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Press release from CNW Group

DAVIS + HENDERSON REPORTS FOURTH QUARTER, YEAR-END 2010 RESULTS

Tuesday, March 08, 2011

DAVIS + HENDERSON REPORTS FOURTH QUARTER, YEAR-END 2010 RESULTS17:25 EST Tuesday, March 08, 2011Stock Exchange Symbol: DHWebsite: www.dhltd.comTORONTO, Mar. 8 /CNW/ - Davis + Henderson ("D+H" or the "Business" or the "Company") today reported solid financial results for the three and twelve months ended December 31, 2010 that were consistent with expectations and we are satisfied with these results given the changes within the markets we service and in the context of our strategic agenda. Overall, revenue growth for the year ended December 31, 2010, compared to the year ended December 31, 2009, was primarily attributable to the inclusion of Resolve, which was acquired mid-way through 2009. For the year overall, we financially benefited from the inclusion of Resolve service offerings and, through the latter portion of 2009 and into 2010, from stronger volumes within our lending and loan servicing areas. During the fourth quarter we had revenue increases within most major service areas. In many instances, these increases did not substantially impact earnings as expenses increased in support of the revenue increases. Additionally, we recorded a $6.2 million restructuring charge, consistent with expectation, and incurred increases in other integration based items with the result that EBITDA(1) was lower than the prior comparable period. As previously expressed, we are satisfied with these results overall.Fourth Quarter Highlights << - Revenue was $160.5 million, an increase of $8.9 million, or 5.9%, compared to the same quarter in 2009. - EBITDA was $29.5 million, a decrease of $7.6 million, or 20.5%, compared to $37.1 million for the same quarter in 2009. The fourth quarter of 2010 included a $6.2 million restructuring charge. - Adjusted income(1) was $20.4 million ($0.3834 per unit), a decrease of $8.8 million, or 30.1%, as compared to $29.2 million ($0.5488 per unit) for the same quarter in 2009. Adjusted income and Adjusted income per unit for 2010 both included a restructuring charge of $6.2 million ($0.1177 per unit). - Net income was $12.9 million ($0.2415 per unit), a year-over-year decrease of $12.7 million, or 49.8%, compared to $25.6 million ($0.4809 per unit) for the same quarter in 2009. Net income and net income per unit included the restructuring charges, as well as non- cash items related to mark-to-market adjustments on interest-rate swaps, future income taxes and amortization of acquisition intangibles related to business acquisitions. - Cash distributions paid for the fourth quarter of 2010 were $0.4599 per unit, unchanged from the same quarter 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. >>2010 Highlights << - Revenue was $640.4 million, an increase of $166.5 million, or 35.1%, compared to 2009. - EBITDA was $149.4 million, an increase of $13.8 million, or 10.2%, compared to 2009. The increase in EBITDA of 10.2% relative to the increase in revenue of 35.1% reflected the inclusion of acquired Resolve service offerings that contributed lower margins as a percentage of revenues as compared to other D+H services. Additionally, EBITDA was impacted by the previously described restructuring charge which for all of 2010 was $8.4 million. - Adjusted income was $115.1 million, an increase of $5.6 million, or 5.1%, compared to $109.5 million for 2009. Adjusted income per unit was $2.1617, a decrease of 5.3%, compared to $2.2820 per unit for 2009. Adjusted income per unit was impacted by the issuance of 9,286,581 trust units for the Resolve acquisition and the restructuring charge of $8.4 million ($0.1583 per unit). - Net income was $82.5 million, a year-over-year decrease of $12.5 million, or 13.1% compared to $95.0 million for 2009. Net income per unit was $1.5503, a decrease of 21.7% compared to $1.9808 per unit for the same period in 2009. As described above, the decreases in both net income and net income per unit include the previously announced restructuring charge, as well as non-cash items including mark-to-market adjustments on interest-rate swaps, future income taxes 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 in 2010 were $1.8396 per unit, unchanged from 2009. - On October 7, 2010, the Business sold a non-strategic component of its contact centre business and as such, the results of these operations are presented as discontinued operations for both current and prior periods presented. >>During the year there were several highlights related to our strategic agenda, including (i) our announcement of operational integration efforts that are designed to strengthen our service capabilities and improve our effectiveness, (ii) the divestiture of a non-core business acquired as part of our Resolve acquisition, (iii) the announcement of the acquisition of ASSET Inc. (completed in January, 2011) and (iv) the approval and completion of our corporate conversion. Together, these initiatives position the Business to continue to grow and strategically diversify consistent with our vision.For a more detailed discussion of the results and management's outlook please see Management's Discussion and Analysis below.Caution Concerning Forward-looking StatementsThis news release 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 pace of adoption by consumers of other payment means such as electronic person-to-person payments; 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 and twelve months ended December 31, 2010 via conference call at 10:00 a.m. EST (Toronto time) on Wednesday, March 9, 2011. 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 44637985. The rebroadcast will be available until Wednesday, March 23, 2011. 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 fourth quarter of 2010 and year ended December 31, 2010 should be read in conjunction with MD&A in the Fund's Annual Report for the year ended December 31, 2009, dated March 2, 2010, the Short Form Prospectus, dated May 30, 2006, and the attached unaudited consolidated financial statements. External economic and industry factors remain substantially unchanged from the annual MD&A and the Short Form Prospectus, unless otherwise stated.Effective January 1, 2011, pursuant to a plan of arrangement ("the Arrangement"), the Fund's income trust structure was converted to a corporate structure and the publicly traded corporation is now named Davis + Henderson Corporation (the "Corporation"). This conversion was approved at a meeting of unitholders held on June 17, 2010, at which unitholders approved the Arrangement by a vote of 99.8%. The information circular in respect of this meeting, which provided a detailed outline of the conversion is available on SEDAR at www.sedar.com. Under the Arrangement, unitholders of the Fund received, on a tax deferred, roll-over basis, one common share of the Corporation, for each unit of the Fund held. Common shares of Davis + Henderson Corporation commenced trading on the Toronto Stock Exchange on January 4, 2011, under the symbol DH.In conjunction with the conversion, the Company also undertook an internal reorganization to simplify its business operations by consolidating the various businesses it had previously operated as separate legal entities. The combined business now primarily operates within D+H Limited Partnership. The conversion was treated as a change in business form and was accounted for as a continuity of interests. As such, the carrying amounts of assets, liabilities and unitholders' equity in the consolidated financial statements of the Fund immediately before the conversion remained the same as the carrying values of Davis + Henderson Corporation immediately after the conversion.Commencing in 2011, as a corporation, the Business is subject to corporate taxes. We had previously announced our intention to pay quarterly dividends commencing in 2011 at an initial annualized rate of $1.20 per share. Also as previously announced, D+H intends to declare a special dividend of $0.15 per share in early March 2011. The special dividend payment date is expected to be at the end of March 2011. Consequently, for the first quarter of 2011, it is expected that the Business will pay approximately $0.30 per share of distributions comprised of a $0.1533 per unit distribution paid on January 31, 2011 and a $0.15 per share dividend paid in March 2011. Subsequently, it is our intention to pay regular quarterly dividends at a rate of $0.30 per share (equivalent to $1.20 per share annualized) with the intended initial regular quarterly dividend being declared in May 2011 and paid in June 2011. Actual dividends declared will be subject to the discretion of the D+H Board of Directors and may vary from the intentions stated. Among other items, in determining actual dividends declared, the Board of Directors will consider the financial performance, capital plans, acquisition plans, expectations of future economic conditions and other factors.In addition, on January 18, 2011, D+H announced the completion of its acquisition of substantially all the assets of ASSET Inc. ("ASSET") for a purchase price of $76 million payable in cash, which D+H financed with an extension of its current credit facilities. ASSET is Canada's largest provider of technology based asset recovery and insolvency management solutions to the Canadian financial services industry. On behalf of lenders, ASSET uses web-enabled platforms to manage the recovery process around loans provided for moveable property and provides solutions to support real property recovery, unsecured debt recovery, insolvency process management, and personal property lien search and registration services. This acquisition furthers D+H's strategy of being a leading provider of integrated solutions to the financial services industry and, in particular, deepens the Corporation's capabilities across the broader lending spectrum.Notwithstanding the structural and distribution changes described above, the strategies and objectives of the Business remain unchanged.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 lending 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. Davis + Henderson's long-term financial objective is to deliver sustainable and growing earnings through continued organic revenue growth and by way of strategic acquisitions. 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, Resolve in 2009 and ASSET in January 2011, and by further enhancing our services and capabilities. As a result, we offer a diverse range of market-leading services.FINANCIAL INFORMATION PRESENTATIONBetween 2006 and the second quarter of 2009, the Business operated as, and reported upon, two business segments, the "D+H Segment" and the "Filogix Segment". Subsequent to the completion of the Resolve acquisition, the Business announced that it would move to a single integrated operation in order to better serve customers and maximize efficiencies. The Business is now managed along functional lines and operating decisions and performance assessment is aligned with these functions. As such, the Business now reports as a single segment. Revenue pertaining to major service areas and expenses pertaining to significant categories have been presented to reflect how management operates the Business.OPERATING RESULTS FOR THE FOURTH QUARTEROverviewD+H had solid operating performance in the fourth quarter of 2010 that was consistent with our expectations and we are satisfied with these results given market conditions and the activities undertaken related to our strategic initiatives. Overall, the Business had growth in revenues in the fourth quarter of 2010 over the same period in 2009 but given changes in product mix and increases in certain expenses, including the previously announced restructuring charges, EBITDA was lower as compared to the comparable period in 2009. Specifically, the Business recorded a restructuring charge of $6.2 million in the fourth quarter of 2010 as part of a total restructuring charge for 2010 of $8.4 million. This restructuring, announced in October 2010 is designed to improve the Business' effectiveness and efficiency as well as to better position the new integrated and larger Business going forward. For a more detailed description on revenues and expenses, see the comments below. << Consolidated Operating and Financial Results (in thousands of Canadian dollars, except per unit amounts, unaudited) Quarter ended December 31, 2010 2009 ------------------------------------------------------------------------- Revenue $ 160,457 $ 151,521 Expenses 124,733 114,467 Restructuring charges(4) 6,268 - ------------------------------------------------------------------------- EBITDA(1) 29,456 37,054 Amortization of capital assets and non-acquisition intangibles 5,643 4,514 Interest expense 3,405 3,326 ------------------------------------------------------------------------- Adjusted income(1) 20,408 29,214 Amortization of mark-to-market adjustment of interest-rate swaps 52 103 Net unrealized loss (gain) on derivative instruments(2) (2,848) (1,620) Future income tax expense (recovery) 2,620 (2,605) Amortization of intangibles from acquisitions 7,108 7,330 ------------------------------------------------------------------------- Income from continuing operations 13,476 26,006 Income (loss) from discontinued operations, net of taxes(3) (620) (405) ------------------------------------------------------------------------- Net income $ 12,856 $ 25,601 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Adjusted income per unit, basic and diluted(1) $ 0.3834 $ 0.5488 Net income per unit, basic and diluted $ 0.2415 $ 0.4809 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Quarter ended December 31, 2010 vs. 2009 % change ------------------------------------------------------------------------- Revenue 5.9% EBITDA(1) -20.5% Adjusted income per unit(1) -30.1% Net income per unit -49.8% ------------------------------------------------------------------------- ------------------------------------------------------------------------- (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 divested operations are presented as discontinued operations for both current and prior periods presented. (4) Restructuring charges of $6.2 million ($0.1177 per unit) 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. >>RevenueConsolidated revenue for the fourth quarter of 2010 was $160.5 million, an increase of $8.9 million, or 5.9%, compared to the same quarter in 2009. Increase in revenue was due to modest increases in several service areas and by specific customer-driven project initiatives that increased both revenues and expenses during the quarter as compared to the previous year.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 and fourth quarters, as was the case in 2010.(in thousands of Canadian dollars, unaudited) << Quarter ended December 31, 2010 2009 ------------------------------------------------------------------------- Revenue Programs to the chequing account $ 73,020 $ 71,787 Loan servicing 32,926 29,554 Loan registration technology services 23,930 21,729 Lending technology services 19,946 17,527 Other(1) 10,635 10,924 ------------------------------------------------------------------------- $ 160,457 $ 151,521 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Excluded for the current and comparative periods are the discontinued operations that were sold on October 7, 2010. >>Revenue for the fourth quarter from programs to the chequing account was $73.0 million, an increase of $1.2 million, or 1.7%, compared to the same quarter in 2009. The modest increase was primarily attributable to program changes and product and service enhancements that increased average order values partially offset by cheque order volume reductions. Management believes that the long-term historical trend related to current 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 fourth quarter of 2010 from loan servicing, which includes student loan administration services and credit card servicing was $32.9 million, an increase of $3.4 million, or 11.4%, compared to the same quarter in 2009. Revenue from student loan administrative services, which comprise the largest portion of revenues within this service area was relatively unchanged as compared to the fourth quarter of 2009. Revenues in this area are 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 majority of the revenue increase in this service area is attributed to the credit card servicing area, and in turn, primarily related to specific customer projects. These projects increased both revenues and expenses with minimal impact on profitability.Loan registration technology services revenue for the fourth quarter of 2010 was $23.9 million, an increase of $2.2 million, or 10.1%, compared to the same quarter in 2009. Services in this area are directed toward supporting personal and commercial 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 fourth quarter, the Business experienced increases in registration revenue as compared to the same period in 2009, however, much of the increase was related to recovery of third-party costs that do not provide increased contributions. In general, volumes were stronger in the latter portion of 2009 and into 2010 as compared to the latter part of 2010. This service area typically experiences seasonality and generally has stronger volumes during the second and third quarters as compared to the first and fourth quarters as consumers typically purchase and finance cars in the spring and summer.Revenue for the fourth quarter of 2010 from lending technology services, which includes services to the mortgage market and other credit markets was $19.9 million, an increase of $2.4 million, or 13.8%, compared to the same quarter in 2009. The increase during the fourth quarter was higher than had been expected and was partially due to the strong Canadian real estate and mortgage markets, which provided a year-over-year increase of 7% in mortgage origination service fees. This fourth quarter increase of 7% compares to an average increase of 18% during the first nine months of 2010. In general, industry analysts expect the housing and mortgage markets to further settle as compared to earlier periods in 2010. Also during the quarter, we had increases in professional services fees associated with specific customer projects. In general, the Company incurs substantial costs to support the professional services activities.Other revenue for the fourth quarter of 2010 was $10.6 million, as compared to $10.9 million for the same period in 2009, and 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 divested operations are presented as discontinued operations in both current and prior periods presented. Accordingly, the revenues relating to this part of the Business of $0.3 million for the fourth quarter of 2010 and $4.7 million for the comparative period in 2009 have been removed from reported consolidated revenue.Expenses(1)On a consolidated basis, expenses for the fourth quarter of 2010 of $124.7 million increased by $10.3 million, or 9.0%, compared to the same quarter in 2009. The increase primarily reflects the higher costs in support of increased revenue as described above and the ongoing costs of integrating the businesses, reduced by continued cost management activities and integration savings. << Quarter ended December 31, (in thousands of Canadian dollars, unaudited) 2010 2009 ------------------------------------------------------------------------- Employee compensation and benefits $ 50,556 $ 49,053 Non-compensation direct expenses(2) 47,774 $ 44,087 Other operating expenses(3) 21,591 17,101 Occupancy costs 4,812 4,226 ------------------------------------------------------------------------- $ 124,733 $ 114,467 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (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. For the three months ended December 31, 2009, to be consistent with comparative periods presented, some expenses have been reclassified to Non-compensation direct expenses from Other operating expenses. There was no change in total expenses related to this reclassification. (3) Other operating expenses include communication costs, licensing fees, professional fees and expenses not included in other categories. >>Employee compensation and benefits costs of $50.6 million for the fourth quarter of 2010 modestly increased by $1.5 million, or 3.1%, compared to the same quarter in 2009, with the increase primarily due to a general increase in compensation levels and increases in project-related activities, partially offset by integration savings.Non-compensation direct expenses were $47.8 million for the fourth quarter of 2010, an increase of $3.7 million, or 8.4%, compared to the same quarter in 2009. In general, these expenses directionally change with revenue changes. The increase in expenses also reflects costs in connection with the cheque supply programs which can vary by quarter and by customer in accordance with our contractual obligations.Other operating expenses were $21.6 million, an increase of $4.5 million, or 26.3% compared to the same quarter in 2009. In general, these increases were primarily attributable to the engagement of contractors in support of the previously mentioned customer project activities and to the ongoing costs of integration partially offset by cost management activities.Occupancy costs for the fourth quarter of 2010 were $4.8 million, an increase of $0.6 million, or 13.9%, compared to the same quarter in 2009. This increase was mainly due to higher operating and maintenance costs as well as a portion of facility costs no longer being allocated to the discontinued operations in the fourth quarter of 2010.Restructuring ChargesD+H recorded a restructuring charge of $6.2 million during the fourth quarter of 2010. This charge, together with a charge of $2.2 million recorded in the third quarter of 2010 is consistent with the range of $7.0 - $9.0 million previously announced. 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 fourth quarter of 2010, including the $6.2 million restructuring charge, was $29.5 million, a decrease of $7.6 million, or 20.5%, compared to the same quarter in 2009. As previously described, in addition to the impact of the restructuring charges, EBITDA also decreased due to increases in expenses supporting revenue growth and other integration activities.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 fourth quarter of 2010 increased by $1.1 million, or 25.0% compared to the fourth quarter of 2009. This increase is related to the capital additions throughout 2010, including the significant additions in the fourth quarter of 2010.Interest ExpenseInterest expense for the fourth quarter of 2010 modestly increased by $0.1 million compared to the same quarter last year, with slight increases in interest rates being offset by reduced borrowings.Net Unrealized Loss (Gain) on Derivative InstrumentsA net unrealized gain of $2.8 million on interest-rate swaps and foreign currency contracts was recognized in the fourth quarter of 2010 (Q4 2009 - $1.6 million net unrealized gain) reflecting mark-to-market adjustments related to changes in market interest rates at December 31, compared to September 30. 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. Provided the Business does not cancel its interest-rate swaps, the unrealized amounts represent a non-cash unrealized gain or loss that will subsequently reverse through income as the related swaps mature. The Company has historically held its derivative contracts to maturity.Future Income Tax Expense (Recovery)In the fourth quarter of 2010, the Fund recorded a future tax expense from continuing operations of $2.6 million (Q4 2009 - $2.6 million recovery). This future tax expense related to the addition of capital assets for which tax depreciation exceeded accounting depreciation and was partially offset by a future tax recovery related to the amortization of intangibles for accounting purposes. In both instances, the expense and recovery are non-cash items.Amortization of Intangibles from AcquisitionsAmortization of acquisition related intangibles for the fourth quarter of 2010 decreased by $0.2 million, as compared to the same period in 2009 due to changes in asset classification upon the finalization of the Resolve purchase price equation.Income (loss) from Discontinued OperationsOn October 7, 2010, D+H announced the sale of the non-strategic portion of its contact centre business, which primarily served non-core markets of D+H. Consequently, the results of operations related to this part of the Business have been classified as discontinued operations for both current and comparative periods. Refer to the Divestiture section in the MD&A for further details.Net IncomeNet income of $12.9 million for the fourth quarter of 2010 decreased by $12.7 million, or 49.8%, compared to the same period in 2009. On a per unit basis, net income decreased by 49.8% to $0.2415 per unit, compared to the fourth quarter of 2009 . The decreases are primarily attributable to the restructuring charge recorded during the current period, the non-cash changes in the future income taxes and to a lesser extent, the reduced EBITDA, all as described above.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 $20.4 million for the fourth quarter of 2010, a decrease of $8.8 million. Of this decrease, $6.2 million relates to the restructuring charge, described above.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) << Quarter ended December 31, 2010 2009 ------------------------------------------------------------------------- Cash flows from operating activities $ 42,916 $ 40,575 Add: Changes in non-cash working capital and other items(2) (17,703) (7,357) ------------------------------------------------------------------------- Adjusted cash flows from operating activities 25,213 33,218 Less: Asset expenditures(3) 12,166 5,113 Contract payments(4) 1,750 20 ------------------------------------------------------------------------- Adjusted cash flows after asset expenditures and contract payments 11,297 28,085 Less: Distributions paid to unitholders 24,482 24,482 ------------------------------------------------------------------------- (13,185) 3,603 Cash flows provided by (used in repayment of) long-term indebtedness (6,000) (6,000) Fair value of acquisitions - (1,449) Cash flows from sale of discontinued operations 1,602 - Changes in non-cash working capital and other items(2) 17,703 7,357 ------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents for the period $ 120 $ 3,511 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (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 and may include obligations for unusual items such as the restructuring charges. Specifically, over the next several quarters, the Business will make payments related to the restructuring charges. 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 quarter ended December 31, 2010 were $10.6 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 quarter ended December 31, 2010 were $3.3 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) << Quarter ended December 31, 2010 2009 % change ------------------------------------------------------------------------- Adjusted cash flows from operating activities $ 0.4736 $ 0.6240 -24.1% Adjusted cash flows after asset expenditures and contract payments $ 0.2122 $ 0.5276 -59.8% Cash distributions paid to unitholders $ 0.4599 $ 0.4599 0.0% Distributions declared during period $ 0.4599 $ 0.4599 0.0% ------------------------------------------------------------------------- ------------------------------------------------------------------------- >>Cash Flows, Income and Distributions PaidThe following table compares cash flows from operating activities and income to distributions paid: << Quarter ended December 31, (in thousands of Canadian dollars, unaudited) 2010 2009 ------------------------------------------------------------------------- Cash flows from operating activities $ 42,916 $ 40,575 Net income $ 12,856 $ 25,601 Adjusted income(1) $ 20,408 $ 29,214 Distributions paid during period $ 24,482 $ 24,482 Excess (shortfall) of cash flows from operating activities over cash distributions paid $ 18,434 $ 16,093 Excess (shortfall) of net income over cash distributions paid $ (11,626) $ 1,119 Excess (shortfall) of Adjusted income over cash distributions paid $ (4,074) $ 4,732 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (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. Distributions may exceed net income as a result of significant non-cash charges recorded through income including amortization of intangible assets related to acquisitions and future income taxes.Over the next several quarters, payments will be made related to restructuring activities pertaining to the operational integration of the Business which will reduce cash flows otherwise generated within the Business.Expenditures on Capital Assets and Contract PaymentsCompared to the same period in 2009, total capital asset expenditures increased by $7.1 million to $12.2 million in the fourth quarter of 2010. Fixed contract payments increased by $1.7 million in the fourth quarter of 2010 compared to 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. Capital spend in the latter part of 2010 was higher 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. The changes in fixed contract payments relate to timing of when payments are made. The capital spend for the year was consistent with expectations.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 fourth quarter of 2010, which remained the same for the comparative period in 2009. For the fourth quarter of 2010, both distributions declared and paid per unit were unchanged.On an annualized basis, the monthly cash distribution rate for December 2010 was $1.84 per unit, unchanged from December 2009.Changes in Non-Cash Working Capital and Other Items(in thousands of Canadian dollars, unaudited) << Quarter ended December 31, 2010 2009 ------------------------------------------------------------------------- Decrease (increase) in non-cash working capital items $ 17,921 $ 4,855 Decrease (increase) in other operating assets and liabilities (218) 2,502 ------------------------------------------------------------------------- Decrease (increase) in non-cash working capital and other items $ 17,703 $ 7,357 ------------------------------------------------------------------------- ------------------------------------------------------------------------- >>The net decrease in non-cash working capital items for the fourth quarter of 2010 is primarily attributable to the increase in trade payables due to normal course timing differences and to amounts related to the restructuring charge previously described. Although some of the restructuring charges were paid during 2010, significant amounts are to be paid in future periods, which will reduce the balance sheet obligations and reduce cash otherwise available.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.DivestitureOn 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 results of these operations were classified as discontinued operations for both current and comparative periods.The transaction fees and other transition costs relating to the disposition were recognized as part of the final purchase price allocation for Resolve.2010 OPERATING RESULTSOverviewDavis + Henderson had a solid year in 2010 in relation to the execution of its strategic plan and in the context of variable economic and market conditions. As an overall summary, when comparing the results of 2010 to 2009, there were large year-over-year increase in revenues and expenses that were primarily due to the inclusion of Resolve, which was acquired during the third quarter of 2009. The Business also benefited from increase in revenues from several service areas as more fully described below. Additionally, the Business continued its integration and transformation activities, following the Resolve acquisition. These activities had the effect of increasing expenses, including those related to the $8.4 million restructuring charges, but are expected to provide subsequent cost savings and enhanced effectiveness within the Business.In addition, on October 7, 2010, the Business sold a non-strategic component of its contact centre business and as such, the results of these operations are presented as discontinued operations for both current and prior periods presented.The 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 section for a discussion of non-GAAP terms used. Effective July 27, 2009, the consolidated results include those of Resolve.Operating and Financial Results(1)(in thousands of Canadian dollars, except per unit amounts) << Year ended December 31, 2010 2009 2008 ------------------------------------------------------------------------- Revenue $ 640,374 $ 473,852 $ 367,231 Expenses 482,578 338,334 245,678 Restructuring charges(2) 8,428 - - ------------------------------------------------------------------------- EBITDA(3) 149,368 135,518 121,553 Amortization of capital assets and non-acquisition intangibles 20,304 16,517 15,538 Interest expense 13,988 9,541 6,847 ------------------------------------------------------------------------- Adjusted income(3) 115,076 109,460 99,168 Amortization of mark-to-market adjustment of interest-rate swaps 396 478 561 Net unrealized loss (gain) on derivative instruments(4) (1,199) (4,145) 5,691 Future income tax expense (recovery) 3,239 (2,372) 1,217 Amortization of intangibles from acquisitions 28,288 20,087 13,716 ------------------------------------------------------------------------- Income from continuing operations 84,352 95,412 77,983 Income (loss) from discontinued operations, net of taxes(5) (1,826) (398) 465 ------------------------------------------------------------------------- Net income 82,526 95,014 78,448 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Adjusted income per unit, basic and diluted(3) $ 2.1617 $ 2.2820 $ 2.2565 Net income per unit, basic and diluted $ 1.5503 $ 1.9808 $ 1.7851 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- 2010 vs. 2009 vs. 2009 2008 % change % change ------------------------------------------------------------------------- Revenue 35.1% 29.0% EBITDA(3) 10.2% 11.5% Adjusted income per unit(3) -5.3% 1.1% Net income per unit -21.7% 11.0% ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) The results for 2009 include those of Resolve, effective from the date of acquisition of July 27, 2009. (2) Restructuring charges of $8.4 million ($0.1583 per unit) relate to further integration and transformation initiatives designed to better position the Business going forward to serve customers and improve the effectiveness and efficiency of operations. (3) EBITDA and Adjusted income are non-GAAP terms. See Non-GAAP Measures for a more complete description of these terms. (4) 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. (5) On October 7, 2010, the Business sold a non-strategic component of its contact centre business and as such, the results of these operations are presented as discontinued operations for both current and prior periods presented. Discontinued operations for 2008 relate to services previously provided under a U.S. cheque supply contract. >>Year Ended December 31, 2010 Compared to Year Ended December 31, 2009Revenue(1)Total consolidated revenue for the year ended December 31, 2010 was $640.4 million, an increase of $166.5 million, or 35.1%, compared to 2009 with the increase primarily due to the inclusion of Resolve (effective July 27, 2009) and from modest increases in several service areas. Revenue by major service area is summarized in the table below. << Year ended December 31, 2010 2009 ------------------------------------------------------------------------- Revenue Programs to the chequing account $ 293,838 $ 288,557 Loan servicing 125,752 50,645 Loan registration technology services 102,342 41,785 Lending technology services 77,281 69,244 Other(1) 41,161 23,621 ------------------------------------------------------------------------- $ 640,374 $ 473,852 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Excluded from the current and comparative periods are the discontinued operations that were sold on October 7, 2010. >>Revenue for the year ended December 31, 2010 from programs to the chequing account was $293.8 million, an increase of $5.3 million, or 1.8%, compared to 2009. The modest increase was primarily attributable to program changes and product and service enhancements that increased average order values and offset the impact of order volume declines. Management believes that the long-term historical trend related to current 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 2010 from loan servicing, which includes student loan administration services and credit card servicing was $125.8 million. There were no meaningful comparable results in 2009 as this service area relates to the Resolve business which was acquired in the third quarter 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 2010 results from student loan administration services also benefited from strong performance incentives which can be earned under contracts within the service area. Loan servicing revenues in 2010 within the credit card servicing area also benefited from delivery of services to a new customer and from project services delivered to an existing customer.Loan registration technology services revenue for 2010 was $102.3 million. There were no meaningful comparable results in 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 commercial 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. In general, volumes were stronger in the latter portion of 2009 and early periods in 2010, compared to the latter part of 2010.Revenue for 2010 from lending technology services, which includes services to the mortgage market and other credit markets was $77.3 million, an increase of $8.0 million, or 11.6%, compared to 2009. The majority of the increase in 2010 from this service area relates to higher mortgage origination service fees which increased by 15% on a year-over-year basis. In general, industry analysts expect the housing and mortgage markets to moderate in 2011 as compared to 2010.Other revenue 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, the results of these operations are presented as discontinued operations in both current and prior periods presented. Accordingly, the revenues relating to this part of the Business for both 2010 and 2009 of $13.8 million and $7.9 million respectively, 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 % Revenue ------------------------------------------------------------------------- Revenue Programs to the chequing account 46% Loan servicing 20% Loan registration technology services 16% Lending technology services 12% Other 6% ------------------------------------------------------------------------- 100% ------------------------------------------------------------------------- >>Expenses(1)For 2010, on a consolidated basis, expenses of $482.6 million increased by $144.2 million, or 42.6%, compared to 2009. The increases primarily reflected the inclusion of Resolve. The changes also reflect the ongoing costs of integrating the businesses, reduced by continued cost management activities and integration savings. << Year ended December 31, (in thousands of Canadian dollars, unaudited) 2010 2009 ------------------------------------------------------------------------- Employee compensation and benefits $ 193,481 $ 134,585 Non-compensation direct expenses(2) 191,213 147,845 Other operating expenses(3) 80,027 44,678 Occupancy costs(4) 17,857 11,226 ------------------------------------------------------------------------- $ 482,578 $ 338,334 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Excluded from the current and comparative periods are the discontinued operations that were sold on October 7, 2010 and the restructuring charge, further described below. (2) Non-compensation direct expenses include materials, shipping, selling expenses and third party direct disbursements. For the year ended December 31, 2009, to be consistent with comparative periods presented, some expenses have been reclassified from Other operating expenses to Non-compensation direct expenses. There was no change in total expenses related to this reclassification. (3) Other operating expenses include communication costs, licensing fees, professional fees and expenses not included in other categories. (4) For the year ended December 31, 2010, some expenses have been reclassified from Other operating expenses to Occupancy costs. There was no change in total expenses related to this reclassification. >>For 2010, employee compensation and benefit costs were $193.5 million, an increase of $58.9 million, or 43.8% compared to 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 $191.2 million for 2010, an increase of $43.4 million, or 29.3% compared to 2009. The increase was mainly due to the inclusion of Resolve expenses. In general, these expenses directionally change with revenue changes.For 2010, other operating expenses were $80.0 million, an increase of $35.3 million, or 79.1% compared to 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 2010 were $17.9 million, an increase of $6.6 million, or 59.1%, compared to 2009. The increase in occupancy costs 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 $8.4 million during the year ended December 31, 2010. This charge is consistent with the range of $7.0 - $9.0 million previously announced. 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 for 2010 was $149.4 million, an increase of $13.8 million, or 10.2% compared to 2009. For 2010, EBITDA as a percentage of revenue was 23.3% compared to 28.6% for 2009, with the change primarily attributed to the full year 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.Other ExpensesAmortization of Capital and Non-acquisition IntangiblesAmortization of capital and non-acquisition intangible assets during 2010 increased by $3.8 million, or 22.9% compared to 2009. These increases were 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 2010 increased by $4.4 million compared to 2009 due to an increase in the level of outstanding debt related to the acquisition of Resolve, as well as the write-off of certain unamortized financing costs during 2010. In June 2010, the Business renewed its bank credit facilities and also issued a new seven-year Bond. Certain unamortized financing fees totalling $0.4 million were written off in 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 2010.Net Unrealized Loss (Gain) on Derivative InstrumentsA net unrealized gain of $1.2 million was recorded in 2010 (2009 - unrealized gain of $4.1 million) reflecting mark-to-market adjustments related to changes in market interest rates at December 31, 2010, compared to December 31, 2009. 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. The unrealized gains in 2009 and 2010 recovered the unrealized losses recorded in earlier periods. Provided the Business does not cancel its interest-rate swaps, the unrealized amounts represent a non-cash unrealized gain or loss that will subsequently reverse through income as the related swaps mature. The Company has historically held its derivative contracts to maturity.Future Income Tax Expense (Recovery)For 2010, the Fund recorded a future tax expense from continuing operations of $3.2 million (2009 - $2.6 million recovery). This future tax expense related to the addition of capital assets for which tax depreciation exceeded accounting depreciation and was partially offset by a future tax recovery related to the amortization of intangibles for accounting purposes.Amortization of Intangibles from AcquisitionsAmortization of acquisition related intangibles for 2010 increased by $8.2 million as compared to 2009 due to the incremental intangible assets from the acquisition of Resolve on July 27, 2009.Income (loss) from Discontinued OperationsOn October 7, 2010, the Business sold a non-strategic component of its contact centre business and as such, the results of these operations are presented as discontinued operations for both current and prior periods presented. Refer to the Divestiture section in the MD&A for further details.Net IncomeFor 2010, net income of $82.5 million decreased by $12.5 million, or 13.1% compared to 2009. The decrease in net income in 2010 relates to the changes in non-cash mark-to-market adjustments on interest-rate swaps, non-cash taxes and amortization of intangible assets related to business acquisitions and to the impact of the $8.4 million restructuring charge. Net income per unit of $1.5503 decreased by 21.7% for the same reasons as described above and due to the impact of the issuance of 9,286,581 trust units for the Resolve acquisition.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 $115.1 million for 2010, a 5.1% increase over 2009. This increase includes the impact of the $8.4 million ( $0.1583 per unit) restructuring charge. On a per unit basis, reflecting the issuance of 9,286,581 units upon the acquisition of Resolve, Adjusted income per unit of $2.1617 decreased by 5.3% compared to 2009.EIGHT QUARTER CONSOLIDATED STATEMENT OF INCOME - SUMMARY(in thousands of Canadian dollars, except per unit amounts, unaudited) << 2010 Q4 Q3 Q2 Q1 ------------------------------------------------------------------------- Revenue $ 160,457 $ 161,900 $ 164,319 $ 153,698 Expenses 124,733 121,311 120,545 115,989 Restructuring charges(4) 6,268 2,160 - - ------------------------------------------------------------------------- EBITDA(1) 29,456 38,429 43,774 37,709 Amortization of capital assets and non-acquisition intangibles 5,643 5,030 4,962 4,669 Interest expense 3,405 3,517 3,692 3,374 ------------------------------------------------------------------------- Adjusted income(1) 20,408 29,882 35,120 29,666 Amortization of mark-to-market adjustment of interest-rate swaps 52 52 103 189 Net unrealized loss (gain) on derivative instruments(2) (2,848) 1,514 1,694 (1,559) Future income tax expense (recovery) 2,620 (645) 603 661 Amortization of intangibles from acquisition 7,108 6,925 7,158 7,097 ------------------------------------------------------------------------- Income from continuing operations 13,476 22,036 25,562 23,278 Income (loss) from discontinued operations, net of taxes(3) (620) (465) (531) (210) ------------------------------------------------------------------------- Net income $ 12,856 $ 21,571 $ 25,031 $ 23,068 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Adjusted income per unit, basic and diluted(1) $ 0.3834 $ 0.5613 $ 0.6597 $ 0.5572 Net income per unit, basic and diluted $ 0.2415 $ 0.4052 $ 0.4702 $ 0.4333 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 2009 Q4 Q3 Q2 Q1 ------------------------------------------------------------------------- Revenue $ 151,521 $ 139,245 $ 94,557 $ 88,529 Expenses 114,467 101,696 62,080 60,091 Restructuring charges(4) - - - - ------------------------------------------------------------------------- EBITDA(1) 37,054 37,549 32,477 28,438 Amortization of capital assets and non-acquisition intangibles 4,514 4,505 3,679 3,819 Interest expense 3,326 2,681 1,787 1,747 ------------------------------------------------------------------------- Adjusted income(1) 29,214 30,363 27,011 22,872 Amortization of mark-to-market adjustment of interest-rate swaps 103 103 136 136 Net unrealized loss (gain) on derivative instruments(2) (1,620) (1,647) (1,069) 191 Future income tax expense (recovery) (2,605) 1,015 (718) (64) Amortization of intangibles from acquisition 7,330 5,942 3,441 3,374 ------------------------------------------------------------------------- Income from continuing operations 26,006 24,950 25,221 19,235 Income (loss) from discontinued operations, net of taxes(3) (405) 7 - - ------------------------------------------------------------------------- Net income $ 25,601 $ 24,957 $ 25,221 $ 19,235 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Adjusted income per unit, basic and diluted(1) $ 0.5488 $ 0.6000 $ 0.6146 $ 0.5204 Net income per unit, basic and diluted $ 0.4809 $ 0.4931 $ 0.5739 $ 0.4377 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (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 divested 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 generally in the economic environment, the housing and mortgage markets and the auto lending markets specifically, have increased volatility. Measured on a sequential quarter-to-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, however, recent quarters were additionally impacted by the restructuring charges and integration activities. Adjusted income excludes the results of the discontinued operations and includes the impact of the restructuring charge previously described. 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, amortization of intangibles from acquisitions and changes in future income tax provisions.SELECTED BALANCE SHEET INFORMATION(in thousands of Canadian dollars, unaudited) << Year ended December 31, 2010 2009 2008 ------------------------------------------------------------------------- Total assets $ 933,521 $ 941,555 $ 663,906 ------------------------------------------------------------------------- Total long-term liabilities $ 266,810 $ 278,801 $ 165,106 ------------------------------------------------------------------------- >>Total assets of $933.5 million at December 31, 2010 decreased by $8.0 million compared with total assets at December 31, 2009, primarily as a result of amortization of intangible assets. The increase in total assets between December 31, 2008 and December 31, 2009 was primarily a result of the acquisition of Resolve in July 2009.Long-term liabilities at December 31, 2010 decreased by $12.0 million compared to 2009 and the decrease was primarily due to repayments made under the credit facilities in 2010. The increase in long-term liabilities between December 31, 2008 and December 31, 2009 was principally due to the increase in credit facilities in order to assume the debt obligations within Resolve and adjustments to future tax liabilities.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) << Year ended December 31, 2010 2009 2008 ------------------------------------------------------------------------- Cash flows from operating activities $ 137,253 $ 119,722 $ 116,062 Add (deduct): Changes in non-cash working capital and other items(2) (4,223) 5,780 (594) ------------------------------------------------------------------------- Adjusted cash flows from operating activities 133,030 125,502 115,468 Less: Asset expenditures(3) 26,797 11,668 10,218 Contract payments(4) 3,467 3,137 3,220 ------------------------------------------------------------------------- Adjusted cash flows after asset expenditures and contract payments(3) 102,766 110,697 102,030 Distributions paid to unitholders 97,928 87,962 78,580 ------------------------------------------------------------------------- 4,838 22,735 23,450 Cash flows provided by (used in repayment of) long-term indebtedness (11,000) (11,948) 18,000 Cash flows used in issuance costs (2,564) (2,321) - Fair value of acquisitions 167 (10,874) (43,126) Cash flows from sale of discontinued operations 1,602 - - Changes in non-cash working capital and other items(2) 4,223 (5,780) 594 ------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents for the year $ (2,734) $ (8,188) $ (1,082) ------------------------------------------------------------------------- ------------------------------------------------------------------------- (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 and may include obligations for unusual items such as restructuring charges. Specifically, for the next several quarters, the Business will make payments related to the restructuring charges. 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 year ended December 31, 2010 were $20.6 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 2010 were $9.7 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) << Year ended December 31, 2010 2009 2008 ------------------------------------------------------------------------- Adjusted cash flows from operating activities $ 2.4990 $ 2.6165 $ 2.6275 Adjusted cash flows after asset expenditures and contract payments $ 1.9305 $ 2.3078 $ 2.3217 Cash distributions paid to unitholders $ 1.8396 $ 1.8396 $ 1.7881 Distributions declared during year(1) $ 1.8396 $ 1.8396 $ 1.8384 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Includes a special non-cash distribution in 2008 of $0.04 per unit. ------------------------------------------------------------------------- 2010 vs. 2009 vs. 2009 2008 % change % change ------------------------------------------------------------------------- Adjusted cash flows from operating activities -4.5% -0.4% Adjusted cash flows after capital expenditures and contract payments -16.3% -0.6% Cash distributions paid to unitholders 0.0% 2.9% Distributions declared during year(1) 0.0% 0.1% ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Includes a special non-cash distribution in 2008 of $0.04 per unit. >>Cash Flows, Income and Distributions PaidThe following table compares cash flows from operating activities and income to distributions paid: << Year ended (in thousands of Canadian December 31, dollars, unaudited) 2010 2009 2008 ------------------------------------------------------------------------- Cash flows from operating activities $ 137,253 $ 119,722 $ 116,062 Net income $ 82,526 $ 95,014 $ 78,448 Adjusted income(1) $ 115,076 $ 108,923 $ 99,168 Distributions paid during year $ 97,928 $ 87,962 $ 78,580 Excess (shortfall) of cash flows from operating activities over cash distributions paid $ 39,325 $ 31,760 $ 37,482 Excess (shortfall) of net income over cash distributions paid $ (15,402) $ 7,052 $ (132) Excess (shortfall) of Adjusted income over cash distributions paid $ 17,148 $ 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. Distributions may exceed net income as a result of significant non-cash charges recorded through income, including amortization of intangible assets related to acquisitions and future income taxes.Expenditures on Capital Assets and Contract PaymentsCompared to 2009, total capital asset expenditures increased by $15.5 million to $30.3 million for 2010. The increase in capital expenditures over 2009 relates to the increased size of operations since the acquisition of Resolve in July 2009 and to capital applied in relation to the Fund's integration activities.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 $1.8396 per unit ($97.9 million) for 2010, compared to $1.8396 per unit ($88.0 million) in 2009. The increase in total distributions in 2010 reflects the issuance of 9,286,581 units on July 27, 2009, in connection with the Resolve acquisition. For 2010, both distributions declared and paid per unit were unchanged.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 tax allocation of distributions 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 December 31, 2010, the total number of trust units outstanding was 53,233,373, which was the same as at December 31, 2009. This reflects an issuance of 9,286,581 trust units on July 27, 2009 in exchange for all the outstanding units of Resolve.As previously discussed, the Fund's income trust structure was converted into a corporate structure on January 1, 2011. Under the Arrangement, unitholders of the Fund received, on a tax deferred, roll-over basis, one common share of the Corporation, for each unit of the Fund held. As at March 8, 2011, the number of shares outstanding was 53,233,373.Commencing in 2011, as a corporation, the Business is subject to corporate taxes. We had previously announced our intention to pay quarterly dividends commencing in 2011 at an initial annualized rate of $1.20 per share. Also as previously announced, D+H intends to declare a special dividend of $0.15 per share in early March 2011. The special dividend payment date is expected to be at the end of March 2011. Consequently, for the first quarter of 2011, it is expected that the Business will pay approximately $0.30 per share of distributions comprised of a $0.1533 per unit distribution paid on January 31, 2011 and a $0.15 per share dividend paid in March 2011. Subsequently, it is our intention to pay regular quarterly dividends at a rate of $0.30 per share (equivalent to $1.20 per share annualized) with the intended initial regular quarterly dividend being declared in May 2011 and paid in June 2011.Changes in Non-Cash Working Capital and Other Items(in thousands of Canadian dollars, unaudited) << Year ended December 31, 2010 2009 2008 ------------------------------------------------------------------------- Decrease (increase) in non-cash working capital items 1,574 (8,443) 1,933 Decrease (increase) in other operating assets and liabilities 2,649 2,663 (1,339) ------------------------------------------------------------------------- Decrease (increase) in non-cash working capital and other items $ 4,223 $ (5,780) $ 594 ------------------------------------------------------------------------- ------------------------------------------------------------------------- >>The net decrease in non-cash working capital items in 2010 was primarily related to the increase in trade payables due to normal course timing of payments which were partially offset by an increase in trade receivables attributable to higher revenues and normal course timing differences.The net increase in non-cash working capital in 2009 was primarily a result of a decrease in payables reflecting normal course timing differences of when payments were made, payments under certain multi-year compensation programs and severance payments made earlier in the year partially offset by a decrease in receivables due to normal course timing differences.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 acquired recently.AcquisitionsWith the acquisition of Resolve in 2009, 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) was approximately $130.5 million. During 2010, management completed its assessment of the valuation of the assets acquired and liabilities assumed for this acquisition including finalizing related restructuring charges.Subsequent to December 31, 2010, the Business acquired the assets and operations of ASSET Inc. for approximately $76 million excluding fees and transaction costs adjustments. This acquisition was funded through utilizing an extension of the Company's secured credit facilities.DivestitureOn October 7, 2010, D+H announced the sale of its non-strategic contact centre operations acquired as part of the Resolve acquisition, which primarily served non-core markets of D+H, for proceeds approximately equal to the working capital and certain assets of the operations sold. These operations have been classified as discontinued operations for the comparative periods presented.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 December 31, 2010, cash and cash equivalents totalled $1.1 million, compared to $3.9 million at December 31, 2009. The long-term indebtedness as at December 31, 2010, before deducting unamortized deferred finance fees, was $199.0 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 $149.0 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 $2.8 million as at December 31, 2010. During 2010, the Business made net repayments of $11.0 million on its long-term indebtedness.Total senior secured credit facilities at December 31, 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 December 31, 2010, the Business had drawn $130.0 million under the non-revolving term loan and $19.0 million under the revolving term credit facility. The Business is permitted to draw on the revolving facility's available balance of $71.0 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 December 31, 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 following table : << (in thousands of Canadian dollars, unaudited) ------------------------------------------------------------------------- Fair value of interest-rate swaps ------------------------ Interest Maturity Date Notional Amount Asset Liability Rate(1) ------------------------------------------------------------------------- January 5, 2011 $ 22,000 $ - $ 39 1.980% June 15, 2011 20,000 - 443 4.685% June 15, 2011 25,000 - 554 4.685% December 18, 2014 25,000 - 364 2.720% March 18, 2015 25,000 - 549 2.940% March 20, 2017 25,000 - 798 3.350% March 20, 2017 20,000 - 656 3.366% ------------------------------------------------------------------------- $ 162,000 $ - $ 3,403 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (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 December 31, 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 December 31, 2010, the Fund would have to pay the fair value of $3.4 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 December 31, 2010, the average effective interest rate on the Fund's total indebtedness is approximately 5.7%.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.Contractual Obligations - Payments Due by PeriodThe table below presents the contractual obligations of the Business as at December 31, 2010 and the timing of the expected payments. << ------------------------------------------------------------------------- (in thousands of Canadian dollars, Less than 1 - 3 4 - 5 After 5 unaudited) Total 1 year years years years ------------------------------------------------------------------------- Long-term indebtedness 199,000 - 149,000 - 50,000 Operating leases 48,334 10,730 20,804 7,709 9,091 Employee future benefits 5,003 298 895 597 3,213 Contractual supplier obligation 1,394 4 1,046 344 - Obligations relating to deferred compensation program 1,934 - 1,934 - - ------------------------------------------------------------------------- $ 255,665 $ 11,032 $ 173,679 $ 8,649 $ 62,304 ------------------------------------------------------------------------- ------------------------------------------------------------------------- >>Long-term IndebtednessTotal senior secured credit facilities at December 31, 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 December 31, 2010, the Business had drawn $130.0 million under the non-revolving term loan and $19.0 million under the revolving term credit facility. The credit facilities do not require the Fund to make any principal payments prior to their stated maturities.The Business also 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.Operating LeasesThe Business rents facilities, equipment and vehicles under various operating leases. As of December 31, 2010, minimum payments under these operating leases totalled $48.3 million.Employee Future BenefitsObligations relating to employee future benefits relate to the Fund's non-pension post-retirement benefit plans. The latest actuarial valuation of the post-retirement benefit plans was performed as of December 31, 2010.Contractual Supplier ObligationThe contractual supplier obligation relates to payments to be made for a customized software package.Deferred Compensation ProgramThe Business provides multi-year performance based compensation plans to its senior executives. These include 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.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 derivative instruments, 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 Asset 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 asset 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 long-term financial objective is to deliver sustainable and growing earnings through continued organic revenue growth and by way of strategic acquisitions. For 2009 and 2010, revenue was substantially higher due to the inclusion of the results of Resolve. Future comparative periods will fully include the Resolve results. On January 17, 2011, the Company completed the acquisition of ASSET which will again increase revenues and expenses of future periods as compared to previous periods.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: (i) 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), (ii) the expansion of our current services within the student lending, commercial and personal lending areas (including the mortgage, credit card and personal property markets), (iii) selling and delivering our lending technology services to new customers and (iv) combining the capabilities of D+H together with those of the recently acquired Resolve and ASSET businesses to develop new service offerings for our financial institution customers. Our acquisition strategy focuses on acquiring companies that extend or add to the services that we provide within the financial services marketplace. Our acquisition plans may involve extending beyond the Canadian market consistent with the expansion strategies of our major Canadian 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; (iii) variability in fees relating to mortgage origination services revenues due to recent significant variability in the housing market, and (iv) fees and expenses incurred in connection with acquisitions and related business integration activities. 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. For the fourth quarter and for the next several quarters, our results will compare 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, the consolidated capital spend was approximately $30 million. For 2011, we anticipate that our capital spending will be similar to 2010.Effective January 1, 2011, pursuant to the Arrangement, the Fund's income trust structure was converted to a corporate structure and the publicly traded corporation is now named Davis + Henderson Corporation. This conversion was approved at a meeting of unitholders held on June 17, 2010, at which unitholders approved the Arrangement by a vote of 99.8%. The information circular in respect of this meeting, which provided a detailed outline of the conversion is available on SEDAR at www.sedar.com. Under the Arrangement, unitholders of the Fund received, on a tax deferred, roll-over basis, one common share of the Corporation, for each unit of the Fund held. Common shares of Davis + Henderson Corporation commenced trading on the Toronto Stock Exchange on January 4, 2011, under the symbol DH.In conjunction with the conversion, the Company also undertook an internal reorganization to simplify its business operations by consolidating the various businesses it operates through separate legal entities, arising as a consequence of recent acquisitions, into a single operating entity. The businesses were combined and will operate as D+H Limited Partnership. As a result of this reorganization and the utilization of loss carry-forward balances, it is anticipated that the Corporation will commence paying cash taxes in 2013.Commencing in 2011, as a corporation, the Business is subject to corporate taxes. We have previously announced our intention to pay quarterly dividends commencing in 2011 at an initial annualized rate of $1.20 per share. Also as previously announced, D+H intends to declare a special dividend of $0.15 per share in early March 2011. The special dividend payment date is expected to be at the end of March 2011. Consequently, for the first quarter of 2011, it is expected that the Business will pay approximately $0.30 per share of distributions comprised of a $0.1533 per unit distribution paid on January 31, 2011 and a $0.15 per share dividend paid in March 2011. Subsequently, it is our intention to pay regular quarterly dividends at a rate of $0.30 per share (equivalent to $1.20 per share annualized) with the intended regular quarterly dividend being declared in May 2011 and paid in June 2011. Actual dividends declared will be subject to the discretion of the D+H Board of Directors and may vary from the intentions stated. Among other items, in determining actual dividends declared, the Board of Directors will consider the financial performance, capital plans, acquisition plans, expectations of future economic conditions and other factors.Historically, as an income trust, Davis + Henderson had delivered stable and growing distributions to owners. As a result of the proposed changes in taxation affecting income trusts, distributions had been held constant for a period of time. With the conversion to a corporation now complete, we look to increase dividends as the business grows.Notwithstanding the structural and distribution changes described above, the strategies and objectives of the Business 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. << CONSOLIDATED BALANCE SHEETS December 31, 2010 and 2009 (in thousands of Canadian dollars) 2010 2009 ------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 1,144 $ 3,878 Accounts receivable (note 3) 63,902 57,251 Inventory (note 4) 6,006 6,197 Prepaid expenses 7,552 6,156 Future income tax asset - current (note 11) 2,464 3,274 ------------------------------------------------------------------------- 81,068 76,756 Future income tax asset (note 11) 26,085 21,425 Capital assets (note 5) 32,289 33,296 Fair value of derivatives (note 9) - 456 Intangible assets (note 6) 266,837 289,774 Goodwill (note 7) 527,242 519,848 ------------------------------------------------------------------------- $ 933,521 $ 941,555 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES AND UNITHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 91,927 $ 72,274 Distributions payable to unitholders 8,161 8,161 Deferred revenue - current 6,338 7,028 ------------------------------------------------------------------------- 106,426 87,463 Long-term indebtedness (note 8) 196,215 208,463 Fair value of derivatives (note 9) 3,403 4,733 Deferred revenue - non-current 9,226 9,510 Other long-term liabilities (note 10) 8,327 7,161 Future income tax liability (note 11) 49,639 48,934 ------------------------------------------------------------------------- 373,236 366,264 Unitholders' equity: Trust units (note 12) 595,859 595,859 Deficit (35,488) (20,086) Accumulated other comprehensive income (loss) (86) (482) ------------------------------------------------------------------------- 560,285 575,291 Commitments (note 14) Subsquent events (note 19) ------------------------------------------------------------------------- $ 933,521 $ 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) Quarter ended Years ended December 31, December 31, 2010 2009 2010 2009 ------------------------------------------------------------------------- Revenue (note 16) $ 160,457 $ 151,521 $ 640,374 $ 473,852 Cost of sales and operating expenses (note 4) 125,116 114,800 484,046 339,616 Restructuring charges (note 17) 6,268 - 8,428 - Amortization of capital assets (note 5) 2,023 1,811 7,689 6,075 ------------------------------------------------------------------------- 27,050 34,910 140,211 128,161 Interest expense 3,457 3,429 14,384 10,019 Net unrealized loss (gain) on derivative instruments (2,848) (1,620) (1,199) (4,145) Amortization of intangible assets (note 6) 10,345 9,700 39,435 29,247 ------------------------------------------------------------------------- Income from continuing operations before income taxes 16,096 23,401 87,591 93,040 Future income tax expense (recovery) (note 11) 2,620 (2,605) 3,239 (2,371) ------------------------------------------------------------------------- Income from continuing operations 13,476 26,006 84,352 95,411 Loss from discontinued operations, net of taxes (note 11, 18) (620) (405) (1,826) (397) ------------------------------------------------------------------------- Net income $ 12,856 $ 25,601 $ 82,526 $ 95,014 ------------------------------------------------------------------------- Net income per unit, basic and diluted $ 0.2415 $ 0.4809 $ 1.5503 $ 1.9808 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands of Canadian dollars, unaudited) Quarter ended Year ended December 31, December 31, 2010 2009 2010 2009 ------------------------------------------------------------------------- Net income $ 12,856 $ 25,601 $ 82,526 $ 95,014 Other comprehensive income: Amortization of mark-to-market adjustment of interest-rate swaps 52 103 396 478 ------------------------------------------------------------------------- Total comprehensive income $ 12,908 $ 25,704 $ 82,922 $ 95,492 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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) Quarter ended Year ended December 31, December 31, 2010 2009 2010 2009 ------------------------------------------------------------------------- Deficit Deficit, beginning of period $ (23,862) $ (21,205) $ (20,086) $ (25,714) Net income 12,856 25,601 82,526 95,014 Distributions (24,482) (24,482) (97,928) (89,386) ------------------------------------------------------------------------- Deficit, end of period (35,488) (20,086) (35,488) (20,086) ------------------------------------------------------------------------- Accumulated Other Comprehensive Income (Loss) Accumulated other comprehensive income (loss), beginning of period (138) (585) (482) (960) Other comprehensive income : Amortization of mark-to-market adjustment of interest-rate swaps 52 103 396 478 ------------------------------------------------------------------------- Accumulated other comprehensive income (loss), end of period(1) (86) (482) (86) (482) ------------------------------------------------------------------------- Deficit and accumulated other comprehensive income (loss), end of period $ (35,574) $ (20,568) $ (35,574) $ (20,568) ------------------------------------------------------------------------- ------------------------------------------------------------------------- (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) Quarter ended Year ended December 31, December 31, 2010 2009 2010 2009 ------------------------------------------------------------------------- Cash and cash equivalents provided by (used in): OPERATING ACTIVITIES Net income from continuing operations $ 13,476 $ 26,006 $ 84,352 $ 95,411 Add: Amortization of capital assets 2,023 1,811 7,689 6,075 Amortization of capital assets included in cost of sales 383 333 1,468 1,282 Amortization of intangible assets 10,345 9,700 39,435 29,247 Amortization of mark-to- market adjustment of interest-rate swaps 52 103 396 478 Net unrealized loss (gain) on derivative instruments (2,848) (1,620) (1,199) (4,145) Future income tax expense (recovery) 2,620 (2,605) 3,239 (2,371) ------------------------------------------------------------------------- 26,051 33,728 135,380 125,977 Decrease (increase) in non- cash working capital items 17,921 4,855 1,574 (8,443) Changes in other operating assets and liabilities (218) 2,502 2,649 2,663 Cash flows from discontinued operations (838) (510) (2,350) (475) ------------------------------------------------------------------------- 42,916 40,575 137,253 119,722 ------------------------------------------------------------------------- FINANCING ACTIVITIES Repayment of long-term indebtedness (8,900) (6,000) (73,900) (87,948) Proceeds from long-term indebtedness 2,900 - 62,900 76,000 Issuance costs of long- term indebtedness - - (2,564) (1,621) Issuance costs of trust units - - - (700) Distributions paid to unitholders (24,482) (24,482) (97,928) (87,962) ------------------------------------------------------------------------- (30,482) (30,482) (111,492) (102,231) ------------------------------------------------------------------------- INVESTING ACTIVITIES Expenditures on capital assets, non-acquisition intangible assets and long- term contracts (13,916) (5,133) (30,264) (14,805) Acquisition of businesses and acquisition adjustments - (1,011) 167 (10,436) Payments related to customer service contract - (438) - (438) Cash flows from sale of discontinued operations 1,602 - 1,602 - ------------------------------------------------------------------------- (12,314) (6,582) (28,495) (25,679) ------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents for the period 120 3,511 (2,734) (8,188) Cash and cash equivalents, beginning of period 1,024 367 3,878 12,066 ------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 1,144 $ 3,878 $ 1,144 $ 3,878 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Supplementary information: Cash interest paid $ 3,179 $ 2,880 $ 12,995 $ 9,033 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. >> << NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2010 and 2009 (in thousands of Canadian dollars, except unit and per unit amounts, unaudited) NATURE OF BUSINESS Davis + Henderson Income Fund (the "Fund" or "Company" or "Davis + Henderson" or "D+H" or the "Business") 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 Canadian Generally Accepted Accounting Principles. 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 year ended December 31, 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 $7.4 million (net of taxes) was recorded during the year that included adjustments relating to changes in estimated tax attributes of Resolve resulting from information that became available during the year, severances, transaction fees and other transition 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. The adjustments also included revaluation of customer relationship intangibles which resulted in a reduction of intangible assets. 3. ACCOUNTS RECEIVABLE 2010 2009 ------------------------------------------------------------------------- Trade receivables $ 63,270 $ 56,073 Other receivables 632 1,178 ------------------------------------------------------------------------- $ 63,902 $ 57,251 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Allowance for doubtful accounts recorded as at December 31, 2010 was $985 (2009 - $614). Past due accounts as at December 31, 2010 were $918 (2009 - $919). 4. INVENTORY 2010 2009 ------------------------------------------------------------------------- Raw materials $ 2,364 $ 2,457 Work-in-process 1,647 1,322 Finished goods 1,995 2,418 ------------------------------------------------------------------------- $ 6,006 $ 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 December 31, 2010 was $10,888 (Q4 2009 - $9,627) and year ended December 31, 2010 was $42,031 (2009 - $42,715). The amount of write-down of inventories recognized as an expense during the three months ended December 31, 2010 was $18 (Q4 2009 - $45) and year ended December 31, 2010 was $158 (2009 - $189). 5. CAPITAL ASSETS 2010 ------------------------------------------------------------------------- Furniture, fixtures and lease- Machinery hold 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 - 708 8,046 856 9,610 Other movements(1) (834) - (3,730) (1,719) (6,283) ------------------------------------------------------------------------- At December 31, 2010 $ 2,141 $ 20,679 $ 29,905 $ 11,935 $ 64,660 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Depreciation and impairment losses Balance at January 1, 2010 $ 45 $ 9,998 $ 10,617 $ 7,377 $ 28,037 Amortization 226 1,920 5,413 1,598 9,157 Other movements(1) (12) - (3,590) (1,221) (4,823) ------------------------------------------------------------------------- At December 31, 2010 $ 259 $ 11,918 $ 12,440 $ 7,754 $ 32,371 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net carrying amount At December 31, 2010 $ 1,882 $ 8,761 $ 17,465 $ 4,181 $ 32,289 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 2009 ------------------------------------------------------------------------- Furniture, fixtures and lease- Machinery hold 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 4,414 8,971 4,039 20,399 Other movements(1) - (32) (1,873) (289) (2,194) ------------------------------------------------------------------------- At December 31, 2009 $ 2,975 $ 19,971 $ 25,589 $ 12,798 $ 61,333 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Depreciation and impairment losses Balance at January 1, 2009 $ - $ 8,609 $ 7,438 $ 6,617 $ 22,664 Amortization(2) 45 1,421 4,879 1,042 7,387 Other movements(1) - (32) (1,700) (282) (2,014) ------------------------------------------------------------------------- At December 31, 2009 $ 45 $ 9,998 $ 10,617 $ 7,377 $ 28,037 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net carrying amount At December 31, 2009 $ 2,930 $ 9,973 $ 14,972 $ 5,421 $ 33,296 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Other movements relate to fully amortized assets removed from the accounts and assets removed and classified as discontinued operations. (2) Amortization for the year ended December 31, 2009 includes $30 of amortization related to discontinued operations. 6. INTANGIBLE ASSETS 2010 --------------------------------------------------- Contracts Software --------- --------------------- Internally Purchased Developed --------------------------------------------------- Cost At January 1, 2010 $ 6,799 $ 29,814 $ 14,126 Additions 3,606 6,101 10,960 Other movements(1) (3,537) (19,313) 322 --------------------------------------------------- At December 31, 2010 6,868 16,602 25,408 --------------------------------------------------- --------------------------------------------------- Amortization and impairment loss At January 1, 2010 $ 4,693 $ 19,261 $ 4,674 Amortization 2,336 5,162 3,648 Other movements(1) (3,537) (18,420) (1,002) --------------------------------------------------- At December 31, 2010 3,492 6,003 7,320 --------------------------------------------------- --------------------------------------------------- Net carrying amount At December 31, 2010 $ 3,376 $ 10,599 $ 18,088 --------------------------------------------------- --------------------------------------------------- 2010 ------------------------------------------------------------------------- Acquisition of business Total -------------------------------------------- ---------- Customer Proprietary Brand relation- Contracts software names ships ------------------------------------------------------------------------- Cost At January 1, 2010 $ 438 $ 70,500 $ 10,900 $232,935 $365,512 Additions - - - - 20,667 Other movements(1) - - - (4,600) (27,128) ------------------------------------------------------------------------- At December 31, 2010 438 70,500 10,900 228,335 359,051 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Amortization and impairment loss At January 1, 2010 $ 37 $ 17,149 $ 2,180 $ 27,744 $ 75,738 Amortization 417 7,329 729 19,814 39,435 Other movements(1) (219) - - 219 (22,959) ------------------------------------------------------------------------- At December 31, 2010 235 24,478 2,909 47,777 92,214 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net carrying amount At December 31, 2010 $ 203 $ 46,022 $ 7,991 $180,558 $266,837 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 2009 --------------------------------------------------- Contracts Software --------- --------------------- Internally Purchased Developed --------------------------------------------------- Cost At January 1, 2009 $ 8,761 $ 21,727 $ 10,676 Additions 1,600 10,510 4,883 Other movements(1) (3,562) (2,423) (1,433) --------------------------------------------------- At December 31, 2009 $ 6,799 $ 29,814 $ 14,126 --------------------------------------------------- --------------------------------------------------- Amortization and impairment loss At January 1, 2009 $ 5,414 $ 17,393 $ 4,194 Amortization(2) 2,841 4,368 1,983 Other movements(1) (3,562) (2,500) (1,503) --------------------------------------------------- At December 31, 2009 $ 4,693 $ 19,261 $ 4,674 --------------------------------------------------- --------------------------------------------------- Net carrying amount At December 31, 2009 $ 2,106 $ 10,553 $ 9,452 --------------------------------------------------- --------------------------------------------------- 2009 ------------------------------------------------------------------------- Acquisition of business 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 438 14,600 - 142,200 174,231 Other movements(1) (1,201) (193) - (16,329) (25,141) ------------------------------------------------------------------------- At December 31, 2009 $ 438 $ 70,500 $ 10,900 $232,935 $365,512 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Amortization and impairment loss At January 1, 2009 $ 864 $ 11,017 $ 1,452 $ 31,413 $ 71,747 Amortization(2) 374 6,325 728 12,660 29,279 Other movements(1) (1,201) (193) - (16,329) (25,288) ------------------------------------------------------------------------- At December 31, 2009 $ 37 $ 17,149 $ 2,180 $ 27,744 $ 75,738 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net carrying amount At December 31, 2009 $ 401 $ 53,351 $ 8,720 $205,191 $289,774 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Other movements relate to fully amortized assets removed from the accounts, revaluation of certain customer relationship intangibles in Resolve which resulted in a reduction of intangibles and assets removed and classified as discontinued operations. (2) Amortization for the year ended December 31, 2009 includes $32 of amortization related to discontinued operations. 7. GOODWILL 2010 2009 ------------------------------------------------------------------------- Balance, beginning of year $ 519,848 $ 458,989 Goodwill additions and adjustments during the year: Cyence - (1,417) Resolve 7,394 63,632 Filogix - (1,356) ------------------------------------------------------------------------- Balance, end of year $ 527,242 $ 519,848 ------------------------------------------------------------------------- ------------------------------------------------------------------------- A net adjustment of $7.4 million was made to goodwill in Resolve during the year ended December 31, 2010. These adjustments related to revaluation of certain customer relationship contracts, changes in estimated tax attributes of Resolve resulting from information that became available during the period and the purchase price adjustments for Resolve 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. These adjustments were recorded net of taxes. 8. LONG-TERM INDEBTEDNESS 2010 2009 ------------------------------------------------------------------------- Non-revolving term loan $ 130,000 $ 190,000 Drawings under revolving credit facility 19,000 20,000 ------------------------------------------------------------------------- 149,000 210,000 Series A 5.99% Bonds due June 30, 2017 50,000 - ------------------------------------------------------------------------- 199,000 210,000 Deferred finance costs (2,785) (1,537) ------------------------------------------------------------------------- $ 196,215 $ 208,463 ------------------------------------------------------------------------- ------------------------------------------------------------------------- As at December 31, 2010, the Fund had $220 million of 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 June 30, 2013. As of December 31, 2010, $19 million was drawn under the revolving term credit facility and $130 million was drawn under the non- revolving term loan. The credit facilities do not require the Fund to make any principal payments prior to June 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 derivative 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 December 31, 2010, the Fund was in compliance with all of its financial covenants and financial condition tests. The carrying value of long-term 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 June 30, 2010. Amortization of deferred finance costs during the year ended December 31, 2010 was $1.1 million ( 2009 - $0.8 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 year ended December 31, 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, and long-term indebtedness. The Fund does not enter into financial instruments for trading or speculative purposes. As such, financial assets are classified as loans and receivables. Financial liabilities other than derivatives are recorded at amortized cost. Initially, all financial assets and financial liabilities other than derivatives 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 are classified as held-for-trading and 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 year ended December 31, 2010. As the sensitivity is hypothetical, it should be used with caution. ------------------------------------------------------------------------- + 100 bps -100 bps ------------------------------------------------------------------------- Increase (decrease) in interest expense $ - $ - Change to net unrealized (gain) loss on interest-rate swaps (4,400) 4,400 ------------------------------------------------------------------------- Increase (decrease) in net income $ 4,400 $ (4,400) ------------------------------------------------------------------------- Increase (decrease) in total comprehensive income $ 4,400 $ (4,400) ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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 December 31, 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 $ - $ 39 1.980% June 15, 2011 20,000 - 443 4.685% June 15, 2011 25,000 - 554 4.685% December 18, 2014 25,000 - 364 2.720% March 18, 2015 25,000 - 549 2.940% March 20, 2017 25,000 - 798 3.350% March 20, 2017 20,000 - 656 3.366% ------------------------------------------------------------------------- $ 162,000 $ - $ 3,403 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (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 December 31, 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. Liquidity Risk The Fund has outstanding long-term indebtedness of $199 million, consisting of bank indebtedness of $149 million with a maturity date of June 30, 2013 and fixed-interest-rate Bonds of $50 million maturing June 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: 2010 ------------------------------------------------------------------------- Level 1 Level 2 Level 3 Total Assets: Derivative instruments $ - $ - $ - $ - ------------------------------------------------------------------------- $ - $ - $ - $ - ------------------------------------------------------------------------- ------------------------------------------------------------------------- Liabilities: Derivative instruments $ - $ 3,403 $ - $ 3,403 ------------------------------------------------------------------------- $ - $ 3,403 $ - $ 3,403 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The Level 2 financial instruments recorded in the Fund's balance sheet include interest-rate swaps and foreign exchange contracts. There has been no movement between the levels during 2010. 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 2010 2009 ------------------------------------------------------------------------- Deferred compensation program $ 1,934 $ 845 Employee future benefits 5,003 4,987 Contractual supplier obligation 1,390 1,319 Capital lease - 10 ------------------------------------------------------------------------- $ 8,327 $ 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 non-pension post-retirement benefit plans. 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 obligation 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, 2010. The next valuation will be performed in 2011. 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 year ended December 31, 2010 was $2.9 million (2009 - $2.2 million). The components of post-retirement benefit obligation recognized are as follows: 2010 2009 ------------------------------------------------------------------------- Change in post-retirement benefit obligation Balance at beginning of year $ 3,950 $ 707 Acquisition of Resolve - 3,392 Current service costs 56 89 Interest cost 212 248 Plan amendments - (71) Benefits paid (198) (159) Actuarial loss (gain) 372 (256) ------------------------------------------------------------------------- Balance at end of year 4,392 3,950 ------------------------------------------------------------------------- Funded status Balance of post-retirement benefit obligation 4,392 3,950 Unamortized net actuarial loss 470 884 Unamortized past service benefits 141 153 ------------------------------------------------------------------------- Accrued non-pension post-retirement benefit liability $ 5,003 $ 4,987 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Actuarial assumptions: Accrued benefit obligation Discount rate 5.50% 6.50% Rate of compensation increase 2.00% 2.00% Initial weighted average health-care trend rate 7.19% 7.30% Ultimate weighted average health-care trend rate 4.28% 4.50% Year the rate reaches the ultimate trend rate 2029 2029 Net benefit plan expense Discount rate 6.50% 7.25% Rate of compensation increase 2.00% 3.05% Initial weighted average health-care trend rate 7.25% 8.39% Ultimate weighted average health care trend rate 4.50% 4.71% Year the rate reaches the ultimate trend rate 2029 2029 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Effects of change in assumed health cost trend rates: 1% increase: Effect on total service and interest cost components $ 27 $ 38 Effect on post-retirement accrued benefit obligation 321 434 1% decrease: Effect on total service and interest cost components (24) (31) Effect on post-retirement accrued benefit obligation (284) 357 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The contractual supplier obligation, expiring in May 31, 2013 relates to payments to be made for a customized software package. The total liability is $1.4 million of which a minimal amount relates to 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. The Fund's 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: 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 24,402 19,289 Accrued and other liabilities 7,877 6,088 ------------------------------------------------------------------------- 42,838 38,596 Valuation allowance (14,289) (13,897) ------------------------------------------------------------------------- Total future tax asset 28,549 24,699 Future income tax liabilities: Capital assets greater than tax values 10,974 3,208 Intangible assets greater than tax values 38,665 45,726 ------------------------------------------------------------------------- Total future tax liabilities 49,639 48,934 ------------------------------------------------------------------------- Net future income tax liabilities $ 21,090 $ 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 net operating losses carry-forwards of certain Canadian and U.S. 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 $3,730. 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. As at December 31, 2010, certain Canadian and U.S. corporate subsidiaries of the Fund had $89,404 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 approximately $4,890 is subject to annual limitations. One of the Fund's Canadian corporate subsidiaries also had $75,849 of capital losses for income tax purposes. The benefit of these losses, which do not expire, has not been recognized above because management does not expect to utilize these losses in the foreseeable future. The provision for future income taxes of $2,597 ($3,239 expense relating to continuing operations and $642 recovery related to discontinued operations) in the consolidated statement of income represents an effective rate difference than the Canadian Corporate statutory rate of 31% (2009 - 33%). The differences are as follows: 2010 2009 ------------------------------------------------------------------------- Income before income taxes $ 85,123 $ 92,503 Income taxes at statutory rates of 31% (2009 -33%) 26,388 30,526 Increase (decrease) resulting from: Impact of income distributed to unitholders (25,905) (30,774) Change in future tax rates and reversal of timing differences 508 (2,225) Change in valuation allowance 875 (82) Other Items 731 44 ------------------------------------------------------------------------- Future income tax (recovery) expense $ 2,597 $ (2,511) ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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 net proceeds from the issuance of trust units and the number of units outstanding are as follows: 2010 2009 ------------------------------------------------------------------------- Balance, beginning of year $ 595,859 $ 476,343 Units issued - 119,516 ------------------------------------------------------------------------- Balance, end of year $ 595,859 $ 595,859 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Units outstanding, end of year 53,233,373 53,233,373 ------------------------------------------------------------------------- The weighted average number of units outstanding during the year ended December 31, 2010 was 53,233,373 (2009 - 47,966,736). 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. 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 December 31, 2010, this ratio was calculated at 1.30 (12-month trailing period ended December 31, 2009 - 1.27). 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 distributions paid. Any major acquisition would be financed in part with additional equity. 14. COMMITMENTS As at December 31, 2010, the Fund has lease obligations with respect to real estate, vehicles and equipment as follows: 2011 10,730 2012 7,883 2013 6,996 2014 5,925 2015 4,300 Thereafter 12,500 -------------------------------------- 48,334 -------------------------------------- -------------------------------------- 15. SIGNIFICANT CUSTOMERS For the three months ended December 31, 2010, the Fund earned 64% of its consolidated revenue from its seven largest customers (Q4 2009 - 64%). For the three months ended December 31, 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 December 31, 2009, three of these customers individually accounted for greater than 10%, but not more than 13% of the Fund's total revenue). For the year ended December 31, 2010, the Fund earned 65% of its consolidated revenue from its seven largest customers (2009 - 67%). For the year ended December 31, 2010, three of these customers individually accounted for greater than 10%, but not more than 14% of the Fund's total revenue (2009 - three of these customers individually accounted for greater than 10%, but not more than 15% of the Fund's total revenue). 16. SEGMENTED INFORMATION The Fund had previously operated and reported upon two business segments, the "D+H Segment" and the "Filogix Segment". Subsequent to the completion of the Resolve acquisition in July 2009, the Fund announced that it would move to a single integrated operation in order to better serve customers and maximize effectiveness. The business is now managed along functional lines and operating decisions and performance assessment is aligned with these functions. As such, commencing in 2009, the Fund reports its business as a single segment and all prior year segment information has been restated. Revenue pertaining to major service areas for the quarter and year ended December 31, 2010 and 2009 are as follows: Quarter ended Year ended December 31, December 31, 2010 2009 2010 2009 ------------------------------------------------------------------------- Revenue Programs to the chequing account $ 73,020 $ 71,787 $ 293,838 $ 288,557 Loan servicing 32,926 29,554 125,752 50,645 Loan registration technology services 23,930 21,729 102,342 41,785 Lending technology services 19,946 17,527 77,281 69,244 Other(1) 10,635 10,924 41,161 23,621 ------------------------------------------------------------------------- $ 160,457 $ 151,521 $ 640,374 $ 473,852 ------------------------------------------------------------------------- (1) Excluded from the current and comparative periods are the discontinued operations that were sold on October 7, 2010. 17. RESTRUCTURING CHARGES During the year ended December 31, 2010, the Fund recorded a restructuring charge of $8,428 relating to severances, consolidation of facilities, contract termination and consulting costs 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. The following table summarizes the total restructuring charges incurred during the year ended December 31, 2010: ----------------------------------------------- Facilities Consolidation Employee and Contract Termination Termination Consulting Costs Costs Costs Total ------------------------------------------------------------------------- Provision balance at January 1, 2010 $ - $ - $ - $ - Expense during the year 4,077 2,353 1,998 8,428 Cash payments during the year (84) (116) (224) (424) ------------------------------------------------------------------------- Provision balance at December 31, 2010 $ 3,993 $ 2,237 $ 1,774 $ 8,004 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 18. DISCONTINUED OPERATIONS On October 7, 2010 D+H sold its non-strategic contact centre operations acquired as part of the Resolve acquisition. These operations have been classified as discontinued operations for both current and comparative periods presented. Revenue attributable to the discontinued operations during the quarter and the year ended December 31, 2010 was $317 and $13,799 (Q4 2009 - $4,694; 2009 - $7,912). 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 quarter and year ended December 31, 2010 was a recovery of $218 and $642 (Q4 2009 - $142 recovery; 2009 - $140 recovery). Per unit information relating to the discontinued operations is as follows: Quarter ended Year ended December 31, December 31, 2010 2009 2010 2009 ------------------------------------------------------------------------- Loss from discontinued operations, per unit, basic and diluted $ (0.0116) $ (0.0076) $ (0.0343) $ (0.0083) Income from continuing operations, per unit, basic and diluted 0.2530 0.4885 1.5847 1.9891 ------------------------------------------------------------------------- Net income per unit, basic and diluted $ 0.2415 $ 0.4809 $ 1.5503 $ 1.9808 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 19. SUBSEQUENT EVENTS Conversion from an Income Trust to a Corporation On January 4, 2011, the Company announced the completion of the previously announced plan of arrangement (the "Arrangement") pursuant to which the Fund's income trust structure was converted into a dividend paying publicly traded corporation named Davis + Henderson Corporation, effective January 1, 2011. The Company followed the guidelines included in IFRS to reflect the impact of the Fund's conversion to a Corporation. The conversion was treated as a change in business form and was accounted for as a continuity of interests. As such, the carrying amounts of assets, liabilities and unitholders' equity in the consolidated financial statements of the Company immediately before the conversion remained the same as the carrying values of Davis + Henderson Corporation immediately after the conversion. Effective January 1, 2011, the share capital of Davis + Henderson Corporation in respect of the common shares were reduced by the deficit outstanding as at December 31, 2010. In conjunction with the conversion, the Company also undertook an internal reorganization to simplify its business operations by consolidating the various businesses it operates through separate legal entities, arising as a consequence of recent acquisitions, into a single operating entity. The businesses were combined and will operate as D+H Limited Partnership. Acquisition On January 18, 2011, D+H announced the completion of its acquisition of substantially all the assets of ASSET Inc. ("ASSET") for a purchase price of $76 million payable in cash, which D+H financed with an extension of its current credit facilities. ASSET is Canada's largest provider of technology based asset recovery and insolvency management solutions to the Canadian financial services industry. On behalf of lenders, ASSET uses web-enabled platforms to manage the recovery process around loans provided for moveable property and provides solutions to support real property recovery, unsecured debt recovery, insolvency process management, and personal property lien search and registration services. 20. COMPARATIVE FIGURES Certain comparative figures have been reclassified to conform to the current period's presentation. SUPPLEMENTARY FINANCIAL INFORMATION Consolidated Operating Results by Period ------------------------------------------------------------------------- Three Three Three Year months months months ended ended ended ended (in thousands of Canadian December December September June 30, dollars, unaudited) 31, 2010 31, 2010 30, 2010 2010 ------------------------------------------------------------------------- Revenue $640,374 160,457 $161,900 $164,319 Expenses 482,578 124,733 121,311 120,545 Restructuring charges(5) 8,428 6,268 2,160 - ------------------------------------------------------------------------- EBITDA(1) 149,368 29,456 38,429 43,774 Amortization of capital assets and non-acquisition intangibles 20,304 5,643 5,030 4,962 Interest expense 13,988 3,405 3,517 3,692 Minority interest - - - - ------------------------------------------------------------------------- Adjusted income(1) 115,076 20,408 29,882 35,120 ------------------------------------------------------------------------- Amortization of mark-to-market adjustment of interest-rate swaps 396 52 52 103 Net unrealized loss (gain) on derivative instruments(2) (1,199) (2,848) 1,514 1,694 Future income tax expense (recovery) 3,239 2,620 (645) 603 Amortization of intangibles from acquisition 28,288 7,108 6,925 7,158 ------------------------------------------------------------------------- Income from continuing operations 84,352 13,476 22,036 25,562 Income (loss) from discontinued operations, net of taxes(6) (1,826) (620) (465) (531) ------------------------------------------------------------------------- Net income $ 82,526 $ 12,856 $ 21,571 $ 25,031 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash flows from operating activities 137,253 42,916 36,743 36,613 Changes in non-cash working capital and other items(3) (4,223) (17,703) (2,419) 2,792 ------------------------------------------------------------------------- Adjusted cash flows from operating activities 133,030 25,213 34,324 39,405 Less: Asset expenditures and contract payments(4) 30,264 13,916 7,079 5,293 ------------------------------------------------------------------------- Adjusted cash flows after asset expenditures and contract payments 102,766 11,297 27,245 34,112 Distributions paid to unitholders 97,928 24,482 24,482 24,482 ------------------------------------------------------------------------- 4,838 (13,185) 2,763 9,630 Cash flows provided by (used in) other financing activities (13,564) (6,000) (5,000) (7,564) Fair value of acquisitions 167 - 167 - Fair value of trust units issued - - - - Changes in non-cash working capital and other items(3) 4,223 17,703 2,419 (2,792) Cash flows from sale of discontinued operations 1,602 1,602 - - Distributions paid to minority interest - - - - ------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents for the period $ (2,734) $ 120 $ 349 $ (726) ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- Three Three Three months Year months months ended ended ended ended (in thousands of Canadian March 31, December December September dollars, unaudited) 2010 31, 2009 31, 2009 30, 2009 ------------------------------------------------------------------------- Revenue $153,698 $473,852 $151,521 $139,245 Expenses 115,989 338,334 114,467 101,696 Restructuring charges(5) - - - - ------------------------------------------------------------------------- EBITDA(1) 37,709 135,518 37,054 37,549 Amortization of capital assets and non-acquisition intangibles 4,669 16,517 4,514 4,505 Interest expense 3,374 9,541 3,326 2,681 Minority interest - - - - ------------------------------------------------------------------------- Adjusted income(1) 29,666 109,460 29,214 30,363 ------------------------------------------------------------------------- Amortization of mark-to-market adjustment of interest-rate swaps 189 478 103 103 Net unrealized loss (gain) on derivative instruments(2) (1,559) (4,145) (1,620) (1,647) Future income tax expense (recovery) 661 (2,372) (2,605) 1,015 Amortization of intangibles from acquisition 7,097 20,087 7,330 5,942 ------------------------------------------------------------------------- Income from continuing operations 23,278 95,412 26,006 24,950 Income (loss) from discontinued operations, net of taxes(6) (210) (398) (405) 7 ------------------------------------------------------------------------- Net income $ 23,068 $ 95,014 $ 25,601 $ 24,957 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash flows from operating activities 20,981 119,722 $ 40,575 $ 38,959 Changes in non-cash working capital and other items(3) 13,107 5,781 (7,356) (4,056) ------------------------------------------------------------------------- Adjusted cash flows from operating activities 34,088 125,503 33,219 34,903 Less: Asset expenditures and contract payments(4) 3,976 14,805 5,133 2,818 ------------------------------------------------------------------------- Adjusted cash flows after asset expenditures and contract payments 30,112 110,698 28,086 32,085 Distributions paid to unitholders 24,482 87,962 24,482 23,058 ------------------------------------------------------------------------- 5,630 22,736 3,604 9,027 Cash flows provided by (used in) other financing activities 5,000 (13,569) (6,000) (5,569) Fair value of acquisitions - (130,968) (1,449) (129,682) Fair value of trust units issued - 119,394 - 119,394 Changes in non-cash working capital and other items(3) (13,107) (5,781) 7,356 4,056 Cash flows from sale of discontinued operations - - - - Distributions paid to minority interest - - - - ------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents for the period $ (2,477) $ (8,188) $ 3,511 $ (2,774) ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- Three Three Three months months Year months ended ended ended ended (in thousands of Canadian June 30, March 31, December December dollars, unaudited) 2009 2009 31, 2008 31, 2008 ------------------------------------------------------------------------- Revenue $ 94,557 $ 88,529 $367,231 $ 89,357 Expenses 62,080 60,091 245,678 62,413 Restructuring charges(5) - - - - ------------------------------------------------------------------------- EBITDA(1) 32,477 28,438 121,553 26,944 Amortization of capital assets and non-acquisition intangibles 3,679 3,819 15,538 3,800 Interest expense 1,787 1,747 6,847 1,647 Minority interest - - - - ------------------------------------------------------------------------- Adjusted income(1) 27,011 22,872 99,168 21,497 ------------------------------------------------------------------------- Amortization of mark-to-market adjustment of interest-rate swaps 136 136 561 151 Net unrealized loss (gain) on derivative instruments(2) (1,069) 191 5,691 3,653 Future income tax expense (recovery) (718) (64) 1,217 399 Amortization of intangibles from acquisition 3,441 3,374 13,716 3,409 ------------------------------------------------------------------------- Income from continuing operations 25,221 19,235 77,983 13,885 Income (loss) from discontinued operations, net of taxes(6) - - 465 51 ------------------------------------------------------------------------- Net income $ 25,221 $ 19,235 $ 78,448 $ 13,936 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash flows from operating activities $ 27,173 $ 13,015 $116,062 $ 31,806 Changes in non-cash working capital and other items(3) 3,517 13,676 (594) (6,380) ------------------------------------------------------------------------- Adjusted cash flows from operating activities 30,690 26,691 115,468 25,426 Less: Asset expenditures and contract payments(4) 2,491 4,363 13,438 4,915 ------------------------------------------------------------------------- Adjusted cash flows after asset expenditures and contract payments 28,199 22,328 102,030 20,511 Distributions paid to unitholders 20,211 20,211 78,580 20,211 ------------------------------------------------------------------------- 7,988 2,117 23,450 300 Cash flows provided by (used in) other financing activities (2,000) - 18,000 28,000 Fair value of acquisitions 103 60 (43,126) (38,876) Fair value of trust units issued - - - - Changes in non-cash working capital and other items(3) (3,517) (13,676) 594 6,380 Cash flows from sale of discontinued operations - - - - Distributions paid to minority interest - - - - ------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents for the period $ 2,574 $(11,499) $ (1,082) $ (4,196) ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- Three Three Three months months months Year ended ended ended ended (in thousands of Canadian September June 30, March 31, December dollars, unaudited) 30, 2008 2008 2008 31, 2007 ------------------------------------------------------------------------- Revenue $ 95,055 $ 95,407 $ 87,412 $369,726 Expenses 61,664 61,334 60,267 250,237 Restructuring charges(5) - - - - ------------------------------------------------------------------------- EBITDA(1) 33,391 34,073 27,145 119,489 Amortization of capital assets and non-acquisition intangibles 4,219 3,771 3,748 15,080 Interest expense 1,690 1,754 1,756 7,531 Minority interest - - - 379 ------------------------------------------------------------------------- Adjusted income(1) 27,482 28,548 21,641 96,499 ------------------------------------------------------------------------- Amortization of mark-to-market adjustment of interest-rate swaps 151 152 107 678 Net unrealized loss (gain) on derivative instruments(2) 728 (1,034) 2,344 (740) Future income tax expense (recovery) 52 766 - 1,591 Amortization of intangibles from acquisition 3,412 3,447 3,448 13,298 ------------------------------------------------------------------------- Income from continuing operations 23,139 25,217 15,742 81,672 Income (loss) from discontinued operations, net of taxes(6) 167 149 98 567 ------------------------------------------------------------------------- Net income $ 23,306 $ 25,366 $ 15,840 $ 82,239 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash flows from operating activities $ 35,110 $ 32,623 $ 16,523 $117,401 Changes in non-cash working capital and other items(3) (3,169) (82) 9,037 (4,949) ------------------------------------------------------------------------- Adjusted cash flows from operating activities 31,941 32,541 25,560 112,452 Less: Asset expenditures and contract payments(4) 3,027 2,962 2,534 15,496 ------------------------------------------------------------------------- Adjusted cash flows after asset expenditures and contract payments 28,914 29,579 23,026 96,956 Distributions paid to unitholders 20,211 19,305 18,853 78,357 ------------------------------------------------------------------------- 8,703 10,274 4,173 18,599 Cash flows provided by (used in) other financing activities (5,000) (5,000) - (15,000) Fair value of acquisitions - - (4,250) (746) Fair value of trust units issued - - - - Changes in non-cash working capital and other items(3) 3,169 82 (9,037) 4,949 Cash flows from sale of discontinued operations - - - - Distributions paid to minority interest - - - (442) ------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents for the period $ 6,872 $ 5,356 $ (9,114) $ 7,360 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ---------------------------------------- Year ended (in thousands of Canadian December dollars, unaudited) 31, 2006 ---------------------------------------- Revenue $317,967 Expenses 223,562 Restructuring charges(5) - ---------------------------------------- EBITDA(1) 94,405 Amortization of capital assets and non-acquisition intangibles 13,040 Interest expense 6,016 Minority interest 202 ---------------------------------------- Adjusted income(1) 75,147 ---------------------------------------- Amortization of mark-to-market adjustment of interest-rate swaps - Net unrealized loss (gain) on derivative instruments(2) - Future income tax expense (recovery) - Amortization of intangibles from acquisition 8,236 ---------------------------------------- Income from continuing operations 66,911 Income (loss) from discontinued operations, net of taxes(6) (382) ---------------------------------------- Net income $ 66,529 ---------------------------------------- ---------------------------------------- Cash flows from operating activities $ 89,753 Changes in non-cash working capital and other items(3) (1,048) ---------------------------------------- Adjusted cash flows from operating activities 88,705 Less: Asset expenditures and contract payments(4) 9,855 ---------------------------------------- Adjusted cash flows after asset expenditures and contract payments 78,850 Distributions paid to unitholders 61,311 ---------------------------------------- 17,539 Cash flows provided by (used in) other financing activities 202,749 Fair value of acquisitions (223,852) Fair value of trust units issued - Changes in non-cash working capital and other items(3) 1,048 Cash flows from sale of discontinued operations - Distributions paid to minority interest - ---------------------------------------- Increase (decrease) in cash and cash equivalents for the period $ (2,516) ---------------------------------------- ---------------------------------------- (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. The distinction between growth and maintenance asset expenditures will become less relevant to management in the future as D+H converts to a corporation. (5) Restructuring charges relate to further integration and transformation initiatives designed to better position the business going forward to serve customers and improve the effectiveness and efficiency of operations. (6) On October 7, 2010, the Business sold a non-strategic component of its contact centre business and as such, the results of these operations are presented as discontinued operations for both current and prior periods presented. Discontinued operations for 2008 relate to services previously provided under a U.S. cheque supply contract. Summary of Cash Flows Per Unit ------------------------------------------------------------------------- Three Three Three Three Year months months months months ended ended ended ended ended (in Canadian dollars, December December September June 30, March 31, unaudited) 31, 2010 31, 2010 30, 2010 2010 2010 ------------------------------------------------------------------------- Adjusted income per unit, basic and diluted $2.1617 $0.3834 $0.5613 $0.6597 $0.5573 Net income per unit, basic and diluted $1.5503 $0.2415 $0.4052 $0.4702 $0.4333 Adjusted cash flows from operating activities $2.4989 $0.4736 $0.6448 $0.7402 $0.6403 Adjusted cash flows after asset expenditures and contract payments $1.9305 $0.2122 $0.5118 $0.6408 $0.5657 Cash distributions paid to unitholders $1.8396 $0.4599 $0.4599 $0.4599 $0.4599 Distributions declared during period $1.8396 $0.4599 $0.4599 $0.4599 $0.4599 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- Three Three Three Three Year months months months months ended ended ended ended ended (in Canadian dollars, December December September June 30, March 31, unaudited) 31, 2009 31, 2009 30, 2009 2009 2009 ------------------------------------------------------------------------- Adjusted income per unit, basic and diluted $2.2820 $0.5488 $0.6000 $0.6146 $0.5204 Net income per unit, basic and diluted $1.9808 $0.4809 $0.4931 $0.5739 $0.4377 Adjusted cash flows from operating activities $2.6164 $0.6240 $0.6897 $0.6983 $0.6073 Adjusted cash flows after asset expenditures and contract payments $2.3078 $0.5276 $0.6340 $0.6417 $0.5081 Cash distributions paid to unitholders $1.8396 $0.4599 $0.4599 $0.4599 $0.4599 Distributions declared during period $1.8396 $0.4599 $0.4599 $0.4599 $0.4599 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- Three Three Three Three Year months months months months ended ended ended ended ended (in Canadian dollars, December December September June 30, March 31, unaudited) 31, 2008 31, 2008 30, 2008 2008 2008 ------------------------------------------------------------------------- Adjusted income per unit, basic and diluted $2.2565 $0.4892 $0.6253 $0.6496 $0.4924 Net income per unit, basic and diluted $1.7851 $0.3172 $0.5303 $0.5772 $0.3604 Adjusted cash flows from operating activities $2.6275 $0.5786 $0.7268 $0.7405 $0.5816 Adjusted cash flows after asset expenditures and contract payments $2.3217 $0.4667 $0.6579 $0.6731 $0.5240 Cash distributions paid to unitholders $1.7881 $0.4599 $0.4599 $0.4393 $0.4290 Distributions declared during period $1.8384 $0.4999 $0.4599 $0.4496 $0.4290 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------- Year Year ended ended (in Canadian dollars, December December unaudited) 31, 2007 31, 2006 ------------------------------------------- Adjusted income per unit, basic and diluted $2.1959 $1.8164 Net income per unit, basic and diluted $1.8713 $1.6081 Adjusted cash flows from operating activities $2.5588 $2.1441 Adjusted cash flows after asset expenditures and contract payments $2.2062 $1.9059 Cash distributions paid to unitholders $1.7830 $1.4940 Distributions declared during period $1.7980 $1.5000 ------------------------------------------- ------------------------------------------- Condensed Consolidated Balance Sheet ------------------------------------------------------------------------- (in thousands of Canadian December September June 30, March 31, dollars, unaudited) 31, 2010 30, 2010 2010 2010 ------------------------------------------------------------------------- Cash and cash equivalents $ 1,144 $ 1,024 $ 675 $ 1,401 Other current assets 79,924 81,245 89,034 88,247 Capital and other non-current assets 58,374 56,571 54,591 52,848 Intangible assets 266,837 267,938 273,938 279,663 Goodwill 527,242 527,242 520,364 522,482 ------------------------------------------------------------------------- $933,521 $934,020 $938,602 $944,641 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Payables and other current liabilities $106,426 $88,836 $87,499 $159,873 Other long-term liabilities 70,595 71,270 69,483 66,942 Long-term indebtedness 196,215 202,055 206,902 143,760 Unitholders' equity 560,285 571,859 574,718 574,066 ------------------------------------------------------------------------- $933,521 $934,020 $938,602 $944,641 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- (in thousands of Canadian December September June 30, March 31, dollars, unaudited) 31, 2009 30, 2009 2009 2009 ------------------------------------------------------------------------- Cash and cash equivalents $ 3,878 $ 367 $ 3,141 $ 567 Other current assets 72,878 85,242 30,078 27,219 Capital and other non-current assets 55,177 61,122 24,121 23,772 Intangible assets 289,774 293,623 136,905 140,902 Goodwill 519,848 516,374 457,636 459,037 ------------------------------------------------------------------------- $941,555 $956,728 $651,881 $651,497 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Payables and other current liabilities $87,463 $93,385 $36,745 $37,464 Other long-term liabilities 70,338 75,165 15,691 17,804 Long-term indebtedness 208,463 214,109 145,470 147,400 Unitholders' equity 575,291 574,069 453,975 448,829 ------------------------------------------------------------------------- $941,555 $956,728 $651,881 $651,497 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- (in thousands of Canadian December September June 30, March 31, dollars, unaudited) 31, 2008 30, 2008 2008 2008 ------------------------------------------------------------------------- Cash and cash equivalents $ 12,066 $ 16,262 $ 9,390 $ 4,034 Other current assets 23,468 25,604 26,847 25,382 Capital and other non-current assets 24,708 18,883 19,977 20,394 Intangible assets 144,675 123,270 126,903 130,815 Goodwill 458,989 441,193 441,193 441,193 ------------------------------------------------------------------------- $663,906 $625,212 $624,310 $621,818 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Payables and other current liabilities $49,101 $44,119 $42,427 $38,491 Other long-term liabilities 17,805 6,038 5,143 7,417 Long-term indebtedness 147,331 119,262 124,193 129,123 Unitholders' equity 449,669 455,793 452,547 446,787 ------------------------------------------------------------------------- $663,906 $625,212 $624,310 $621,818 ------------------------------------------------------------------------- ------------------------------------------------------------------------- --------------------------------------------------- (in thousands of Canadian December December dollars, unaudited) 31, 2007 31, 2006 --------------------------------------------------- Cash and cash equivalents $ 13,148 $ 5,788 Other current assets 26,149 27,457 Capital and other non-current assets 21,597 20,944 Intangible assets 134,756 148,316 Goodwill 438,502 438,546 --------------------------------------------------- $634,152 $641,051 --------------------------------------------------- --------------------------------------------------- Payables and other current liabilities $49,116 $44,420 Other long-term liabilities 6,289 4,978 Long-term indebtedness 129,054 143,778 Unitholders' equity 449,693 447,875 --------------------------------------------------- $634,152 $641,051 --------------------------------------------------- --------------------------------------------------- Distribution History ------------------------------------------------------------------------- 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 0.1533 0.1320 0.1250 November(2) 0.1533 0.1533 0.1533 0.3430 0.1280 December(3) 0.1533 0.1533 0.1933 0.1430 0.1280 ------------------------------------------------------------------------- $1.8396 $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 2005 2004 2003 2002 ------------------------------------------------------------------------- Dividend income 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 15.0% 19.5% 16.9% Other income 100.0% 100.0% 100.0% 100.0% 100.0% 91.6% 75.2% 69.5% 71.5% Return of capital 0.0% 0.0% 0.0% 0.0% 0.0% 8.4% 9.8% 11.0% 11.6% ------------------------------------------------------------------------- 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% ------------------------------------------------------------------------- The above tax allocation of distributions for 2010 represents an estimatebased on the total 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 - Q4 20.68 18.51 19.83 130 53,233 1,055,618 - 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.For 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