<<
TSX Stock Symbol: "DHF.UN".
Website: www.dhltd.com
>>
TORONTO, April 27 /CNW/ - Davis + Henderson reported solid financial
results for the three months ended March 31, 2009.
<<
First Quarter Highlights
- Revenue was $88.5 million, an increase of $1.1 million, or 1.3%, as
compared to the same quarter in 2008. This increase was attributed to
the inclusion of the Cyence business, acquired in December 2008.
- EBITDA(1) was $28.4 million, an increase of $1.3 million, or 4.8%, as
compared to the same quarter in 2008.
- Adjusted income(1) was $22.9 million, an increase of $1.2 million, or
5.7%, as compared to the same quarter in 2008.
- Net income was $19.2 million, an increase of $3.4 million, or 21.4%,
as compared to the same quarter in 2008. Included in net income for
the first quarter is a non-cash mark-to-market interest-rate swap
loss of $0.2 million, as compared to a $2.3 million loss in the same
quarter last year.
- Cash distributions declared were $0.4599 per unit compared to $0.4290
per unit during the first quarter of 2008, a 7.2% increase.
>>
Management Commentary
Overall, we are pleased with the results of the first quarter of 2009 in
the context of a challenging economic environment. On a year-over-year basis,
the Business reported increases in revenue (due to the inclusion of the
acquired Cyence business), EBITDA and net income. Revenue growth for the
quarter was below our long-term objective of 3% to 5% as the current economic
conditions have affected fees related to our lending origination services
(down 16% on a year over year basis), and have also reduced cheque order
volumes related to small business consumers. These reductions were offset by
the inclusion of revenues from our Cyence International acquisition, which was
completed in late 2008. In response to these challenges, we implemented many
expense reduction measures and, going forward, we will continue to be diligent
in managing costs. We believe that the combination of our revenue base,
business model and capital position will allow us to manage through these
challenging economic conditions, which are expected to prevail for the
remainder of 2009.
In addition, during the quarter, the Business continued to build on and
evolve its programs to the chequing and lending accounts, invested in product
progression, and is now benefiting from the expansion of its product offering
as a result of the acquisition of Cyence International in late 2008.
For a more detailed discussion of first quarter results and management's
outlook and caution concerning forward-looking statements in this quarterly
report, please see the Management's Discussion and Analysis below.
<<
(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 non-cash impacts of certain fair value
and purchase accounting items and future tax recoveries or expenses.
These items are excluded in calculating Adjusted income as they are
non-cash items and 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. A reconciliation of these non-
GAAP measures to related GAAP measures is included in the attachments
to this quarterly report.
>>
Caution Concerning Forward-Looking Statements
Forward-looking statements may also include, without limitation, any
statement relating to future events, conditions or circumstances. Davis +
Henderson cautions you not to place undue reliance upon any such
forward-looking statements, which speak only as of the date they are made.
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; exposure to fluctuations
in residential real estate and mortgage activity; strategic initiatives being
undertaken to meet the Fund's financial objectives as well as general market
conditions, including economic and interest rate dynamics and investor
interest in, and government regulations relating to income trusts.
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.
Conference Call
Davis + Henderson will discuss its financial results for the first
quarter ended March 31, 2009 via conference call at 10:00 a.m. EST (Toronto
time) on Tuesday April 28, 2009. The number to use for this call is
416-644-3415 for Toronto area callers or 1-800-732-9303 for all other callers.
The conference call will be hosted by Bob Cronin, Chief Executive Officer and
by Catherine Martin, 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 is: 416-640-1917 for Toronto area callers, or
1-877-289-8525 for all other callers, with reservation number 21302775
followed by the number sign. The rebroadcast will be available until Tuesday
May 12, 2009. 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 INFORMATION
Additional information relating to the Fund, including the Fund's most
recently filed Annual Information Form and the Short Form Prospectus dated May
30, 2006, is available on SEDAR at www.sedar.com.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's Discussion and Analysis ("MD&A") for the first quarter of
2009 should be read in conjunction with MD&A in Davis + Henderson Income
Fund's (the "Fund" or the "Company" or the "Business" or "Davis + Henderson")
Annual Report for the year ended December 31, 2008, dated February 24, 2009,
and the attached interim unaudited consolidated financial statements. External
economic and industry factors remain substantially unchanged from the annual
MD&A and the Fund's most recently filed Annual Information Form, unless
otherwise stated.
STRATEGY
The Fund's financial goal is to deliver stable and modestly growing cash
distributions to unitholders by targeting annual revenue growth in the range
of 3% to 5% and maintaining margins. The Fund has three primary strategies to
meet this financial goal. These are to enhance the value of the Davis +
Henderson cheque supply program, to offer additional programs to serve the
chequing and credit card accounts, and to deliver services and solutions
within the lending services market. The Fund advances its strategies through
internal (or organic) initiatives, as well as by partnering with third parties
and by way of selective acquisitions.
In growing its cheque supply program, Davis + Henderson is focused on
increasing value by continuously introducing product design alternatives,
enhancing security components and combining other logical products and
services into convenient and valuable packages for chequing account holders.
Other Davis + Henderson programs that serve the chequing and/or credit
card account include a deposit program, which is directed towards small
business chequing account holders, and eSwitch®, a service that allows
financial institutions to more easily move electronic pre-authorized payments
and direct deposit authorizations between chequing accounts or credit card
accounts on behalf of account holders at the time of new account openings.
With the acquisition of Filogix in 2006, Davis + Henderson significantly
expanded its offerings to the lending services market. Currently, Davis +
Henderson, through Filogix, offers a comprehensive range of technology and
other business solutions, which together the Company refers to as credit
lifecycle management services. These offerings include technology, processing
and professional services related to the mortgage, consumer, small business,
commercial and industrial finance areas.
In 2007, changes were made to the Income Tax Act that will require
certain income trusts, including the Fund, to pay taxes after fiscal 2010,
similar to those paid by taxable Canadian corporations. The payment of such
taxes will, in the future, reduce the cash flow of the Fund, thereby reducing
the amount available for distribution to unitholders. Since the announcement
of this change in tax legislation, management and the Trustees have monitored
the changes in the income trust environment and capital markets and continue
to review potential impacts on the Fund's current strategies and the
alternatives available to the Fund, consistent with protecting and enhancing
unitholder value.
FINANCIAL INFORMATION PRESENTATION
The Fund operates in two business segments, the "Davis + Henderson or D+H
Segment" and the "Filogix Segment". The Davis + Henderson Segment includes the
cheque supply program, deposit program, and eSwitch, among other offerings.
The Filogix Segment includes services related to the origination and
underwriting of mortgages in Canada, the personal property, search and
registration ("PPSA") program, and, with the addition of Cyence in late 2008,
technology solutions related to consumer, small business, commercial and
industrial finance loans, among other offerings. Corporate expenses have also
been segmented and include expenditures related to public company activities,
a share of executive corporate management costs, corporate development costs
and certain other business-wide costs.
Effective December 31, 2008, the D+H Segment ceased providing service
under a U.S. cheque supply contract. As a result, the 2008 revenues and
expenses related to the U.S. operations have been removed from the operating
results of continuing operations and have been reclassified as discontinued
operations for the comparative prior periods presented.
OPERATING RESULTS FOR THE FIRST QUARTER - CONSOLIDATED
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.
<<
Operating and Financial Results
(in thousands of Canadian dollars, except per unit amounts, unaudited)
Three months
ended March 31,
2009 2008
-------------------------------------------------------------------------
Revenue $ 88,529 $ 87,412
Expenses 60,091 60,267
-------------------------------------------------------------------------
EBITDA(1) 28,438 27,145
Amortization of capital assets
and non-acquisition intangibles 3,819 3,748
Interest Expense 1,747 1,756
-------------------------------------------------------------------------
Adjusted income(1) 22,872 21,641
Amortization of mark-to-market adjustment
of interest-rate swaps 136 107
Net unrealized loss (gain) on
interest-rate swaps(2) 191 2,344
Future income tax expense (recovery) (64) -
Amortization of intangibles from acquisition 3,374 3,448
-------------------------------------------------------------------------
Income from continuing operations 19,235 15,742
Income from discontinued operations(3) - 98
-------------------------------------------------------------------------
Net income $ 19,235 $ 15,840
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Adjusted income per unit, basic and diluted(1) $ 0.5204 $ 0.4924
Net income per unit, basic and diluted $ 0.4377 $ 0.3604
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months
ended March 31,
2009 vs. 2008
% change
-------------------------------------------------------------------------
Revenue 1.3%
EBITDA(1) 4.8%
Adjusted income per unit(1) 5.7%
Net income per unit 21.4%
-------------------------------------------------------------------------
(1) EBITDA and Adjusted income are non-GAAP terms. Please see Non-GAAP
Measures section for a more complete description of these terms.
(2) The Business enters into contracts to fix the interest rates on a
significant portion of its outstanding bank debt. For accounting
purposes, these interest-rate swaps are not considered hedges and,
accordingly, any change in the fair value of these contracts is
recorded through income. Provided the Business does not cancel its
contracts, the amounts represent a non-cash unrealized gain or loss
that will subsequently reverse through income.
(3) Effective December 31, 2008, the Fund ceased providing services under
a U.S. cheque supply contract. As a result, the U.S. operations
related to the service of this contract have been classified as
discontinued operations.
>>
Revenue
Total consolidated revenue for the quarter ended March 31, 2009 was $88.5
million, an increase of $1.1 million, or 1.3%, compared to the same quarter in
2008. This increase reflects the inclusion of the results of the Cyence
business acquired late in 2008, partially offset by a decrease within the D+H
Segment and other areas within our Filogix Segment. Results for both segments
are discussed in more detail in the sections that follow.
Expenses
On a consolidated basis, expenses for the first quarter of 2009 decreased
by $0.2 million, or 0.3%, compared to the same quarter in 2008. The decrease
was due to reduced costs related to company-wide cost reduction initiatives
and decreases in business volume which in combination exceeded expense
increases from the inclusion of the expense base of the Cyence business, as
more fully described below.
Amortization of Capital and Non-acquisition Intangible Assets
Amortization of capital and non-acquisition intangible assets increased
by $0.1 million when compared to the first quarter of 2008.
Other Expenses
Interest expense was substantially unchanged for the first quarter of
2009 compared to the same quarter in the prior year with the impact of an
increase in the level of outstanding debt offset by lower interest rates. The
Business partially financed its acquisition of Cyence by borrowing on its
credit facility.
Amortization of mark-to-market adjustment of interest-rate swap refers to
the amortization of net losses in fair market value of interest-rate swaps
that were deferred prior to January 1, 2007. Commencing January 1, 2007, the
Business no longer designated its interest-rate swaps as hedges for accounting
purposes.
An unrealized loss on interest-rate swaps of $0.2 million was recognized
in the first quarter of 2009 (Q1 2008 - $2.3 million), reflecting
mark-to-market adjustments related to generally lower interest rates at March
31 as compared to December 31. These unrealized gains and losses are
recognized in income as these swaps are not designated as hedges for
accounting purposes. Provided the business does not cancel its contracts, the
amounts represent a non-cash unrealized gain or loss that will subsequently
reverse through income.
Income earned by the Business and distributed annually to unitholders is
not subject to taxation in the Fund, but is taxed at the individual unitholder
level. The Fund and its subsidiaries do not anticipate being subject to taxes
until 2011, as long as all taxable income generated by the Fund is paid to
unitholders in the form of distributions. In 2011 and subsequent years, the
Fund will pay a tax on its income that is distributed to its unitholders at a
rate similar to that paid by taxable corporations. However, the Fund does
recognize future income tax assets and liabilities, with a corresponding
impact on future income tax expense or recovery based on temporary differences
expected to reverse after December 31, 2010 and for temporary differences in
businesses in corporate form. These include the entities purchased with the
acquisition of the Cyence business. In the first quarter of 2009, the Fund
recorded a future tax recovery of $0.1 million (first quarter 2008 - nil).
Amortization of acquisition related intangibles for the first quarter of
2009 was comparable to the first quarter of 2008. The increase in amortization
related to the incremental intangible assets arising on the acquisition of the
Cyence business were offset by reductions related to certain intangible assets
having become fully amortized.
Income from Discontinued Operations
Effective December 31, 2008, the Fund ceased providing services under a
U.S. cheque supply contract. As a result, the 2008 operating results from the
U.S. operations related to the service of this contract have been classified
as discontinued operations. As the service commitments for the contract was
primarily outsourced to a third party, the termination of this contract has
not disrupted business operations.
Net Income
Net income of $19.2 million for the first quarter of 2009 increased by
$3.4 million, or 21.4%, compared to the same period in 2008. On a per unit
basis, net income per unit of $0.4377 increased by $0.0773 over the first
quarter of 2008. Excluding the non-cash impacts of amortization of
mark-to-market adjustments on interest-rate swaps, mark-to-market gains and
losses on interest-rate swaps, future income taxes and amortization of
intangibles from acquisitions, Adjusted income increased by $1.2 million, or
5.7%, in the first quarter of 2009 over the same period in the prior year.
<<
Operating Results by Business Segment
(in thousands of Canadian dollars, unaudited)
MDA - Business Segments
Three months
ended March 31,
-------------------------------------------------------------------------
Davis + Henderson Segment Filogix Segment
------------------------- ----------------------
2009 2008 2009 2008
-------------------------------------------------------------------------
Revenue $ 72,827 $ 73,048 $ 15,702 $ 14,364
Expenses 48,031 48,604 11,181 11,071
-------------------------------------------------------------------------
EBITDA(1) 24,796 24,444 4,521 3,293
Amortization of capital
assets and non-acquisition
intangibles 2,044 2,511 1,775 1,237
Interest expense - - - -
-------------------------------------------------------------------------
Adjusted income (loss)(1) 22,752 21,933 2,746 2,056
Amortization of mark-to-market
adjustment of
interest-rate swaps - - - -
Net unrealized loss (gain)
on interest-rate swaps(2) - - - -
Future income tax
expense (recovery) - - - -
Amortization of intangibles
from acquisition 140 724 3,234 2,724
-------------------------------------------------------------------------
Income (loss) from continuing
operations 22,612 21,209 (488) (668)
Income (loss) from
discontinued operations(3) - 98 - -
-------------------------------------------------------------------------
Net income (loss) $ 22,612 $ 21,307 $ (488) $ (668)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months
ended March 31,
-------------------------------------------------------------------------
Corporate Segment Consolidated
------------------------- ----------------------
2009 2008 2009 2008
-------------------------------------------------------------------------
Revenue $ - $ - $ 88,529 $ 87,412
Expenses 879 592 60,091 60,267
-------------------------------------------------------------------------
EBITDA(1) (879) (592) 28,438 27,145
Amortization of capital
assets and non-acquisition
intangibles - - 3,819 3,748
Interest expense 1,747 1,756 1,747 1,756
-------------------------------------------------------------------------
Adjusted income (loss)(1) (2,626) (2,348) 22,872 21,641
Amortization of mark-to-market
adjustment of
interest-rate swaps 136 107 136 107
Net unrealized loss (gain)
on interest-rate swaps(2) 191 2,344 191 2,344
Future income tax
expense (recovery) (64) - (64) -
Amortization of intangibles
from acquisition - - 3,374 3,448
-------------------------------------------------------------------------
Income (loss) from continuing
operations (2,889) (4,799) 19,235 15,742
Income (loss) from
discontinued operations(3) - - - 98
-------------------------------------------------------------------------
Net income (loss) $ (2,889) $ (4,799) $ 19,235 $ 15,840
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) EBITDA and Adjusted income are non-GAAP terms. Please see Non-GAAP
Measures section for a more complete description of these terms.
(2) The Business enters into contracts to fix the interest rates on a
significant portion of its outstanding bank debt. For accounting
purposes, these interest-rate swaps are not considered hedges and,
accordingly, any change in the fair value of these contracts is
recorded through income. Provided the Business does not cancel its
contracts, the amounts represent a non-cash unrealized gain or loss
that will subsequently reverse through income.
(3) Effective December 31, 2008, the Fund ceased providing services under
a U.S. cheque supply contract. As a result, the U.S. operations
related to the service of this contract have been classified as
discontinued operations.
>>
Operating Results - D+H Segment
Revenue
Revenue within the Davis + Henderson Segment for the first quarter of
2009 decreased by $0.2 million, or 0.3%, compared with the same period in
2008. Revenue decreased due to lower cheque order volumes, particularly
related to small business demand for our cheque products, substantially offset
by annual program changes and product and service enhancements, such as
IDefence® and BizAssist®, which positively impacted revenues in the first
quarter of 2009. Management believes that cheque orders from small business
consumers were negatively impacted by the economic downturn, which in turn
reduced cheque usage by existing businesses and reduced the number of small
business start-ups. In general, management believes that the long-term
historical trend related to cheque order decline is unchanged and is in the
low single digits.
Expenses
Expenses within the Davis + Henderson Segment for the first quarter of
2009 decreased by $0.6 million, or 1.2%, compared to the same period in 2008.
This decrease was primarily the result of reduced costs related to the decline
in cheque order volumes, the implementation of expense reduction measures, and
reduced compensation related to long-term compensation incentive plans. In
addition, a greater proportion of executive corporate management costs and
certain other business-wide costs have been allocated to the Corporate
Segment, reflecting the centralization of selected corporate functions and a
reallocation of resources to focus on corporate development activities.
Operating Results - Filogix Segment
Revenue
Revenue in the Filogix Segment for the first quarter of 2009 increased by
$1.3 million, or 9.3%, over the same period in 2008. Revenue for the first
quarter included the results of the Cyence business which was acquired in late
2008. Excluding the Cyence business, revenue decreased approximately 16%
compared with the same period in 2008 primarily as a result of the reduced
activities in the mortgage markets and, to a lesser extent, a decrease in
revenues from project implementation and customization services. Increasingly,
the Cyence business is being operated on an integrated basis within the
Filogix Segment.
A significant component of the Filogix Segment revenue is derived from
services related to the origination of mortgages. The volume of origination
transactions is driven by new mortgages and, in the case of broker-originated
transactions, also by refinancing and renewal of existing mortgages. As such,
while the Filogix Segment revenue is impacted by changes in housing market
activity; negative market impacts are partially mitigated by refinancing and
renewal activity. Consistent with reduced activities in the real estate and
mortgage markets, origination services revenues were down 16% compared to the
same period last year. Revenues for the Cyence business were consistent with
management's expectations.
Expenses
Expenses for the Filogix Segment increased by $0.1 million, or 1.0%, in
the first quarter of 2009 compared with the same period last year primarily
due to the inclusion of the Cyence expense base, partially offset by expense
reduction measures including fewer personnel and reduced variable partner
fees, partially offset by higher fixed contract payments.
Operating Results - Corporate Segment
Expenses within the Corporate Segment increased by $0.3 million for the
first quarter of 2009 compared with the same period in the prior year. The
increase reflects centralization of selected corporate functions and an
increase in corporate development activities.
<<
EIGHT QUARTER CONSOLIDATED STATEMENT OF INCOME - SUMMARY
(in thousands of Canadian dollars, except per unit amounts, unaudited)
2009
Q1 Q4 Q3 Q2
-------------------------------------------------------------------------
Revenue $ 88,529 $ 89,357 $ 95,055 $ 95,407
Expenses 60,091 62,413 61,664 61,334
-------------------------------------------------------------------------
EBITDA(1) 28,438 26,944 33,391 34,073
Amortization of capital
assets and non-acquisition
intangibles 3,819 3,800 4,219 3,771
Interest expense 1,747 1,647 1,690 1,754
Minority interest - - - -
-------------------------------------------------------------------------
Adjusted income(1) 22,872 21,497 27,482 28,548
Amortization of
mark-to-market adjustment
of interest-rate swaps 136 151 151 152
Net unrealized loss (gain)
on interest-rate swaps(2) 191 3,653 728 (1,034)
Future income tax
expense (recovery) (64) 399 52 766
Amortization of intangibles
from acquisition 3,374 3,409 3,412 3,447
-------------------------------------------------------------------------
Income from continuing
operations 19,235 13,885 23,139 25,217
Income from discontinued
operations(3) - 51 167 149
-------------------------------------------------------------------------
Net income $ 19,235 $ 13,936 $ 23,306 $ 25,366
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Adjusted income per unit,
basic and diluted(1) $ 0.5204 $ 0.4892 $ 0.6253 $ 0.6496
Net income per unit,
basic and diluted $ 0.4377 $ 0.3171 $ 0.5303 $ 0.5772
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2008 2007
Q1 Q4 Q3 Q2
-------------------------------------------------------------------------
Revenue $ 87,412 $ 88,641 $ 92,724 $ 99,250
Expenses 60,267 62,075 61,695 64,450
-------------------------------------------------------------------------
EBITDA(1) 27,145 26,566 31,029 34,800
Amortization of capital
assets and non-acquisition
intangibles 3,748 3,970 3,809 3,670
Interest expense 1,756 1,713 1,819 1,945
Minority interest - (139) 205 204
-------------------------------------------------------------------------
Adjusted income(1) 21,641 21,022 25,196 28,981
Amortization of
mark-to-market adjustment
of interest-rate swaps 107 163 163 176
Net unrealized loss (gain)
on interest-rate swaps(2) 2,344 823 957 (2,196)
Future income tax
expense (recovery) - 137 - 1,454
Amortization of intangibles
from acquisition 3,448 3,386 3,347 3,271
-------------------------------------------------------------------------
Income from continuing
operations 15,742 16,513 20,729 26,276
Income from discontinued
operations(3) 98 109 147 244
-------------------------------------------------------------------------
Net income $ 15,840 $ 16,622 $ 20,876 $ 26,520
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Adjusted income per unit,
basic and diluted(1) $ 0.4924 $ 0.4783 $ 0.5733 $ 0.6595
Net income per unit,
basic and diluted $ 0.3604 $ 0.3782 $ 0.4750 $ 0.6035
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) EBITDA and Adjusted income are non-GAAP terms. Please see Non-GAAP
Measures section for a more complete description of these terms.
(2) The Business enters into contracts to fix the interest rates on a
significant portion of its outstanding bank debt. For accounting
purposes, these interest-rate swaps are not considered hedges and,
accordingly, any change in the fair value of these contracts is
recorded through income. Provided the Business does not cancel its
contracts, the amounts represent a non-cash unrealized gain or loss
that will subsequently reverse through income.
(3) Effective December 31, 2008, the Fund ceased providing services under
a U.S. cheque supply contract. As a result, the U.S. operations
related to the service of this contract have been classified as
discontinued operations.
>>
Historically, the Fund has generally reported quarterly revenues that are
stable and growing when measured on a year-over-year basis. Measured on a
quarter-over-quarter basis, revenues can vary as they are subject to
seasonality and are generally stronger in the second and third quarter of each
year. The quarterly results in 2007 and 2008 were additionally impacted by (1)
for the first three quarters of 2007, higher than expected cheque order
volume, and (2) stronger mortgage origination fees. As a result of the change
in cheque reorder patterns in 2007, management believes that the Business
received fewer cheque orders in the first two quarters of 2008 than would
normally be expected. The Business also experienced reduced mortgage
origination fees and lower volumes as it relates to small business demand for
our cheque order products beginning in the later part of 2008 and continuing
into the first quarter of 2009.
Adjusted income per unit has generally been trending consistently with
changing revenue. Net income has been more variable as it has been
significantly affected by the variability in the changes in non-cash items
such as mark-to-market adjustments on interest rate swaps and future income
tax provisions.
CASH FLOW AND LIQUIDITY
The 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 section for a
discussion of non-GAAP terms used.
<<
Summary of Cash Flows(1)
(in thousands of Canadian dollars, unaudited)
Three months ended
March 31, March 31,
2009 2008
-------------------------------------------------------------------------
Cash flows from operating activities $ 13,015 $ 16,523
Add:
Changes in non-cash working capital
and other items(2) 13,676 9,037
-------------------------------------------------------------------------
Adjusted cash flows from operating activities 26,691 25,560
Less:
Maintenance asset expenditures(3) 1,302 1,017
Growth asset expenditures(3) 544 -
Contract payments(4) 2,517 1,517
-------------------------------------------------------------------------
Adjusted cash flows after capital expenditures and
contract payments(3) 22,328 23,026
Less:
Distributions paid to unitholders 20,211 18,853
-------------------------------------------------------------------------
2,117 4,173
Cash flows used in acquisition
of Cyence business 60 -
Cash flows used in other acquisitions - (4,250)
Changes in non-cash working capital and
other items(2) (13,676) (9,037)
-------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents for the period $ (11,499) $ (9,114)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) The subtotals in this table are not consistent with GAAP and
accordingly are considered non-GAAP measures. Please see Non-GAAP
Measures section for a more complete discussion of non-GAAP terms.
(2) Changes in non-cash working capital and certain other balance sheet
items have been excluded from adjusted cash flows from operating
activities so as to remove the effects of timing differences in cash
receipts and cash disbursements, which generally reverse themselves
but can vary significantly across quarters. For details, see the
Changes in Non-Cash Working Capital and Other Items section.
(3) 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.
(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 Davis + Henderson its customers and partners of
the many activities related to ordering, data handling, customer
service, customer access and other activities.
Summary of Cash Flows per Unit
(in Canadian dollars, unaudited)
` Three months ended
March 31, March 31,
2009 2008 % change
-------------------------------------------------------------------------
Adjusted cash flows from operating
activities $ 0.6073 $ 0.5816 4.4%
Adjusted cash flows after capital
expenditures and contract payments $ 0.5081 $ 0.5240 -3.0%
Distributions paid to unitholders $ 0.4599 $ 0.4290 7.2%
Cash distributions declared during
period $ 0.4599 $ 0.4290 7.2%
-------------------------------------------------------------------------
Cash Flows, Income and Distributions Paid
The following table compares cash flows from operating activities and
income to distributions paid:
Three months Year Year
ended ended ended
(in thousands of Canadian dollars, March 31, December 31, December 31,
unaudited) 2009 2008 2007
-------------------------------------------------------------------------
Cash flows from operating
activities $ 13,015 $ 116,062 $ 117,401
Net income $ 19,235 $ 78,448 $ 82,239
Adjusted income(1) $ 22,872 $ 99,168 $ 96,499
Distributions paid during period $ 20,211 $ 78,580 $ 78,357
Excess (shortfall) of cash flows
from operating activities over
cash distributions paid $ (7,196) $ 37,482 $ 39,044
Excess (shortfall) of net income
over cash distributions paid $ (976) $ (132) $ 3,882
Excess (shortfall) of adjusted
income over cash distributions
paid $ 2,661 $ 20,588 $ 18,142
-------------------------------------------------------------------------
(1) Adjusted income is a non-GAAP term. See Non-GAAP Measures section 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. In the first quarter of 2009, cash flow from
operating activities was less than cash distributions paid as $13.8 million of
cash was applied to fund reductions in non-cash working capital. The
application of this cash largely reflects the reversing of the growth in cash
balances from the fourth quarter of 2008, and also includes payments made
pursuant to multi-year incentive compensation plans.
Expenditures on Capital Assets and Contract Payments
Total capital asset expenditures for the first quarter of 2009 were $1.8
million, an increase of $0.8 million compared to the same period in 2008. The
Filogix Segment expenditures increased $1.4 million over the same period last
year, while the Davis + Henderson Segment expenditures were down $0.6 million.
Additionally, fixed contract payments related to Filogix partners increased in
the first quarter of 2009. The net increase over 2008, relates to the timing
of capital project expenditures, and does not reflect a change in the expected
overall capital expenditures program for the year.
The level of investment in 2009, for both capital assets and contract
payments that is required to maintain, sustain and grow the productive
capacity of the Business, is expected to be in the range of $12.0 million to
$14.0 million, similar to the level of expenditures made in fiscal 2008. The
Business' capital program provides for continued expenditures to be funded by
cash flows from operations.
Distributions
The Trustees of the Fund establish distribution levels of the Fund with
reference to its financial position, the historical results, projected
performance of the business and funds required for potential acquisitions. The
Fund intends to make monthly cash distributions of its adjusted cash flows
after capital asset and contract expenditures, subject to working capital
requirements, debt repayments and other reserves.
The Fund paid cash distributions of $20.2 million ($0.4599 per unit)
during the first quarter of 2009 compared to $18.9 million ($0.4290 per unit)
in the same period in 2008, an increase of 7.2%.
On an annualized basis, the monthly cash distribution rate for March 2009
was $1.84 per unit as compared to $1.72 per unit annualized in March 2008,
representing an increase of 7.0%.
Distributions paid can be different than distributions declared during a
period. Monthly distributions are declared by the Fund for unitholders of
record on the last business day of each month and are paid within 31 days
following each month end. In the first quarter of 2009, these amounts were the
same.
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. Historically, Davis + Henderson has paid distributions below the level
of adjusted cash flows after capital asset and contract expenditures generated
and has not paid taxes as the Business had excess tax deductions available to
eliminate taxable income.
The estimated tax allocation of distributions to be declared for 2009 is
100% "other income", as was the case for all of 2008.
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 March 31, 2009 and December 31, 2008,
43,946,792 trust units were outstanding.
<<
Changes in Non-Cash Working Capital and Other Items
(in thousands of Canadian dollars, unaudited)
Three months ended
March 31, March 31,
2009 2008
-------------------------------------------------------------------------
Decrease (increase) in non-cash working
capital items $ (13,885) $ (9,092)
Decrease (increase) in other operating assets and
liabilities 209 55
-------------------------------------------------------------------------
Decrease (increase) in non-cash working capital
and other items $ (13,676) $ (9,037)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
The increase in non-cash working capital items for the first quarter of
2009 was primarily related to decreases in payables reflecting normal course
timing differences of when payments are made, to payments under certain
multi-year compensation programs and to severance payments made during the
quarter. Most of the reduction in payables reflects a reversal of the growth
in payables in the fourth quarter of 2008.
Cash Balances and Long-term Indebtedness
At March 31, 2009, cash and cash equivalents totalled $0.6 million,
compared to $12.1 million at December 31, 2008. This decrease relates
primarily to the reduction of non-cash working capital as described above.
Total debt facilities available at March 31, 2009 were $170.0 million and
included a $120.0 million non-revolving term loan and a $50.0 million
revolving term credit facility. As of March 31, 2009, the Business had drawn
$120.0 million under the non-revolving term loan and $28.0 million under the
revolving term credit facility. The Business is permitted to draw on the
revolving facility's available balance of $22.0 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, a minimum net worth test and a limit on the
maximum amount of distributions that may be made by Davis + Henderson L.P. 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.
As of March 31, 2009, the Fund had interest-rate swap hedge contracts in
place with certain of its lenders, such that the borrowing rates on 81.1% of
outstanding indebtedness are effectively fixed at the interest rates and for
the time periods ending as follows:
<<
(in thousands of Canadian dollars, unaudited)
-------------------------------------------------------------------------
Fair value of interest-rate swaps
---------------------------------
Maturity Date Notional Interest
Amount Asset Liability Rate(1)
-------------------------------------------------------------------------
July 15, 2009 $ 20,000 $ - $ 396 5.688%
July 15, 2010 33,000 - 2,034 5.690%
January 5, 2011 22,000 - 483 2.855%
June 15, 2011 20,000 - 1,794 5.560%
June 15, 2011 25,000 - 2,243 5.560%
-------------------------------------------------------------------------
$ 120,000 $ - $ 6,950
-------------------------------------------------------------------------
(1) The listed interest rates are inclusive of bankers' acceptance fees
currently in effect. Such fees could increase or decrease depending
on the Fund's financial leverage as compared to certain levels
specified in the Credit Agreement.
>>
As at March 31, 2009, the Fund would have to pay the fair value of $6.9
million, the liability on the balance sheet if it were to close out the
interest-rate swap contracts. It is not the present intention of management to
close out these contracts. The Fund expects to continue to enter into
interest-rate swaps for the purpose of hedging interest rates.
The Fund's remaining indebtedness is subject to floating interest rates
that may be funded either by way of prime-rate loans or through the issuance
of bankers' acceptance with maturities, and thus interest rates, resetting
typically in the one-month to three-month range.
The average effective interest rate applicable to the Fund's total
indebtedness was 4.45% as at March 31, 2009.
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. The Company believes that its customers,
suppliers and lenders, while impacted by the current economic recession, will
continue to operate with the Company on similar terms to those currently in
place. As well, while the Company's products and services will be impacted by
the changing economic environment, the Company expects to remain profitable
and generate positive cash flow. The Company has expanded into the lending
services marketplace over the past several years through acquisitions and we
expect to continue to use an acquisition strategy to expand in the future.
Weak capital and credit markets may negatively impact the Company's ability in
the near term to expand by way of acquisition.
Non-GAAP Measures
The information presented within the above tables include certain
adjusted financial measures such as Earnings before income taxes, depreciation
and amortization ("EBITDA") and "Adjusted income" (net income before certain
non-cash charges), "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.
EBITDA
In 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 Income
Adjusted income is used as a measure of internal performance similar to
net income, but is calculated after removing the non-cash impacts of certain
fair value and purchase accounting items and future tax recoveries or
expenses. These items are excluded in calculating adjusted income as they are
non-cash items and not considered indicative of the financial performance of
the Business for the period being reviewed.
<<
Adjusted Cash Flows from Operating Activities and Adjusted Cash Flows
after Capital Expenditures and Contract Payments
>>
Certain subtotals presented within the cash flows table above, such as
"Adjusted cash flows from operating activities" and "Adjusted cash flows after
capital expenditures and contract payments", are not defined terms under GAAP.
Management uses these subtotals as measures of internal performance and as a
supplement to the Consolidated Statements of Cash Flows.
CHANGES IN ACCOUNTING POLICY
The Fund reviews all revisions to the Canadian Institute of Chartered
Accountants ("CICA") Handbook when issued. All revisions are considered and
applied by the effective date or earlier if practical. Effective January 1,
2009, the Fund adopted CICA Handbook Section 3064, Goodwill and Intangible
Assets. This section, which replaces Section 3062, Goodwill and Other
Intangible Assets, and Section 3450, Research and Development Costs,
establishes standards for the recognition, measurement and disclosure of
goodwill and intangible assets. The provisions relating to the definition and
initial recognition of intangible assets are equivalent to the corresponding
provision of International Financial Reporting Standard IAS 38, Intangible
Assets. The new standard also provides guidance for the recognition of
internally developed intangible assets, including assets developed from
research and development activities, ensuring consistent treatment of all
intangible assets, whether separately acquired or internally developed. The
Fund has evaluated the impact of adopting Section 3064 and has reclassified
all software and its related amortization from capital assets to intangible
assets.
Future Accounting and Reporting Changes
International Financial Reporting Standards - The Accounting Standards
Board of Canada (AcSB) plans to converge Canadian GAAP for publicly
accountable enterprises with International Financial Reporting Standards
(IFRS) over a transition period that will end effective January 1, 2011 with
the adoption of IFRS. The AcSB announced on February 13, 2008 that IFRS will
be required in 2011 for publicly accountable profit-oriented enterprises. The
changeover date is for interim and annual financial statements relating to
fiscal years beginning on or after January 1, 2011. The Fund is in the process
of establishing a changeover plan to convert to these new standards according
to the timetable set with these new rules. An implementation team has been
created, and third party advisors have been engaged to provide training to
staff. The implementation team has started the process of assessing accounting
policy choices and elections that are allowed under IFRS. The Fund is also
assessing the impact of the conversion on business activities including the
effect on information technology and data systems, internal controls over
financial reporting and disclosure controls. The Fund will continually review
and adjust the changeover plan to ensure the implementation process properly
addresses the key elements of the plan.
DISCLOSURE CONTROLS AND INTERNAL CONTROLS
The Fund and its subsidiaries have designed and maintain a set of
disclosure controls and procedures designed to ensure that information
required to be disclosed in filings made pursuant to Multilateral Instrument
52-109 is recorded, processed, summarized and reported within the time periods
specified in the Canadian Securities Administrators' rules and forms.
The Fund and its subsidiaries have also designed and maintain a set of
internal controls over financial reporting to provide reasonable assurance
regarding the reliability of financial reporting and preparation of financial
statements for external purposes in accordance with Canadian GAAP.
There have been no changes in the Fund's internal controls over financial
reporting during the quarter ended March 31, 2009 that have materially
affected, or are reasonably likely to materially affect, its internal control
over financial reporting.
OUTLOOK
Davis + Henderson's overall long-term objective is to deliver stable and
modestly growing cash distributions through growing revenue in the 3% to 5%
range and maintaining margins.
Revenues, earnings and cash flow over the past two years have been more
variable than those experienced historically due to (1) changes in the imaging
standards on cheques in Canada that affected the D+H cheque reordering cycle,
and (2) dramatic growth followed by cyclical contraction within the real
estate and mortgage origination market. More recently, the Business has been
operating in a recessionary environment. Historically, it has not been the
Business' experience that cheque order volumes, which currently contribute
approximately 80% of the consolidated revenues of the overall Business, vary
significantly with changes in the economic environment. However, the Company
believes that the current, more dramatic recessionary period has reduced the
demand for small business cheque orders. Revenues related to small business
cheque orders represent approximately 40% of consolidated revenues. As well,
the Business' revenues from mortgage origination fees have been impacted by
changes in the real estate and mortgage markets and the slowing economic
activity. In 2008, origination services revenue represent approximately 13% of
the consolidated revenues of the Business.
As set out in the Fund's statement of strategy, the objective is to grow
profits and cash flow by enhancing the value of our cheque supply program,
offering additional programs to serve the chequing account and delivering
programs within the lending services market.
Management's operational plans include many initiatives which, when
combined, are intended to allow the Fund to meet its objective. Examples
include further implementations and enhancements of IDefence, BizAssist and
eSwitch programs. Relating to lending markets, the Business looks to grow
revenues related to services directed toward underwriting activities, PPSA
activities and, generally, the inclusion of and growth of services
attributable to the newly acquired Cyence business.
The Business' capital program provides for continued expenditures to be
funded by cash flows from operations. The 2009 capital program is expected to
be in the range of $12.0 million to $14.0 million as compared to $13.4 million
and $15.5 million in 2008 and 2007, respectively.
As we move through 2009, it is apparent that the economic environment is
likely to continue to be difficult. This in turn will affect our revenues
related to lending origination and underwriting services, and will likely
continue to have some impact on our cheque program as it relates to small
business demand for our products. Throughout 2008 and into 2009, we
implemented many expense reduction measures, and going forward we will
continue to be diligent in managing costs. In summary, we believe the
combination of our revenue base, business model and capital structure
positions the Business to deal with the challenges we face.
Changes made to the Income Tax Act require certain income trusts,
including the Fund, to pay taxes after fiscal 2010, similar to those paid by
taxable Canadian corporations. The payment of such taxes will, in the future,
reduce the cash flow of the Fund, thereby reducing the amount available for
distributions to unitholders. Since the announcement of this change in tax
legislation, management and the Trustees have monitored the changes in the
income trust environment and capital markets and continue to review potential
impacts on the Fund's current strategies and the alternatives available to the
Fund, consistent with protecting and enhancing unitholder value.
Caution Concerning Forward-looking Statements
This MD&A contains certain statements that constitute forward-looking
information within the meaning of applicable securities laws ("forward-looking
statements") including those set out in the Outlook above. Such
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.
Forward-looking statements include all disclosure regarding possible events,
conditions or results of operations that are based on assumptions about future
economic conditions and courses of action. Forward-looking statements may also
include, without limitation, any statement relating to future events,
conditions or circumstances. Davis + Henderson cautions you not to place undue
reliance upon any such forward-looking statements, which speak only as of the
date they are made.
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 and mortgage markets; as well as general market conditions,
including economic and interest rate dynamics and investor interest in, and
government regulations relating to, income trusts. 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.
ADDITIONAL INFORMATION
Additional 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
(in thousands of Canadian dollars, unaudited)
March 31, December 31,
2009 2008
-------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 567 $ 12,066
Accounts receivable 19,304 16,180
Inventory (note 3) 4,571 4,475
Prepaid expenses 3,262 2,813
-------------------------------------------------------------------------
27,704 35,534
Future income tax asset (note 12) 2,894 3,162
Capital assets (note 4) 19,878 20,464
Other assets (note 5) 1,082 1,082
Intangible assets (note 6) 140,902 144,675
Goodwill (note 7) 459,037 458,989
-------------------------------------------------------------------------
$ 651,497 $ 663,906
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND UNITHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 30,707 $ 40,827
Distributions payable to unitholders 6,737 6,737
Current portion of disbursement obligations
on customer contracts (note 8) 20 1,537
-------------------------------------------------------------------------
37,464 49,101
Disbursement obligations on customer
contracts (note 8) 30 30
Long-term indebtedness (note 9) 147,400 147,331
Interest-rate swaps (note 10) 6,950 6,759
Other long-term liabilities (note 11) 952 812
Future income tax liability (note 12) 9,872 10,204
-------------------------------------------------------------------------
202,668 214,237
Unitholders' equity:
Trust units (note 13) 476,343 476,343
Deficit (26,690) (25,714)
Accumulated other comprehensive income
(loss) (824) (960)
-------------------------------------------------------------------------
448,829 449,669
Commitments (note 15)
-------------------------------------------------------------------------
$ 651,497 $ 663,906
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated
financial statements.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of Canadian dollars, except per unit amounts, unaudited)
Three months ended
March 31, March 31,
2009 2008
-------------------------------------------------------------------------
Revenue $ 88,529 $ 87,412
Cost of sales and operating expenses (note 3) 60,401 60,701
Amortization of capital assets 1,098 982
-------------------------------------------------------------------------
27,030 25,729
Interest expense 1,883 1,863
Net unrealized loss (gain) on interest-rate
swaps 191 2,344
Amortization of intangible assets 5,785 5,780
-------------------------------------------------------------------------
Income from continuing operations before
income taxes 19,171 15,742
Future income tax expense (recovery) (64) -
-------------------------------------------------------------------------
Income from continuing operations 19,235 15,742
Income from discontinued operations (note 18) - 98
-------------------------------------------------------------------------
Net income $ 19,235 $ 15,840
-------------------------------------------------------------------------
Net income per unit, basic and diluted $ 0.4377 $ 0.3604
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated
financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands of Canadian dollars, unaudited)
Three months ended
March 31, March 31,
2009 2008
-------------------------------------------------------------------------
Net income $ 19,235 $ 15,840
Other comprehensive income:
Amortization of mark-to-market adjustment of
interest-rate swaps 136 107
-------------------------------------------------------------------------
Total comprehensive income $ 19,371 $ 15,947
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated
financial statements.
CONSOLIDATED STATEMENTS OF DEFICIT AND ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS)
(in thousands of Canadian dollars, unaudited)
Three months ended
March 31, March 31,
2009 2008
-------------------------------------------------------------------------
DEFICIT
Deficit, beginning of period $ (25,714) $ (23,371)
Net income 19,235 15,840
Distributions (20,211) (18,853)
-------------------------------------------------------------------------
Deficit, end of period (26,690) (26,384)
-------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss),
beginning of period (960) (1,521)
Other comprehensive income:
Amortization of mark-to-market adjustment
of interest-rate swaps 136 107
-------------------------------------------------------------------------
Accumulated other comprehensive income
(loss), end of period (824) (1,414)
-------------------------------------------------------------------------
Deficit and accumulated other comprehensive
income (loss), end of period $ (27,514) $ (27,798)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated
financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of Canadian dollars, unaudited)
Three months ended
March 31, March 31,
2009 2008
-------------------------------------------------------------------------
Cash and cash equivalents provided by (used in):
OPERATING ACTIVITIES
Net income $ 19,235 $ 15,840
Add:
Amortization of capital assets 1,098 1,040
Amortization of capital assets included
in cost of sales 310 434
Amortization of intangible assets 5,785 5,795
Amortization of mark-to-market adjustment
of interest-rate swaps 136 107
Net unrealized loss (gain) on interest-rate
swaps 191 2,344
Future income tax expense (recovery) (64) -
-------------------------------------------------------------------------
26,691 25,560
Decrease in non-cash working capital items (13,885) (9,092)
Changes in other operating assets and
liabilities 209 55
-------------------------------------------------------------------------
13,015 16,523
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Distributions paid to unitholders (20,211) (18,853)
-------------------------------------------------------------------------
(20,211) (18,853)
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Expenditures on capital assets,
non-acquisition intangible assets and
long term contracts (4,363) (2,534)
Acquisition of businesses (note 2) 60 (4,250)
-------------------------------------------------------------------------
(4,303) (6,784)
-------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents for the period (11,499) (9,114)
Cash and cash equivalents, beginning of period 12,066 13,148
-------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 567 $ 4,034
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplementary information:
Cash interest paid $ 1,100 $ 1,568
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated
financial statements.
Notes to Consolidated Financial Statements
Three months ended March 31, 2009 and 2008
(in thousands of Canadian dollars, except unit and per unit amounts,
unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared using accounting
policies generally accepted in Canada and follow the same accounting
policies and their method of application as the Fund's consolidated
financial statements for the year ended December 31, 2008, which are
included in the 2008 Annual Report along with changes in accounting
policies that became effective January 1, 2009. They do not conform in
all respects with disclosures required for annual financial statements
and should be read in conjunction with the audited consolidated financial
statements of the Fund for the year ended December 31, 2008.
2. ACQUISITIONS
a. Cyence Business
On December 19, 2008, the Fund completed an agreement to acquire a 100%
interest in Cyence International Inc., an international provider of
credit lifecycle management software and service solutions to financial
institutions in Canada, United States and Australia. The assets acquired
and consideration given were as follows:
Net assets acquired, at fair value:
Assets $ 5,092
Intangible assets 24,800
Liabilities (9,920)
-------------------------------------------------------------------------
19,972
Goodwill 17,844
-------------------------------------------------------------------------
Total $ 37,816
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consideration for 100% ownership:
Cash $ 37,816
-------------------------------------------------------------------------
Total $ 37,816
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The purchase price and related transaction costs were financed with
$28 million from the drawdown of the existing credit facility, and the
balance from cash on hand. The Fund has not completed its assessment and
valuation of the assets acquired and liabilities assumed for this
acquisition. As a result, the amount of the purchase price in excess of
the carrying value of the acquired assets and liabilities has not been
fully allocated to the acquired assets and liabilities in the
consolidated balance sheet.
The results of the Cyence operations have been reported as part of the
Filogix Segment for segment reporting purposes.
b. AVS Business
On April 28, 2005, the Fund entered into an agreement to acquire a 50%
interest in AVS L.P. through a step-by-step acquisition over 20 months
ending January 2007. On May 25, 2006, the Fund entered into an amending
agreement to accelerate its remaining obligation as well as exercising
its option to acquire a further 25% interest in the AVS business. Total
consideration paid for the 75% interest in the AVS business was
$11.1 million of which $3.5 million was allocated to intangible assets,
$7.2 million to goodwill and the remaining balance to net assets.
Effective January 2, 2008, the Fund acquired the remaining 25% of
interest in the AVS business for a consideration of $4.2 million of which
$1.4 million was allocated to intangible assets, $2.7 million to
goodwill, and the remaining balance to net assets.
Each step acquisition was made with available cash on hand.
3. INVENTORY
March 31, December 31,
2009 2008
-------------------------------------------------------------------------
Raw materials $ 2,066 $ 1,988
Work-in-process 1,472 1,503
Finished goods 1,033 984
-------------------------------------------------------------------------
$ 4,571 $ 4,475
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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. Finished goods
primarily consist of retail products, labels, accessories and security
bags.
Inventory that was recognized as cost of sales during the three months
ended March 31, 2009 was $10,467 (Q1 2008 - $12,488). The amount of
write-down of inventories recognized as an expense during the three
months ended March 31, 2009 was $43 (Q1 2008 - $87).
4. CAPITAL ASSETS
March 31, 2009
-------------------------------------------------------------------------
Accumulated
Cost amortization Net
-------------------------------------------------------------------------
Machinery and equipment $ 15,600 $ 8,803 $ 6,797
Computer equipment 17,594 6,778 10,816
Furniture, fixtures and leasehold
improvements 8,781 6,516 2,265
-------------------------------------------------------------------------
$ 41,975 $ 22,097 $ 19,878
-------------------------------------------------------------------------
-------------------------------------------------------------------------
December 31, 2008
-------------------------------------------------------------------------
Accumulated
Cost amortization Net
-------------------------------------------------------------------------
Machinery and equipment $ 15,589 $ 8,609 $ 6,980
Computer equipment 18,492 7,439 11,053
Furniture, fixtures and leasehold
improvements 9,048 6,617 2,431
-------------------------------------------------------------------------
$ 43,129 $ 22,665 $ 20,464
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Commencing January 1, 2009, in accordance with Section 3064, Goodwill and
Intangible Assets, the Fund reclassified software costs previously
recorded in capital assets to intangible assets. Accordingly, net book
value of $10,816 at December 31, 2008 was reclassified from computer
equipment and software to intangible assets.
Amortization during the three months ended March 31, 2009 was $1,408
(Q1 2008 - $1,474), of which $310 was included in cost of sales
(Q1 2008 - $434). For the three months ended March 31, 2008, amortization
of $1,426 was reclassified from capital assets to intangible assets.
Fully amortized capital assets removed from the accounts during the three
months ended March 31, 2009 were $1,973 (Q1 2008 - $4,143).
5. OTHER ASSETS
March 31, December 31,
2009 2008
-------------------------------------------------------------------------
Investments $ 1,000 $ 1,000
Other 82 82
-------------------------------------------------------------------------
$ 1,082 $ 1,082
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Commencing January 1, 2009, the Fund reclassified long-term supply
contracts previously recorded in other assets to intangible assets.
Accordingly, net book value of $3,347 at December 31, 2008 was
reclassified from other assets to intangible assets.
On December 19, 2008, the Fund acquired a portfolio investment in a
technology services company for a cash consideration of $1 million. This
investment has been accounted for using the cost method.
6. INTANGIBLE ASSETS
Three months ended March 31, 2009
---------------------------------------------------
Contracts Software
----------- ---------------------
Internally
Purchased Developed
---------------------------------------------------
Cost
At January 1, 2009 $ 8,761 $ 21,727 $ 10,676
Additions 1,000 482 535
Other movements(1) (3,162) (2,516) (1,508)
---------------------------------------------------
At March 31, 2009 $ 6,599 $ 19,693 $ 9,703
---------------------------------------------------
---------------------------------------------------
Amortization and
impairment loss
At January 1, 2009 $ 5,414 $ 17,393 $ 4,194
Amortization 917 1,074 421
Other movements(1) (3,162) (2,516) (1,503)
---------------------------------------------------
At March 31, 2009 $ 3,169 $ 15,951 $ 3,112
---------------------------------------------------
---------------------------------------------------
Net carrying amount
At March 31, 2009 $ 3,430 $ 3,742 $ 6,591
At December 31,
2008 $ 3,347 $ 4,334 $ 6,482
---------------------------------------------------
---------------------------------------------------
Three months ended March 31, 2009
-------------------------------------------------------------------------
Acquisition of businesses Total
-------------------------------------------- ----------
Customer
Proprietary Brand relation-
Contracts software names ships
-------------------------------------------------------------------------
Cost
At January 1, 2009 $ 1,201 $ 56,093 $ 10,900 $107,064 $216,422
Additions - - - - 2,017
Other movements(1) - (193) - (16,329) (23,708)
-------------------------------------------------------------------------
At March 31, 2009 $ 1,201 $ 55,900 $ 10,900 $ 90,735 $194,731
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Amortization and
impairment loss
At January 1, 2009 $ 864 $ 11,017 $ 1,452 $ 31,413 $ 71,747
Amortization 140 1,397 182 1,654 5,785
Other movements(1) - (193) - (16,329) (23,703)
-------------------------------------------------------------------------
At March 31, 2009 $ 1,004 $ 12,221 $ 1,634 $ 16,738 $ 53,829
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net carrying amount
At March 31, 2009 $ 197 $ 43,679 $ 9,266 $ 73,997 $140,902
At December 31,
2008 $ 337 $ 45,076 $ 9,448 $ 75,651 $144,675
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended March 31, 2008
---------------------------------------------------
Contracts Software
----------- ---------------------
Internally
Purchased Developed
---------------------------------------------------
Cost
At January 1, 2008 $ 12,581 $ 20,509 $ 10,230
Additions - 48 577
Other movements(1) (3,718) (1,742) (2,470)
---------------------------------------------------
At March 31, 2008 $ 8,863 $ 18,815 $ 8,337
---------------------------------------------------
---------------------------------------------------
Amortization and
impairment loss
At January 1, 2008 $ 6,757 $ 14,875 $ 5,018
Amortization 906 1,040 386
Other movements(1) (3,588) (1,742) (2,470)
---------------------------------------------------
At March 31, 2008 $ 4,075 $ 14,173 $ 2,934
---------------------------------------------------
---------------------------------------------------
Net carrying amount
At March 31, 2008 $ 4,788 $ 4,642 $ 5,403
---------------------------------------------------
---------------------------------------------------
Three months ended March 31, 2008
-------------------------------------------------------------------------
Acquisition of businesses Total
------------------------------------------- ----------
Customer
Proprietary Brand relation-
Contracts software names ships
-------------------------------------------------------------------------
Cost
At January 1, 2008 $ 1,201 $ 41,993 $ 8,400 $ 97,521 $192,435
Additions - - - 1,343 1,968
Other movements(1) - - - - (7,930)
-------------------------------------------------------------------------
At March 31, 2008 $ 1,201 $ 41,993 $ 8,400 $ 98,864 $186,473
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Amortization and
impairment loss
At January 1, 2008 $ 303 $ 6,773 $ 887 $ 23,067 $ 57,680
Amortization(2) 140 1,067 140 2,101 5,780
Other movements(1) - - - - (7,800)
-------------------------------------------------------------------------
At March 31, 2008 $ 443 $ 7,840 $ 1,027 $ 25,168 $ 55,660
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net carrying amount
At March 31, 2008 $ 758 $ 34,153 $ 7,373 $ 73,696 $130,813
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Other movements primarily relate to fully amortized assets removed
from the accounts during the period.
(2) Amortization for the three months ended March 31, 2008 does not
include $15 of amortization that is related to discontinued
operations.
7. GOODWILL
March 31, December 31,
2009 2008
-------------------------------------------------------------------------
Balance, beginning of period $ 458,989 $ 438,502
Goodwill acquired during the period:
AVS acquisition - 2,691
Cyence acquisition 48 17,796
-------------------------------------------------------------------------
Balance, end of period $ 459,037 $ 458,989
-------------------------------------------------------------------------
-------------------------------------------------------------------------
8. DISBURSEMENT OBLIGATIONS ON CUSTOMER CONTRACTS
March 31, December 31,
2009 2008
-------------------------------------------------------------------------
Current portion $ 20 $ 1,537
Long-term portion 30 30
-------------------------------------------------------------------------
Total disbursement obligations on customer
contracts $ 50 $ 1,567
-------------------------------------------------------------------------
The Fund has fixed customer contract disbursement obligations payable as
of March 31, 2009 as follows:
2009 $ 20
2010 15
2011 10
2012 5
-------------------------------------------------------------------------
$ 50
-------------------------------------------------------------------------
-------------------------------------------------------------------------
9. LONG-TERM INDEBTEDNESS
March 31, December 31,
2009 2008
-------------------------------------------------------------------------
Non-revolving term loan $ 120,000 $ 120,000
Revolving credit facility 28,000 28,000
-------------------------------------------------------------------------
148,000 148,000
Deferred finance costs (600) (669)
-------------------------------------------------------------------------
$ 147,400 $ 147,331
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Fund has $170.0 million of available term credit facilities due
June 15, 2011 (December 31, 2008 - $170.0 million), consisting of a
$120.0 million non-revolving term loan and a $50.0 million revolving
credit facility. The credit facilities do not require the Fund to make
any principal payments prior to their maturity. The 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 credit facilities, including any hedge contracts with the lenders,
are secured in first priority by a pledge of substantially all of the
Fund's assets and by a pledge of the Fund's indirect ownership interest
in Davis + Henderson L.P. 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 Credit Agreement for the Fund contains a number of covenants and
restrictions including the requirement to meet certain financial ratios
and financial condition tests. As at March 31, 2009, the Fund was in
compliance with all of its financial covenants and financial condition
tests.
Deferred finance costs relate to the renewal and amendment of long-term
indebtedness on June 15, 2006. Amortization of deferred finance costs
during the three months ended March 31, 2009 was $69 (Q1 2008 - $69).
Amortization of deferred finance costs is recognized over the term of the
facilities as interest expense using the effective interest method.
10. FINANCIAL INSTRUMENTS
Recognition and Measurement
The Fund's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities,
disbursement obligations on customer contracts, distributions payable to
unitholders, interest-rate swaps and long-term indebtedness. The Fund
does not enter into financial instruments for trading or speculative
purposes. Financial assets are classified as available for sale, held to
maturity, held for trading, or loans and receivables. Financial
liabilities are recorded at amortized cost. Initially, all financial
assets and financial liabilities must be recorded on the balance sheet at
fair value. Subsequent measurement is determined by the classification of
each financial asset and financial liability. Unrealized gains and losses
on financial assets that are held as available for sale are recorded in
other comprehensive income until realized, at which time they will be
recorded in the consolidated statement of income. All derivatives,
including embedded derivatives that must be separately accounted for, are
recorded at fair value in the consolidated balance sheet. Transaction
costs related to financial instruments are generally capitalized and then
amortized over the expected life of the financial instrument using the
effective yield method.
Credit Risk
The Fund's financial assets that are exposed to credit risk consist
primarily of cash and cash equivalents, accounts receivable 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. Risks associated with concentrations of credit risk
with respect to accounts receivable and interest-rate swaps are limited
due to the credit rating of customers and swap counterparties serviced by
the Fund and the generally short payment terms and frequent settlement of
swap differences.
Market Risk
The Fund is subject to interest-rate risks as its credit facilities bear
interest at rates that depend on certain financial ratios of the Fund and
vary in accordance with borrowing rates in Canada and the United States.
The following table presents a sensitivity analysis to changes in market
interest rates and their potential impact on the Fund for the three
months ended March 31, 2009. As the sensitivity is hypothetical, it
should be used with caution.
-------------------------------------------------------------------------
+100 bps -100 bps
-------------------------------------------------------------------------
Increase (decrease) in interest expense $ 69 $ (69)
Change to net unrealized (gain) loss on
interest-rate swaps (1,800) 1,800
-------------------------------------------------------------------------
Increase (decrease) in net income $ 1,731 $ (1,731)
-------------------------------------------------------------------------
Increase (decrease) in total comprehensive
income $ 1,731 $ (1,731)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Fund manages its interest-rate risks through the use of interest-rate
swaps for most of its outstanding long-term indebtedness. As of March 31,
2009, the Fund has entered into interest-rate swap contracts with its
lenders, such that the floating borrowing rates on $120.0 million, or
81.1%, of its outstanding term indebtedness are effectively fixed at
interest rates and for periods shown in the following table:
-------------------------------------------------------------------------
Fair value of
interest-rate swaps
--------------------------- Interest
Maturity date Notional Amount Asset Liability rate(1)
-------------------------------------------------------------------------
July 15, 2009 $ 20,000 $ - $ 396 5.688%
July 15, 2010 33,000 - 2,034 5.690%
January 5, 2011 22,000 - 483 2.855%
June 15, 2011 20,000 - 1,794 5.560%
June 15, 2011 25,000 - 2,243 5.560%
-------------------------------------------------------------------------
$ 120,000 $ - $ 6,950
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) The listed interest rates are inclusive of bankers' acceptance fees
currently in effect. Such fees could increase or decrease depending
on the Fund's financial leverage as compared to certain levels
specified in the Credit Agreement.
Liquidity Risk
The Fund has long-term indebtedness with a maturity date of June 15,
2011. 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 credit facilities. Further, the
Fund has made numerous voluntary payments on its outstanding long-term
indebtedness and a portion of its committed term credit facilities
remains undrawn.
Management measures liquidity risk through comparisons of current
financial ratios with financial covenants contained in the Credit
Agreement.
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 interest-rate swaps outstanding at December 31, 2006.
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.
11. OTHER LONG-TERM LIABILITIES
March 31, December 31,
2009 2008
-------------------------------------------------------------------------
Deferred compensation program $ 195 $ -
Employee future benefits 679 707
Capital lease 78 105
-------------------------------------------------------------------------
$ 952 $ 812
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 payment component. Both the cash component and
the cash-settled unit-based payment component awarded at the grant date
are subject to a 3-year performance target for compound annual growth in
adjusted income. The units awarded will earn distributions through the
3 years equal to the actual per unit distributions declared on the units
of Davis + Henderson during the fiscal periods that form the performance
period. The cash-settled unit-based payment is determined based on the
average trading price for the units in the 30 days following the release
of the results for the last fiscal year in the performance period, along
with the annualized growth rate achieved and the distributions earned.
The employee must remain an employee throughout the three-year
performance period in order for the plan to vest. The first possible
payment under this program is in 2012.
Employee future benefits consist of defined contribution pension plans
and a non-pension post-retirement benefit plan. Obligations relating to
employee future benefits relate to the non-pension post-retirement
benefit plan.
The Fund's principal pension plans are defined contribution pension plans
that provide pensions to substantially all eligible employees. Total
expense for the Fund's defined contribution pension plan for the three
months ended March 31, 2009 was $0.5 million (Q1 2008 - $0.5 million).
12. 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 not distributed to unitholders prior to January 1, 2011
and on all taxable income subsequent to December 31, 2010. If the Fund's
equity capital grows beyond certain dollar limits prior to January 1,
2011, the Fund would become a SIFT and would commence in that year being
subject to tax on income distributed. The Fund expects that its income
distributed will not be subject to tax prior to 2011 and accordingly has
not provided for future income taxes on its temporary differences and
those of its flow-through subsidiary trust and partnerships expected to
reverse prior to 2011 as it is considered tax exempt for accounting
purposes.
Taxable income distributed by the Fund to its unitholders will be taxable
income of those unitholders.
Significant components of the Fund's future tax assets and liabilities
with respect to the consolidated carrying values related to its
investments in certain partnership and trust subsidiaries and their
corporate subsidiaries are as follows:
March 31, December 31,
2009 2008
-------------------------------------------------------------------------
Future income tax assets:
Capital assets less than tax values $ 2,894 $ 3,121
Intangible assets less than tax values 11,174 10,979
Loss carryforwards 1,356 1,677
Valuation allowance (12,530) (12,615)
-------------------------------------------------------------------------
Total future tax assets 2,894 3,162
-------------------------------------------------------------------------
Future income tax liabilities:
Capital assets greater than tax values 2,594 2,849
Intangible assets greater than tax values 7,278 7,355
-------------------------------------------------------------------------
Total future tax liabilities 9,872 10,204
-------------------------------------------------------------------------
Net future income tax liabilities $ 6,978 $ 7,042
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 for the portion that is not expected
to reverse. The Fund also does not expect to realize the benefit of
certain loss carryforwards of certain corporate subsidiaries in the
foreseeable future and accordingly has reduced the related future income
tax asset by a valuation allowance for the portion that is not expected
to be realized.
With the acquisition of the Cyence business, the Fund recognized a future
income tax asset of $3,121 relating to capital assets that are less than
their tax values and a future income tax liability of $7,355 relating to
intangible assets that are greater than their tax values. Both the future
income tax asset and the future income tax liability are expected to
reverse in the foreseeable future.
No future tax liability has been provided for the taxable temporary
difference related to goodwill since this amount is not deductible for
tax purposes and is therefore specifically exempt from the recognition
requirements.
The provision for future income taxes in the consolidated statement of
income represents the change in the consolidated net future income tax
liabilities, after giving effect to the increase in the future income tax
liability arising on the acquisition of Cyence International Inc. The
effective tax rate for the period differs from the expected tax rate of
nil due to the change in temporary differences of the Fund and its
flow-through trust and partnership subsidiaries expected to reverse after
2010 and the results of operations of its corporate subsidiaries.
13. TRUST UNITS
An unlimited number of trust units may be issued by the Fund pursuant to
the Fund's Declaration of Trust. Each unit is transferable and represents
an equal, undivided beneficial interest in any distributions from the
Fund and in the net assets of the Fund. All units are of the same class
with equal rights and privileges and are not subject to future calls or
assessments. Each unit entitles the holder to one vote at all meetings of
unitholders and a pro rata share of distributions declared by the Fund.
The Fund intends to make monthly cash distributions of its distributable
cash, as defined in the Fund's Declaration of Trust, subject to working
capital requirements and other reserves. The net proceeds from the
issuance of trust units and the number of units outstanding are as
follows:
March 31, December 31,
2009 2008
-------------------------------------------------------------------------
Balance, beginning of period $ 476,343 $ 474,585
Non-cash distribution - 1,758
-------------------------------------------------------------------------
Balance, end of period $ 476,343 $ 476,343
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Units outstanding, end of period 43,946,792 43,946,792
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The weighted average number of units outstanding during the three months
ended March 31, 2009 was 43,946,792 (Q1 2008 - 43,946,792).
14. 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 a low level of indebtedness
relative to cash flow in order to provide increased financial flexibility
and to provide increased protection for unitholders relative to their
expectation of distributions. Additionally, the Fund has historically
generated cash flow in excess of distributions and has used a portion of
such excess to pay down indebtedness. The Fund would consider increasing
its level of indebtedness relative to cash flow to assist in the
financing of an acquisition. As well, the Fund will review its level of
indebtedness in the context of the change in taxation impacting the Fund
commencing 2011.
The Fund's indebtedness is subject to a number of covenants and
restrictions including the requirement to meet certain financial ratios
and financial condition tests at a subsidiary level. One such ratio is
the "Total 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
three months ended March 31, 2009, this ratio was calculated at 1.25
(12-month trailing period ended March 31, 2008 - 1.11). Management also
uses this ratio as a key indicator in managing the Fund's capital.
With respect to its equity, the current level of capital is considered
adequate in the context of current operations and the present strategic
plan of the Fund. The equity component of capital increases primarily
based upon the income of the business less the distribution paid. Any
major acquisition would be financed in part with additional equity. The
Fund will also review its level of equity in the context of the change in
taxation impacting the Fund commencing in 2011.
15. COMMITMENTS
As of March 31, 2009, the Fund has annual lease obligations with respect
to real estate, vehicles and equipment as follows:
2009 $ 4,193
2010 4,040
2011 2,502
2012 1,353
2013 619
Thereafter 351
-------------------------------------------------------------------------
$ 13,058
-------------------------------------------------------------------------
-------------------------------------------------------------------------
16. SIGNIFICANT CUSTOMERS
For the three months ended March 31, 2009, the Fund earned 76% of its
consolidated revenue from its seven largest customers (Q1 2008 - 80%).
For the three months ended March 31, 2009, four of these customers
individually accounted for greater than 10%, but not more than 17% of the
Fund's total revenue (for the three months ended March 31, 2008, four of
these customers individually accounted for greater than 10%, but not more
than 17% of the Fund's total revenue).
17. SEGMENTED INFORMATION
The Fund operates its business in two segments, organized on the basis of
products, services and markets served. The Davis + Henderson Segment
includes the cheque supply program, deposit bags program and eSwitch®,
among other offerings. The Filogix Segment includes services related to
the credit lifecycle management, including origination and underwriting
of mortgages in Canada, and the personal property, search and
registration programs, among other offerings.
Segment assets include goodwill and intangible assets recognized with the
acquisition of businesses included with each respective Segment.
Corporate costs include expenditures related to public company
activities, a share of executive corporate management costs, corporate
development costs and certain other business-wide costs. Corporate assets
consist primarily of cash and cash equivalents.
Summarized financial information for the three months ended March 31,
2009 and 2008 are as follows:
Three months ended March 31,
-------------------------------------------------------------------------
Davis +
Henderson Segment Filogix Segment
--------------------- ---------------------
2009 2008 2009 2008
-------------------------------------------------------------------------
Revenue $ 72,827 $ 73,048 $ 15,702 $ 14,364
Cost of sales and
operating expenses 48,341 49,038 11,181 11,071
Amortization of capital assets 449 470 649 512
-------------------------------------------------------------------------
24,037 23,540 3,872 2,781
Interest expense - - - -
Net unrealized loss (gain)
on interest-rate swaps - - - -
Amortization of
intangible assets 1,425 2,331 4,360 3,449
-------------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes 22,612 21,209 (488) (668)
Future income tax
expense (recovery) - - - -
-------------------------------------------------------------------------
Income (loss) from continuing
operations 22,612 21,209 (488) (668)
Income (loss) from discontinued
operations - 98 - -
-------------------------------------------------------------------------
Net income (loss) $ 22,612 $ 21,307 $ (488) $ (668)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Asset expenditures $ 1,829 $ 2,465 $ 2,534 $ 69
Intangible assets $ 6,002 $ 13,374 $134,900 $117,441
Goodwill $359,385 $359,385 $ 99,652 $ 81,808
Total assets $460,189 $427,494 $190,741 $190,290
-------------------------------------------------------------------------
Corporate Consolidated
--------------------- ---------------------
2009 2008 2009 2008
-------------------------------------------------------------------------
Revenue $ - $ - $ 88,529 $ 87,412
Cost of sales and
operating expenses 879 592 60,401 60,701
Amortization of capital assets - - 1,098 982
-------------------------------------------------------------------------
(879) (592) 27,030 25,729
Interest expense 1,883 1,863 1,883 1,863
Net unrealized loss (gain)
on interest-rate swaps 191 2,344 191 2,344
Amortization of
intangible assets - - 5,785 5,780
-------------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes (2,953) (4,799) 19,171 15,742
Future income tax expense
(recovery) (64) - (64) -
-------------------------------------------------------------------------
Income (loss) from continuing
operations (2,889) (4,799) 19,235 15,742
Income (loss) from discontinued
operations - - - 98
-------------------------------------------------------------------------
Net income (loss) $ (2,889) $ (4,799) $ 19,235 $ 15,840
-------------------------------------------------------------------------
Asset Expenditures $ - $ - $ 4,363 $ 2,534
Intangible assets $ - $ - $140,902 $130,815
Goodwill $ - $ - $459,037 $441,193
Total assets $ 567 $ 4,034 $651,497 $621,818
-------------------------------------------------------------------------
For the three months ended March 31, 2009, the Davis + Henderson Segment
had six customers that individually accounted for greater than 10% but
not more than 18% of the Davis + Henderson Segment revenue and the
Filogix Segment had two customers that individually accounted for greater
than 10% but not more than 13% of the Filogix Segment revenue (for the
three months ended 2008 - Davis + Henderson Segment had six customers
that individually accounted for greater than 10% but not more than 20% of
the Davis + Henderson Segment revenue and the Filogix Segment had three
customers that individually accounted for greater than 10% but not more
than 19% of the Filogix Segment revenue).
18. DISCONTINUED OPERATIONS
Effective December 31, 2008, the Fund ceased servicing a U.S. cheque
supply contract. As a result, the U.S. operations were classified as
discontinued operations at December 31, 2008.
Revenue attributable to the discontinued operations during the three
months ended March 31, 2009 was nil (Q1 2008 - $1,676). Earnings per
share information relating to the discontinued operations is as follows:
Three months ended
-------------------------------------------------------------------------
March 31, 2009 March 31, 2008
-------------------------------------------------------------------------
Income from discontinued operations,
per unit, basic and diluted $ - $ 0.0022
Income from continuing operations,
per unit, basic and diluted 0.4377 0.3582
-------------------------------------------------------------------------
Net income per unit, basic and diluted $ 0.4377 $ 0.3604
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The results of the U.S. operations were reported as part of the Davis +
Henderson Segment in both current and prior periods.
19. 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 months months Three Three
months ended ended months months
(in thousands of ended December September ended ended
Canadian dollars, March 31, 31, 30, June 30, March 31,
unaudited) 2009 2008 2008 2008 2008
-------------------------------------------------------------------------
Revenue $ 88,529 $ 89,357 $ 95,055 $ 95,407 $ 87,412
Expenses 60,091 62,413 61,664 61,334 60,267
-------------------------------------------------------------------------
EBITDA 28,438 26,944 33,391 34,073 27,145
Amortization of
capital assets and
non-acquisition
intangibles 3,819 3,800 4,219 3,771 3,748
Interest expense 1,747 1,647 1,690 1,754 1,756
-------------------------------------------------------------------------
Adjusted income 22,872 21,497 27,482 28,548 21,641
Amortization of
mark-to-market
adjustment
of interest-rate
swaps 136 151 151 152 107
Net unrealized
loss (gain) on
interest-rate
swaps 191 3,653 728 (1,034) 2,344
Future income tax
expense (recovery) (64) 399 52 766 -
Amortization of
intangibles from
acquisition 3,374 3,409 3,412 3,447 3,448
-------------------------------------------------------------------------
Income from
continuing
operations 19,235 13,885 23,139 25,217 15,742
Income from
discontinued
operations - 51 167 149 98
-------------------------------------------------------------------------
Net income $ 19,235 $ 13,936 $ 23,306 $ 25,366 $ 15,840
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash flows from
operating
activities $ 13,015 $ 31,806 $ 35,110 $ 32,623 $ 16,523
Changes in
non-cash working
capital and
other items(1) 13,676 (6,380) (3,169) (82) 9,037
------------------------------------------------------
Adjusted cash
flows from
operating
activities 26,691 25,426 31,941 32,541 25,560
Less:
Asset
expenditures
and contract
payments(2) 4,363 4,915 3,027 2,962 2,534
-------------------------------------------------------------------------
Adjusted cash flows
after capital
asset expenditures
and contract
payments 22,328 20,511 28,914 29,579 23,026
Distributions paid
to unitholders 20,211 20,211 20,211 19,305 18,853
-------------------------------------------------------------------------
2,117 300 8,703 10,274 4,173
Cash flows provided
by (used in) other
financing
activities - 28,000 (5,000) (5,000) -
Cash flows used in
acquisition of
Cyence business 60 (37,876) - - -
Cash flows used in
other acquisitions - (1,000) - - (4,250)
Changes in non-cash
working capital and
other items(1) (13,676) 6,380 3,169 82 (9,037)
-------------------------------------------------------------------------
Increase (decrease)
in cash and cash
equivalents for
the period $ (11,499) $ (4,196) $ 6,872 $ 5,356 $ (9,114)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Summary of Cash Flows Per Unit
-------------------------------------------------------------------------
Three Three
Three months months Three Three
months ended ended months months
(in Canadian ended December September ended ended
dollars, March 31, 31, 30, June 30, March 31
unaudited) 2009 2008 2008 2008 2008
-------------------------------------------------------------------------
Adjusted income
per unit, basic
and diluted $ 0.5204 $ 0.4892 $ 0.6253 $ 0.6496 $ 0.4924
Net income per
unit, basic
and diluted $ 0.4377 $ 0.3172 $ 0.5303 $ 0.5772 $ 0.3604
Adjusted cash
flows from
operating
activities $ 0.6073 $ 0.5786 $ 0.7268 $ 0.7405 $ 0.5816
Adjusted cash
flows after
capital asset
expenditures and
contract
payments $ 0.5081 $ 0.4667 $ 0.6579 $ 0.6731 $ 0.5240
Distributions
paid to
unitholders $ 0.4999 $ 0.4599 $ 0.4599 $ 0.4393 $ 0.4290
Distributions
declared
during period $ 0.4599 $ 0.4999 $ 0.4599 $ 0.4496 $ 0.4290
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) 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. Changes to other
long-term liabilities are deducted to arrive at adjusted cash flows.
(2) Asset expenditures include expenditure on capital asset, contract
payments and non-acquisition intangibles.
(3) Certain comparative figures have been reclassified to conform to
the current period's presentation.
Condensed Consolidated Balance Sheet
-------------------------------------------------------------------------
(in thousands of December September
Canadian dollars, March 31, 31, 30, June 30, March 31,
unaudited) 2009 2008 2008 2008 2008
-------------------------------------------------------------------------
Cash and cash
equivalents $ 567 $ 12,066 $ 16,262 $ 9,390 $ 4,034
Other current
assets 27,137 23,468 25,604 26,847 25,382
Capital and other
assets 23,854 24,708 18,883 19,977 20,394
Goodwill and
intangible assets 599,939 603,664 564,463 568,096 572,008
-------------------------------------------------------------------------
$ 651,497 $ 663,906 $ 625,212 $ 624,310 $ 621,818
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Payables and
other current
liabilities $ 37,464 $ 49,101 $ 44,119 $ 42,427 $ 38,491
Other long-term
liabilities 17,804 17,805 6,038 5,143 7,417
Long-term
indebtedness 147,400 147,331 119,262 124,193 129,123
Unitholders'
equity 448,829 449,669 455,793 452,547 446,787
-------------------------------------------------------------------------
$ 651,497 $ 663,906 $ 625,212 $ 624,310 $ 621,818
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distribution History
-------------------------------------------------------------------------
Distributions per unit(1)
Month 2009 2008 2007 2006 2005
-------------------------------------------------------------------------
January $ 0.1533 $ 0.1430 $ 0.1280 $ 0.1220 $ 0.1200
February 0.1533 0.1430 0.1280 0.1220 0.1200
March 0.1533 0.1430 0.1320 0.1250 0.1200
April 0.1430 0.1320 0.1250 0.1200
May 0.1533 0.1320 0.1250 0.1200
June 0.1533 0.1320 0.1250 0.1200
July 0.1533 0.1320 0.1250 0.1200
August 0.1533 0.1320 0.1250 0.1220
September 0.1533 0.1320 0.1250 0.1220
October 0.1533 0.1320 0.1250 0.1220
November(2) 0.1533 0.3430 0.1280 0.1220
December(3) 0.1933 0.1430 0.1280 0.1220
-------------------------------------------------------------------------
$ 0.4599 $ 1.8384 $ 1.7980 $ 1.5000 $ 1.4500
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributions per unit(1)
Month 2004 2003 2002 2001
-------------------------------------------------------------------------
January $ 0.1150 $ 0.1117 $ 0.1083 $ -
February 0.1150 0.1117 0.1083 -
March 0.1168 0.1117 0.1083 -
April 0.1168 0.1133 0.1083 -
May 0.1168 0.1133 0.1083 -
June 0.1168 0.1133 0.1083 -
July 0.1168 0.1133 0.1117 -
August 0.1168 0.1133 0.1117 -
September 0.1168 0.1133 0.1117 -
October 0.1168 0.1150 0.1117 -
November(2) 0.1200 0.1150 0.1117 -
December(3) 0.1200 0.1150 0.1117 0.0427
-------------------------------------------------------------------------
$ 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
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
unit holders of record on December 31, 2008 and was paid December 31,
2008.
Tax Allocation of Distributions
-------------------------------------------------------------------------
2009 2008 2007 2006
-------------------------------------------------------------------------
Dividend income 0.0% 0.0% 0.0% 0.0%
Other income 100.0% 100.0% 100.0% 100.0%
Return of capital 0.0% 0.0% 0.0% 0.0%
-------------------------------------------------------------------------
100.0% 100.0% 100.0% 100.0%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2005 2004 2003 2002
-------------------------------------------------------------------------
Dividend income 0.0% 15.0% 19.5% 16.9%
Other income 91.6% 75.2% 69.5% 71.5%
Return of capital 8.4% 9.8% 11.0% 11.6%
-------------------------------------------------------------------------
100.0% 100.0% 100.0% 100.0%
-------------------------------------------------------------------------
The above tax allocation of distributions for 2009 represents an estimate
based on the total expected distributions for the year ended December 31,
2009.
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
-------------------------------------------------------------------------
2009 - 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 + Henderson
Davis + Henderson uses its market-leading capabilities to meet the
evolving needs of the financial services industry in Canada and abroad.
Founded in 1875, the company today provides innovative programs to customers
who offer chequing and credit card accounts, and a comprehensive array of
technology-based solutions to support our customers' credit lifecycle
management services. Davis + Henderson Income Fund is listed on the Toronto
Stock Exchange under the symbol DHF.UN. Further information can be found in
the disclosure documents filed by Davis + Henderson Income Fund with the
securities regulatory authorities, available at www.sedar.com.
%SEDAR: 00017092EF
For further information: Bob Cronin, Chief Executive Officer, Davis +
Henderson, Limited Partnership, (416) 696-7700, extension 5301,
bob.cronin@dhltd.com; Catherine Martin, Chief Financial Officer, Davis +
Henderson, Limited Partnership, (416) 696-7700, extension 5265,
catherine.martin@dhltd.com
