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Press release from Marketwire

D+H Announces Agreement to Acquire Harland Financial Solutions, U.S. Leader in Lending Compliance Solutions and Core Banking Technology and $600 Million Bought Deal Financing

Acquisition significantly accelerates D+H's strategy to become a leading North American FinTech provider with the addition of mission-critical banking technology solutions and 5,400 U.S. financial institution customers - Enhances diversification by clients, revenue, cash flow and geography with a pro forma client base of over 6,200 in North America - Expected to be immediately accretive to Adjusted Net Income(1) per share and will generate high single-digit accretion in 2014

Tuesday, July 23, 2013

D+H Announces Agreement to Acquire Harland Financial Solutions, U.S. Leader in Lending Compliance Solutions and Core Banking Technology and $600 Million Bought Deal Financing

15:42 EDT Tuesday, July 23, 2013

TORONTO, ONTARIO--(Marketwired - July 23, 2013) -

NOT FOR DISTRIBUTION TO U.S. NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES

Davis + Henderson Corporation ("D+H") (TSX:DH) today has entered into an agreement to acquire Harland Financial Solutions ("HFS"), a leading U.S-based provider of strategic technology, including lending and compliance, core banking, and channel management technology solutions to U.S. banks, credit unions, and mortgage companies. The purchase price for the Lake Mary, Florida-based HFS is approximately US$1.2 billion in cash.

The acquisition enhances D+H's competitive position as a leading North American financial technology ("FinTech") provider to larger financial institutions, community banks and credit unions. In addition to D+H's existing strong relationships with Canadian and U.S. financial institutions, the acquisition provides D+H with:

  • A leading U.S. provider of lending compliance solutions for banks and credit unions of all sizes.
  • Top four core banking technology provider in the U.S. coupled with several additional solutions that support online and mobile banking, online account opening, branch automation and commercial lending, all designed to help banks comply with an increasingly complex regulatory environment.
  • 5,400 U.S. bank and credit union clients, bringing D+H's total client base to over 6,200 financial institutions after accounting for shared relationships.
Financially, the combination of D+H and HFS creates a company with:
  • Pro forma 2012 combined annual revenue of approximately $1.1 billion of which approximately 90% is recurring in nature.
  • 36% of 2012 revenue in the U.S. versus 8% for D+H pre-acquisition2.
  • Pro forma 2012 combined Adjusted EBITDA1 of $291.5 million with 27.6% Adjusted EBITDA Margin and Adjusted Net Income(1) of $123.4 million.
  • Revenue visibility for the next two to three years from (i) HFS' strong backlog1 of revenues estimated to be US$462.7 million and US$399.3 million as at December 31, 2012 and 2011 respectively, and (ii) 80% of HFS' revenue being recurring in nature.
  • Lower service line concentration (payment solutions will decline to 30% of revenue on a pro forma basis from 43% as at December 31, 20122).
  • Potential synergies through cross-selling opportunities.
  • Significant and stable cash flow generation to enable D+H to reduce debt and maintain its current dividend level.

"Acquiring HFS fully aligns with D+H's FinTech vision and our objective of growing our technology capabilities and value proposition in the service of banks and credit unions," said Gerrard Schmid, CEO of D+H. "With proven technology solutions that are mission critical for clients and complementary to our D+H offerings, solid financial performance, including strong cash flows provided under long-term contracts, and an experienced team of approximately 1,350 employees across some 17 locations, HFS adds the scope and scale necessary for D+H to be a trusted market leader in the U.S. We also believe that this union will allow us to create even more differentiated product offerings by combining our market-leading lending solutions with HFS' strong suite of lending products."

"For our shareholders, HFS provides the strategic platform to accelerate the growth and diversification of D+H revenues and cash flows," said Brian Kyle, Chief Financial Officer of D+H, "and importantly, the transaction will be immediately accretive at an Adjusted Net Income per share level. The combination of the strong and growing cash flows of HFS with those of D+H will allow us to target reducing our Debt to EBITDA ratio1 to below 2.5 times from 3.4 times at closing by 2016 while fully supporting our dividend."

Two Strong Platforms for Cross-Selling Opportunities

HFS provides two equally important platforms: lending solutions and core banking technology.

HFS' lending solutions platform includes LaserPro®, the leading automated loan compliance solution in the U.S. D+H's lending solution platform includes market-leading Mortgagebot Point of Sale (POS) and Loan Origination Systems (LOS). By combining these suites, D+H will have a substantial portfolio of best-of-breed solutions to cross-sell to banks and credit unions in the large and growing U.S. lending market.

HFS also commands the number four U.S. market position in core technology, a segment that D+H does not address with its current solutions. Through its PhoenixEFE® technology - the 2012 recipient of the Xcelent Technology Award for Core Banking Solutions - HFS supports mission-critical activities including customer account openings, payment processing, deposit account balancing and interest-rate calculations, and the management of commercial, consumer and mortgage loans.

"Experience shows that the installation of a core banking system drives additional sales of ancillary FinTech solutions. HFS has several competitive solutions such as online and mobile banking, branch automation, business intelligence solutions and lending solutions to complement the sale of a core platform," said Mr. Schmid. "In combination with our D+H products we can address the broader needs of our combined customer base and use our improved value proposition as a springboard to grow in the U.S. market that includes over 13,000 credit unions and community banks."

According to a 2012 survey by the Independent Community Bankers of America, more than half of community bank respondents are using core banking technology systems that are more than 10 years old. These older systems limit a bank's ability to launch new products in a timely manner and to offer an integrated customer experience across channels, are costly to maintain and make it more challenging to remain compliant in an increasingly complex regulatory environment. With the U.S. economy and banking sector continuing to stabilize, market forecasts suggest spending on core banking technology will increase over the next few years.

"HFS' services, including cloud solutions delivered on an account-based fee basis or in house depending on customer preferences, are the perfect complement to D+H's portfolio business solutions, with limited overlap of clients or products," said William W. Neville, President of D+H's U.S. Operations. "The combination of our two firms will create a larger product and service portfolio for U.S. banks and credit unions who will now be able to access integrated, market-leading technology solutions through a single vendor. We are delighted to welcome HFS' leadership and employees to D+H and look forward to working together in providing reliable, effective solutions that are relevant to our customers."

Raju Shivdasani, CEO of HFS, said: "The combination of D+H and HFS will create a powerful combination with both parties bringing significant capabilities to the North American FinTech market."

"We are excited by the prospect of becoming part of D+H and believe that this transaction is right for both our customers and our employees. We are joining a growing, trusted, customer focused organization that is committed to helping clients grow, compete, and offer their desired consumer experience. By combining organizations, we'll be well positioned to do even more for customers in future," said Bill Zayas, Chief Operating Officer of HFS.

Acquisition Terms and Timing

D+H is acquiring 100% of HFS from its parent company, Harland Clarke Holdings Corp., at a purchase price of US$1.2 billion. HFS' Adjusted revenue was $296.8 million and $287.2 million for fiscal 2012 and 2011, respectively. Adjusted revenue for HFS includes non-cash fair value acquisition accounting adjustments, applicable in such periods only, related to deferred revenues. The purchase price for the acquisition will be paid in cash.

Closing of the acquisition is subject to approval under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 in the U.S. and other customary conditions and is expected to occur on or about August 19, 2013.

Acquisition Financing

In conjunction with the acquisition, D+H has entered into an agreement with a syndicate of underwriters (the "Underwriters") co-led by Scotiabank, RBC Capital Markets and CIBC to sell $400,180,000 of subscription receipts (the "Subscription Receipts") and $200,000,000 of 6.00% extendible convertible unsecured subordinated debentures (the "Debentures") on a bought deal basis (together, the "Bought Deal Financing") for gross proceeds of approximately $600 million. In addition, a syndicate of existing and new private placement lenders have offered to provide funding for the acquisition. As these transactions may not be completed by the time of acquisition closing, D+H has obtained a fully committed bridge facility for the full purchase price plus transaction expenses required to close the acquisition (as described in more detail below).

D+H has granted the Underwriters an over-allotment option to purchase from treasury up to an additional 2,805,000 Subscription Receipts and up to an additional $30,000,000 aggregate principal amount of Debentures, on the same terms and conditions as the Bought Deal Financing, exercisable in whole or in part at any time not later than the earlier of (i) the 30th day following the closing date of the Bought Deal Financing, and (ii) the occurrence of a Termination Event3.

Each Subscription Receipt represents the right of the holder to receive, upon closing of the acquisition, without payment of additional consideration, one common share of D+H plus an amount equal to the amount per common share of D+H of any dividends for which record dates have occurred during the period from the closing date of the Bought Deal Financing to the date immediately preceding the closing date of the acquisition, less any withholding taxes, if any.

The Debentures will have an initial maturity date of the Termination Date, which will be automatically extended to September 30, 2018 upon the closing of the acquisition. The Debentures will have an interest rate of 6.00% per annum payable semi-annually in arrears on the last day of March and September in each year commencing March 31, 2014. Each $1,000 principal amount of Debentures is convertible at the option of the holder into approximately 34.4234 common shares of D+H (representing a conversion price of $29.05), subject to adjustment in certain circumstances, at any time prior to the close of business on the earlier of the business day immediately preceding the maturity date and the business day immediately preceding the date fixed for redemption of the Debentures.

The Bought Deal Financing will be offered in all provinces and territories of Canada by way of a short form prospectus to be filed with the securities commissions or similar authorities in each of the provinces and territories of Canada. The offering is subject to the receipt of all necessary regulatory and stock exchange approvals. Closing of the Bought Deal Financing is expected to occur on or about August 13, 2013.

The securities to be offered pursuant to the Bought Deal Financing have not been and will not be registered under the United States Securities Act of 1933, as amended (the "U.S. Securities Act") and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the U.S. Securities Act and applicable state securities laws. This news release shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of the Subscription Receipts or Debentures in the United States or any jurisdiction in which such offer, solicitation or sale would be unlawful.

Concurrently with the announcement of the acquisition, D+H obtained a commitment letter from The Bank of Nova Scotia and Royal Bank of Canada (the "Credit Facility Underwriters") for secured credit facilities in an aggregate amount of $1.56125 billion and US$244 million (collectively, the "Credit Facilities"), $355 million of which replaces D+H's existing revolving credit facility. The Bank of Nova Scotia and RBC Capital Markets, in their capacity as co-lead arrangers and joint bookrunners of the Credit Facilities, intend to syndicate the Credit Facilities to other financial institutions prior to the closing. The Credit Facilities are subject to completion of definitive documentation which shall contain customary representations and warranties and restrictive covenants, including compliance with certain financial ratios, including a Debt to EBITDA ratio for covenant calculation purposes and an interest coverage ratio, and restrictions on further borrowing, acquisitions and dispositions, restrictions on granting liens and other restrictions.

The Credit Facilities are comprised of different components: (i) a non-revolving, non-amortizing term credit facility in the amount of $427.25 million or the U.S. dollar equivalent ("Acquisition Term Facility") to be available in a single drawdown, for the purpose of financing a portion of the purchase price; (ii) a non-revolving, non-amortizing term credit facility in the amount of $179 million ("Debt Refinancing Facility") to be available in a single drawdown, for the purpose of refinancing D+H's existing notes should D+H choose to prepay the outstanding principal amount of such notes; (iii) a non-revolving, non-amortizing term credit facility in the amount of US$244 million ("Additional Notes Bridge Facility") to be available in a single drawdown, for the purpose of financing a portion of the purchase price; (iv) a non-revolving, non-amortizing term credit facility in the amount of $600 million ("Equity Bridge Facility") to be available in a single drawdown, for the purpose of financing a portion of the purchase price and (v) a $355 million revolving, non-amortizing term credit facility with an overdraft facility and fronting fees as per D+H's existing credit facility.

In lieu of drawing on the Additional Note Bridge Facility, D+H expects to issue approximately US$244 million of senior secured guaranteed notes (the "Additional Notes") to certain institutional investors (including to some of its current notes holders) immediately prior to the closing. In the event that the Additional Notes are issued after the Closing, the proceeds therefrom will be used by D+H to repay the drawdown on the Additional Note Bridge Facility.

Raymond James acted as D+H's financial advisor on the transaction.

Second Quarter Financial Results

D+H is scheduled to release its second quarter results after market close on August 7, 2013 to be followed by a conference call on August 8, 2013. D+H anticipates that its results will be in line with management expectations.

Conference Call/Webcast

D+H will host a conference call and webcast with accompanying slides on July 23, 2013 at 4:00 pm (Toronto time). Local and international callers should use (647) 427-7450 while those from elsewhere in Canada or the United States should use (888) 231-8191. An audio webcast with slides will also be available by accessing CNW Group's website:
http://event.on24.com/r.htm?e=658611&s=1&k=94480B1805FEAC2E7C2DA63335D82BDE. The slide deck can be downloaded at www.dhltd.com and will be archived at www.dhltd.com.

For anyone unable to listen to the scheduled call, a rebroadcast will be available at (416) 849-0833 for local and international callers or (855) 859-2056 for all other callers in Canada or the United States with Encore Password 20658559. This rebroadcast will be available until 23:59 ET on July 30, 2013. An archive recording of the conference call will also be available at the above noted web address for one month following the call and a text version of the call will be available at www.dhltd.com.

For more information on this transaction, please visit www.NewFinTechFuture.com.

About D+H

D+H is a leading provider of secure and reliable technology solutions to North American financial institutions with a reputation for being a trusted partner that helps clients build deeper, more profitable relationships with customers based on rich industry and client insight, and consumer knowledge. Our integrated, compliant technology solutions enable clients to grow, compete, and optimize their operations, while our forward looking approach helps them stay ahead of the market and anticipate changing consumer needs.

Today, more than 1,700 banks and credit unions across North America rely on D+H to deliver solutions across three broad service areas: Banking and Lending Technology, Lending Processing Solutions, and Payments Solutions. In 2012, D+H rose to 35th on the FinTech 100, a ranking of the top technology providers to the global financial services industry, and is ranked 24th on the 2013 Branham 300, a listing of the top Canadian ICT companies.

Davis + Henderson Corporation is listed on the Toronto Stock Exchange under the symbol DH. Further information can be found in the disclosure documents filed by Davis + Henderson Corporation with the securities regulatory authorities, available at www.sedar.com.

About Harland Financial Solutions

HFS is a leading United States-based strategic technology partner to financial institution clients of all sizes, including commercial banks, thrifts and credit unions. HFS serves 5,400 financial institutions and counts more than half of the top 100 financial institutions in the United States as its clients. The company supplies comprehensive software solutions and services that help increase institutional performance and drive profitability. Its portfolio of solutions includes branch automation, business intelligence, core processing systems, enterprise content management, financial accounting, lending & compliance, loan servicing, payments, risk management and self service solutions.

HFS is headquartered in Lake Mary, Florida, and operates from offices throughout the U.S., as well as in Dublin, Ireland, Trivandrum, India and Tel Aviv, Israel.

Forward Looking Statements

Certain statements contained in this news release that are not current or historic factual statements constitute forward-looking information within the meaning of applicable securities laws ("forward-looking statements"). Statements concerning D+H's objectives, goals, strategies, intentions, plans, beliefs, expectations and estimates, and the business, operations, financial performance and condition of D+H are forward-looking statements. The words "pro forma", "believe", "expect", "anticipate", "estimate", "intend", "may", "will", "would" and similar expressions and the negative of such expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements are subject to important assumptions, including the following specific assumptions: the ability of D+H to meet its revenue, EBITDA, Adjusted EBITDA, Adjusted Net Income, Adjusted revenue, payout ratio and Debt to EBITDA ratio targets (see "Non-IFRS and Non-U.S. GAAP Financial Measures" below for a more complete description of the terms EBITDA, Adjusted EBITDA, Adjusted Net Income, Adjusted revenue, payout ratio and Debt to EBITDA ratio); D+H's ability to generate sufficient cash flow to maintain its current dividend level and also reduce debt; general industry and economic conditions; changes in D+H's relationship with its customers and suppliers; pricing pressures and other competitive factors; the anticipated effect of the acquisition of HFS on the financial performance of D+H; D+H's belief that there exists a growing market for the replacement of legacy core processing systems; and the ability of D+H to achieve the expected benefits of the HFS acquisition, including (i) through the recognition of backlog as revenue following the closing of the acquisition of HFS, (ii) D+H's ability to enhance its presence in the U.S. FinTech market; (iii) the diversification of D+H's business in terms of service offerings, clients and geographic focus as a result of the acquisition of HFS; (v) the benefits of the acquisition of HFS for D+H from a margin, accretion and cash flow perspective (each of which may be impacted by final financing arrangements, the realization and timing of any potential synergies and the operating performance of D+H and HFS); (vi) D+H's ability to successfully integrate the HFS business with D+H's existing business; and (vii) D+H's expectations regarding enhanced revenue generation through cross-selling opportunities.

D+H has also made certain macroeconomic and general industry assumptions in the preparation of such forward-looking statements. While D+H considers these factors and assumptions to be reasonable based on information currently available, there can be no assurance that actual results will be consistent with these forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of D+H's business, HFS's business or developments in D+H's industry, to differ materially from the anticipated results, performance, achievements or developments expressed or implied by such forward-looking statements. Risks related to forward-looking statements include, among other things, challenges relating to the integration of HFS' business with D+H's existing business; the possibility that D+H may not generate sufficient cash flow following the acquisition to maintain its current dividend level and also reduce debt; challenges presented by declines in the use of personal and business cheques; D+H's dependence on a limited number of large financial institution customers and dependence on their acceptance of new programs; strategic initiatives being undertaken to meet D+H's financial objective; stability and growth in the real estate, mortgage and lending markets; increased pricing pressures and increased competition which could lead to loss of contracts or reduced margins; challenges arising from changes in laws and regulations in Canada and the United States; as well as general market conditions, including economic and interest rate dynamics.

Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Forward-looking statements are based on management's current plans, estimates, projections, beliefs and opinions, and D+H does not undertake any obligation to update forward-looking statements should assumptions related to these plans, estimates, projections, beliefs and opinions change except as required by applicable securities laws.

All of the forward-looking statements made in this news release are qualified by these cautionary statements and other cautionary statements or factors contained herein, and there can be no assurance that the actual results or developments will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, D+H.

Non-IFRS and Non-U.S. GAAP Financial Measures

This news release makes reference to certain non-IFRS financial measures. There non-IFRS financial measures are not recognized measures under IFRS, do not have a standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies. Rather, there measures are provided as additional information to complement IFRS measures by providing further understanding of operations from management's perspective. Accordingly, non-IFRS measures should never be considered in isolation nor as a substitute to using net income as a measure of profitability or as an alternative to the IFRS consolidated statements of income or other IFRS statements. Management presents non-IFRS measures, specifically EBITDA, Adjusted EBITDA, Adjusted Net Income, Adjusted Net Income per share, Adjusted revenue, payout ratio and Debt to EBITDA ratio as it believes these supplementary disclosures provide useful additional information related to the operating results of D+H and uses these measures of financial performance as a supplement to the consolidated statements of income of D+H. The measures reported in the pro forma summary financial information tables herein reflect D+H and HFS as a combined entity.
The definitions of the non-IFRS measures contained this news release are as follows: (i) "EBITDA" which is calculated as net income, excluding interest, taxes, depreciation and amortization and fair value adjustments of interest-rate swaps which are directly related to interest expense, income from investment in an associate, gain on remeasurement of previously held equity interest in an associate and income (loss) from discontinued operations; (ii) "Adjusted EBITDA" which is calculated as EBITDA adjusted to remove the effect of purchase accounting on the fair value of acquired deferred revenue, acquisition-related and other charges, including expenses incurred in connection with cost-realignment initiatives, corporate development expenses related to strategic acquisition initiatives, certain retention and incentive expenses, transaction costs and business integration costs incurred in connection with acquisitions, all of which are not considered to be incurred in the normal course of operations and are not indicative of the underlying business performance; (iii) "Adjusted EBITDA Margin" which is calculated as Adjusted EBITDA divided by Adjusted revenue (as defined herein); (iv) "Adjusted Net Income" which is calculated as net income after removing the impacts of purchase accounting adjustments related to the fair value of deferred revenue and other non-recurring items, certain non-cash charges such as amortization of intangibles from acquisitions and fair value adjustments of interest-rate swaps and certain items of note such as acquisition-related and other charges, discontinued operations, including tax effects of these items and tax effects of acquisitions and corporate conversion and "Adjusted Net Income per share" which is calculated as Adjusted Net Income divided by the weighted average number of issued and outstanding Common Shares during the relevant financial period; (v) "Adjusted revenue" which is calculated as revenue after removing the effect of purchase accounting on the fair value of acquired deferred revenue; (vi) "payout ratio" which is calculated as annual dividend per share divided by Adjusted net income per share; and (vii) "Debt to EBITDA ratio" which is calculated as the sum of all interest bearing debt (excluding convertible debentures which are considered to be equity for the purposes of this calculation) of D+H on a consolidated basis over EBITDA (with adjustments). Investors are directed to the prospectus to be filed in connection with the offering for the relevant reconciliations.

In addition, this news release contains information with respect to HFS which includes certain adjusted financial measures which are not defined under U.S. GAAP, such as "backlog", which is calculated as contracted products, maintenance, outsourced services and professional services prior to revenue recognition and/or delivery. In management's view, backlog provides useful additional financial information related to the long-term performance prospects of the HFS business. However, backlog has limitations as an analytical tool and does not have any standardized meaning prescribed by U.S. GAAP. As such, investors should not consider this measure in isolation or as a substitute for analysis of results as reported under U.S. GAAP.

1 These financial measures are not defined under IFRS. See "Non-IFRS and Non-U.S. GAAP Financial Measures".

2 Calculations including percentages exclude revenue related to D+H's non-strategic businesses (previously reported by D+H as business services solutions and loan servicing) which were divested on May 10, 2013.

3 A Termination Event will have occurred if (i) the closing of the acquisition does not occur by 5:00 p.m. (Toronto time) on February 28, 2014, (ii) the stock purchase agreement is terminated at any earlier time, or (iii) D+H advises the lead Underwriters or announces to the public that it does not intend to proceed with the acquisition. The date upon which such event occurs is the "Termination Date".

FOR FURTHER INFORMATION PLEASE CONTACT:

Contact Information:
Davis + Henderson Corporation
Brian Kyle
Chief Financial Officer
investorrelations@dhltd.com


Investor Relations
Davis + Henderson Corporation
Richard Colgan
Manager, Investor Relations
investorrelations@dhltd.com


Media
Davis + Henderson Corporation
Melissa Dinsmore
VP Corporate Affairs
melissa.dinsmore@dhltd.com

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