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Press release from CNW Group

Davis + Henderson Reports Third Quarter 2010 Results

Tuesday, November 02, 2010

Davis + Henderson Reports Third Quarter 2010 Results17:10 EDT Tuesday, November 02, 2010TSX Stock Symbol: "DHF.UN".Website: www.dhltd.comTORONTO, Nov. 2 /CNW/ - Davis + Henderson ("D+H" or the "Business" or the "Company") today reported solid financial results for the three months ended September 30, 2010 that were consistent with expectations. As in previous quarters in 2010, growth in revenues compared to last year was primarily attributable to the inclusion of Resolve, which was acquired mid-way through the third quarter in 2009. Additionally, the results for the third quarter included the previously announced restructuring plan that resulted in a charge of $2.2 million.Third Quarter Highlights << - Revenue was $161.9 million, an increase of $22.7 million, or 16.3%, compared to the same quarter in 2009. - EBITDA(1) was $38.4 million, an increase of $0.9 million, or 2.3%, compared to the same quarter in 2009 and included the $2.2 million restructuring charge. - Adjusted income(1) was $29.9 million, a decrease of $0.5 million, or 1.6%, as compared to the same quarter in 2009. Adjusted income(1) per unit was $0.5613, a decrease of 6.4%, compared to the same quarter in 2009. Adjusted income and Adjusted income per unit both included the $2.2 million restructuring charge in the third quarter of 2010. - Net income was $21.6 million, a year-over-year decrease of $3.4 million, or 13.6%. Net income per unit was $0.4052, a decrease of 17.8%, compared to the same quarter in 2009. Net income and net income per unit include the non-cash expenses related to mark-to market adjustments on interest-rate swaps and amortization of acquisition intangibles related to business acquisitions. Net income per unit was also impacted by the issuance of 9,286,581 trust units for the Resolve acquisition. - Cash distributions paid for the third quarter of 2010 were $0.4599 per unit, unchanged from the same quarter in 2009. Nine-Month Highlights - Revenue was $479.9 million, an increase of $157.6 million, or 48.9%, compared to the same nine-month period in 2009. - EBITDA was $119.9 million, an increase of $21.4 million, or 21.8%, compared to the same period in 2009. The increase in EBITDA of 21.8% relative to the increase in revenue of 48.9% reflected the inclusion of acquired Resolve service offerings that contributed lower margins as a percentage of revenues as compared to the other D+H services. - Adjusted income was $94.7 million, an increase of $14.4 million, or 18%, compared to the first nine months of 2009. Adjusted income(1) per unit was $1.7784, an increase of 2.4%, compared to the same period in 2009. - Net income was $69.7 million, a year-over-year increase of $0.3 million, or 0.4%. Net income per unit was $1.3088, a decrease of 12.9% compared to the same period in 2009. As described above, the decrease in net income per unit includes the non-cash expenses including mark-to-market adjustments on interest-rate swaps and amortization of intangible assets related to business acquisitions. Net income per unit was also impacted by the issuance of 9,286,581 trust units for the Resolve acquisition. - Cash distributions paid for the first nine months were $1.3797 per unit, unchanged from the same period in 2009. ------------------------- (1) Davis + Henderson reports several non-GAAP measures, including EBITDA and Adjusted income used above. Adjusted income is calculated as net income, adjusted to remove the results of discontinued operations and the non-cash impacts of mark-to-market gains and losses on derivative instruments, future income taxes and amortization of intangibles from acquisitions. These items are excluded in calculating Adjusted income as they are not considered indicative of the financial performance of the Business for the period being reviewed. Any non-GAAP measures should be considered in context with the GAAP financial presentation and should not be considered in isolation or as a substitute for GAAP net earnings or cash flow. Further, Davis + Henderson's measures may be calculated differently from similarly titled measures of other companies. See Non-GAAP Measures for a more complete description of these terms. >>Management CommentaryThe results for the third quarter of 2010 are consistent with our expectations and we are satisfied with these results given the changes within the markets we service and their related impacts on our volumes. Financially, we benefited from the inclusion of Resolve service offerings from July 27, 2009, and through the latter portion of 2009 and into 2010, we also experienced stronger volumes, particularly related to services to the lending markets. In the third quarter of 2010 and in next several quarters, our results will be compared to those earlier periods that featured strong activity in real estate, mortgage and other lending markets where activity is now expected to moderate.Also during the quarter, we continued to advance our strategy related to enhancing our service offerings and integrating our operations. These initiatives are designed to achieve our goal of positioning D+H to grow in the future.As part of our further integration and transformation initiatives, and as previously announced, D+H recorded a restructuring charge in the third quarter of 2010 of $2.2 million and expects to record an additional restructuring charge in the range of $5.0 to $7.0 million in the fourth quarter of 2010. The annualized savings of $3.0 to $4.0 million associated with these initiatives are expected to be realized by the end of 2012.In addition to and separate from the restructuring charge, D+H announced on October 7, 2010 that it sold its non-strategic contact centre operations acquired as part of the Resolve acquisition. As at September 30, 2010, these operations were held for sale and classified as discontinued operations for both current and comparative periods. For further information, refer to the Company's press release issued on October 7, 2010 outlining the divestiture.As previously announced, the Company received unitholder approval to convert to a corporation effective January 1, 2011 and we are executing against that plan. In addition, our intention remains to maintain monthly distributions for the remainder of 2010 at an annualized rate of $1.84 per unit and commencing in 2011 to move to a quarterly dividend payout to owners at $1.20 per share annualized.For a more detailed discussion of third quarter results and management's outlook, please see Management's Discussion and Analysis below.Caution Concerning Forward-Looking StatementsThis MD&A contains certain statements that constitute forward-looking information within the meaning of applicable securities laws ("forward-looking statements"). Statements concerning Davis + Henderson's objectives, goals, strategies, intentions, plans, beliefs, expectations and estimates, and the business, operations, financial performance and condition of Davis + Henderson are forward-looking statements. The words "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 Davis + Henderson to meet its revenue and EBITDA targets; general industry and economic conditions; changes in Davis + Henderson's relationship with its customers and suppliers; pricing pressures and other competitive factors. Davis + Henderson has also made certain macroeconomic and general industry assumptions in the preparation of such forward-looking statements. While Davis + Henderson considers these factors and assumptions to be reasonable based on information currently available, they may prove to be incorrect.Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Business, or developments in Davis + Henderson'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 presented by declines in the use of cheques by consumers; the Fund'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 the Fund's financial objective; stability and growth in the real estate, mortgage and lending markets; as well as general market conditions, including economic and interest rate dynamics and investor interest in, and government regulations relating to, Income Trusts. 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 Davis + Henderson 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.Conference CallDavis + Henderson will discuss its financial results for the three months ended September 30, 2010 via conference call at 10:00 a.m. EST (Toronto time) on Wednesday, November 3, 2010. The number to use for this call is 647-427-7450 for Toronto area callers or 1-888-231-8191 for all other callers. The conference call will be hosted by Bob Cronin, Chief Executive Officer and by Brian Kyle, Chief Financial Officer. The conference call will also be available on the web by accessing CNW Group's website www.newswire.ca/webcast/. For anyone unable to listen to the scheduled call, the rebroadcast number will be: 416-849-0833 for Toronto area callers, or 1-800-642-1687 for all other callers, with Encore Password 19604329. The rebroadcast will be available until Wednesday, November 17, 2010. 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.ADDITIONAL INFORMATIONAdditional information relating to the Fund, including the Fund's most recently filed Annual Information Form, is available on SEDAR at www.sedar.com.MANAGEMENT'S DISCUSSION AND ANALYSISManagement's Discussion and Analysis ("MD&A") for the third quarter of 2010 for the Davis + Henderson Income Fund (the "Fund" or the "Company" or the "Business" or "Davis + Henderson" or "D+H" or "we" or "our") should be read in conjunction with the MD&A in the Annual Report for the year ended December 31, 2009, dated March 2, 2010, and the attached interim unaudited consolidated financial statements. External economic and industry factors remain substantially unchanged from those described in the annual MD&A and the Fund's most recently filed Annual Information Form.STRATEGYDavis + Henderson is a leading solutions provider to the financial services marketplace. We have several market-leading service offerings within Canada, including our cheque supply program, the servicing of student loans, the provision of registration and related services for secured loan products and the delivery of leading technology solutions within the mortgage market. We also offer broader technology solutions in the commercial lending, small business lending and leasing area, as well as servicing solutions within the credit card market and other outsourced services in a number of specialty areas.Davis + Henderson's strategy is to establish market leading positions within well defined and growing service areas in the financial services marketplace and to further expand our service offerings by enhancing the activities that we perform on behalf of our customers. We expect to advance this strategy through internal (or organic) initiatives, as well as by partnering with third parties and by way of selective acquisitions. The Business' financial goal is to deliver stable and modestly growing cash distributions to unitholders by targeting annual revenue growth in the range of 3% to 5%. The Business has three primary strategies to meet its objectives. These are to: (i) evolve and enhance the value of the cheque supply program and services to the chequing account; (ii) extend our technology supported services related to personal, student and commercial lending and leasing markets; and (iii) pursue opportunities in other areas within the financial services marketplace.Over the past several years, D+H has executed this strategy by evolving our programs to the chequing account, completing several acquisitions, including Advanced Validation Systems ("AVS") in 2005, Filogix in 2006, Cyence in 2008 and Resolve in 2009, and by further enhancing our services and capabilities. As a result, we offer a diverse range of market-leading services.Since December 2001, the initial public offering date of Davis + Henderson Income Fund, the Business has operated as a subsidiary of an Income Trust pursuant to its Declaration of Trust. In 2007, changes were made to the Income Tax Act that will require certain Income Trusts, including D+H, to be subject to taxes after fiscal 2010, similar to those paid by taxable Canadian corporations. At the meeting of unitholders held on June 17, 2010, D+H unitholders approved a proposal to convert from an income trust into a corporation effective January 1, 2011. Upon completion of the conversion, unitholders will receive on a tax deferred, roll-over basis, one share of the resulting public corporation for each unit held. The information circular in respect of the Meeting, which provided a detailed outline of the conversion, is available on SEDAR at www.sedar.com.Independent of the conversion plan and as a result of the enacted tax changes, the Business will be subject to taxes commencing in 2011 that will reduce the amount of cash flow otherwise available for distribution. Our current intention is to pay quarterly dividends commencing in 2011 at an initial annualized rate of $1.20 per share. For the remainder of 2010, we intend to maintain our current annualized distributions at $1.84 per unit ($0.1533 per unit monthly). Subsequent to the conversion, distributions made by Davis + Henderson will be taxed as dividends rather than regular income as they are today. Investors that are taxed as individuals may be entitled to dividend tax credits which may enhance their after-tax yield and therefore significantly reduce the after-tax impact of the reduction in distributions.Consistent with past practices, actual distributions will only be made to owners of record based upon a declaration by the Trustees. Among other items, in determining actual distributions, the Trustees will consider the financial performance, capital plans, acquisition plans, expectations of future economic conditions and other factors.Notwithstanding the structural and distribution changes attributed to the changes to the law, the strategies and objectives of the Business will remain unchanged.OPERATING RESULTS FOR THE THIRD QUARTER - CONSOLIDATEDThe following table is derived from, and should be read in conjunction with, the Consolidated Statements of Income and includes non-GAAP measures. Management believes this supplementary disclosure provides useful additional information. See Non-GAAP Measures for a discussion of non-GAAP terms used. Effective July 27, 2009, the consolidated results include those of Resolve. << Consolidated Operating and Financial Results (in thousands of Canadian dollars, except per unit amounts, unaudited) Three months ended Nine months ended September 30, September 30, 2010 2009 2010 2009 ------------------------------------------------------------------------- Revenue $ 161,900 $ 139,245 $ 479,917 $ 322,331 Expenses 121,311 101,696 357,845 223,867 Restructuring charges(4) 2,160 - 2,160 - ------------------------------------------------------------------------- EBITDA(1) 38,429 37,549 119,912 98,464 Amortization of capital assets and non-acquisition intangibles 5,030 4,505 14,661 12,003 Interest expense 3,517 2,681 10,583 6,215 ------------------------------------------------------------------------- Adjusted income(1) 29,882 30,363 94,668 80,246 Amortization of mark-to-market adjustment of interest-rate swaps 52 103 344 375 Net unrealized loss (gain) on derivative instruments(2) 1,514 (1,647) 1,649 (2,525) Future income tax expense (recovery) (645) 1,015 619 233 Amortization of intangibles from acquisitions 6,925 5,942 21,180 12,757 ------------------------------------------------------------------------- Income from continuing operations 22,036 24,950 70,876 69,406 Income (loss) from discontinued operations, net of taxes(3) (465) 7 (1,206) 7 ------------------------------------------------------------------------- Net income $ 21,571 $ 24,957 $ 69,670 $ 69,413 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Adjusted income per unit, basic and diluted(1) $ 0.5613 $ 0.6000 $ 1.7784 $ 1.7372 Net income per unit, basic and diluted $ 0.4052 $ 0.4931 $ 1.3088 $ 1.5027 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Three months ended Nine months ended September 30, September 30, 2010 vs. 2009 2010 vs. 2009 % change % change ------------------------------------------------------------------------- Revenue 16.3% 48.9% EBITDA(1) 2.3% 21.8% Adjusted income per unit(1) -6.4% 2.4% Net income per unit -17.8% -12.9% ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) EBITDA and Adjusted income are non-GAAP terms. See Non-GAAP Measures for a more complete description of these terms. (2) The Business enters into derivative contracts to fix the interest rates and foreign exchange rates on a significant portion of its outstanding bank debt and foreign currency transactions, which are relatively minor, respectively. For accounting purposes, these derivative instruments do not qualify for hedge accounting treatment and, accordingly, any change in the fair value of these contracts is recorded through income. Provided the Business does not cancel its derivative contracts prior to maturity, the amounts represent a non-cash unrealized gain or loss that will subsequently reverse through income. The Company has historically held its derivative contracts to maturity. (3) On October 7, 2010, the Business sold a non-strategic component of its contact centre business and as such, these disposed operations are presented as discontinued operations for both current and prior periods. (4) Restructuring charges relate to further integration and transformation initiatives designed to better position the business going forward to serve customers and improve the effectiveness, efficiency and scalability of operations. >>OverviewD+H had solid operating performance in the third quarter of 2010 in the context of current economic and market conditions. The large year-over-year increase in revenues and expenses during the first nine months of 2010 and more modestly for the three months ended September 30, 2010, were primarily due to the inclusion of Resolve, which was acquired during the third quarter of 2009. The Business also benefited from a modest increase in revenues from several service areas as more fully described below. Additionally, the Business continued its integration and transformation activities, including activities related to the attainment of cost synergies. As part of a restructuring initiative, the Business recorded a charge of $2.2 million in the third quarter of 2010. Also as referred to below, on October 7, 2010, the Business sold a non-strategic component of its contact centre business and as such, these disposed operations are presented as discontinued operations for both current and prior periods presented. On a per unit basis, after reflecting the additional units issued in connection with the acquisition of Resolve, and the restructuring charge, D+H's consolidated Adjusted income per unit for the third quarter of 2010 was lower by 6.4%, and for the first nine months of 2010 was higher by 2.4%, both as compared to the same periods in 2009. Net income per unit for the third quarter and year-to-date 2010, was lower by 17.8%, and 12.9%, respectively, compared to the same periods in 2009, largely as a result of the increase in amortization of intangible assets related to business acquisitions and the mark-to-market adjustment on derivative instruments, both of which are more fully described below within the MD&A.Revenue(in thousands of Canadian dollars, unaudited) << Three months ended Nine months ended September 30, September 30, 2010 2009 2010 2009 ------------------------------------------------------------------------- Revenue Programs to the chequing account $ 72,994 $ 72,239 $ 220,818 $ 216,770 Loan servicing 32,738 21,091 92,826 21,091 Loan registration technology services 27,227 18,119 78,412 20,056 Lending technology services 19,392 18,891 57,335 51,717 Other(1) 9,549 8,905 30,526 12,697 ------------------------------------------------------------------------- $ 161,900 $ 139,245 $ 479,917 $ 322,331 ------------------------------------------------------------------------- (1) Excluded for the current and comparative periods are the discontinued operations that were sold on October 7, 2010. >>Revenue - Third Quarter and Year-to-DateConsolidated revenue for the third quarter of 2010 was $161.9 million, an increase of $22.7 million, or 16.3%, compared to the same quarter in 2009. For the first nine months of 2010, consolidated revenue was $479.9 million, an increase of $157.6 million, or 48.9%, compared to the same period in 2009. Revenue for both the three months and the nine months ended September 30, 2010 increased primarily due to the inclusion of Resolve (effective July 27, 2009) and from modest increases in several service areas. Services delivered by the Business are subject to seasonality, particularly relating to fees earned in connection with mortgage origination services and automobile loan registration services, which are typically stronger in the second and third quarters than in the first quarter, as was the case this year.Revenue for the third quarter from programs to the chequing account was $73.0 million, an increase of $0.8 million, or 1.0%, compared to the same quarter in 2009. Revenue for the first nine months from programs to the chequing account was $220.8 million, an increase of $4.0 million, or 1.9%, compared to the same period in 2009. The modest increase in both periods was primarily attributable to program changes and product and service enhancements that increased average order values. The increase in the third quarter was less than in earlier periods in 2010 due to a decline in overall volumes, particularly related to personal cheque orders. Management believes that the long-term historical trend related to cheque order decline is relatively unchanged and continues to be in the low single digit range, however, there has been more volatility in order volumes in recent periods.Revenue for the third quarter of 2010 from loan servicing, which includes student loan administration services and credit card servicing was $32.7 million and $92.8 million for the first nine months of 2010. There were no meaningful comparable results in either reporting period of 2009. Revenue from student loan administrative services, which comprise the largest portion of revenues within this service area, is expected to be relatively stable over the short-term with modestly growing volumes and new program initiatives being offset by reduced pricing related to particular contracts. The year-to-date results also benefited from strong performance incentives which can be earned under contracts within the service area.Loan registration technology services revenue for the third quarter of 2010 was $27.2 million and for the first nine months of 2010 was $78.4 million. There were no meaningful comparable results in either reporting period of 2009. This service area includes the personal property search and registration ("PPSA") business acquired with the Resolve acquisition and the PPSA program historically operated by D+H. In both instances, our services are directed toward supporting personal and commerical lending activity within Canada. Volumes in this area can be variable, and in general change in line with the changes in the overall Canadian economic environment, particularly as it relates to servicing customers within the automotive lending area. During the third quarter, the Business experienced declines in certain year-over-year volume changes as the economic recovery in the latter portion of 2009 and into 2010 drove stronger volumes as compared to the more recent months in 2010. This service area also experiences seasonality and generally has stronger volumes during the second and third quarters as compared to the first quarter as consumers typically purchase and finance cars in the spring and summer.Revenue for the third quarter of 2010 from lending technology services, which includes services to the mortgage market and other credit markets was $19.4 million, an increase of $0.5 million, or 2.7%, compared to the same quarter in 2009. For the first nine months of 2010, revenue from lending technology services was $57.3 million, an increase of $5.6 million, or 10.9%, compared to the same period in 2009. The modest increase during the third quarter was less than earlier periods in 2010 due to a slowing of the Canadian real estate and mortgage markets. Specifically, third quarter mortgage origination service fees increased year-over-year by 3% as compared to an average increase of 28% for the first six months of 2010. In general, industry analysts expect the housing and mortgage markets to further settle as compared to earlier periods in 2010.Other revenue for the third quarter of 2010 of $9.5 million and $30.5 million for the first nine months of 2010 is comprised of a number of smaller service offerings. In general, revenues from these service areas change due to customer specific and some seasonal activities, with such changes not material to overall consolidated earnings. On October 7, 2010, the Business sold a non-strategic component of its contact centre business and as such, these disposed operations are presented as discontinued operations in both current and prior periods presented. Accordingly, the revenues relating to this part of the Business of $4.3 million and $13.5 million respectively, for the third quarter and the first nine months of 2010 have been removed from reported consolidated revenue.The following table reflects the current relative size of each of the major service areas as a percentage of total revenue on an annualized basis: << Allocation of Revenue by Service Area(1) % Revenue ------------------------------------------------------------------------- Revenue Programs to the chequing account 46% Loan servicing 19% Loan registration technology services 16% Lending technology services 12% Other 7% ------------------------------------------------------------------------- 100% ------------------------------------------------------------------------- (1) Based on a 12 month rolling revenue from Q4 2009 to Q3 2010. >>Expenses(1) - Third Quarter and Year-to-DateOn a consolidated basis, expenses for the third quarter of 2010 of $121.3 million increased by $19.6 million, or 19.3%, compared to the same quarter in 2009. Expenses for the first nine months of 2010 were $357.8 million, an increase of $134.0 million, or 59.8%. The increases for both periods primarily reflected the inclusion of Resolve with the impact being less significant in the third quarter of 2010 due to the acquisition being completed on July 27, 2009. The changes also reflect the ongoing costs of integrating the businesses, reduced by continued cost management activities and integration savings. << Three months ended Nine months ended (in thousands of Canadian September 30, September 30, dollars, unaudited) 2010 2009 2010(4) 2009 ------------------------------------------------------------------------- Employee compensation and benefits $ 47,498 $ 40,120 $ 142,925 $ 85,532 Non-compensation direct expenses(2) 49,203 $ 43,131 $ 143,439 $ 102,890 Other operating expenses(3) 20,728 14,896 $ 58,777 $ 28,445 Occupancy costs 3,882 3,549 $ 12,704 $ 7,000 ------------------------------------------------------------------------- $ 121,311 $ 101,696 $ 357,845 $ 223,867 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Excluded from the current and comparative periods are the discontinued operations that were sold on October 7, 2010. (2) Non-compensation direct expenses include materials, shipping, selling expenses and third party direct disbursements. (3) Other operating expenses include communication costs, licensing fees, professional fees and expenses not included in other categories. (4) For the nine months ended September 30, 2010, to be consistent with second and third quarter presentation, $1.5 million of Other operating expenses from Q1 2010 have been reclassified as Non-compensation direct expenses. There was no change in total expenses related to this reclassification. >>Employee compensation and benefits costs of $47.5 million for the third quarter of 2010 increased by $7.4 million, or 18.4%, compared to the same quarter in 2009. For the first nine months of 2010, employee compensation and benefit costs were $142.9 million, up $57.4 million, or 67.1% compared to the same period in 2009, with the increase primarily due to the inclusion of Resolve expenses. Resolve service offerings, such as loan servicing, contact centre services and other process outsourcing services are more employee intensive than other D+H service areas.Non-compensation direct expenses were $49.2 million for the third quarter of 2010, an increase of $6.1 million, or 14.1%, compared to the same quarter in 2009. For the first nine months of 2010, these expenses were $143.4 million, an increase of $40.5 million, or 39.4% compared to the same period in 2009. The increase was mainly due to the inclusion of Resolve expenses. In general, these expenses directionally change with revenue changes, and as such increased in the third quarter due to some of the seasonality changes described above.Other operating expenses were $20.7 million, an increase of $5.8 million, or 39.2% compared to the same quarter in 2009. For the first nine months of 2010, other operating expenses were $58.8 million, an increase of $30.3 million, or 106.6% compared to the same period in 2009. These increases were primarily attributable to the inclusion of Resolve expenses and to a lesser extent, the ongoing costs of integration partially offset by cost management activities.Occupancy costs for the third quarter of 2010 were $3.9 million, an increase of $0.3 million, or 9.4%, compared to the same quarter in 2009. For the first nine months of 2010, occupancy costs were $12.7 million, an increase of $5.7 million, or 81.5%, compared to the same period in 2009. The increase in occupancy costs in the first nine months of 2010 was mainly due to the inclusion of Resolve facilities, which as described above, are employee intensive service businesses.Restructuring ChargesD+H recorded a restructuring charge of $2.2 million during the third quarter of 2010. Additionally, the Company expects to incur a further $5.0 - 7.0 million charge in the fourth quarter of 2010, as previously announced. Together, these charges relate to integration and transformation initiatives designed to better position the business going forward to serve customers and improve the effectiveness, efficiency and scalability of our operations. These initiatives are a result of the Company completing four acquisitions over the past four years which led to expanded service offerings and operations. The integration activities consist of items that include the consolidation of facilities, centralization of certain functions and operations, elimination of management duplication and repositioning of personnel related to the integrated business, among other items. As a result of these activities we expect to both better position the Company to grow and to achieve annualized savings in the range of $3.0 - 4.0 million by the end of 2012.EBITDAEBITDA during the third quarter of 2010, including the $2.2 million restructuring charge, was $38.4 million, an increase of $0.9 million, or 2.3%, compared to the same quarter in 2009. For the first nine months of 2010, EBITDA was $119.9 million, an increase of $21.4 million, or 21.8% compared to the same period in 2009. As a percentage of revenue, EBITDA margins have decreased to 23.7% in the third quarter of 2010 from 27.0% in the third quarter of 2009. This was due to the full quarter inclusion of Resolve service areas that contribute lower margins than the historical D+H service areas as well as an increase in integration and investment expenses including the restructuring charge. For the first nine months of 2010, EBITDA as a percentage of revenue was 25.0% compared to 30.5% for the first nine months of 2009, with the change primarily attributed to the factors just described. The decrease in the third quarter of 2010 as compared to earlier 2010 quarters is primarily attributed to the restructuring charge.In general, the later periods of 2009 and the first portion of 2010 provided stronger than normal volumes for D+H as the economy moved out of the recession and, in particular, lending activity increased. Additionally, the Business now experiences increases in seasonality with the second and third quarter volumes generally being stronger than the first and fourth quarters.Other ExpensesAmortization of Capital and Non-acquisition IntangiblesAmortization of capital and non-acquisition intangible assets during the third quarter of 2010 increased by $0.5 million, or 11.7% compared to the third quarter of 2009, and during the first nine months of 2010, increased by $2.7 million, or 22.1% compared to the same period in 2009. These increases primarily related to the inclusion of amortization related to assets acquired from the Resolve business and to capital additions during 2010.Interest ExpenseInterest expense for the third quarter of 2010 increased by $0.8 million compared to the same quarter last year, due to an increase in the level of outstanding debt related to the acquisition of Resolve. For the first nine months of 2010, interest expense increased by $4.4 million compared to the same period in 2009, due to the reason described above, as well as the write-off of certain unamortized financing costs during the second quarter of 2010 as described below. During the second quarter of 2010, the Business renewed its bank credit facilities and issued a seven-year Bond as described below. Certain unamortized financing fees totalling $0.4 million were written off during the second quarter of 2010 in connection with the renewal of the credit facilities and changes made to the syndicate. This write-off is included in interest expense for the first nine months of 2010.Net Unrealized Loss (Gain) on Derivative InstrumentsA net unrealized loss of $1.5 million on interest-rate swaps and foreign currency contracts was recognized in the third quarter of 2010 (Q3 2009 - $1.6 million net unrealized gain) reflecting mark-to-market adjustments related to changes in market interest rates at September 30, compared to June 30, and from currency fluctuations on foreign exchange contracts. For the nine months ended September 30, 2010, an unrealized loss of $1.6 million was recorded (nine months ended September 30, 2009 - unrealized gain of $2.5 million). These unrealized gains and losses are recognized in income because these swaps are not designated as hedges for accounting purposes. In general, a loss on interest-rate swaps is recorded when rates decrease as compared to previous periods and a gain is recorded when rates increase. In addition, unrealized gains and losses on foreign exchange contracts are recognized in income because the foreign exchange contracts do not qualify for hedge accounting treatment. Provided the Business does not cancel its interest-rate swaps or foreign exchange contracts, the unrealized amounts represent a non-cash unrealized gain or loss that will subsequently reverse through income as the related swaps and foreign exchange contracts mature. The Company has historically held its derivative contracts to maturity.Future Income Tax Expense (Recovery)In the third quarter of 2010, the Fund recorded a future tax recovery of $0.6 million (Q3 2009 - $1.0 million expense). This related to the recording of a future tax benefit for tax losses and other deductible temporary differences in certain corporate subsidiaries and the decrease in the future tax liability resulting from the amortization of intangibles. For the first nine months of 2010, the Fund recorded a future tax expense of $0.6 million (nine months ended September 30, 2009 - $0.2 million).Amortization of Intangibles from AcquisitionsAmortization of acquisition related intangibles for the third quarter of 2010 and for the first nine months of 2010, increased by $1.0 million and $8.4 million respectively, as compared to the same periods in 2009 due to the incremental intangible assets from the acquisition of Resolve on July 27, 2009.Income (loss) from Discontinued OperationsAs of September 30, 2010, the non-strategic portion of the contact centre operations of D+H was held for sale, and the results of operations related to this part of the Business have been classified as discontinued operations for both current and comparative periods. The sale of this component was completed in October 2010. Refer to the Divestiture section in the MD&A for further details.Net IncomeNet income of $21.6 million for the third quarter of 2010 decreased by $3.4 million, or 13.6%, compared to the same period in 2009. For the nine months ended September 30, 2010, net income of $69.7 million increased by $0.3 million, or 0.4% compared to the same period in 2009. On a per unit basis, net income decreased by 17.8% to $0.4052 per unit, compared to the third quarter of 2009. For the first nine months of 2010, net income per unit decreased by 12.9% to $1.3088 per unit, compared to the same period in 2009. Adjusted income which excludes the (1) non-cash impacts of mark-to-market gains and losses on derivative instruments, future income taxes and amortization of intangibles from acquisitions, and (2) discontinued operations, was $29.9 million for the third quarter of 2010. This included the $2.2 million restructuring charge. Adjusted income decreased by $0.5 million, or 1.6%, compared to the same period in 2009. Adjusted income for the first nine months of 2010 increased by $14.4 million, or 18.0% compared to the same period in 2009. On a per unit basis, reflecting the issuance of 9,286,581 units upon the acquisition of Resolve, Adjusted income per unit of $0.5613 decreased by 6.4%, compared to the third quarter of 2009. For the nine months ended September 30, 2010, Adjusted income of $1.7784 per unit increased by 2.4% compared to the same period in 2009. << EIGHT QUARTER CONSOLIDATED STATEMENT OF INCOME - SUMMARY (in thousands of Canadian dollars, except per unit amounts, unaudited) 2010 Q3 Q2 Q1 -------------------------------------------------------------- Revenue $ 161,900 $ 164,319 $ 153,698 Expenses 121,311 120,545 115,989 Restructuring charges(4) 2,160 - - -------------------------------------------------------------- EBITDA(1) 38,429 43,774 37,709 Amortization of capital assets and non-acquisition intangibles 5,030 4,962 4,669 Interest expense 3,517 3,692 3,374 -------------------------------------------------------------- Adjusted income(1) 29,882 35,120 29,666 Amortization of mark-to-market adjustment of interest-rate swaps 52 103 189 Net unrealized loss (gain) on derivative instruments(2) 1,514 1,694 (1,559) Future income tax expense (recovery) (645) 603 661 Amortization of intangibles from acquisition 6,925 7,158 7,097 -------------------------------------------------------------- Income from continuing operations 22,036 25,562 23,278 Income (loss) from discontinued operations, net of taxes(3) (465) (531) (210) -------------------------------------------------------------- Net income $ 21,571 $ 25,031 $ 23,068 -------------------------------------------------------------- -------------------------------------------------------------- Adjusted income per unit, basic and diluted(1) $ 0.5613 $ 0.6597 $ 0.5572 Net income per unit, basic and diluted $ 0.4052 $ 0.4702 $ 0.4333 -------------------------------------------------------------- -------------------------------------------------------------- 2009 2008 Q4 Q3 Q2 Q1 Q4 ------------------------------------------------------------------------- Revenue $ 151,521 $ 139,245 $ 94,557 $ 88,529 $ 89,357 Expenses 114,467 101,696 62,080 60,091 62,413 Restructuring charges(4) - - - - - ------------------------------------------------------------------------- EBITDA(1) 37,054 37,549 32,477 28,438 26,944 Amortization of capital assets and non-acquisition intangibles 4,514 4,505 3,679 3,819 3,800 Interest expense 3,326 2,681 1,787 1,747 1,647 ------------------------------------------------------------------------- Adjusted income(1) 29,214 30,363 27,011 22,872 21,497 Amortization of mark-to-market adjustment of interest-rate swaps 103 103 136 136 151 Net unrealized loss (gain) on derivative instruments(2) (1,620) (1,647) (1,069) 191 3,653 Future income tax expense (recovery) (2,605) 1,015 (718) (64) 399 Amortization of intangibles from acquisition 7,330 5,942 3,441 3,374 3,409 ------------------------------------------------------------------------- Income from continuing operations 26,006 24,950 25,221 19,235 13,885 Income (loss) from discontinued operations, net of taxes(3) (405) 7 - - 51 ------------------------------------------------------------------------- Net income $ 25,601 $ 24,957 $ 25,221 $ 19,235 $ 13,936 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Adjusted income per unit, basic and diluted(1) $ 0.5488 $ 0.6000 $ 0.6146 $ 0.5204 $ 0.4892 Net income per unit, basic and diluted $ 0.4809 $ 0.4931 $ 0.5739 $ 0.4377 $ 0.3172 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) EBITDA and Adjusted income are non-GAAP terms. See Non-GAAP Measures for a more complete description of these terms. (2) The Business enters into derivative contracts to fix the interest rates and foreign exchange rates on a significant portion of its outstanding bank debt and foreign currency transactions, which are relatively minor, respectively. For accounting purposes, these derivative instruments do not qualify for hedge accounting treatment. Accordingly, any change in the fair value of these contracts is recorded through income. Provided the Business does not cancel its derivative contracts prior to maturity, the amounts represent a non-cash unrealized gain or loss that will subsequently reverse through income. The Company has historically held its derivative contracts to maturity. (3) On October 7, 2010, the Business sold a non-strategic component of its contact centre business and as such, these disposed operations are presented as discontinued operations in both current and prior periods presented. (4) Restructuring charges relate to further integration and transformation initiatives designed to better position the business going forward to serve customers and improve the effectiveness, efficiency and scalability of operations. >>The Business has generally reported quarterly revenues that are stable and growing when measured on a year-over-year basis, however more recent changes in the economic environment and the housing and mortgage markets have increased volatility. Measured on a sequential quarter-over-quarter basis, revenues can also vary due to seasonality and are generally stronger in the second and third quarters. The acquisition of the Resolve business has resulted in a substantial increase in all reported balances since the acquisition on July 27, 2009, except per unit amounts, which were additionally impacted by the issuance of 9,286,581 additional units of Davis + Henderson to fund the Resolve acquisition.Adjusted income per unit has generally been trending consistently with changing revenue. Adjusted income for the third quarter of 2010 and all comparative periods presented exclude the results of the discontinued operations sold on October 7, 2010. Net income has been more variable as it has been affected by the variability in non-cash items such as mark-to-market adjustments on interest-rate swaps and foreign exchange contracts, amortization of intangibles from acquisitions and changes in future income tax provisions. Both Adjusted income and net income for the third quarter of 2010 were also impacted by the restructuring charges recorded during the period relating to integration and transformation activities.CASH FLOW AND LIQUIDITYThe following table is derived from, and should be read in conjunction with, the Consolidated Statements of Cash Flows and includes non-GAAP measures. Management believes this supplementary disclosure provides useful additional information related to the cash flows of the Fund, repayment of debt and other investing activities. See Non-GAAP Measures for a discussion of non-GAAP terms used. << Summary of Cash Flows(1) (in thousands of Canadian dollars, unaudited) Three months ended Nine months ended September 30, September 30, 2010 2009 2010 2009 ------------------------------------------------------------------------- Cash flows from operating activities $ 36,743 $ 38,959 $ 94,337 $ 79,147 Add: Changes in non-cash working capital and other items(2) (2,419) (4,056) 13,480 13,137 ------------------------------------------------------------------------- Adjusted cash flows from operating activities 34,324 34,903 107,816 92,284 Less: Asset expenditures(3) 7,079 2,518 14,631 6,555 Contract payments(4) - 300 1,717 3,117 ------------------------------------------------------------------------- Adjusted cash flows after asset expenditures and contract payments 27,245 32,085 91,468 82,612 Less: Distributions paid to unitholders 24,482 23,058 73,446 63,480 ------------------------------------------------------------------------- 2,763 9,027 18,022 19,132 Cash flows provided by (used in repayment of) long-term indebtedness (5,000) (3,948) (5,000) (5,948) Cash flows used in issuance costs - (2,321) (2,564) (2,321) Fair value of acquisitions 167 (9,588) 167 (9,425) Changes in non-cash working capital and other items(2) 2,419 4,056 (13,480) (13,137) ------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents for the period $ 349 $ (2,774) $ (2,854) $ (11,699) ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) The subtotals in this table are not consistent with GAAP and accordingly are considered non-GAAP measures. See Non-GAAP Measures for a discussion of non-GAAP terms used. (2) Changes in non-cash working capital and certain other balance sheet items have been excluded from adjusted cash flows from operating activities so as to remove the effects of timing differences in cash receipts and cash disbursements, which generally reverse themselves, but can vary significantly across quarters. For details, see the Changes in Non-Cash Working Capital and Other Items section. (3) Asset expenditures include both maintenance asset expenditures and growth asset expenditures. Maintenance asset expenditures for the three months ended September 30, 2010 were $4.3 million and for the nine months ended September 30, 2010 were $8.2 million. Maintenance asset expenditures are defined by the Fund as asset expenditures necessary to maintain and sustain the current productive capacity of the Business or generally improve the efficiency of the Business. Growth asset expenditures for the three months ended September 30, 2010 were $2.7 million and for the nine months ended September 30, 2010 were $6.4 million. Growth asset expenditures are defined by the Fund as asset expenditures that increase the productive capacity of the Business with a reasonable expectation of an increase in cash flow. The distinction between growth and maintenance asset expenditures will become less relevant to management in the future as D+H converts to a corporation. (4) The Business has various payment obligations under customer and partner contracts, which include fixed contract or program initiation payments and annual payments payable over the life of the contract. The aggregate of all contract payments, both fixed and variable, reflects, among other things, the high degree of integration and sharing between D+H and its customers and partners of the many activities related to ordering, data handling, customer service, customer access and other activities. Summary of Cash Flows per Unit (in Canadian dollars, unaudited) Three months ended Nine months ended September 30, September 30, 2010 2009 % change 2010 2009 % change ------------------------------------------------------------------------- Adjusted cash flows from operating activities $ 0.6448 $ 0.6897 -6.5% $ 2.0253 $ 1.9979 1.4% Adjusted cash flows after asset expenditures and contract payments $ 0.5118 $ 0.6340 -19.3% $ 1.7182 $ 1.7884 -3.9% Cash distributions paid to unitholders $ 0.4599 $ 0.4599 0.0% $ 1.3797 $ 1.3797 0.0% Distributions declared during period $ 0.4599 $ 0.4599 0.0% $ 1.3797 $ 1.3797 0.0% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash Flows, Income and Distributions Paid The following table compares cash flows from operating activities andincome to distributions paid: Three Nine months months Year Year ended ended ended ended (in thousands of Canadian September September December December dollars, unaudited) 30, 2010 30, 2010 31, 2009 31, 2008 ------------------------------------------------------------------------- Cash flows from operating activities $ 36,743 $ 94,337 $ 119,722 $ 116,062 Net income $ 21,571 $ 69,670 $ 95,014 $ 78,448 Adjusted income(1) $ 29,882 $ 94,668 $ 108,923 $ 99,168 Distributions paid during period $ 24,482 $ 73,446 $ 87,962 $ 78,580 Excess (shortfall) of cash flows from operating activities over cash distributions paid $ 12,261 $ 20,891 $ 31,760 $ 37,482 Excess (shortfall) of net income over cash distributions paid $ (2,911) $ (3,776) $ 7,052 $ (132) Excess (shortfall) of Adjusted income over cash distributions paid $ 5,400 $ 21,222 $ 20,961 $ 20,588 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Adjusted income is a non-GAAP term. See Non-GAAP Measures for a more complete description of this term. >>Historically, excess cash flows from operating activities over cash distributions paid have been used to fund capital expenditures, pay down debt and to fund acquisitions. During certain periods, distributions have exceeded net income as a result of non-cash charges recorded through income including amortization of intangible assets related to acquisitions and future income taxes. During the third quarter of 2010 and over the next several quarters, payments will be made related to restructuring activities pertaining to the operational integration of the Business as well as payments related to the settlement of outstanding contractual obligations within Resolve.Expenditures on Capital Assets and Contract PaymentsCompared to the prior year periods, total capital asset expenditures increased by $4.6 million to $7.1 million in the third quarter of 2010 and increased by $8.1 million to $14.6 million over the first nine months of 2010. Fixed contract payments decreased by $0.3 million in the third quarter of 2010 compared to 2009 and decreased by $1.4 million in the first nine months of 2010 compared to the same period in 2009. The increase in capital expenditures over 2009 relates to the increased size of operations since the acquisition of Resolve in July 2009 and the Company's plans for further integration activities. The changes in fixed contract payments relate to timing of when payments are made.The Business' capital program provides for continued expenditures to be funded by cash flows from operations.DistributionsThe Trustees of the Fund establish distribution levels of the Fund with reference to its financial position, historical results, projected performance of the Business and funds required for potential acquisitions.The Fund paid cash distributions of $0.4599 per unit ($24.5 million) during the third quarter of 2010 and $1.3797 per unit ($73.4 million) in the first nine months of 2010, compared to $0.4599 per unit ($23.1 million) and $1.3797 per unit ($63.5 million) in the first three and nine months ended September 30, 2009 respectively. For the third quarter of 2010 both distributions declared and paid per unit were unchanged.On an annualized basis, the monthly cash distribution rate for September 2010 was $1.84 per unit, unchanged from September 2009.Distributions paid can be different than distributions declared during a period. Monthly distributions are declared by the Fund for unitholders of record on the last business day of each month and are paid within 31 days following each month end. In the third quarter of 2010, these amounts were the same on a per unit basis.In general, mutual fund trusts, like the Fund, must distribute all their taxable income to their unitholders in order not to pay income taxes in the trust.The estimated tax allocation of distributions to be declared for 2010 is 100% "other income", as was the case for all of 2009.The Fund may issue an unlimited number of trust units. Each trust unit is transferable and represents an equal, undivided beneficial interest in any distribution from the Fund and the net assets of the Fund. All units are of the same class with equal rights and privileges and are not subject to future calls or assessments. Each unit entitles the holder to one vote at all meetings of unitholders. As at September 30, 2010 and November 2, 2010, the total number of trust units outstanding was 53,233,373, which was the same as at September 30, 2009. This reflects an issuance of 9,286,581 trust units on July 27, 2009 in exchange for all the outstanding units of Resolve. << Changes in Non-Cash Working Capital and Other Items (in thousands of Canadian dollars, unaudited) Three months ended Nine months ended September 30, September 30, 2010 2009 2010 2009 ------------------------------------------------------------------------- Decrease (increase) in non-cash working capital items $ 1,909 $ 4,452 $ (16,347) $ (13,157) Decrease (increase) in other operating assets and liabilities 510 (396) 2,867 20 ------------------------------------------------------------------------- Decrease (increase) in non-cash working capital and other items $ 2,419 $ 4,056 $ (13,480) $ (13,137) ------------------------------------------------------------------------- ------------------------------------------------------------------------- >>The net decrease in non-cash working capital items for the third quarter of 2010 is attributable to the decrease in trade receivables offset by a decrease in trade payables.The net increase in non-cash working capital items for the nine months ended September 30, 2010 was primarily related to the increase in trade receivables attributable to higher revenues and revenues that are subject to seasonality are generally stronger in the second and third quarters.The Company expects to experience a continuing increase in the volatility of non-cash working capital due to the nature and timing of services rendered in connection with the businesses recently acquired.AcquisitionWith the acquisition of Resolve, the Business significantly advanced its strategy by expanding its service offerings within the financial services industry, by establishing market leading positions in several niche markets and by increasing its overall servicing capabilities. The acquisition was funded through the issuance of Davis + Henderson units in exchange for all the outstanding units of Resolve, valued at $119.5 million (net of after-tax issuance costs of $0.6 million), and the assumption of Resolve debt. Including transaction costs and estimated restructuring costs, the total cost of the acquisition (excluding assumed debt) is approximately $130.5 million. During the third quarter of 2010, management completed its assessment of the valuation of the assets acquired and liabilities assumed for this acquisition including finalizing related restructuring charges and consequently, recorded an adjustment to the purchase price allocation of approximately $6.9 million, net of taxes. For additional information on the acquisition and the final allocation of the purchase price, refer to Note 2 to the consolidated financial statements.DivestitureAs of September 30, 2010, the non-strategic portion of the contact centre operations of D+H were held for sale, and the results of these operations were classified as discontinued operations for both current and comparative periods.On October 7, 2010, D+H announced the sale of this part of the Business, which primarily served non-core markets of D+H, for proceeds approximately equal to the working capital and certain assets of the operations sold. The transaction fees and other transition costs relating to the disposition were recognized as part of the final purchase price allocation for Resolve.Cash Balances and Long-Term IndebtednessAt September 30, 2010, cash and cash equivalents totalled $1.0 million, compared to $3.9 million at December 31, 2009. The long-term indebtedness as at September 30, 2010, before deducting unamortized deferred finance fees, was $205.0 million compared to $210.0 million at December 31, 2009 and consisted of drawings under a Fifth Amended and Restated Credit Agreement dated June 30, 2010 ("Credit Agreement") of $155.0 million and fixed-rate Bonds issued under a Note Purchase and Private Shelf Agreement dated June 30, 2010 ("Note Purchase Agreement") of $50.0 million. The long-term indebtedness is recorded on the Balance Sheet, net of unamortized deferred financing fees of $2.9 million as at September 30, 2010.Total senior secured credit facilities available at September 30, 2010 were $220.0 million, consisting of a non-revolving term loan of $130.0 million and a revolving term credit facility of $90.0 million that each mature on June 30, 2013. As of September 30, 2010, the Business had drawn $130.0 million under the non-revolving term loan and $25.0 million under the revolving term credit facility. The Business is permitted to draw on the revolving facility's available balance of $65.0 million to fund capital expenditures or for other general purposes. The Credit Agreement contains a number of covenants and restrictions, including the requirement to meet certain financial ratios and financial condition tests. The financial covenants include a leverage test, a fixed charge coverage ratio test and a limit on the maximum amount of distributions that may be made by Davis + Henderson, Limited Partnership to the Fund during each rolling four-quarter period. Davis + Henderson was in compliance with all of its financial covenants and financial condition tests as of the end of its latest quarterly period. A copy of the Credit Agreement is available at www.sedar.com.The Business has $50.0 million of Bonds issued under the senior secured Note Purchase Agreement at a fixed-interest rate of 5.99% until maturity on June 30, 2017. The Bonds rank equally in all respects with amounts outstanding under the Credit Agreement, any related hedging contracts and cash management facilities and benefit from the same financial covenants as exist under the Credit Agreement described above. The Note Purchase Agreement is available at www.sedar.com.To reduce liquidity risk, management has historically renewed the terms of the Fund's long-term indebtedness in advance of its maturity dates and the Fund has maintained financial ratios that are conservative compared to financial covenants applicable to the financing arrangements. To enhance its liquidity position, in prior years the Fund has made numerous voluntary payments on its outstanding long-term indebtedness and a portion of its committed term credit facilities remain undrawn. Further, the Credit Agreement and the Note Purchase Agreement provide for additional uncommitted credit arrangements of up to $150.0 million and additional Bonds under the uncommitted shelf note facility of up to $30.0 million with the use of these arrangements subject to the prior approval of the relevant lenders with any fees, spreads and other additional terms to be negotiated at that time.The Fund looks to hedge against increases in market interest rates by utilizing interest-rate swaps. In respect of interest-rate swap hedge contracts with its lenders, as of September 30, 2010 the Fund's borrowing rates on the outstanding long-term indebtedness under the Credit Agreement are effectively fixed at the interest rates and for the time periods ending as outlined in the table below: << ------------------------------------------------------------------------- Fair value of interest-rate swaps (in thousands of Canadian dollars,unaudited) -------------------- Notional Interest Maturity Date Amount Asset Liability Rate(1) ------------------------------------------------------------------------- January 5, 2011 22,000 - 104 1.980% June 15, 2011 20,000 - 633 4.685% June 15, 2011 25,000 - 791 4.685% December 18, 2014 25,000 - 822 2.720% March 18, 2015 25,000 - 1,054 2.940% March 20, 2017 25,000 - 1,571 3.350% March 20, 2017 20,000 - 1,276 3.366% ------------------------------------------------------------------------- $ 162,000 $ - $ 6,251 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) The listed interest rates exclude bankers' acceptance fees and prime-rate spreads currently in effect. Such fees and spreads could increase or decrease depending on the Fund's financial leverage as compared to certain levels specified in the Credit Agreement. As of September 30, 2010, the Fund's long-term bank indebtedness was subject to bankers' acceptance fees of 2.50% over the applicable BA rate and prime rate spreads of 1.50% over the prime rate. >>As at September 30, 2010, the Fund would have to pay the fair value of $6.3 million if it were to close out all of the interest-rate swap contracts as set out on the balance sheet. It is not the present intention of management to close out these contracts and the Company has historically held its derivative contracts to maturity. The Fund expects to continue to enter into interest-rate swaps for the purpose of hedging interest rates.As of September 30, 2010, the average effective interest rate on the Fund's total indebtedness is approximately 6.0%.The Fund also enters into foreign-exchange contracts to fix foreign-exchange rates on its foreign currency transactions, which are relatively minor. As at September 30, 2010, the Fund had three foreign-exchange contracts in place with one of its lenders amounting to $1.5 million USD and the last of these contracts expires on December 15, 2010.The Company believes that its customers, suppliers and lenders, while impacted by economic volatility, will continue to operate with the Company on similar terms to those currently in place. As well, while the Company's products and services may be impacted by the changing economic environment, the Company expects to remain profitable and generate positive cash flow.Cash flows from operations, together with cash balances on hand and unutilized term credit facilities are expected to be sufficient to fund the Business' operating requirements, asset expenditures, contractual obligations and anticipated distributions.Business RisksFor a comprehensive discussion of business risks, please refer to the Fund's most recently filed Annual Information Form and Annual Report available on SEDAR at www.sedar.com.Non-GAAP MeasuresThe information presented within the tables in this MD&A include certain adjusted financial measures such as "EBITDA" (Earnings before interest, taxes, depreciation and amortization), "Adjusted income" (net income before certain non-cash charges and discontinued operations) and "Adjusted cash flow after capital expenditures and contract payments", all of which are not defined terms under Canadian generally accepted accounting principles ("GAAP"). These non-GAAP financial measures are derived from, and should be read in conjunction with, the Consolidated Statements of Income and the Consolidated Statements of Cash Flow. Management believes these supplementary disclosures provide useful additional information related to the operating results of the Fund.Management uses these subtotals as measures of financial performance and as a supplement to the Consolidated Statements of Income and Consolidated Statements of Cash Flow. Investors are cautioned that these measures should not be construed as an alternative to using net income as a measure of profitability or as an alternative to the GAAP Consolidated Statements of Income or other GAAP statements. Further, the Fund's method of calculating each balance may not be comparable to calculations used by other Income Trusts bearing the same description.EBITDAIn addition to its use by management as an internal measure of financial performance, EBITDA is used to measure (with adjustments) compliance with certain financial covenants under the Fund's credit facility. EBITDA is also widely used by the Fund and others in assessing performance and value of a business. EBITDA has limitations as an analytical tool, and the reader should not consider it in isolation or as a substitute for analysis of results as reported under GAAP.Adjusted IncomeAdjusted income is used as a measure of internal performance similar to net income, but is calculated after removing the impacts of discontinued operations and certain non-cash items such as mark-to-market adjustments on interest-rate swaps and foreign exchange contracts, amortization of intangibles from acquisition and changes in future income tax provisions. These items are excluded in calculating Adjusted income as they are not considered indicative of the financial performance of the Business for the period being reviewed.Adjusted Cash Flows from Operating Activities and Adjusted Cash Flows after Capital Expenditures and Contract PaymentsCertain subtotals presented within the cash flows table above, such as "Adjusted cash flows from operating activities" and "Adjusted cash flows after capital expenditures and contract payments", are not defined terms under GAAP. Management uses these subtotals as measures of internal performance and as a supplement to the Consolidated Statements of Cash Flows.OUTLOOKDavis + Henderson's overall long-term financial objective for revenues is to deliver stable and modestly growing cash distributions by growing revenue in the 3% to 5% range. For 2009 and the first nine months of 2010, revenue was substantially above this range due to the inclusion of the results of Resolve. As measured on a quarter-over-quarter basis, future comparative periods will fully include the Resolve results.In the immediate future, we will focus on executing our organic growth initiatives, integrating the Business and continuing to diligently manage costs. Beyond the immediate term, we believe that our market leadership and combined capabilities will solidly position D+H in the markets we serve and allow us to grow consistent with our long-term objectives.As set out in our statement of strategy, we look to grow our Business through a combination of organic initiatives, partnering with third parties and by way of selective acquisitions. Our organic initiatives are many and include: (1) the ongoing enhancement and evolution of our cheque program through the addition of value-added service enhancements (such as our IDefence(R) and BizAssist(R) programs), (2) the expansion of our current services within the student lending, commercial and personal lending areas (including the mortgage, credit card and personal property markets), (3) selling and delivering our lending technology services to new customers and (4) combining the capabilities of D+H together with those of the recently acquired Resolve and Cyence businesses to develop new service offerings for our financial institution customers.With the inclusion of several new service areas over the last several years, we expect to experience some level of increase in variability in year-over-year quarterly revenues, earnings and cash flows, due to: (i) volume variances within the lien registration service area; (ii) variability in professional services work; and (iii) variability in fees relating to mortgage origination services revenues due to recent significant variability in the housing market. The Company believes that, in general, revenues in the latter part of 2009 and early 2010 benefited from stronger volumes as housing and mortgage markets, and auto and personal lending markets increased following earlier contractions. During the third quarter and for the next several quarters, our results will be compared to these earlier periods that featured strong activity in real estate, mortgage and other lending markets where activity is now expected to moderate.For 2010, with a full-year inclusion of Resolve and various integration and transformation initiatives, we expect the consolidated capital program to be in the range of $28.0 million to $30.0 million. The fourth quarter capital spend will be higher than the third quarter due to the timing of expenditures relating to the additional initiatives designed to save costs and improve delivery within the integrated business and to support revenue growth through the building of technology products. For 2011, we anticipate that our capital spending will be similar to 2010.Since December 2001, the initial public offering date of Davis + Henderson Income Fund, the Business has operated as a subsidiary of an Income Trust pursuant to its Declaration of Trust. In 2007, changes were made to the Income Tax Act that will require certain Income Trusts, including D+H, to be subject to taxes after fiscal 2010, similar to those paid by taxable Canadian corporations. At a meeting of unitholders held on June 17, 2010, D+H unitholders approved a proposal to convert from an income trust into a corporation effective January 1, 2011. Upon completion of the conversion, unitholders will receive on a tax deferred, roll-over basis, one share of the resulting public corporation for each unit held. The information circular in respect of the Meeting, which provided a detailed outline of the conversion is available on SEDAR at www.sedar.com.Independent of the conversion plan and as a result of the enacted tax changes, the Business will be subject to taxes commencing in 2011 that will reduce the amount of cash flow otherwise available for distribution. Our current intention is to pay quarterly dividends commencing in 2011 at an initial annualized rate of $1.20 per share. For the remainder of 2010, we intend to maintain our current annualized distributions at $1.84 per unit ($0.1533 per unit monthly). Subsequent to the conversion, distributions made by Davis + Henderson will be taxed as dividends rather than regular income as they are today. Investors that are taxed as individuals may be entitled to dividend tax credits which may enhance their after-tax yield and therefore significantly reduce the after-tax impact of the reduction in distributions.Consistent with past practices, actual distributions will only be made to owners of record based upon a declaration by the Trustees. Among other items, in determining actual distributions, the Trustees will consider the financial performance, capital plans, acquisition plans, expectations of future economic conditions and other factors.Notwithstanding the structural and distribution changes attributed to the changes to the law, the strategies and objectives of the Business will remain unchanged.Caution Concerning Forward-Looking StatementsThis MD&A contains certain statements that constitute forward-looking information within the meaning of applicable securities laws ("forward-looking statements"). Statements concerning Davis + Henderson's objectives, goals, strategies, intentions, plans, beliefs, expectations and estimates, and the business, operations, financial performance and condition of Davis + Henderson are forward-looking statements. The words "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 Davis + Henderson to meet its revenue and EBITDA targets; general industry and economic conditions; changes in Davis + Henderson's relationship with its customers and suppliers; pricing pressures and other competitive factors. Davis + Henderson has also made certain macroeconomic and general industry assumptions in the preparation of such forward-looking statements. While Davis + Henderson considers these factors and assumptions to be reasonable based on information currently available, they may prove to be incorrect.Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Business, or developments in Davis + Henderson'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 presented by declines in the use of cheques by consumers; the Fund'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 the Fund's financial objective; stability and growth in the real estate, mortgage and lending markets; as well as general market conditions, including economic and interest rate dynamics and investor interest in, and government regulations relating to, Income Trusts. 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 Davis + Henderson 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.ADDITIONAL INFORMATIONAdditional information relating to the Fund, including the Fund's most recently filed Annual Information Form, is available on SEDAR at www.sedar.com. << Davis + Henderson Income Fund Unaudited Consolidated Financial Statements For the Three and Nine Months Ended September 30, 2010 and 2009 CONSOLIDATED BALANCE SHEETS (in thousands of Canadian dollars, unaudited) September 30, December 31, 2010 2009 ------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 1,024 $ 3,878 Accounts receivable (note 3) 63,801 57,251 Inventory (note 4) 5,843 6,197 Prepaid expenses 8,018 6,156 Future income tax asset - current (note 11) 3,583 3,274 Assets held for sale (note 18) 1,731 - ------------------------------------------------------------------------- 84,000 76,756 Future income tax asset (note 11) 24,817 21,425 Capital assets (note 5) 30,023 33,296 Fair value of derivatives (note 9) - 456 Intangible assets (note 6) 267,938 289,774 Goodwill (note 7) 527,242 519,848 ------------------------------------------------------------------------- $ 934,020 $ 941,555 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES AND UNITHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 73,979 $ 72,274 Distributions payable to unitholders 8,161 8,161 Deferred revenue - current 6,567 7,028 Liabilities held for sale (note 18) 129 - ------------------------------------------------------------------------ 88,836 87,463 Long-term indebtedness (note 8) 202,055 208,463 Fair value of derivatives (note 9) 6,253 4,733 Deferred revenue - non-current 9,370 9,510 Other long-term liabilities (note 10) 8,559 7,161 Future income tax liability (note 11) 47,088 48,934 ------------------------------------------------------------------------- 362,161 366,264 Unitholders' equity: Trust units (note 12) 595,859 595,859 Deficit (23,862) (20,086) Accumulated other comprehensive income (loss) (138) (482) ------------------------------------------------------------------------- 571,859 575,291 Commitments (note 14) ------------------------------------------------------------------------- $ 934,020 $ 941,555 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. CONSOLIDATED STATEMENTS OF INCOME (in thousands of Canadian dollars, except per unit amounts, unaudited) Three months ended Nine months ended September September September September 30, 2010 30, 2009 30, 2010 30, 2009 ------------------------------------------------------------------------- Revenue $ 161,900 $ 139,245 $ 479,917 $ 322,331 Cost of sales and operating expenses (note 4) 121,679 102,022 358,930 224,816 Restructuring charges (note 17) 2,160 - 2,160 - Amortization of capital assets 2,023 2,088 5,666 4,264 ------------------------------------------------------------------------- 36,038 35,135 113,161 93,251 Interest expense 3,569 2,784 10,927 6,590 Net unrealized loss (gain) on derivative instruments 1,514 (1,647) 1,649 (2,525) Amortization of intangible assets (note 6) 9,564 8,033 29,090 19,547 ------------------------------------------------------------------------- Income from continuing operations before income taxes 21,391 25,965 71,495 69,639 Future income tax expense (recovery) (note 11) (645) 1,015 619 233 ------------------------------------------------------------------------- Income from continuing operations 22,036 24,950 70,876 69,406 Income (loss) from discontinued operations, net of taxes (note 18) (465) 7 (1,206) 7 ------------------------------------------------------------------------- Net income $ 21,571 $ 24,957 $ 69,670 $ 69,413 ------------------------------------------------------------------------- Net income per unit, basic and diluted $ 0.4052 $ 0.4931 $ 1.3088 $ 1.5027 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands of Canadian dollars, unaudited) Three months ended Nine months ended September September September September 30, 2010 30, 2009 30, 2010 30, 2009 ------------------------------------------------------------------------- Net income $ 21,571 $ 24,957 $ 69,670 $ 69,413 Other comprehensive income: Amortization of mark-to- market adjustment of interest-rate swaps 52 103 344 375 ------------------------------------------------------------------------- Total comprehensive income $ 21,623 $ 25,060 $ 70,014 $ 69,788 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. CONSOLIDATED STATEMENTS OF DEFICIT AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (in thousands of Canadian dollars, unaudited) Three months ended Nine months ended September September September September 30, 2010 30, 2009 30, 2010 30, 2009 ------------------------------------------------------------------------- Deficit Deficit, beginning of period $ (20,951) $ (21,680) $ (20,086) $ (25,714) Net income 21,571 24,957 69,670 69,413 Distributions (24,482) (24,482) (73,446) (64,904) ------------------------------------------------------------------------- Deficit, end of period (23,862) (21,205) (23,862) (21,205) ------------------------------------------------------------------------- Accumulated Other Comprehensive Income (Loss) Accumulated other comprehensive income (loss), beginning of period (190) (688) (482) (960) Other comprehensive income: Amortization of mark-to-market adjustment of interest-rate swaps 52 103 344 375 ------------------------------------------------------------------------- Accumulated other comprehensive income (loss), end of period(1) (138) (585) (138) (585) ------------------------------------------------------------------------- Deficit and accumulated other comprehensive income (loss), end of period $ (24,000) $ (21,790) $ (24,000) $ (21,790) ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Accumulated other comprehensive income (loss) consists of cumulative net gains and losses that were deferred prior to January 1, 2007 when hedge accounting was used by the Fund. The accompanying notes are an integral part of these consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of Canadian dollars, unaudited) Three months ended Nine months ended September September September September 30, 2010 30, 2009 30, 2010 30, 2009 ------------------------------------------------------------------------- Cash and cash equivalents provided by (used in): OPERATING ACTIVITIES Net income from continuing operations $ 22,036 $ 24,950 $ 70,876 $ 69,406 Add: Amortization of capital assets 2,023 2,088 5,666 4,264 Amortization of capital assets included in cost of sales 368 326 1,085 949 Amortization of intangible assets 9,564 8,033 29,090 19,547 Amortization of mark-to- market adjustment of interest-rate swaps 52 103 344 375 Net unrealized loss (gain) on derivative instruments 1,514 (1,647) 1,649 (2,525) Future income tax expense (recovery) (645) 1,015 619 233 ------------------------------------------------------------------------- 34,912 34,868 109,329 92,249 Decrease (increase) in non- cash working capital items 1,909 4,452 (16,347) (13,157) Changes in other operating assets and liabilities 510 (396) 2,867 20 Cash flows from discontinued operations (588) 35 (1,512) 35 ------------------------------------------------------------------------- 36,743 38,959 94,337 79,147 ------------------------------------------------------------------------- FINANCING ACTIVITIES Repayment of long-term indebtedness (5,000) (3,948) (65,000) (5,948) Proceeds from long-term indebtedness - - 60,000 - Issuance costs of long-term indebtedness - (1,621) (2,564) (1,621) Issuance costs of trust units - (700) - (700) Distributions paid to unitholders (24,482) (23,058) (73,446) (63,480) ------------------------------------------------------------------------- (29,482) (29,327) (81,010) (71,749) ------------------------------------------------------------------------- INVESTING ACTIVITIES Expenditures on capital assets, non-acquisition intangible assets and long-term contracts (7,079) (2,818) (16,348) (9,672) Acquisition of businesses and acquisition adjustments(note 2) 167 (9,588) 167 (9,425) ------------------------------------------------------------------------- (6,912) (12,406) (16,181) (19,097) ------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents for the period 349 (2,774) (2,854) (11,699) Cash and cash equivalents, beginning of period 675 3,141 3,878 12,066 ------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 1,024 $ 367 $ 1,024 $ 367 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Supplementary information: Cash interest paid $ 4,411 $ 3,436 $ 9,816 $ 6,153 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Three and nine months ended September 30, 2010 and 2009 (in thousands of Canadian dollars, except unit and per unit amounts, unaudited) NATURE OF BUSINESS Davis + Henderson Income Fund (the "Fund") is a limited-purpose trust, formed under the laws of the Province of Ontario by a declaration of trust dated November 6, 2001 and as amended and restated on July 23, 2004. The Fund holds indirectly all of the partnership units of Davis + Henderson, Limited Partnership ("Davis + Henderson L.P.") and its subsidiaries including Filogix Limited Partnership ("Filogix L.P."), Filogix Inc., Cyence International Inc. ("Cyence") and Resolve Corporation ("Resolve"). 1. SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared using the accounting policies generally accepted in Canada and follow the same accounting policies and their method of application as the Fund's consolidated financial statements for the year ended December 31, 2009, which are included in the 2009 Annual Report. They do not conform in all respects with disclosures required for annual financial statements and should be read in conjunction with the audited financial statements of the Fund for the year ended December 31, 2009. 2. ACQUISITION Resolve Business On July 27, 2009, the Fund acquired all of the outstanding units of Resolve Business Outsourcing Income Fund through the exchange of 0.285 trust units of the Fund for each unit of Resolve Business Outsourcing Income Fund. A total of 9,286,581 Fund trust units were issued for this exchange. Resolve is a leading provider in Canada of student loan administration services, credit card portfolio management services, and search and registration services, among other offerings. The net assets acquired and consideration given were as follows: Net assets acquired, at fair value: Current assets $ 55,362 Capital and other assets 16,425 Intangible assets 160,396 Future income tax asset 27,152 Payables and other current liabilities (74,123) Future income tax liability (45,100) Long-term indebtedness (73,812) Other long-term liabilities (6,800) ------------------------------------------------------------------------- 59,500 Goodwill 71,026 ------------------------------------------------------------------------- Total $ 130,526 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Consideration for 100% ownership: Units issued $ 120,094 Acquisition costs, net of cash acquired of $3,212 10,432 ------------------------------------------------------------------------- Total $ 130,526 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The value of the Fund's trust units issued on acquisition reflects the unit's average trading price over a five-day period surrounding the Fund's announcement to acquire Resolve Business Outsourcing Income Fund on June 3, 2009. The acquisition costs of $13.6 million, which included transaction and restructuring costs were reduced by Resolve's cash on hand of $3.2 million at the date of acquisition. In addition, the Fund also incurred after tax costs of $0.6 million to issue additional trust units. During the three months ended September 30, 2010, management completed its assessment of the valuation of the assets acquired and liabilities assumed for this acquisition and the purchase price allocation shown above has been finalized. An adjustment to the purchase price allocation of approximately $6.9 million (net of taxes) was recorded during the three months ended September 30, 2010, that included adjustments relating to severances, transaction fees and other transaction costs relating to the disposition of the non-strategic part of the contact centre operations, estimated liabilities related to the consolidation of facilities and the finalization of other liabilities as at the acquisition date. This adjustment includes a revaluation of intangibles which resulted in a reduction of intangible assets of $1.0 million. 3. ACCOUNTS RECEIVABLE September 30, December 31, 2010 2009 ------------------------------------------------------------------------- Trade receivables $ 63,311 $ 56,073 Other receivables 490 1,178 ------------------------------------------------------------------------- $ 63,801 $ 57,251 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The amount for allowance for doubtful accounts recorded as at September 30, 2010 was $960 (December 31, 2009 - $614). The amount of past due accounts as at September 30, 2010 was $2,242 (Q3 2009 - $2,200). 4. INVENTORY September 30, December 31, 2010 2009 ------------------------------------------------------------------------- Raw materials $ 2,376 $ 2,457 Work-in-process 1,480 1,322 Finished goods 1,987 2,418 ------------------------------------------------------------------------- $ 5,843 $ 6,197 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Raw materials primarily consist of paper but also include foil, hologram and ink. Work-in-process consists of base stock, which refers to sheets of cheque stock with non-personalized background print, and manufacturer coupons. Finished goods primarily consist of retail products, labels, accessories, security bags and corporate seals. Inventory that was recognized as cost of sales during the three months ended September 30, 2010 was $10,066 (Q3 2009 - $11,285) and nine months ended September 30, 2010 was $31,143 (nine months ended September 30, 2009 - $33,000). The amount of write-down of inventories recognized as an expense during the three months ended September 30, 2010 was $39 (Q3 2009 - $18) and nine months ended September 30, 2010 was $140 (nine months ended September 30, 2009 - $144). 5. CAPITAL ASSETS Three months ended September 30, 2010 ------------------------------------------------------------------------- Furniture, fixtures and Machinery leasehold Land and and Computer improve- buildings equipment equipment ments Total ------------------------------------------------------------------------- Cost Balance at July 1, 2010 $ 2,975 $ 20,201 $ 25,555 $ 13,191 $ 61,922 Additions - 11 2,082 403 2,496 Other movements(1) (800) - - (98) (898) ------------------------------------------------------------------------- At September 30, 2010 $ 2,175 $ 20,212 $ 27,637 $ 13,496 $ 63,520 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Depreciation and impairment losses Balance at July 1, 2010 $ 193 $ 11,080 $ 11,793 $ 8,019 $ 31,085 Amortization 46 311 1,410 624 2,391 Other movements(1) 7 - - 14 21 ------------------------------------------------------------------------- At September 30, 2010 $ 246 $ 11,391 $ 13,203 $ 8,657 $ 33,497 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net carrying amount At September 30, 2010 $ 1,929 $ 8,821 $ 14,434 $ 4,839 $ 30,023 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Three months ended September 30, 2009 ------------------------------------------------------------------------- Furniture, fixtures and Machinery leasehold Land and and Computer improve- buildings equipment equipment ments Total ------------------------------------------------------------------------- Cost Balance at July 1, 2009 $ - $ 15,667 $ 18,238 $ 8,814 $ 42,719 Additions 2,975 3,962 5,694 3,762 $ 16,393 Other movements(1) - - - - - ------------------------------------------------------------------------- At September 30, 2009 $ 2,975 $ 19,629 $ 23,932 $ 12,576 $ 59,112 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Depreciation and impairment losses Balance at July 1, 2009 $ - $ 9,031 $ 7,740 $ 6,702 $ 23,473 Amortization(2) 26 571 1,445 384 $ 2,426 Other movements(1) - - - - - ------------------------------------------------------------------------- At September 30, 2009 $ 26 $ 9,602 $ 9,185 $ 7,086 $ 25,899 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net carrying amount At September 30, 2009 $ 2,949 $ 10,027 $ 14,747 $ 5,490 $ 33,213 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Nine months ended September 30, 2010 ------------------------------------------------------------------------- Furniture, fixtures and Machinery leasehold Land and and Computer improve- buildings equipment equipment ments Total ------------------------------------------------------------------------- Cost Balance at January 1, 2010 $ 2,975 $ 19,971 $ 25,589 $ 12,798 $ 61,333 Additions - 212 3,462 763 4,437 Other movements(1) (800) 29 (1,414) (65) (2,250) ------------------------------------------------------------------------- At September 30, 2010 $ 2,175 $ 20,212 $ 27,637 $ 13,496 $ 63,520 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Depreciation and impairment losses Balance at January 1, 2010 $ 45 $ 9,998 $ 10,617 $ 7,377 $ 28,037 Amortization 180 1,364 3,948 1,259 6,751 Other movements(1) 21 29 (1,362) 21 (1,291) ------------------------------------------------------------------------- At September 30, 2010 $ 246 $ 11,391 $ 13,203 $ 8,657 $ 33,497 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net carrying amount At September 30, 2010 $ 1,929 $ 8,821 $ 14,434 $ 4,839 $ 30,023 At December 31, 2009 $ 2,930 $ 9,973 $ 14,972 $ 5,421 $ 33,296 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Nine months ended September 30, 2009 ------------------------------------------------------------------------- Furniture, fixtures and Machinery leasehold Land and and Computer improve- buildings equipment equipment ments Total ------------------------------------------------------------------------- Cost Balance at January 1, 2009 $ - $ 15,589 $ 18,491 $ 9,048 $ 43,128 Additions 2,975 4,079 7,219 3,810 18,083 Other movements(1) - (39) (1,778) (282) (2,099) ------------------------------------------------------------------------- At September 30, 2009 $ 2,975 $ 19,629 $ 23,932 $ 12,576 $ 59,112 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Depreciation and impairment losses Balance at January 1, 2009 $ - $ 8,609 $ 7,438 $ 6,617 $ 22,664 Amortization(2) 26 1,025 3,423 751 5,225 Other movements(1) - (32) (1,676) (282) (1,990) ------------------------------------------------------------------------- At September 30, 2009 $ 26 $ 9,602 $ 9,185 $ 7,086 $ 25,899 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net carrying amount At September 30, 2009 $ 2,949 $ 10,027 $ 14,747 $ 5,490 $ 33,213 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Other movements primarily relate to fully amortized assets removed from the accounts during the period. Other movements for the three and nine months ended September 30, 2010 reflect assets removed and classified as held for sale. (2) Amortization for the three and nine months ended September 30, 2009 includes $12 of amortization related to discontinued operations. 6. INTANGIBLE ASSETS Three months ended September 30, 2010 --------------------------------------------------- Contracts Software --------- --------------------- Internally Purchased Developed --------------------------------------------------- Cost At July 1, 2010 $ 4,979 $ 28,513 $ 17,832 Additions - 1,469 3,114 Other movements(1) - - - --------------------------------------------------- At September 30, 2010 4,979 29,982 20,946 --------------------------------------------------- --------------------------------------------------- Amortization and impairment loss At July 1, 2010 $ 1,972 $ 19,810 $ 5,411 Amortization 600 1,096 943 Other movements(1) - 19 - --------------------------------------------------- At September 30, 2010 2,572 20,925 6,354 --------------------------------------------------- --------------------------------------------------- Net carrying amount At September 30, 2010 2,407 9,057 14,592 --------------------------------------------------- --------------------------------------------------- Three months ended September 30, 2010 ------------------------------------------------------------------------- Acquisition of businesses Total -------------------------------------------- ---------- Customer Proprietary Brand relation- Contracts software names ships ------------------------------------------------------------------------- Cost At July 1, 2010 $ 438 $ 70,500 $ 10,900 $229,335 $362,497 Additions - - - - 4,583 Other movements(1) - - - (1,000) (1,000) ------------------------------------------------------------------------- At September 30, 2010 438 70,500 10,900 228,335 366,080 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Amortization and impairment loss At July 1, 2010 $ 346 $ 20,814 $ 2,545 $ 37,661 $ 88,559 Amortization 54 1,832 182 4,857 9,564 Other movements(1) - - - - 19 ------------------------------------------------------------------------- At September 30, 2010 400 22,646 2,727 42,518 98,142 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net carrying amount At September 30, 2010 38 47,854 8,173 185,817 267,938 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Three months ended September 30, 2009 --------------------------------------------------- Contracts Software --------- --------------------- Internally Purchased Developed --------------------------------------------------- Cost At July 1, 2009 $ 6,499 $ 20,422 $ 10,422 Additions 300 4,222 3,442 Other movements(1) - - - --------------------------------------------------- At September 30, 2009 $ 6,799 $ 24,644 $ 13,864 --------------------------------------------------- --------------------------------------------------- Amortization and impairment loss At July 1, 2009 $ 3,501 $ 17,115 $ 3,520 Amortization(2) 601 1,009 494 Other movements(1) - - - --------------------------------------------------- At September 30, 2009 $ 4,102 $ 18,124 $ 4,014 --------------------------------------------------- --------------------------------------------------- Net carrying amount At September 30, 2009 $ 2,697 $ 6,520 $ 9,850 --------------------------------------------------- --------------------------------------------------- Three months ended September 30, 2009 ------------------------------------------------------------------------- Acquisition of businesses Total -------------------------------------------- ---------- Customer Proprietary Brand relation- Contracts software names ships ------------------------------------------------------------------------- Cost At July 1, 2009 $ 1,201 $ 55,900 $ 10,900 $ 90,735 $196,079 Additions - 14,600 - 142,200 164,764 Other movements(1) (1,201) - - - (1,201) ------------------------------------------------------------------------- At September 30, 2009 $ - $ 70,500 $ 10,900 $232,935 $359,642 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Amortization and impairment loss At July 1, 2009 $ 1,201 $ 13,629 $ 1,816 $ 18,392 $ 59,174 Amortization(2) - 1,689 182 4,071 8,046 Other movements(1) (1,201) - - - (1,201) ------------------------------------------------------------------------- At September 30, 2009 $ - $ 15,318 $ 1,998 $ 22,463 $ 66,019 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net carrying amount At September 30, 2009 $ - $ 55,182 $ 8,902 $210,472 $293,623 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Nine months ended September 30, 2010 --------------------------------------------------- Contracts Software --------- --------------------- Internally Purchased Developed --------------------------------------------------- Cost At January 1, 2010 $ 6,799 $ 29,814 $ 14,126 Additions 1,717 3,452 6,742 Other movements(1) (3,537) (3,284) 78 --------------------------------------------------- At September 30, 2010 4,979 29,982 20,946 --------------------------------------------------- --------------------------------------------------- Amortization and impairment loss At January 1, 2010 $ 4,693 $ 19,261 $ 4,674 Amortization 1,416 3,811 2,682 Other movements(1) (3,537) (2,147) (1,002) --------------------------------------------------- At September 30, 2010 2,572 20,925 6,354 --------------------------------------------------- --------------------------------------------------- Net carrying amount At September 30, 2010$ 2,407 $ 9,057 $ 14,592 At December 31, 2009 $ 2,106 $ 10,553 $ 9,452 --------------------------------------------------- --------------------------------------------------- Nine months ended September 30, 2010 ------------------------------------------------------------------------- Acquisition of businesses Total -------------------------------------------- ---------- Customer Proprietary Brand relation- Contracts software names ships ------------------------------------------------------------------------- Cost At January 1, 2010 $ 438 $ 70,500 $ 10,900 $232,935 $365,512 Additions - - - - 11,911 Other movements(1) - - - (4,600) (11,343) ------------------------------------------------------------------------- At September 30, 2010 438 70,500 10,900 228,335 366,080 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Amortization and impairment loss At January 1, 2010 $ 37 $ 17,149 $ 2,180 $ 27,744 $ 75,738 Amortization 363 5,497 547 14,774 29,090 Other movements(1) - - - - (6,686) ------------------------------------------------------------------------- At September 30, 2010 400 22,646 2,727 42,518 98,142 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net carrying amount At September 30, 2010$ 38 $ 47,854 $ 8,173 $185,817 $267,938 At December 31, 2009 $ 401 $ 53,351 $ 8,720 $205,191 $289,774 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Nine months ended September 30, 2009 --------------------------------------------------- Contracts Software --------- --------------------- Internally Purchased developed --------------------------------------------------- Cost At January 1, 2009 $ 8,761 $ 21,727 $ 10,676 Additions 1,600 5,340 4,696 Other movements(1) (3,562) (2,423) (1,508) --------------------------------------------------- At September 30, 2009 $ 6,799 $ 24,644 $ 13,864 --------------------------------------------------- --------------------------------------------------- Amortization and impairment loss At January 1, 2009 $ 5,414 $ 17,393 $ 4,194 Amortization(2) 2,250 3,231 1,323 Other movements(1) (3,562) (2,500) (1,503) --------------------------------------------------- At September 30, 2009 $ 4,102 $ 18,124 $ 4,014 --------------------------------------------------- --------------------------------------------------- Net carrying amount At September 30, 2009 $ 2,697 $ 6,520 $ 9,850 --------------------------------------------------- --------------------------------------------------- Nine months ended September 30, 2009 ------------------------------------------------------------------------- Acquisition of businesses Total -------------------------------------------- ---------- Customer Proprietary Brand relation- Contracts software names ships ------------------------------------------------------------------------- Cost At January 1, 2009 $ 1,201 $ 56,093 $ 10,900 $107,064 $216,422 Additions - 14,600 - 142,200 168,436 Other movements(1) (1,201) (193) - (16,329) (25,216) ------------------------------------------------------------------------- At September 30, 2009 $ - $ 70,500 $ 10,900 $232,935 $359,642 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Amortization and impairment loss At January 1, 2009 $ 864 $ 11,017 $ 1,452 $ 31,413 $ 71,747 Amortization(2) 337 4,494 546 7,379 19,560 Other movements(1) (1,201) (193) - (16,329) (25,288) ------------------------------------------------------------------------- At September 30, 2009 $ - $ 15,318 $ 1,998 $ 22,463 $ 66,019 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net carrying amount At September 30, 2009 $ - $ 55,182 $ 8,902 $210,472 $293,623 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Other movements primarily relate to fully amortized assets removed from the accounts during the period. For three and nine months ended September 30, 2010, other movements include reclassification from intangibles to goodwill of certain Resolve customer relationship intangibles and reflect assets removed and classified as held for sale. (2) Amortization for the three and nine months ended September 30, 2009 includes $13 of amortization related to discontinued operations. 7. GOODWILL September 30, December 31, 2010 2009 ------------------------------------------------------------------------- Balance, beginning of period $ 519,848 $ 458,989 Goodwill additions and adjustments during the period: Cyence - (1,417) Resolve 7,394 63,632 Filogix - (1,356) ------------------------------------------------------------------------- Balance, end of period $ 527,242 $ 519,848 ------------------------------------------------------------------------- ------------------------------------------------------------------------- A net adjustment of $7.4 million was made to goodwill in Resolve during the nine months ended September 30, 2010. An adjustment of $2.6 million recorded during the first quarter of 2010 related to the revaluation of certain customer relationship contracts which resulted in a reduction of intangibles. This was partially offset by an adjustment to goodwill during the second quarter of 2010 of $2.1 million relating to changes in the estimated tax attributes of Resolve resulting from information that became available during the period. During the three months ended September 30, 2010, an adjustment of $6.9 million (net of taxes) was recorded to goodwill as a result of Resolve purchase price adjustments relating to severances, estimated loss on disposition of the non-strategic part of the contact centre operations, estimated liabilities related to consolidation of facilities and finalization of other liabilities as at the acquisition date. This adjustment includes a revaluation of intangibles which resulted in a reduction of intangibles of $1.0 million. The future income taxes relating to the adjustments to the purchase price allocation recorded during the three months ended September 30, 2010 was $2.7 million, of which $0.3 million related to the reclassification of certain intangibles to goodwill and $2.4 million related to the tax impact of recording certain severance and other costs to the purchase price equation for Resolve. 8. LONG-TERM INDEBTEDNESS September 30, December 31, 2010 2009 ------------------------------------------------------------------------- Non-revolving term loan $ 130,000 $ 190,000 Drawings under revolving credit facility 25,000 20,000 ------------------------------------------------------------------------- 155,000 210,000 Series A 5.99% Bonds due June 30, 2017 50,000 - ------------------------------------------------------------------------- 205,000 210,000 Deferred finance costs (2,945) (1,537) ------------------------------------------------------------------------- $ 202,055 $ 208,463 ------------------------------------------------------------------------- ------------------------------------------------------------------------- As at September 30, 2010, the Fund had $220 million of available senior secured credit facilities consisting of a non-revolving term loan of $130 million and a revolving term credit facility of $90 million each maturing on September 30, 2013. As of September 30, 2010, $25 million was drawn under the revolving term credit facility. The credit facilities do not require the Fund to make any principal payments prior to September 30, 2013. The credit facilities bear interest at rates that depend on certain financial ratios of the Fund and vary in accordance with borrowing rates in Canada. The credit facilities, including any hedge contracts and cash management facilities provided by the lenders, are guaranteed by all entities within the Fund's corporate structure and are secured in first priority by substantially all of the Fund's assets and by a pledge of the Fund's indirect ownership interests in Davis + Henderson L.P. and its other operating subsidiary entities. The Credit Agreement contains a number of covenants and restrictions including the requirement to meet certain financial ratios and financial condition tests and, as at September 30, 2010, the Fund was in compliance with all of its financial covenants and financial condition tests. The carrying value of long-term bank indebtedness approximates its fair value as it bears interest at floating rates that reset in most cases within three months and in all cases within one year. The Fund has $50.0 million of Bonds issued under the senior secured Note Purchase and Private Shelf Agreement at a fixed-interest rate of 5.99% until maturity on June 30, 2017. The Bonds rank equally in all respects with amounts outstanding under the Credit Agreement and any related hedging contracts and cash management facilities and benefit from the same financial covenants that exist under the Credit Agreement described above. Deferred finance costs relate to amendments to the Credit Agreement and entering into the Note Purchase and Private Shelf Agreement dated September 30, 2010. Amortization of deferred finance costs during the three months ended September 30, 2010 was $0.2 million (Q3 2009 - $0.3 million) and the nine months ended September 30, 2010 was $0.8 million (nine months ended September 30, 2009 - $0.4 million). Amortization of deferred finance costs is recognized over the terms of the credit facilities and Bonds as interest expense using the effective interest method. During the nine months ended September 30, 2010, certain unamortized financing fees of $0.4 million were written off in connection with the renewal of the credit facilities and changes in the syndicate. The remaining balance is amortized over the term of the amended credit facilities. In addition to the credit facilities and Bonds described above, the Fund also has unsecured obligations outstanding pursuant to letters of credit and performance guarantees aggregating to $5 million. 9. FINANCIAL INSTRUMENTS Recognition and Measurement The Fund's financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, distributions payable to unitholders, interest-rate swaps, foreign exchange contracts, long-term indebtedness and Bonds. The Fund does not enter into financial instruments for trading or speculative purposes. As such, financial assets are classified as held to maturity, or loans and receivables. Financial liabilities are recorded at amortized cost. Initially, all financial assets and financial liabilities must be recorded on the balance sheet at fair value. Subsequent measurement is determined by the classification of each financial asset and financial liability. All derivatives, including embedded derivatives that must be separately accounted for, are recorded at fair value in the consolidated balance sheet. Transaction costs related to financial instruments are generally capitalized and then amortized over the expected life of the financial instrument using the effective interest method. Credit Risk The Fund's financial assets that are exposed to credit risk consist primarily of cash and cash equivalents, accounts receivable, foreign exchange contracts and interest-rate swaps. The Fund, in its normal course of business, is exposed to credit risk from its customers. The Fund is exposed to credit loss in the event of non-performance by counterparties to the interest-rate swaps and foreign exchange contracts. Risks associated with concentrations of credit risk with respect to accounts receivable, foreign exchange contracts and interest-rate swaps are limited due to the credit rating of the applicable customers serviced by the Fund and hedge counterparties utilized by the Fund and by the generally short payment terms and frequent settlement of foreign exchange and swap differences. Market Risk The Fund is subject to interest-rate risks as its credit facilities bear interest at rates that depend on certain financial ratios of the Fund and vary in accordance with borrowing rates in Canada and the United States. The following table presents a sensitivity analysis to changes in market interest rates and their potential impact on the Fund for the three and nine months ended September 30, 2010. As the sensitivity is hypothetical, it should be used with caution. Three months ended Nine months ended September 30, 2010 September 30, 2010 ------------------------------------------------------------------------- + 100 bps - 100 bps + 100 bps - 100 bps ------------------------------------------------------------------------- Increase (decrease) in interest expense $ (17) $ 17 $ (35) $ 35 Change to net unrealized (gain) loss on interest-rate swaps (4,900) 4,900 (4,900) 4,900 ------------------------------------------------------------------------- Increase (decrease) in net income $ 4,917 $ (4,917) $ 4,935 $ (4,935) ------------------------------------------------------------------------- Increase (decrease) in total comprehensive income $ 4,917 $ (4,917) $ 4,935 $ (4,935) ------------------------------------------------------------------------- ------------------------------------------------------------------------- The Fund manages its interest-rate risks through the use of interest-rate swaps for some of its outstanding long-term indebtedness and by way of the issuance of fixed-interest-rate Bonds. As at September 30, 2010, the following fixed-paying interest-rate swaps were outstanding: ------------------------------------------------------------------------- Fair value of interest-rate swaps --------------------- Interest Maturity Date Notional Amount Asset Liability Rate(1) ------------------------------------------------------------------------- January 5, 2011 $ 22,000 $ - $ 104 1.980% June 15, 2011 20,000 - 633 4.685% June 15, 2011 25,000 - 791 4.685% December 18, 2014 25,000 - 822 2.720% March 18, 2015 25,000 - 1,054 2.940% March 20, 2017 25,000 - 1,571 3.350% March 20, 2017 20,000 - 1,276 3.366% ------------------------------------------------------------------------- $ 162,000 $ - $ 6,251 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) The listed interest rates exclude bankers' acceptance fees and prime- rate spreads currently in effect. Such fees and spreads could increase or decrease depending on the Fund's financial leverage as compared to certain levels specified in the Credit Agreement. As of September 30, 2010, the Fund's long-term bank indebtedness was subject to bankers' acceptance fees of 2.50% over the applicable BA rate and prime rate spreads of 1.50% over the prime rate. The Fund is a party to foreign exchange contracts. As these foreign exchange contracts do not qualify for hedge accounting, the unrealized gain or loss is recorded as mark-to-market on derivative instruments in the consolidated statements of income. The following table lists the foreign exchange contracts as at September 30, 2010: ------------------------------------------------------------------------- Fair value of foreign exchange contracts --------------------------- Exchange Maturity Date Notional Amount Asset Liability Rate ------------------------------------------------------------------------- October 15, 2010 $500 $ - $ 1 1.0275 November 15, 2010 500 - 1 1.0278 December 15, 2010 500 - - 1.0282 ------------------------------------------------------------------------- $ 1,500 $ - $ 2 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The following table presents a sensitivity analysis to changes in the foreign exchange between the Canadian and US dollar on the Fund for the three months ended September 30, 2010. As the sensitivity is hypothetical, it should be used with caution. Three months ended Nine months ended September 30, 2010 September 30, 2010 ------------------------------------------------------------------------- +$0.05 CAD -$0.05 CAD +$0.05 CAD -$0.05 CAD Per USD Per USD Per USD Per USD ------------------------------------------------------------------------- Increase (decrease) in net income $ 112 $ (112) $ 247 $ (247) Unrealized gain (loss) on mark-to-market on foreign exchange contracts (75) 75 (75) 75 ------------------------------------------------------------------------- Total increase (decrease) in net income $ (37) $ 37 $ (172) $ 172 ------------------------------------------------------------------------- Increase (decrease) in total comprehensive income $ (37) $ 37 $ (172) $ 172 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Liquidity Risk The Fund has outstanding long-term bank indebtedness of $155 million with a maturity date of September 30, 2013 and fixed-interest-rate Bonds of $50 million maturing September 30, 2017. The degree to which the Fund is leveraged may reduce its ability to obtain additional financing for working capital and to finance investments to maintain and grow the current levels of cash flows from operations. The Fund may be unable to extend the maturity date of the credit facilities or to refinance outstanding indebtedness. Management, to reduce liquidity risk, has historically renewed the terms of the Fund's long-term indebtedness in advance of its maturity dates and the Fund has maintained financial ratios that are conservative compared to financial covenants applicable to the financing arrangements. To enhance its liquidity position, in prior years the Fund has made numerous voluntary payments on its outstanding long-term indebtedness and a portion of its committed term credit facilities remain undrawn. Further, the Credit Agreement and the Note Purchase and Private Shelf Agreement provide for additional uncommitted credit arrangements of up to $150 million and Bonds (under an uncommitted shelf facility) of up to $30 million with the use of these arrangements subject to the prior approval of the relevant lenders and fees, spreads and other terms to be negotiated at that time. Management measures liquidity risk through comparisons of current financial ratios with financial covenants contained in the Credit Agreement and the Note Purchase and Private Shelf Agreement. Fair Value Hierarchy The Fund values instruments carried at fair value using quoted market prices, where available. Quoted market prices represent a Level 1 valuation. When quoted market prices are not available, the Fund maximizes the use of observable inputs within valuation models. When all significant inputs are observable, the valuation is classified as Level 2. Valuations that require a significant use of unobservable inputs are considered Level 3. The following table outlines the fair value hierarchy of instruments carried at fair value: September 30, 2010 ------------------------------------------------------------------------- Level 1 Level 2 Level 3 Total Assets: Derivative instruments $ - $ - $ - $ - ------------------------------------------------------------------------- $ - $ - $ - $ - ------------------------------------------------------------------------- ------------------------------------------------------------------------- Liabilities: Derivative instruments $ - $ 6,253 $ - $ 6,253 ------------------------------------------------------------------------- $ - $ 6,253 $ - $ 6,253 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The Level 2 financial instruments recorded in the Fund's balance sheet include interest-rate swaps and foreign exchange contracts. Hedge Accounting Where derivatives are held for risk management purposes or when transactions meet the criteria, including documentation requirements, specified in the CICA Handbook Section 3865, hedge accounting is applied to the risks being hedged. When hedge accounting is not applied, the change in the fair value of the derivative is recognized in income, including instruments used for economic hedging purposes that do not meet the requirements for hedge accounting. Effective January 1, 2007, the Fund ceased applying hedge accounting on the outstanding interest-rate swaps and foreign exchange contracts. Derivative Financial Instruments Derivatives are carried at fair value and are reported as assets where they have a positive fair value and liabilities where they have a negative fair value. Derivatives may be embedded in other financial instruments or contracts. Derivatives embedded in other financial instruments are valued as separate derivatives when their economic characteristics and risks are not clearly and closely related to those of the host contract unless such contracts relate to normal course operations and qualify for the normal purchase and sale exemption in accordance with the standards. Accumulated Other Comprehensive Income (Loss) When applicable, changes in the fair value of cash flow hedging instruments are recorded in accumulated other comprehensive income (loss) until recognized in the consolidated statement of income. Accumulated other comprehensive income (loss) forms part of unitholders' equity. 10. OTHER LONG-TERM LIABILITIES September 30, December 31, 2010 2009 ------------------------------------------------------------------------- Deferred compensation program $ 2,313 $ 845 Employee future benefits 4,900 4,987 Contractual supplier obligation 1,346 1,319 Capital lease - 10 ------------------------------------------------------------------------- $ 8,559 $ 7,161 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The deferred compensation program, which commenced on January 1, 2009, is a long-term incentive plan that includes a cash award component and a cash-settled unit-based compensation component. Both the cash component and the cash-settled unit-based compensation component awarded at the grant date are subject to a three year target for compound annual growth in adjusted income. Employee future benefits consist of defined contribution pension plans and a non-pension post-retirement benefit plan. Obligations relating to employee future benefits relate to the non-pension post-retirement benefit plan. The Fund's non-pension post-retirement benefit plans are defined benefit plans funded on a cash basis by contributions from the Fund, which covers certain medical costs of a limited number of employees. The Fund measures its accrued benefit obligations and the fair value of the plan for accounting purposes as at December 31 of each year. The latest actuarial valuation of the post-retirement benefit plan was performed as at December 31, 2009. The next valuation will be performed in 2010. The Fund's principal pension plans are defined contribution pension plans that provide pensions to substantially all eligible employees. Total expense for the Fund's defined contribution pension plan for the three months ended September 30, 2010 was $0.7 million (Q3 2009 - $0.6 million) and for nine months ended September 30, 2010 was $2.2 million (nine months ended September 30, 2009 - $1.5 million). The contractual supplier obligation relates to payments to be made for a customized software package. The total liability is $1.5 million of which $0.1 million is recorded in current liabilities. 11. INCOME TAXES The Fund is a mutual fund trust for income tax purposes and will be a specified investment flow through trust ("SIFT") for years commencing after 2010. As such, the Fund is subject to current income taxes on any taxable income of its corporate subsidiaries, on any of its taxable income for its flow-through subsidiaries not distributed to unitholders prior to January 1, 2011 and on all taxable income subsequent to December 31, 2010. If the Fund's equity capital grows beyond certain dollar limits prior to January 1, 2011, the Fund would become a SIFT and would commence in that year being subject to tax on income distributed. The Fund expects that its income distributed will not be subject to tax prior to 2011 and accordingly has not provided for future income taxes on its temporary differences and those of its flow-through subsidiary trust and partnerships expected to reverse prior to 2011 as it is considered tax exempt for accounting purposes. Taxable income distributed by the Fund to its unitholders will be taxable income of those unitholders. Significant components of the Fund's future tax assets and liabilities with respect to differences between the consolidated carrying values and the related tax bases of the assets and liabilities within certain partnership, trust and corporate subsidiaries are as follows: September 30, December 31, 2010 2009 ------------------------------------------------------------------------- Future income tax assets: Capital assets less than tax values $ - $ 2,935 Intangible assets less than tax values 10,559 10,284 Tax losses available for future periods 24,759 19,289 Accrued and other liabilities 7,718 6,088 ------------------------------------------------------------------------- 43,036 38,596 Valuation allowance (14,636) (13,897) ------------------------------------------------------------------------- Total future tax asset 28,400 24,699 Future income tax liabilities: Capital assets greater than tax values 7,344 3,208 Intangible assets greater than tax values 39,744 45,726 ------------------------------------------------------------------------- Total future tax liabilities 47,088 48,934 ------------------------------------------------------------------------- Net future income tax liabilities $ 18,688 $ 24,235 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The Fund does not expect the temporary differences between the carrying amount and tax base of certain intangible assets to reverse in the foreseeable future and accordingly has reduced the related future income tax asset by a valuation allowance of $10,559. The Fund also does not expect to realize the benefit of certain loss carry-forwards of certain corporate subsidiaries in the foreseeable future and accordingly has not recognized a future income tax asset for such losses by recording a valuation allowance of $4,077. No future tax liability has been provided for the taxable temporary difference related to goodwill since this amount is not deductible for tax purposes and is therefore specifically exempt from the recognition requirements. The provision for future income taxes of $809($645 relating to continuing operations and $164 related to discontinued operations) in the consolidated statement of income represents the quarterly change in the consolidated net future income tax liabilities, excluding amounts that were recorded as an adjustment to goodwill. The effective tax rate for the period differs from the expected tax rate due to the results of operations of its corporate subsidiaries; and the change in temporary differences expected to reverse after 2010 for the Fund, its flow -through trust and partnership subsidiaries. As at September 30, 2010, certain corporate subsidiaries of the Fund had $90,434 of net operating losses for income tax purposes. These losses will begin to expire commencing in fiscal 2022. The deductibility of losses of a U.S. corporate subsidiary of $7,115 is subject to annual limitations. 12. TRUST UNITS An unlimited number of trust units may be issued by the Fund pursuant to the Fund's Declaration of Trust. Each unit is transferable and represents an equal, undivided beneficial interest in any distributions from the Fund and in the net assets of the Fund. All units are of the same class with equal rights and privileges and are not subject to future calls or assessments. Each unit entitles the holder to one vote at all meetings of unitholders and a pro rata share of distributions declared by the Fund. The Fund intends to make monthly cash distributions of its distributable cash, as defined in the Fund's Declaration of Trust, subject to working capital requirements and other reserves. The net proceeds from the issuance of trust units and the number of units outstanding are as follows: September 30, December 31, 2010 2009 ------------------------------------------------------------------------- Balance, beginning of period $ 595,859 $ 476,343 Units issued - 119,516 ------------------------------------------------------------------------- Balance, end of period $ 595,859 $ 595,859 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Units outstanding, end of period 53,233,373 53,233,373 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The weighted average number of units outstanding during the three and nine months ended September 30, 2010 was 53,233,373 (three and nine months ended September 30, 2009 - 50,608,904 and 46,191,900 respectively). 13. CAPITAL The Fund views its capital as the combination of its indebtedness and equity balances. In general, the overall capital of the Fund is evaluated and determined in the context of its financial objectives and its strategic plan. While the Fund carries a level of cash on hand, this amount is modest in relation to its overall capital and is generally in an amount determined in reference to its pending distribution obligations and short-term changes in non-cash working capital balances. With respect to its level of indebtedness, the Fund determines the appropriate level in the context of its cash flow and overall business risks. Generally, the Fund has maintained low level of indebtedness relative to cash flow in order to provide increased financial flexibility and to provide increased protection for unitholders relative to their expectation of distributions. Additionally, the Fund has historically generated cash flow in excess of distributions and has used a portion of such excess to pay down indebtedness. The Fund would consider increasing its level of indebtedness relative to cash flow to assist in the financing of an acquisition. As well, the Fund will review its level of indebtedness in the context of the change in taxation impacting the Fund commencing 2011. The Fund's indebtedness is subject to a number of covenants and restrictions including the requirement to meet certain financial ratios and financial condition tests at a subsidiary level. One such ratio is the "Senior Funded Debt/EBITDA Ratio" as defined in the Credit Agreement. The maximum ratio allowed for a 12-month trailing period is 2.50. For the 12-month trailing period ended September 30, 2010, this ratio was calculated at 1.36 (12-month trailing period ended September 30, 2009 - 1.38). Management also uses this ratio as a key indicator in managing the Fund's capital. With respect to its equity, the current level of capital is considered adequate in the context of current operations and the present strategic plan of the Fund. The equity component of capital increases primarily based upon the income of the business less the distribution paid. Any major acquisition would be financed in part with additional equity. The Fund will also review its level of equity in the context of the change in taxation impacting the Fund commencing in 2011. 14. COMMITMENTS As at September 30, 2010, the Fund has lease obligations with respect to real estate, vehicles and equipment as follows: 2010 3,496 2011 7,392 2012 4,581 2013 3,785 2014 2,507 Thereafter 3,207 ------------------------------------------------------------------------- 24,967 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 15. SIGNIFICANT CUSTOMERS For the three months ended September 30, 2010, the Fund earned 65% of its consolidated revenue from its seven largest customers (Q3 2009 - 67%). For the three months ended September 30, 2010, three of these customers individually accounted for greater than 10%, but not more than 14% of the Fund's total revenue (for the three months ended September 30, 2009, three of these customers individually accounted for greater than 10%, but not more than 14% of the Fund's total revenue). For the nine months ended September 30, 2010, the Fund earned 66% of its consolidated revenue from its seven largest customers (Q3 2009 - 70%). For the nine months ended September 30, 2010, three of these customers individually accounted for greater than 10%, but not more than 15% of the Fund's total revenue (for the nine months ended September 30, 2009, three of these customers individually accounted for greater than 10%, but no more than 16% of the Fund's total revenue). 16. SEGMENTED INFORMATION Revenue pertaining to major service areas for the three and nine months ended September 30, 2010 and 2009 are as follows: Three months ended Nine months ended September 30, September 30, 2010 2009 2010 2009 ------------------------------------------------------------------------- Revenue Programs to the chequing account $ 72,994 $ 72,239 $ 220,818 $ 216,770 Loan servicing 32,738 21,091 92,826 21,091 Loan registration technology services 27,227 18,119 78,412 20,056 Lending technology services 19,392 18,891 57,335 51,717 Other 9,549 8,905 30,526 12,697 ------------------------------------------------------------------------- $ 161,900 $ 139,245 $ 479,917 $ 322,331 ------------------------------------------------------------------------- 17. RESTRUCTURING CHARGES During the three months ended September 30, 2010, the Fund recorded a restructuring charge of $2,160 relating to severances as part of the integration and transformation activities designed to better position the Business going forward to serve customers and improve the effectiveness, efficiency and scalability of operations. These initiatives are a result of the Fund completing four acquisitions over the past four years which led to expanded service offerings and operations. The integration activities consist of items that include the consolidation of facilities, centralization of certain functions and operations, elimination of management duplication, repositioning of personnel related to the integrated business and enhancing the scalability of operations, among other items. 18. DISCONTINUED OPERATIONS As of September 30, 2010, the non-strategic part of the contact centre operations was held for sale, and the results of these operations were classified as discontinued operations for both current and comparative periods presented. Assets and liabilities relating to the discontinued operations are classified as "Assets held for sale" and "Liabilities held for sale" on the balance sheet as at September 30, 2010. Revenue attributable to the discontinued operations during the three months ended September 30, 2010 was $4,346 (three months ended September 30, 2009 was $3,218). Revenue for the nine months ended September 30, 2010 was $13,482 (nine months ended September 30, 2009 was $3,218). In prior periods, revenue related to the discontinued operations was reported as part of the "Other" category in the revenue disclosure by service area. Income taxes attributable to the discontinued operations during the three months ended September 30, 2010 was a recovery of $163 (three months ended September 30, 2009 - $3 expense). $425 of future income tax recovery relates to the discontinued operations for the nine months ended September 30, 2010 (nine months ended September 30, 2009 - $3). Per unit information relating to the discontinued operations is as follows: Three months ended Nine months ended September 30, September 30, 2010 2009 2010 2009 ------------------------------------------------------------------------- Income (loss) from discontinued operations, per unit, basic and diluted $ (0.0087) $ 0.0001 $ (0.0227) $ 0.0002 Income from continuing operations, per unit, basic and diluted 0.4139 0.4930 1.3315 1.5025 ------------------------------------------------------------------------- Net income per unit, basic and diluted $ 0.4052 $ 0.4931 $ 1.3088 $ 1.5027 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 19. SUBSEQUENT EVENT On October 7, 2010, D+H announced the sale of the non-strategic portion of its contact centre operations, which primarily served non-core markets of D+H. The proceeds from the sale were approximately equal to the working capital and certain assets of the operations that were sold. The transaction fees and other transition costs relating to the disposition were recognized as part of the final purchase price allocation for Resolve. D+H and the purchaser have entered into a transition services agreement in order to facilitate the movement of certain staff activities and operations that are presently integrated within other D+H service areas. 20. COMPARATIVE FIGURES Certain comparative figures have been reclassified to conform to the current period's presentation. SUPPLEMENTARY FINANCIAL INFORMATION ------------------------------------------------------------------------- Three Three Three Three Three months months months months months ended ended ended ended ended (in thousands of September June March December September Canadian dollars, 30, 30, 31, 31, 30, unaudited) 2010 2010 2010 2009 2009 ------------------------------------------------------------------------- Revenue $ 161,900 $ 164,319 $ 153,698 $ 151,521 $ 139,245 Expenses 121,311 120,545 115,989 114,467 101,696 Restructuring charges(5) 2,160 - - - - ------------------------------------------------------------------------- EBITDA(1) 38,429 43,774 37,709 37,054 37,549 Amortization of capital assets and non-acquisition intangibles 5,030 4,962 4,669 4,514 4,505 Interest expense 3,517 3,692 3,374 3,326 2,681 ------------------------------------------------------------------------ Adjusted income(1) 29,882 35,120 29,666 29,214 30,363 ------------------------------------------------------------------------- Amortization of mark- to-market adjustment of interest-rate swaps 52 103 189 103 103 Net unrealized loss (gain) on derivative instruments(2) 1,514 1,694 (1,559) (1,620) (1,647) Future income tax expense (recovery) (645) 603 661 (2,605) 1,015 Amortization of intangibles from acquisition 6,925 7,158 7,097 7,330 5,942 ------------------------------------------------------------------------- Income from continuing operations 22,036 25,562 23,278 26,006 24,950 Income (loss) from discontinued operations, net of taxes(6) (465) (531) (210) (405) 7 ------------------------------------------------------------------------- Net income $ 21,571 $ 25,031 $ 23,068 $ 25,601 $ 24,957 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash flows from operating activities 36,743 36,613 20,981 $ 40,575 $ 38,959 Changes in non-cash working capital and other items(3) (2,419) 2,792 13,107 (7,356) (4,056) ------------------------------------------------------------------------- Adjusted cash flows from operating activities 34,324 39,405 34,088 33,219 34,903 Less: Asset expenditures and contract payments(4) 7,079 5,293 3,976 5,133 2,818 ------------------------------------------------------------------------- Adjusted cash flows after asset expenditures and contract payments 27,245 34,112 30,112 28,086 32,085 Distributions paid to unitholders 24,482 24,482 24,482 24,482 23,058 ------------------------------------------------------------------------- 2,763 9,630 5,630 3,604 9,027 Cash flows provided by (used in) other financing activities (5,000) (7,564) 5,000 (6,000) (5,569) Fair value of acquisitions 167 - - (1,449) (129,682) Fair value of trust units issued - - - - 119,394 Changes in non-cash working capital and other items(3) 2,419 (2,792) (13,107) 7,356 4,056 ------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents for the period $ 349 $ (726) $ (2,477) $ 3,511 $ (2,774) (1) EBITDA and Adjusted income are non-GAAP terms. See Non-GAAP Measures for a more complete description of these terms. (2) The Business enters into derivative contracts to fix the interest rates and foreign exchange rates on a significant portion of its outstanding bank debt and foreign currency transactions, which are relatively minor, respectively. For accounting purposes, these derivative instruments do not qualify for hedge accounting treatment and, accordingly, any change in the fair value of these contracts is recorded through income. Provided the Business does not cancel its derivative contracts prior to maturity, the amounts represent a non- cash unrealized gain or loss that will subsequently reverse through income. The Company has historically held its derivative contracts to maturity. (3) Changes in non-cash working capital and certain other balance sheet items have been excluded from adjusted cash flows from operating activities so as to remove the effects of timing differences in cash receipts and cash disbursements, which generally reverse themselves, but can vary significantly across quarters and to remove certain of the payments related to the acquisition and related restructuring activities that were recorded as part of the acquisition. For details, see the Changes in Non-Cash Working Capital and Other Items section. (4)Asset expenditures include both maintenance asset expenditures and growth asset expenditures. Maintenance asset expenditures are defined by the Fund as asset expenditures necessary to maintain and sustain the current productive capacity of the Business or generally improve the efficiency of the Business. Growth asset expenditures are defined by the Fund as asset expenditures that increase the productive capacity of the Business with a reasonable expectation of an increase in cash flow. (5) Restructuring charges relate to further integration and transformation activities designed to better position the Business going forward to serve customers and improve the effectiveness, efficiency and scalability of operations. (6) On October 7, 2010, the Business sold a non-strategic component of its contact centre business and as such, these disposed operations are presented as discontinued operations for both current and prior periods presented. Summary of Cash Flows Per Unit ------------------------------------------------------------------------- Three Three Three Three Three months months months months months ended ended ended ended ended September June March December September (in Canadian 30, 30, 31, 31, 30, dollars, unaudited) 2010 2010 2010 2009 2009 ------------------------------------------------------------------------- Adjusted income per unit, basic and diluted $ 0.5613 $ 0.6597 $ 0.5573 $ 0.5488 $ 0.6000 Net income per unit, basic and diluted $ 0.4052 $ 0.4702 $ 0.4333 $ 0.4809 $ 0.4931 Adjusted cash flows from operating activities $ 0.6448 $ 0.7402 $ 0.6403 $ 0.6240 $ 0.6897 Adjusted cash flows after asset expenditures and contract payments $ 0.5118 $ 0.6408 $ 0.5657 $ 0.5276 $ 0.6340 Cash distributions paid to unitholders $ 0.4599 $ 0.4599 $ 0.4599 $ 0.4599 $ 0.4599 Distributions declared during period $ 0.4599 $ 0.4599 $ 0.4599 $ 0.4599 $ 0.4599 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- Three Three Three Three Three months months months months months ended ended ended ended ended September June March December September (in Canadian 30, 30, 31, 31, 30, dollars, unaudited) 2010 2010 2010 2009 2009 ------------------------------------------------------------------------- Cash and cash equivalents $ 1,024 $ 675 $ 1,401 $ 3,878 $ 367 Other current assets 81,245 89,034 88,247 72,878 85,242 Capital and other non-current assets 56,571 54,591 52,848 55,177 61,122 Intangible assets 267,938 273,938 279,663 289,774 293,623 Goodwill 527,242 520,364 522,482 519,848 516,374 ------------------------------------------------------------------------- $ 934,020 $ 938,602 $ 944,641 $ 941,555 $ 956,728 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Payables and other current liabilities $ 88,836 $ 87,499 $ 159,873 $ 87,463 $ 93,385 Other long-term liabilities 71,270 69,483 66,942 70,338 75,165 Long-term indebtedness 202,055 206,902 143,760 208,463 214,109 Unitholders' equity 571,859 574,718 574,066 575,291 574,069 ------------------------------------------------------------------------- $ 934,020 $ 938,602 $ 944,641 $ 941,555 $ 956,728 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- Distributions per unit(1) Month 2010 2009 2008 2007 2006 ------------------------------------------------------------------------- January $ 0.1533 $ 0.1533 $ 0.1430 $ 0.1280 $ 0.1220 February 0.1533 0.1533 0.1430 0.1280 0.1220 March 0.1533 0.1533 0.1430 0.1320 0.1250 April 0.1533 0.1533 0.1430 0.1320 0.1250 May 0.1533 0.1533 0.1533 0.1320 0.1250 June 0.1533 0.1533 0.1533 0.1320 0.1250 July 0.1533 0.1533 0.1533 0.1320 0.1250 August 0.1533 0.1533 0.1533 0.1320 0.1250 September 0.1533 0.1533 0.1533 0.1320 0.1250 October 0.1533 0.1533 0.1320 0.1250 November(2) 0.1533 0.1533 0.3430 0.1280 December(3) 0.1533 0.1933 0.1430 0.1280 ------------------------------------------------------------------------- $ 1.3797 $ 1.8396 $ 1.8384 $ 1.7980 $ 1.5000 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- Distributions per unit(1) Month 2005 2004 2003 2002 2001 ------------------------------------------------------------------------- January $ 0.1200 $ 0.1150 $ 0.1117 $ 0.1083 $ - February 0.1200 0.1150 0.1117 0.1083 - March 0.1200 0.1168 0.1117 0.1083 - April 0.1200 0.1168 0.1133 0.1083 - May 0.1200 0.1168 0.1133 0.1083 - June 0.1200 0.1168 0.1133 0.1083 - July 0.1200 0.1168 0.1133 0.1117 - August 0.1220 0.1168 0.1133 0.1117 - September 0.1220 0.1168 0.1133 0.1117 - October 0.1220 0.1168 0.1150 0.1117 - November(2) 0.1220 0.1200 0.1150 0.1117 - December(3) 0.1220 0.1200 0.1150 0.1117 0.0427 ------------------------------------------------------------------------- $ 1.4500 $ 1.4044 $ 1.3599 $ 1.3200 $ 0.0427 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Monthly distributions are made to unitholders of record on the last business day of each month and are paid within 31 days following each month end. (2) November 2007 declared distributions included a special distribution of $0.20 for unitholders of record on November 15, 2007 and was paid on November 30, 2007. (3) Distributions in 2001 are in respect of the 12 calendar days from December 20, 2001 to December 31, 2001. December 2008 declared distributions included a non-cash special distribution of $0.04 for unitholders of record on December 31, 2008 and was paid on December 31, 2008. Tax Allocation of Distributions ------------------------------------------------------------------------- 2010 2009 2008 2007 2006 ------------------------------------------------------------------------- Dividend income 0.0% 0.0% 0.0% 0.0% 0.0% Other income 100.0% 100.0% 100.0% 100.0% 100.0% Return of capital 0.0% 0.0% 0.0% 0.0% 0.0% ------------------------------------------------------------------------- 100.0% 100.0% 100.0% 100.0% 100.0% ------------------------------------------------------------------------- -------------------------------------------------------------- 2005 2004 2003 2002 -------------------------------------------------------------- Dividend income 0.0% 15.0% 19.5% 16.9% Other income 91.6% 75.2% 69.5% 71.5% Return of capital 8.4% 9.8% 11.0% 11.6% -------------------------------------------------------------- 100.0% 100.0% 100.0% 100.0% -------------------------------------------------------------- The above tax allocation of distributions for 2010 represents an estimate based on the total expected distributions for the year ended December 31, 2010. Other Statistics (in thousands, except per unit amounts) Number Market Trading price range of units of units capital- (TSX: "DHF.UN") outstand- ization ---------------------------- Average ing at at Quarter High Low Close daily quarter quarter volume end end ------------------------------------------------------------------------- 2010 - Q3 19.25 16.00 19.15 100 53,233 1,019,419 - Q2 18.46 15.16 16.58 118 53,233 882,609 - Q1 18.00 15.59 17.71 161 53,233 942,763 2009 - Q4 16.92 14.05 16.92 177 53,233 900,709 - Q3 14.99 12.25 14.90 182 53,233 793,177 - Q2 14.29 11.51 12.25 126 43,947 538,348 - Q1 16.76 10.40 11.92 104 43,947 523,846 2008 - Q4 17.15 10.30 16.79 117 43,947 737,867 - Q3 16.40 13.50 15.47 93 43,947 679,857 - Q2 17.85 15.53 15.58 83 43,947 684,691 - Q1 21.75 15.77 17.19 107 43,947 755,445 2007 - Q4 22.00 18.75 21.00 98 43,947 922,883 - Q3 20.10 17.14 19.80 78 43,947 870,146 - Q2 19.79 16.30 19.31 90 43,947 848,613 - Q1 17.19 15.00 16.60 87 43,947 729,517 2006 - Q4 19.80 13.80 15.46 143 43,947 679,417 - Q3 19.49 17.21 19.19 96 43,947 843,339 - Q2 21.99 16.99 17.70 100 43,947 777,858 - Q1 23.18 19.50 21.50 61 37,921 815,297 2005 - Q4 24.00 16.32 23.19 92 37,921 879,383 - Q3 24.07 19.50 21.19 88 37,921 803,542 - Q2 22.85 19.58 20.92 61 37,921 793,303 - Q1 23.25 19.65 22.00 67 37,921 834,257 2004 - Q4 23.25 18.80 22.70 81 37,921 860,802 - Q3 19.62 16.75 19.45 58 37,921 737,559 - Q2 19.34 15.05 18.00 93 37,921 682,574 - Q1 19.40 16.71 19.40 92 37,921 735,663 2003 - Q4 17.50 15.10 17.45 67 37,921 661,718 - Q3 15.65 14.52 15.30 99 37,921 580,188 - Q2 15.20 12.91 15.00 82 37,921 568,812 - Q1 13.69 12.48 12.94 92 37,921 490,695 2002 - Q4 13.25 11.22 12.86 139 37,921 487,661 - Q3 12.13 10.45 12.10 165 37,921 458,842 - Q2 11.25 10.00 10.95 176 37,921 415,233 - Q1 11.20 10.11 10.51 149 18,955 199,217 ------------------------------------------------------------------------- >>About Davis + HendersonDavis + Henderson is a leading solutions provider to the financial services marketplace. Founded in 1875, the company today provides innovative programs, technology products and technology based business services to customers who offer chequing accounts, credit card accounts and personal, commercial, and other lending and leasing products. Davis + Henderson Income Fund is listed on the Toronto Stock Exchange under the symbol DHF.UN. Further information can be found in the disclosure documents filed by Davis + Henderson Income Fund with the securities regulatory authorities, available at www.sedar.com.%SEDAR: 00017092EFFor further information: Bob Cronin, Chief Executive Officer, Davis + Henderson, Limited Partnership, (416) 696-7700, extension 5301, bob.cronin@dhltd.com; Brian Kyle, Chief Financial Officer, Davis + Henderson, Limited Partnership, (416) 696-7700, extension 5690, brian.kyle@dhltd.com