DirectCash Income Fund announces results of operations for the three months and year ended December 31, 2008
TSX: DCI.UN
CALGARY, March 19 /CNW/ - DirectCash Income Fund ("DirectCash" or the
"Fund") today announced consolidated financial results for the three months
and year ended December 31, 2008. The Fund's audited consolidated financial
statements for the year ended December 31, 2008 and Management's Discussion &
Analysis, as well as additional information about the Fund are available on
SEDAR (www.sedar.com).
Financial Highlights and Operational Achievements in 2008:
Financial Highlights Q4 - 2008 versus Q4 - 2007
- Increased EBITDA 19.3% from $5.9 million in 2007 to $7.0 million
in 2008
- Improved distributable cash flow payout ratio to 69.4% (2007 - 86.6%)
Financial Highlights 2008 compared to 2007:
- Acquired $6.85 million of ATM terminal assets
- Increased EBITDA 10.9% from $23.4 million in 2007 to $26.0 million
in 2008
- Improved distributable cash flow payout ratio to 76.4% (2007 - 85.3%)
Operational Achievements 2008 compared to 2007:
- Start up of a new ATM business operation in Mexico
- Added 657 ATMs to the existing network representing an 11.7% increase
- Increased ATM transactions processed by 2.5%
- Increased active Debit terminals by 331 or 11.2%
- Increased Debit terminal transactions processed by 28.2%
- Increased Prepaid cash card transactions processed by 30.0%
Management's Commentary
"Our business has demonstrated the ability to deliver consistent cash
flows and generate moderate growth in 2008. We are excited about our continued
ability to grow our distributable cash flow and decrease our payout ratio,
which was 76.4% in 2008 (85.3% in 2007). Our prepaid MasterCard products
demonstrated strong growth in 2008. As well our ATM opportunities in Mexico
have progressed well and we will be in a position to start reporting on
operations in the first quarter of 2009. Our results in 2008 show that we run
a stable contracted cash flow business with consistent growth and operate our
business from a sound balance sheet position." said Jeffrey Smith,
DirectCash's President and Chief Executive Officer.
The fourth quarter of 2008 and the results for the year ended December
31, 2008 continue to demonstrate the Fund's ability to generate consistent
financial performance for our unitholders. In our ATM business we have
increased the aggregate amount of transaction levels on a year over year
comparison, but have seen a decline in average transactions on a per ATM
basis. The business focus will continue to be the growth of sites both
organically and via accretive acquisitions, and to maximize site profitability
through cost and quality control. We are also looking to enter into new
markets, such as Mexico which represents an excellent growth opportunity for
the Fund. The Mexican market is at a similar stage of development as Canada's
was in the 90's. The expectation is to operate initially in this market at
break-even, with the expectation of strong earnings contributions thereafter.
At the end of 2008 approximately 70 ATM's were in operation.
In the ATM line of business gross profits were slightly lower in the
fourth quarter and for the year compared to last year. This is principally a
result of the inventory obsolescence write downs and fourth quarter foreign
exchange losses. The ATM business, which is the backbone of the Fund,
continues to generate consistent performance.
The rollout of our prepaid MasterCard product began in the third quarter
of 2007 and has proven to be a very successful addition to our prepaid product
line business. Revenue from a full year of operations in the prepaid
MasterCard products business helped drive the prepaid products business top
line revenue and gross profit margin growth in 2008. The prepaid products
business is well positioned to continue to make strong gains, particularly as
our prepaid MasterCard product continues to mature. We continue to add new
products and relationships outside of our traditional market focus. It is our
intention to leverage our relationship with DirectCash Bank ("DC Bank") to
offer additional products and services previously unavailable to DirectCash as
the necessary business relationships required with a Canadian chartered bank
were unavailable to us prior to DC Bank.
In the Debit terminal business we continue to grow the recurring services
revenue number and gross profit through increasing the number of terminals and
transactions.
Distributable cash flow per unit for the fourth quarter was $0.50
compared to $.40 in 2007 and for the year distributable cash flow per unit was
$1.80 compared to $1.62 in 2007.
Selected Financial Information
The following table provides selected financial information for the three
months ended and for the years ended December 31, 2008 and 2007.
Selected financial information
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(thousands of Canadian Three months ended Years ended
dollars, except per December 31 December 31
unit amounts) 2008 2007 2008 2007
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Financial Highlights (unaudited) (unaudited) (unaudited) (unaudited)
Revenue
Recurring services
revenue $ 16,302 $ 14,397 $ 63,160 $ 55,380
Products revenue 5,822 6,281 25,081 25,343
Interest income 102 197 531 753
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Total revenue $ 22,226 $ 20,874 $ 88,772 $ 81,476
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Gross profit -
Recurring services
and interest $ 9,613 $ 8,467 $ 36,917 $ 33,843
Gross profit margin 58.9% 58.0% 58.5% 60.3%
Gross profit -
products 226 528 1,453 2,277
Gross profit margin 3.9% 8.4% 5.8% 9.0%
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Total gross profit $ 9,839 $ 8,995 $ 38,370 $ 36,120
Total gross
profit margin 44.3% 43.1% 43.2% 44.3%
Expense and other
income:
Selling, general
and administrative 2,854 2,676 11,494 11,130
Long-term
incentive plan (15) 338 916 1,467
Interest 475 613 2,012 2,208
Depreciation of
equipment 674 599 2,512 2,367
Amortization of
intangible assets 5,071 4,725 19,420 18,244
Other expense - 1,855 - 1,855
Other income - (1,739) - (1,739)
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Net earnings/(loss) $ 780 $ (73) $ 2,016 $ 589
Net earnings/(loss)
per unit $ 0.06 $ (0.01) $ 0.16 $ 0.05
Add back:
Interest 475 613 2,012 2,208
Depreciation of
equipment 674 599 2,512 2,367
Amortization of
intangible assets 5,071 4,725 19,420 18,244
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EBITDA $ 7,000 $ 5,865 $ 25,960 $ 23,408
EBITDA margin 31.5% 28.1% 29.2% 28.7%
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Total assets at
December 31 $ 121,927 $ 135,586 $ 121,927 $ 135,586
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Total debt at
December 31 $ 42,635 $ 35,680 $ 42,635 $ 35,680
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Total debt net of
cash at December 31 $ 20,731 $ 19,644 $ 20,731 $ 19,644
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For purposes of comparison, we have provided the following operational
data:
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Three months ended Years ended
Operational Highlights December 31 December 31
2008 2007 2008 2007
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(unaudited) (unaudited) (unaudited) (unaudited)
Number of machines
- end of period
ATM terminals 6,270 5,613 6,270 5,613
ATM terminals -
active in past
30 days(1) 5,884 5,273 5,884 5,273
Debit terminals 3,294 2,963 3,294 2,963
Debit terminals -
active in past
30 days(1) 3,138 2,879 3,138 2,879
Number of transactions
for the period
ATM transactions 7,452,641 7,153,294 29,763,683 29,042,773
Debit terminal
transactions 2,473,180 2,130,176 9,537,739 7,441,176
Prepaid cash card
activations 664,441 569,709 2,611,462 2,191,135
Prepaid cash card
transactions 1,567,138 1,319,069 6,461,591 4,970,375
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(1) In addition to total ATM and Debit terminal counts, DirectCash has
included statistics for sites that only recorded a transaction in the
past calendar month in order to provide comparison to other industry
players in the financial transaction processing business, who record
sites as active in this manner. This has the impact of eliminating
some seasonal sites or sites temporarily dormant for a number of
reasons from the count, resulting in a net decrease in ATM and Debit
terminal totals of 386 (2007 - 340) and 156 (2007 - 84) respectively.
On a year over year basis, the number of ATMs under contract increased by
657, of which the majority of the additions came from acquisitions. The sites
that were active in the month of December, on a year over year comparison,
showed an increase of 611 or 11.6%. ATM transactions for the three month
period ended December 31, 2008 were up 4.2% and for the year 2.5% when
compared to the prior year period. The increase in ATM transactions reflects
the impact of the February and June ATM acquisitions. ATM fee revenues per
transaction remained constant in 2008 when compared to 2007. ATM transactions
have declined in the network on a per unit basis from the prior years as we
see the impact of a maturing ATM market in Canada. As more ATM's are added to
the Canadian market place there has been no corresponding increase in overall
transactions. The Fund's focus in this line of business is to continue to add
sites and grow aggregate transactions both organically and through accretive
acquisitions and to maximize site profitability through cost and quality
control. In addition, the Fund is also looking at entering into new geographic
markets, such as our Mexican operation which will be adding to our recurring
services line revenue growth in 2009, starting in the first quarter.
The year over year increase in debit terminal count of 331 units is due
to organic growth. The respective 16.1% and 28.2% respective growth in
transactions for the three months and year ended December 31, 2008 is
reflective of the higher numbers of devices deployed as well as higher per
average transactions in the newly acquired and newly deployed devices.
DirectCash continues to pursue organic growth in this area 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.
The respective 16.6% and 19.2% increase in prepaid cash card activations
for the three months and year ended December 31, 2008 continues to reflect the
growth in new customer relationships and growth within existing relationships.
Activation and transaction figures include both prepaid debit and prepaid
credit cards. The prepaid MasterCard program continues to find traction and
displace some debit card activations. The respective 18.8% and 30.0% increases
in prepaid cash card transactions for the three months and year ended December
31, 2008 are due to the same reasons noted above for the increase in prepaid
cash card activations as well as an increase in transactions per card as
prepaid products continue to gain consumer acceptance and confidence.
DirectCash continues to pursue avenues of growth in the prepaid cash card
business as this segment of the business provides numerous growth
opportunities.
Results of Operations for the three months and year ended
December 31, 2008
Revenue
On an aggregate basis, revenues have increased by 6.5% and 9.0%
respectively for the three months and year ended December 31, 2008, as
compared to the prior year. Revenue by line of business, which includes both
recurring services and products revenue, is as follows:
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Three months ended Years ended
Revenue by LOB December 31 December 31
(thousands): 2008 % change 2007 2008 % change 2007
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(unaudited)
ATM Business $ 9,733 5.9% $ 9,193 $38,220 2.0% $37,472
Prepaid products
business 12,021 6.4% 11,295 48,791 15.1% 42,408
Debit terminal
business 472 22.3% 386 1,761 10.3% 1,596
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Total Revenue $22,226 6.5% $20,874 $88,772 9.0% $81,476
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Revenue by type
(thousands)
Recurring services $16,302 13.2% $14,397 $63,160 14.0% $55,380
Products 5,822 -7.3% 6,281 25,081 -1.0% 25,343
Interest 102 -48.0% 196 531 -29.5% 753
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Total Revenue $22,226 6.5% $20,874 $88,772 9.0% $81,476
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Revenue - Recurring Services
Recurring services revenue relates to revenue earned from transaction
processing activities, including ATM, debit terminal and prepaid product
transactions. For the three months and year ended December 31, 2008 recurring
services revenue rose by $1.9 million (13.2%) and $7.8 million (14.0%)
respectively over the prior year.
For the three months ended December 31, 2008, the 13.2% increase in
recurring services revenue is attributable to prepaid products revenue and in
particular the growth in the prepaid MasterCard debit and credit cash card
product, with the balance primarily attributable to increases in ATM services
revenue. The increase in ATM revenues is attributable to the acquisitions made
in early and mid 2008.
For the year ended December 31, 2008, the 14.0% increase in recurring
services revenue is again primarily attributable to the prepaid products
business segment with the largest contribution coming from the prepaid
MasterCard products. The growing acceptance of the MasterCard prepaid products
combined with the growth of our merchants locations will continue to
contribute to the growth of our recurring services revenue for this business
segment. The year over year increase in ATM revenues for the year is again
attributable to the acquisitions made during the year.
There is historic seasonality of processing transaction volumes, with the
highest ATM transaction activity typically occurring in the months of March,
April, July and August, and the lowest activity typically occurring in the
months of November, December, January and February. The first and fourth
quarters are traditionally DirectCash's weakest quarters in terms of
processing transactions and gross profitability. The Fund has eliminated the
impact of seasonal fluctuations in cash flows to Unitholders by equalizing
monthly cash distributions. This seasonality is considered when determining
levels of available cash at the end of each reporting period.
Revenue - Products
Product revenue includes sales of ATMs and related parts, debit terminals
and related parts, and prepaid products, which includes the sale of cash cards
(debit and credit) and prepaid telecommunications products, both physical
("hard phone cards") and electronic ("virtual phone card voucher").
For the three months ended December 31, 2008 revenue from product sales
was down 7.3% or $459 thousand compared to the prior year period, with lower
ATM and debit terminal product sales, lower hard card mobility and long
distance sales offset partially by higher virtual phone card voucher sales.
For the year, product revenues declined marginally by 1.0% or $262
thousand compared to the prior year. Lower ATM and debit sales were partially
offset by higher prepaid product sales during the year. The decline in ATM and
debit terminal sales is primarily attributable to lower ATM and debit terminal
product sales as the business model continues to lean towards full placement,
that is, where DirectCash owns and maintains the products, and the rental of
units versus the outright sale of the units. The improvement in prepaid
product sales is primarily attributable to a full year of MasterCard hard card
sales compared to the prior year, as the MasterCard program was started in
late 2007.
Interest Income
Interest income has declined significantly on a quarter over quarter
basis and for the full year as a result of the impact of lower interest rates
and also a result of the lower amount of restricted funds being held in the
prepaid card business.
Gross Profits
On an aggregate basis, gross profits have increased by 9.4% and 6.2%
respectively for the three months and year ended December 31, 2008, as
compared to the prior year. Gross profit by line of business, which includes
both recurring services and products revenue, is as follows:
Gross profit by line of Business:
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Three months ended Years ended
Gross profit by December 31 December 31
LOB (thousands): 2008 % change 2007 2008 % change 2007
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(unaudited)
ATM Business $ 5,442 -0.8% $ 5,487 $22,327 -1.9% $22,757
gross profit
margin 55.9% 59.7% 58.4% 60.7%
Prepaid products
business 4,050 23.2% 3,288 14,876 20.4% 12,355
gross profit
margin 34.4% 29.1% 30.5% 29.1%
Debit terminal
business 347 58.4% 219 1,167 15.8% 1,008
gross profit
margin 73.5% 56.7% 66.3% 63.2%
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Total Gross Profit $ 9,839 9.4% $ 8,995 $38,370 6.2% $36,120
gross profit
margin 44.3% 43.1% 43.2% 44.3%
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Gross profit by
type (thousands)
Recurring services
and interest $ 9,613 13.5% $ 8,467 $36,917 9.1% $33,843
gross profit
margin 58.9% 58.0% 58.5% 60.3%
Products 226 -57.2% 528 1,453 -36.2% 2,277
gross profit
margin 3.9% 8.4% 5.8% 9.0%
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Total gross profit $ 9,839 9.4% $ 8,995 $38,370 6.2% $36,120
gross profit
margin 44.3% 43.1% 43.2% 44.3%
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Gross Profitability - Recurring Services
Total gross profits realized from recurring service and interest revenues
for the three months and year ended December 31, 2008 increased 13.5% and 9.1%
respectively over the comparative prior year periods due to a combination of
organic growth and acquisitions resulting in higher ATM and debit terminal
transactions and higher prepaid cash card activation and transaction volumes
when compared to the quarter and full year prior periods. The increased
volumes also contributed to higher costs of goods sold and operating costs.
Gross profit margins on a quarter over quarter comparison were slightly
higher as a result of higher prepaid product net contributions in the fourth
quarter of 2008. Gross profit margins for the year were slightly lower
primarily attributable to the prepaid products line of business product shift
towards lower margin, higher volume transactions associated with the
MasterCard prepaid products. The increase in overall transaction levels
continues to reflect in the increase in the gross profit margin on a quarter
over quarter comparison for the current year and year to date.
Gross Profitability - Products
Gross profit from product revenues for the three months and year ended
December 31, 2008 was below 2007 levels. On a year to date basis, gross profit
margins were down 36.2% on a margin decline of $824 thousand. For the fourth
quarter the gross profit margin declined 57.2% or $302 thousand. The decline
in gross profit margins can be explained in two parts, a shift in business
focus to sales of electronic virtual phone card vouchers and less emphasis on
the sales of ATM's and debit terminals as the business model continues to lean
towards full placement and the rental of units. The second reason for the
decline in gross profit margins in the products segment of the business in
2008 relates to the additional costs DirectCash is incurring as a result of
the inventory obsolescence write downs related to upgrading the ATM inventory
to meet next generation Chip and Pin technology as mandated by Interac,
MasterCard and VISA as well as recognizing equipment that no longer meets the
requirements for site deployment. The total amount of inventory written off in
2008 was $435 thousand with $131 thousand being the amount written off in the
fourth quarter of 2008. In addition in the fourth quarter of 2008 DirectCash
incurred foreign exchange losses on supplier purchases as the Canadian dollar
weakened against the U.S dollar.
DirectCash has a strategic focus 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. By maintaining this
strategy for this part of the business, we believe that this will assist the
Fund in acquiring additional long-term revenue generating recurring services
contracts.
Selling, General and Administrative expenses ("SG&A")
For the three months and year ended December 31, 2008 SG&A expenses
increased by $178 thousand or 6.7% and $364 thousand or 3.2% respectively from
the prior year periods. The increase on a quarter over quarter comparison is a
combination of higher salaries and recruitment costs ($83 thousand) as well as
higher general office expenses ($95 thousand). Year over year expenses are
running on track with Calgary's CPI of 3.2% and slightly higher than the
Canadian CPI average for 2008 of 2.4%. Higher legal and professional services
costs were incurred ($477 thousand) principally as a result of litigation
related to ATM site contracts. General operating expenses, principally utility
and building maintenance costs ($141 thousand) were also up in 2008 when
compared to 2007. These cost increases were partially offset by lower salaries
and benefit costs. As a percentage of gross profits, SG&A decreased slightly
during the three months ended December 31, 2008 to 29.0% (2007 - 30.0%) from
29.8% (2007 - 30.8%) during the prior year.
Long-term incentive plan
DirectCash has adopted a long-term incentive plan ("LTIP") as a benefit
plan to provide eligible participants with compensation opportunities that
will encourage ownership of Units, enhance DirectCash's ability to attract,
retain and motivate key personnel, and reward senior management for
significant performance that results in the Fund exceeding its per Unit
distributable cash flow targets.
Pursuant to the LTIP, DirectCash sets aside a pool of funds which is
determined based upon the amount by which the Fund's per Unit distributable
cash flow exceeds certain defined threshold amounts per below:
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Percentage by which Maximum proportion of excess
distributable cash flow per distributable cash available for
Unit exceeds base threshold(1) LTIP payments
------------------------------- ----------------------------------------
5% or less 0%
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greater than 5% and up to 10% 10% of any excess over 5%
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greater than 10% and up to 20% 10% of any excess over 5% to 10%, plus
20% of any excess over 10% to 20%
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greater than 20% 10% of any excess over 5% to 10%, plus
20% of any excess over 10% to 20%, plus
30% of any excess over 20%
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(1) $1.44 per Unit per fiscal year (2007 - $1.20 per Unit)
The LTIP base threshold is periodically reviewed for appropriateness
relative to the market and compensation requirements. With that perspective in
mind the Fund increased the base threshold at the end of 2008 from $1.32 to
$1.44 to reflect current market conditions.
For the year ended December 31, 2008, total LTIP expense awarded was
$915,885 (2007 - $1,466,968), comprised of $1,017,750 (2007 - $1,478,622)
related to financial performance, less net proceeds of $101,864 (2007 -
$11,654) from unvested Units sold in the open market. No unvested Units were
reallocated to other participants.
EBITDA
For the three months and year ended December 31, 2008, EBITDA increased
by 19.3% and 10.9% respectively from prior year levels. This is higher than
the respective increase in gross profits of 9.4% and 6.2% for the comparative
periods. This is a result of the lower LTIP cost in the fourth quarter and for
the year partially offset by higher SG&A costs. As a percentage of revenue,
EBITDA was higher for the three months and year ended December 31, 2008 at
31.5% (2007 - 28.1%) and 29.2% (2007 - 28.7%). This reflects the higher gross
profit contributions for the quarter and full year as well as the lower LTIP
expense in 2008 compared to 2007 offset by the higher SG&A costs.
Interest expense
For the three months and year ended December 31, 2008 interest expense is
lower by 22.5% ($138 thousand) and 8.9% ($196 thousand) respectively when
compared to the prior year periods. The Fund is benefitting from the lower
interest rate environment in the second half of 2008 as the Bank of Canada has
aggressively reduced interest rates (See "Liquidity and Capital Resources").
The increase in the use of our acquisition credit facility is the result of
acquisitions undertaken in 2008. All DirectCash debt is currently on floating
interest rates. A one percent change in interest rates would result in an
approximate $400 thousand change in interest expense based upon the current
debt level at December 31, 2008.
Net Earnings
Net earnings for the three months and year ended December 31, 2008 were
$780,287 and $2,016,267 respectively, versus a loss of $(73,257) and earnings
of $589,276 during the prior year. Earnings for the quarter and year to date
before the inventory obsolescence write downs would have been $911,763 and
$2,452,223. The disparity between net earnings and cash distributions is
primarily due to the amortization of intangible assets related to ATM, debit
terminal and prepaid product site contracts. Typically, these contracts
include automatic renewals for a further minimum five-year period (new
contracts are six years) unless the customer terminates the contract within a
specified time period and include a right of first refusal to match a
competitor's bona fide offer on renewal, which Management believes could
result in the assets having a longer life than the period they are amortized
over.
Standardized Distributable Cash Flow and Distributable Cash Flow per Unit
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Three months ended Years ended
(thousands, except for December 31 December 31 Cumula-
per unit amounts) 2008 2007 2008 2007 tive(3)
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Per consolidated
financial statements:
Net earnings/(loss) $ 780 $ (73) $ 2,016 $ 589 $ 5,959
Add/(Deduct):
Minority interest - - - - 838
Depreciation of
equipment 674 599 2,512 2,367 7,814
Amortization of
intangible
and other assets 5,071 4,725 19,420 18,244 68,562
Changes in non-cash
working capital (151) 137 1,132 (756) (1,381)
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Cash provided by
operations: $ 6,371 $ 5,388 $ 25,080 $ 20,444 $ 81,792
Productive capacity
maintenance (323) (278) (1,414) (998) (4,143)
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Standardized
distributable
cash flow $ 6,048 $ 5,110 $ 23,666 $ 19,446 $ 77,649
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Per unit $ 0.4851 $ 0.4099 $ 1.9000 $ 1.5600 $ 6.2274
Changes in non-cash
working capital 151 (137) (1,132) 756 1,385
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Distributable Cash Flow $ 6,199 $ 4,973 $ 22,534 $ 20,202 $ 79,034
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Per Unit $ 0.4970 $ 0.3984 $ 1.8052 $ 1.6185 $ 6.3385
Distributions declared $ 4,302 $ 4,303 $ 17,209 $ 17,211 $ 63,699
Distributions declared
per unit $ 0.3450 $ 0.3450 $ 1.3800 $ 1.3800 $ 5.1086
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Standardized
Distributable Cash
Flow Payout ratio 71.1% 84.2% 72.6% 88.5% 82.0%
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Distributable Cash
Flow Payout Ratio 69.4% 86.6% 76.4% 85.3% 80.6%
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(3) Since the Fund's initial public offering in December, 2004.
Distributions typically exceed net earnings as a result of non-cash
expenses, such as depreciation of equipment and amortization of intangible
assets. These non-cash expenses result in a reduction to net earnings, with no
impact on cash flow from operating activities. DirectCash's policy is to
distribute all available cash from operations after cash required to maintain
productive capacity, debt repayments, working capital reserves and other
reserves as considered advisable by DirectCash's Board, which reflects the
difference between distributions declared and distributable cash flow. The
lower distributable cash flow payout ratios in 2008 versus 2007 reflect the
impact of the positive cash flow growth impact on distribution levels in 2008
as compared to the prior year.
Since inception, the Fund has distributed 80.6% of its distributable cash
flow to holders of units, exchangeable partnership units and Class B
subordinated partnership units.
Cash distributions and productive maintenance capital programs have been
historically funded via cash from operations, while growth capital
expenditures have primarily been funded with debt. Over time, additional
borrowings and equity issues may be required to increase productive capacity.
Neither standardized distributable cash flow nor distributable cash flow
can be assured. See Key Business Risks in the Fund's MD&A report for a list of
factors which could negatively impact cash flows. The Fund intends to utilize
its credit facilities as part of its capital structure in order to fund future
capital growth, operating within the covenants of its credit facility, thus
enhancing distributable cash flow from operations.
Since inception, 100% of the Fund's distributions declared are considered
other income by unitholders. The consolidated excess of the carrying value of
the Fund's equipment, intangible and other assets over their tax basis is
approximately $1.2 million.
Liquidity and Capital Resources
Management believes that the funds generated from operations will be
sufficient to allow it to meet ongoing requirements for working capital,
maintenance capital expenditures including investments in technology capital,
interest expense, and cash distributions to Unitholders. 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 December 31, 2008, DirectCash utilized approximately $42.6 million
of a total available credit facility of $60.0 million. A summary of
DirectCash's available credit at December 31, 2008 is as follows:
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(thousands) Utilized Limit Available
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Revolving credit facility $ 11,835 $ 20,000 $ 8,165
Acquisition credit facility 30,800 40,000 9,200
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$ 42,635 $ 60,000 $ 17,365
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Included in the revolving credit facility utilization is a $US 1.0
million (CDN$ 1,224,600 each) letter of credit, in favour of MasterCard
International. The letter of credit pertains to DirectCash's prepaid
MasterCard program. The revolving credit facility is demand in nature and is
utilized for ATM cash machine loading, working capital requirements and
commercial letters of credit. The revolving credit facility bears interest at
the Bank's prime lending rate.
The amount of the revolving credit facility was increased from $18
million to a temporary level of $25 million in the summer of 2008, and is
currently at $20 million. The principal reason for the requirement for a
higher operating credit line facility in the summer period was the increase in
ATM cash loads experienced as a result of acquisitions, seasonal load
requirements and organic growth in the mid part of 2008. The internal cash
flow that has been generated in 2008 allows the company additional financial
capacity to meet ongoing operational cash requirements without the need for a
higher operating line.
The acquisition credit facility is utilized to facilitate acquisitions
and to fund business growth opportunities as required in new locations. The
facility is demand in nature and bears interest at the Bank's prime lending
rate or at banker's acceptance rates plus 1.4%. Notwithstanding the demand
nature of the facility, there are no scheduled principal repayments. Depending
upon interest rates and future capital requirements, all or a portion of the
acquisition credit facility could be repaid via a public offering of
DirectCash securities.
For the year ended December 31, 2008, DirectCash operated within its
covenant limits and anticipates it will continue to do so in the future.
Breach of its covenants could result in the triggering of remedies by
DirectCash's lenders, which could ultimately result in the curtailing of
distribution payments.
Non-Cash Working Capital
The change in 2008 non-cash working capital is as follows:
-------------------------------------------------------------------------
(thousands)
As of December 31: 2008 2007 Change
-------------------------------------------------------------------------
Accounts receivable $ 2,304 $ 4,398 $ 2,094
Loans receivable 802 595 $ (207)
Inventories 3,699 4,923 $ 1,224
Prepaid expenses 1,179 694 $ (485)
Accounts payable and accrued
liabilities (6,315) (7,595) $ (1,280)
-------------------------------------------------------------------------
1,669 3,014 1,346
Acquisitions and other (214)
-------------------------------------------------------------------------
Change in non-cash working capital $ 1,132
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Non-cash working capital fluctuates between periods and is dependent upon
factors such as short term inventory requirements, the timing of bulk
inventory shipments, and the timing of accounts receivable collections and
payment of liabilities. In addition prepaid expenses can vary dependent upon
the requirement for deposits and the timing of prepaid interest on bankers
acceptances related to the acquisition credit facility. The decrease in
accounts receivable is attributable to the funds received in early 2008
related to the 2007 settlement of a contract dispute. The increase in
inventory levels relates to the expansion of the ATM business into Mexico and
the purchase of ATM terminals offset by the inventory obsolescence write
downs. The increase in prepaids primarily relates to the deferred start up
costs for the new ATM business being established in Mexico through DirectCash
Management Mexico. The decrease in accounts payable relates to the timing of
vendor payments and the settlement in early 2008 of the other expense item
related to the password compromise in 2007.
Fluctuations in the Fund's non-cash working capital requirements are
funded with DirectCash's revolving credit facility.
Capital Expenditures
-------------------------------------------------------------------------
Three months ended Years ended
December 31 December 31
2008 2007 2008 2007
-------------------------------------------------------------------------
Per consolidated
financial statements:
Acquisitions
- net of cash $ - $ (42) $ 6,850 $ 5,385
Other capital
expenditures 553 225 1,972 1,734
Other intangible
expenditures 7 50 112 722
-------------------------------------------------------------------------
$ 560 $ 233 $ 8,934 $ 7,841
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Split between growth
and maintenance:
Growth capital(1) $ 237 $ (45) $ 7,520 $ 6,853
Productive capital
maintenance(1) 323 278 1,414 988
-------------------------------------------------------------------------
$ 560 $ 233 $ 8,934 $ 7,841
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Growth capital expenditures relate to acquisitions and other expenditures
that increase DirectCash's productive capacity, while productive capital
maintenance expenditures maintain productive capacity at existing levels.
Productive capital maintenance expenditures are expected to trend higher due
to increased security infrastructure expenditure requirements. Growth capital
expenditures vary widely between periods due to the volatility of acquisition
opportunities.
Acquisitions
For the year ended December 31, 2008, DirectCash acquired certain assets
of a number of privately held corporations and individuals engaged in ATM and
debit terminal services for cash consideration of $6.85 million (2007 - $5.5
million), subject to customary performance holdbacks and normal course
purchase adjustments. The number of ATM's acquired by way of acquisitions for
the year ended December 31, 2008 was 795 (2007 - 401).
Significant Customers
DirectCash has two customers which accounted for approximately 18% and
10% (2007 one customer - 14%) respectively, of DirectCash's overall revenues
for the three months and year ended December 31, 2008. The revenues from these
customers are spread across all lines of business. DirectCash has long-term
contractual agreements to provide services to these customers.
Related party transactions - DirectCash Bank
DirectCash has entered into various services and marketing agreements
with DirectCash Bank ("DC Bank"), whereby DirectCash will provide transaction
and processing and technology services to the Bank. DC Bank is now the primary
debit and credit card issuer for DirectCash Prepaid MasterCard and Debit Card
programs. This relationship with DC Bank will allow DirectCash to expand its
ATM and prepaid product businesses.
DC Bank is indirectly owned by the three original principals of
DirectCash, who continue to maintain significant ownership of DirectCash's
assets. One of the DC Bank's principals is also DirectCash's President and
CEO.
During the three months and year ended December 31, 2008 DirectCash paid
$95,512 and $368,276 respectively of transaction processing fees to DC Bank
associated with the DirectCash prepaid products line of business. All
contracts with DC Bank are negotiated at market terms and rates and approved
by the independent members of the Board.
Board and Management Changes
On May 20, 2008 the Chief Financial Officer ('CFO"), Arie Prins resigned
from his position at DirectCash in order to pursue another position as CFO
with a private company in Calgary. On August 5th, 2008 Mr. John E. Fauville
commenced employment as the new CFO for DirectCash Management Inc. and the
various other entities that are part of the DirectCash group of companies. Mr.
Fauville has 25 plus years of experience in financial management, financial
services and financial reporting in various industries - utilities, chemical,
oil & gas, manufacturing and services industries. Most recently Mr. Fauville
was the Director, Business Initiatives for ENMAX Corporation in Calgary. Mr.
Fauville holds a B.SC. from the University of Alberta and is a Certified
Management Accountant.
On February 16, 2009 Mr. Lee Thiessen was appointed a Director for
DirectCash Management Inc. Mr. Thiessen is currently Senior Director, Realty
Tax Consulting, at Altus Group Limited, a subsidiary of Altus Group Income
Fund a public trust listed on the TSX. Mr. Thiessen was previously with
Deloitte & Touche from 2000 to 2008 eventually holding the position of Senior
Tax Partner (national leader - realty tax services). Mr Thiessen holds a B.A.
(U. of Calgary) and MBA (Golden Gate University, California).
Additional Information
Additional information about the Fund, including the Fund's Annual
Information Form and other public filings is available on SEDAR
(www.sedar.com) and on the Fund's website (www.directcash.net).
Non-GAAP measures
There are a number of financial calculations that are not defined
performance measurements under Canadian generally accepted accounting
principles ("GAAP") but which Management believes are useful and accepted
performance measurements utilized by the investing public in assessing the
overall financial performance of Income Trusts.
EBITDA
EBITDA represents gross profits less SG&A and is not a defined
performance measure under GAAP. EBITDA specifically excludes depreciation,
amortization, income taxes and interest. The Fund's EBITDA may differ from
similar computations as reported by other issuers and, accordingly, may not be
comparable to EBITDA as reported by such issuers.
Distributable cash flow and distributable cash flow per unit
Distributable cash flow and distributable cash flow per unit are non-GAAP
measures generally used by Canadian open-ended income funds as an indicator of
financial performance. Readers are cautioned that distributable cash flow is
not a defined performance measure under GAAP, and that distributable cash flow
cannot be assured. The Fund calculates distributable cash flow as equal to the
consolidated funds flow from operations before changes in non-cash working
capital, after provision for maintenance capital expenditures (see discussion
below) and amortization of deferred rent expense. The Fund's distributable
cash flow and distributable cash flow per unit may differ from similar
computations as reported by other issuers and, accordingly, may not be
comparable to distributable cash flow and distributable cash flow per unit as
reported by such issuers.
Unitholders receive cash distributions sourced from distributions made by
DirectCash Limited Partnership indirectly to the Fund. The Fund's policy is to
distribute, to the maximum extent possible, the funds earned from operations
to Unitholders, less amounts estimated to be required for expenses,
maintenance capital, cash redemptions or repurchases of Units, debt
repayments, any tax liability, or other obligations and any reasonable
reserves established. The Fund makes monthly cash distributions to Unitholders
on the last business day of each month to Unitholders of record on the last
business day of the preceding month. Distributions are funded from cash flows
generated by the operation of the business.
(1) Productive capital maintenance expenditures
DirectCash differentiates capital expenditures between growth and
productive capital maintenance ("maintenance capital"). There is no such
distinction under GAAP, however Management believes it is important to
differentiate between them as maintenance capital expenditures represent a
discretionary adjustment to distributable cash flow while growth capital does
not. Maintenance capital expenditures are defined as expenditures required to
service and maintain our existing productive capacity, while growth capital is
expended to increase our productive capacity by adding additional sources of
revenue not currently in existence. Current measures of productive capacity
that DirectCash 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 GAAP. The Fund's 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.
Forward Looking Statements
This MD&A contains certain forward-looking statements relating to future
events. Forward-looking statements are subject to numerous risks and
uncertainties, certain of which are beyond the Fund's ability to control,
including the impact to the Fund's business of general economic conditions,
consumer spending and 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 the MD&A include statements related to the Fund'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 the Fund'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 MD&A.
For further information: John Fauville, Chief Financial Officer,
DirectCash Management Inc., Manager of DirectCash Income Fund, Direct: (403)
387-2103, e-mail: jfauville@directcash.net
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