio30.9:1>4:1Senior Debt to EBITDA0.9:1<2:1DirectCash operated well within its loan covenant limits and anticipates continuing to do so in the future. Breach of DirectCash's bank loan covenants could result in the triggering of remedies by DirectCash's lenders, which could negatively impact distribution payments.Additional InformationAdditional information about DirectCash, including DirectCash's Annual Information Form and other public filings is available on SEDAR (www.sedar.com) and on DirectCash's website (www.directcash.net).Non-IFRS MeasuresThere are a number of financial calculations that are not defined performance measurements under IFRS but which DCPayments believes are useful and accepted performance measurements utilized by the investing public in assessing the overall financial performance of corporations.Earnings before interest, taxes, depreciation and amortization ("EBITDA")EBITDA represents Net Income plus finance costs, depreciation, amortization and taxes and is not a defined performance measure under IFRS. DCPayments believes that EBITDA is a useful supplementary disclosure commonly used by the investing community to assess and compare cash flows between entities. DCPayments EBITDA may differ from similar computations as reported by other issuers and, accordingly, may not be comparable to EBITDA as reported by such issuers. The most directly comparable IFRS measure is Net Income. A reconciliation between EBITDA and Net Income is disclosed in the "Financial Highlights" schedule later on.Funds from operations and funds from operations per shareFunds from operations and funds from operations per share are non-IFRS measures used by DCPayments as an indicator of financial performance. Readers are cautioned that funds from operations is not a defined performance measure under IFRS and that funds from operations cannot be assured to continue at equivalent levels in the future. DCPayments calculates funds from operations as equal to the net cash from operating activities before changes in non-cash working capital, after provision for productive capital maintenance capital expenditures (see discussion below). DCPayments' funds from operations and funds from operations per share may differ from similar computations as reported by other issuers and, accordingly, may not be comparable to funds from operations and funds from operations per share as reported by such issuers.Beginning January 1, 2011 (starting with the January 31, 2011 record date), shareholders of DCPayments have received monthly payments in the form of dividends, with the initial monthly dividend set at $0.115 per Common Share. All dividends are eligible dividends for the purpose of the Income Tax Act (Canada) unless indicated otherwise. Dividends are funded from cash flows generated by the operation of the business. As of January 1, 2011, all of the income generated at the level of the various subsidiaries within the DirectCash Group income is taxable by applicable government authorities with the remaining after-tax funds either being retained by the subsidiary or distributed/dividended up to DCPayments (where it can be made available for payment of dividends by DCPayments). Continued future distribution of dividends (and the amount of any dividends) is subject to DCPayments' Board of Directors approval. DCPayments' Board of Directors is not obligated to distribute all net available cash as dividends to shareholders.Productive capital maintenance expendituresDCPayments differentiates capital expenditures between growth and productive capital maintenance ("Maintenance Capital"). There is no such distinction under IFRS. However, DCPayments believes it is important to differentiate between them as maintenance capital expenditures represent a discretionary adjustment to funds from operations while growth capital does not.Maintenance capital expenditures are defined as expenditures required to service and maintain DirectCash's existing productive capacity, while growth capital is expended to increase DirectCash's productive capacity by adding additional sources of revenue not currently in existence. Current measures of productive capacity that DCPayments utilizes include ATMs and debit terminals under contract (see "Operational Highlights"), software and hardware upgrades to existing infrastructure, ATM and debit terminal equipment upgrades necessary to meet changing regulatory requirements, contract extension incentives, and fleet vehicle purchases and upgrades, are some examples of maintenance capital expenditures. Examples of growth capital expenditures include the acquisition of a competitor's assets, the cost of an ATM in a new location, or technology costs related to new sources of revenue.Readers are cautioned that productive capital maintenance expenditure is not a defined performance measure under IFRS. DCPayments computation of productive maintenance capital expenditure may differ from similar computations as reported by other issuers and, accordingly, may not be comparable to maintenance capital expenditures as reported by such issuers.Non-cash working capitalNon-cash working capital is not a defined IFRS measure. DCPayments calculates non- cash working capital as current assets less current liabilities, but excluding cash and credit facilities. A summary of this calculation is provided in the MD&A.Forward-looking StatementsThis Press Release contains certain forward-looking statements relating to future events. Forward-looking statements are subject to numerous risks and uncertainties, certain of which are beyond DirectCash Group's ability to control, including the impact to DirectCash Group's business, general economic conditions, consumer spending, borrowing trends and regulatory changes to name a few. Certain statements that contain words such as "could", "believe", "expects", "expected", "will", "intends", "projects", "anticipates", "estimates", "continues" or similar words relating to matters that are not historical facts constitute "forward-looking information" within the meaning of applicable Canadian securities legislation. In particular, forward-looking information and statements contained in this Press Release include statements related to DirectCash's projected growth in Canada and Mexico in the ATM business, projected growth in the prepaid and debit terminal business, accretive acquisitions on a go forward basis, expansion of DirectCash's merchant base through new and innovative products, entry into new geographic markets, ability to continue to acquire long-term recurring services contracts and expected increase in capital expenditures due to regulatory mandated security upgrade changes are all statements that have been stated or referred to throughout this Press Release. Readers are cautioned that actual results may vary from the forward-looking information provided.Additional information about DCPayments is available on SEDAR (www.sedar.com) or DCPayments website at www.directcash.net.FOR FURTHER INFORMATION PLEASE CONTACT: Brian B. KatholDirectCash Payments Inc.Chief Financial OfficerDirect Telephone: (403) 387-2103(403) 451-3003 (FAX)bkathol@directcash.netORAmanda J. GallacherDirectCash Payments Inc.Investor RelationsDirect Telephone: (403) 387-2158(403) 451-3058 (FAX)investorrelations@directcash.netwww.directcash.net