TSX Stock Symbol: "DHF.UN".
Website: www.dhltd.com
TORONTO, April 29 /CNW/ - For the first quarter of 2008, Davis +
Henderson today reported solid results that were consistent with management's
expectations.
<<
First Quarter Highlights
- Revenue in the first quarter of 2008 was $89.1 million, a decrease
of $2.1 million, or 2.3%, compared to the same quarter in 2007.
This lower level of revenue reflects reduced cheque order volumes,
consistent with expectations.
- Net income per unit compared to the same period last year
decreased $0.0542, or 13.1% per unit, to $0.3604 per unit.
Excluding the impact of non-cash unrealized gains and losses on
interest-rate swaps, net income was up 1.6% from the same quarter
in 2007.
- Declared distributions in the first quarter of 2008 of $0.4290
per unit were 10.6% higher than the first quarter of 2007.
>>
Davis + Henderson also announced its intent to increase its distributions
for the month of May 2008, payable on June 30, 2008, to $0.1533 per unit
(equivalent to $1.84 per unit annualized), subject to normal course regulatory
requirements. This represents a 7.2% increase over distributions declared for
the month of April 2008, which were equivalent to $1.72 per unit annualized.
This increase in distributions recognizes the recent performance of the
business, expectations of future performance and the need for the Fund to pay
distributions sufficient to ensure the Fund itself is not taxable.
Management Commentary
Overall, we are pleased with the results of the first quarter of 2008.
These results reflect the continued positive expansion of our programs, offset
by, as expected, lower cheque order volumes compared to the first quarter of
2007. Management believes the changes to cheque imaging standards in Canada
resulted in consumers accelerating reorders in the first half of 2007.
Management further believes that these orders would have otherwise have been
received in later periods, including the first quarter of 2008, and
accordingly, their absence resulted in higher order volume declines in the
current quarter than historically observed.
In the D+H Segment, solid results from product repositioning and
successful program initiatives, including our IDefence® and BizAssist®
programs partially offset volume declines resulting from shifting reorder
cycles. Within our Filogix Segment, increases in professional services
revenues offset reduced transaction-based revenues.
Davis + Henderson remains committed to its long-term financial objective
of delivering stable and modestly growing distributions based on achieving
growth in the 3% to 5% range. With the addition of Filogix, Davis + Henderson
has significantly strengthened its capabilities and the breadth of services it
offers to the Canadian financial services marketplace. From Davis +
Henderson's established platforms, management looks to increase value for
customers and unitholders by building on Davis + Henderson's programs.
For a more detailed discussion of first quarter results and management's
outlook, please see the Management's Discussion and Analysis below.
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, 2008 via conference call at 10:00 a.m. EST (Toronto
time) on Wednesday April 30, 2008. The number to use for this call is
416-644-3416 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 21267669
followed by the number sign. The rebroadcast will be available until Wednesday
May 14, 2008. 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 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
2008 should be read in conjunction with MD&A in Davis + Henderson Income
Fund's (the "Fund" or the "Business" or "Davis + Henderson") Annual Report for
the year ended December 31, 2007, dated February 26, 2008 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
Davis + Henderson'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, offer additional programs to serve
the chequing account, and deliver programs 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 account include
a deposit program, which is directed towards small business 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 on behalf of account holders at the time of new
account openings.
Davis + Henderson significantly advanced its third key strategy with the
acquisition of Filogix in June 2006. Among other services, Filogix provides
processing services related to the origination and underwriting of mortgages
in Canada. Davis + Henderson also acquired Advanced Validation Systems Limited
Partnership ("AVS"), which, under Davis + Henderson's brand
CollateralGuard™, provides lenders with, among other offerings, personal
property search and registration ("PPSA") programs across Canada. The addition
of these business interests has created another business platform for Davis +
Henderson.
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.
FINANCIAL INFORMATION PRESENTATION
The Fund operates in two business segments, the "Davis + Henderson
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, and the PPSA program, among other offerings. Corporate
expenses have also been segmented and include expenditures related to public
company activities, a share of executive corporate management costs and
certain other business-wide costs.
Effective January 1, 2008, the PPSA business is operated and reported as
part of the Filogix Segment. Prior to this date, this program was operated and
reported as part of the Davis + Henderson Segment. The comparative segmented
information for previous years has not been reclassified as the operational
integration of the business in previous periods does not make a separation of
these costs practical.
<<
OPERATING RESULTS FOR THE FIRST QUARTER - CONSOLIDATED
Consolidated Statement of Income
(in thousands of Canadian dollars, except per unit amounts, unaudited)
Three months ended March 31,
2008 2007
-------------------------------------------------------------------------
Revenue $ 89,088 $ 91,149
Cost of sales and operating expenses(1) 62,206 64,278
Amortization of capital and other assets(1) 3,387 3,341
-------------------------------------------------------------------------
23,495 23,530
Interest expense 1,863 2,230
Net unrealized loss (gain) on interest-rate swaps 2,344 (324)
Amortization of intangible assets 3,448 3,294
Minority interest - 109
-------------------------------------------------------------------------
Net income $ 15,840 $ 18,221
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net income per unit, basic and diluted $ 0.3604 $ 0.4146
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Historically, the Business has reported amortization related to
production assets used to manufacture finished products as part of
amortization of capital and other assets. Commencing January 1, 2008,
the Fund has included this amortization with cost of sales and
operating expenses in order to present the total costs incurred in
the manufacturing process in cost of sales. The comparative numbers
for previous periods have been reclassified to conform to this new
presentation format. For the quarter ended March 31, 2008, the Fund
has included amortization of $434 (Q1 2007 - $365) in cost of sales
and operating expenses.
>>
Revenue
Revenue for the first quarter of 2008 was $89.1 million, a decrease of
$2.1 million, or 2.3%, when compared to the first quarter of 2007. While
results for both segments are discussed in more detail in the sections that
follow, during the first quarter of 2008 expected declines in cheque order
volumes related to the shift in reorder cycles offset the positive
contribution from program enhancements and Filogix Segment revenue growth.
Cost of Sales and Operating Expenses
On a consolidated basis, cost of sales and operating expenses for the
first quarter of 2008 decreased by $2.1 million, or 3.2%, compared to the
first quarter of 2007. This decline was primarily driven by reduced costs
related to the decline in cheque order volumes in the D+H Segment, partially
offset by increased costs in the Filogix Segment, as more fully described
below.
While Davis + Henderson operates primarily in Canada, the Business also
services a U.S. subsidiary of one of its Canadian customers. All revenue and
substantially all expenses relating to the U.S. cheque supply program are
contracted for in U.S. dollars. As the net U.S. dollar contribution from this
activity is relatively modest, the change in relative dollar valuations has
not had a meaningful impact on the results of the Business.
Amortization of Capital and Other Assets
Amortization of capital and other assets on a consolidated level during
the first quarter of 2008 was substantially unchanged compared to the same
period in the prior year.
Other Expenses and Net Income
Interest expense decreased by $0.4 million for the first quarter of 2008
compared to the same quarter in the prior year, reflecting $15.0 million of
debt repayments made over the past twelve months.
An unrealized loss on interest-rate swaps of $2.3 million was recognized
for the first quarter of 2008 reflecting mark-to-market adjustments related to
generally lower interest rates at March 31, 2008 compared to December 31,
2007. For the same period in 2007, an unrealized gain of $0.3 million was
reported. These unrealized gains and losses were recognized in income as,
effective January 1, 2007, the Business no longer designated its interest-rate
swaps as hedges for accounting purposes.
Amortization of intangibles in the first quarter of 2008 increased by
$0.2 million to $3.4 million compared with the same quarter last year. This
increase was primarily related to the incremental intangible assets arising on
the acquisition of the remaining 25% interest in the AVS business discussed
below and the purchase of a customer service contract.
Effective January 2, 2008, the Fund increased its ownership in AVS to
100%. The acceleration of the ownership interest in AVS was initiated by the
Business so as to better serve customers on an integrated basis. Now a wholly
owned subsidiary, the Business no longer recognizes minority interest, as all
earnings accrue to the Business.
Income earned by the Business and distributed annually to unitholders is
not subject to taxation in the Business, 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. As the
new tax rules were enacted in June 2007, the Fund is required under Canadian
GAAP to recognize future income tax assets and liabilities, with a
corresponding impact on future income tax expense or recovery based on the
temporary differences expected to reverse after the date the tax is effective.
With respect to delivery of products and services under its U.S. cheque
supply contract, the Business does not have a permanent establishment in the
U.S. for the purposes of determining tax liability and therefore does not have
U.S. income tax liability.
Net income of $15.8 million for the first quarter of 2008 decreased by
$2.4 million compared to the first quarter of 2007. On a per unit basis, net
income of $0.3604 per unit decreased by $0.0542 per unit. Excluding the
non-cash impact of the mark-to-market losses on interest-rate swaps, net
income per unit increased 1.6%.
<<
Operating Results by Business Segment(1)
(in thousands of Canadian dollars, unaudited)
Three months ended March 31,
-------------------------------------------------------------------------
Davis + Henderson Segment Filogix Segment
--------------------------- ------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Revenue $ 74,724 $ 78,497 $ 14,364 $ 12,652
Percentage change -4.8% 13.5%
Cost of sales and
operating expenses(2) 50,543 54,851 11,071 8,748
Amortization of capital
and other assets(2) 2,150 2,012 1,237 1,329
-------------------------------------------------------------------------
22,031 21,634 2,056 2,575
Percentage change 1.8% -20.2%
Interest expense - - - -
Net unrealized loss (gain)
on interest-rate swaps - - - -
Amortization of
intangible assets 724 811 2,724 2,483
Minority interest - - - -
-------------------------------------------------------------------------
Net income (loss) $ 21,307 $ 20,823 $ (668) $ 92
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended March 31,
-------------------------------------------------------------------------
Corporate Consolidated
------------------------ ------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Revenue $ - $ - $ 89,088 $ 91,149
Percentage change - -2.3%
Cost of sales and
operating expenses(2) 592 679 62,206 64,278
Amortization of capital
and other assets(2) - - 3,387 3,341
-------------------------------------------------------------------------
(592) (679) 23,495 23,530
Percentage change -12.8% -0.1%
Interest expense 1,863 2,230 1,863 2,230
Net unrealized loss (gain)
on interest-rate swaps 2,344 (324) 2,344 (324)
Amortization of
intangible assets - - 3,448 3,294
Minority interest - 109 - 109
-------------------------------------------------------------------------
Net income (loss) $ (4,799) $ (2,694) $ 15,840 $ 18,221
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Effective January 1, 2008, the results of the PPSA program are
included in the Filogix Segment. Prior to this date, the results were
included in the Davis + Henderson Segment.
(2) Historically, the Business has reported amortization related to
production assets used to manufacture finished products as part of
amortization of capital and other assets. Commencing January 1, 2008,
the Fund has included this amortization with cost of sales and
operating expenses in order to present the total costs incurred in
the manufacturing process in cost of sales. The comparative numbers
for previous periods have been reclassified to conform to this new
presentation format. For the quarter ended March 31, 2008, the Fund
has included amortization of $434 (Q1 2007 - $365) in cost of sales
and operating expenses for the Davis + Henderson Segment.
>>
Operating Results - D+H Segment
Revenue
Revenue within the Davis + Henderson Segment decreased by $3.8 million,
or 4.8%, year-over-year. Of this decrease, $0.9 million relates to the
reclassification of the PPSA business to the Filogix Segment. The PPSA
programs, which were formerly operated and reported within the Davis +
Henderson Segment, are now operated and reported as part of the results of the
Filogix Segment. Excluding the impact of this reclassification, there was a
$2.8 million, or 3.6%, decrease in revenues in the first quarter of 2008,
compared to the same period in 2007. This decrease in revenue was primarily a
result of a decline in cheque order volume partially offset by successful
program initiatives, including products and service enhancements such as
IDefence and BizAssist. Management believes this decline was higher than usual
for two reasons. First, there were two fewer business days in the first
quarter of 2008 versus the same quarter in 2007, and second, the change in
reorder patterns that affected 2007, also impacted reorder volume in the first
quarter of 2008.
Historically, cheque order volumes have, on average, declined annually by
low single digit percentages as a result of declining cheque usage. In the
first quarter of 2008, this decline was in excess of historical declines due
to changes in the imaging standards required for cheques produced in Canada,
which generated incremental and accelerated reorders in the first half of
2007. Management believes that many of these accelerated reorders would
otherwise have been received in later periods pursuant to normal reorder
cycles. Management also believes that, for this reason, cheque order volumes
were lower in the first quarter of 2008 than would otherwise be expected given
historical declines and that declines may continue at this higher level into
the next quarter, before an expected return to reorder declines directionally
more in line with historical experience.
Cost of Sales and Operating Expenses
Expenses within the Davis + Henderson Segment decreased by $4.3 million,
or 7.9%. A large part of the year-over-year expense decrease was related to
the decrease in cheque volumes and other revenue-related reductions including,
the transfer of the PPSA business to the Filogix Segment, and an overall
reduction in project costs and other costs generally related to the PPSA
business.
Operating Results - Filogix Segment
Revenue
Total revenue for the first quarter of 2008 for the Filogix Segment
increased 13.5% over the same period in 2007. Excluding the PPSA program,
revenue increased $0.8 million, or 6.2% compared with the same quarter in
2007. Increased revenue from project implementation and customization services
offset lower origination services revenue. Consistent with reduced activities
in the real estate and mortgage markets, origination services revenue was down
4.4% compared to the same quarter last year.
Cost of Sales and Operating Expenses
Consistent with expense levels in the fourth quarter of 2007 and with
management's expectations, direct and operating expenses for the Filogix
Segment increased by $2.3 million or 26.6%. The year-over-year increase in
operating costs during the first quarter of 2008 compared to the first quarter
of 2007 includes the expenses related to PPSA services now recorded within the
Filogix Segment and a planned increase in expenditures in support of product
enhancements and strengthening the general delivery capabilities of the
Business. These expenditures are expected to continue through 2008. The higher
expense levels combined with the lower revenues in the first quarter,
traditionally the weakest quarter of the year, reduced the segment's overall
margins for the quarter.
<<
EIGHT QUARTER CONSOLIDATED STATEMENT OF INCOME - SUMMARY
(in thousands, except per unit amounts, unaudited)
2008 2007
Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Revenue $ 89,088 $ 90,934 $ 94,676 $ 101,992 $ 91,149
Net income $ 15,840 $ 16,622 $ 20,876 $ 26,520 $ 18,221
-------------------------------------------------------------------------
Net income
per unit $ 0.3604 $ 0.3782 $ 0.4750 $ 0.6035 $ 0.4146
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted
average units
outstanding 43,947 43,947 43,947 43,947 43,947
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2006
Q4 Q3 Q2
-------------------------------------------------
Revenue $ 87,932 $ 87,966 $ 75,900
Net income $ 16,467 $ 15,785 $ 17,717
-------------------------------------------------
Net income
per unit $ 0.3747 $ 0.3592 $ 0.4477
-------------------------------------------------
-------------------------------------------------
Weighted
average units
outstanding 43,947 43,947 39,576
-------------------------------------------------
-------------------------------------------------
>>
The Fund has generally reported quarterly revenues that are stable and
growing. The significant increase in revenue from the second to third quarter
of 2006 is primarily a result of the inclusion of the Filogix Segment revenue
beginning in mid-June 2006. For the first three quarters of 2007, reported
revenues benefited from higher than expected order volume and mortgage
origination fees as described previously. The impact of the higher than
expected order volume was most pronounced in the second quarter of 2007 before
beginning a gradual return toward historical averages.
Net income and net income per unit has generally been trending
consistently with changing revenue with one exception. Commencing in the third
quarter of 2006 and continuing thereafter, as a result of the acquisition of
Filogix, the Business incurred increased amortization of intangible assets
expense and both net income and net income per unit were impacted accordingly.
Management believes that the consolidated Davis + Henderson results will
be subject to seasonality with the inclusion of revenue from the Filogix
Segment. Historically, Filogix has recorded stronger results in the second and
third quarters. Additionally, the accelerated and incremental orders received
within the Davis + Henderson Segment related to the changes in imaging
standards, as previously described, may cause increased variability in revenue
and cash flows.
CASH FLOW AND LIQUIDITY
Non-GAAP Measures
The following table is derived from, and should be read in conjunction
with, the consolidated statement of cash flows. Management believes this
supplementary disclosure provides useful additional information related to the
cash flows of the Fund, repayment of debt and other investing activities.
Certain subtotals presented within the tables below, such as "Adjusted cash
flows from operating activities", "Adjusted cash flows after capital assets
and contract payments", and "Adjusted net income" are not defined terms under
Canadian generally accepted accounting principles ("GAAP"). Management uses
these subtotals as measures of internal performance and as a supplement to the
consolidated statement of cash flows. 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
statement of cash flows. Further, the Fund's method of calculating each
balance may not be comparable to calculations used by other income trusts
bearing the same description.
<<
Summary of Cash Flows
(in thousands of Canadian dollars, unaudited)
Three months ended March 31,
2008 2007
-------------------------------------------------------------------------
Cash flows from operating activities $ 16,523 $ 21,674
Add:
Changes in non-cash working capital other
items(1) 9,037 3,399
-------------------------------------------------------------------------
Adjusted cash flows from operating activities 25,560 25,073
Less:
Maintenance capital expenditures - D+H(2) 948 578
Maintenance capital expenditures - Filogix(2) 69 1,311
Growth capital expenditures(2) - 183
Contract payments(3) 1,517 1,517
-------------------------------------------------------------------------
Adjusted cash flows after capital expenditures
and contract payments(2) 23,026 21,484
Distributions paid to unitholders (18,853) (16,875)
-------------------------------------------------------------------------
4,173 4,609
Cash flows provided by (used in) other financing
activities - -
Cash flows used in acquisition of businesses and
customer service contracts (4,250) 91
Changes in non-cash working capital and
other items(1) (9,037) (3,399)
-------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents for the period $ (9,114) $ 1,301
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note 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. Minority interest and changes to
other long-term liabilities are deducted to arrive at adjusted cash
flows. For details, see the Changes in Non-Cash Working Capital and Other
Items section.
Note 2: Maintenance capital expenditures are defined by the Fund as
capital expenditures necessary to maintain and sustain the current
productive capacity of the Business or generally improve the efficiency
of the Business. Growth capital expenditures are defined by the Fund as
capital expenditures that increase the productive capacity of the
Business with a reasonable expectation of an increase in cash flow.
Note 3: The Business has various payment obligations under customer
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 and the financial institutions of the many activities
related to ordering, data handling, customer service and other activities
undertaken by financial institutions related to the operation of the
cheque supply and other programs.
Summary of Cash Flows per Unit
(in Canadian dollars, unaudited)
Three months ended March 31,
2008 2007 % change
-------------------------------------------------------------------------
Adjusted cash flows from operating
activities $ 0.5816 $ 0.5705 1.9%
Adjusted cash flows after capital
expenditures and contract payments $ 0.5240 $ 0.4889 7.2%
Distributions paid to unitholders $ 0.4290 $ 0.3840 11.7%
Distributions declared during
period $ 0.4290 $ 0.3880 10.6%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
Cash Flows, Net Income and Distributions Paid
The following table compares cash flows from operating activities and net
income to distributions paid for the three months ended March 31, 2008 and for
the years ended December 31, 2007 and 2006.
<<
Three months
ended
(in thousands of Canadian March 31, Year ended December 31,
dollars, unaudited) 2008 2007 2006
-------------------------------------------------------------------------
Cash flows from operating
activities $ 16,523 $ 117,401 $ 89,753
Net income $ 15,840 $ 82,239 $ 66,529
Adjusted net income(1) $ 21,739 $ 97,066 $ 74,765
Distributions paid during period $ 18,853 $ 78,357 $ 61,191
Excess (shortfall) of cash flows
from operating activities over
cash distributions paid $ (2,330) $ 39,044 $ 28,562
Excess (shortfall) of net income
over cash distributions paid $ (3,013) $ 3,882 $ 5,338
Excess (shortfall) of adjusted net
income over cash distributions
paid $ 2,886 $ 18,709 $ 13,574
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note 1: Adjusted net income is a non-GAAP term and is defined as net
income (Q1 2008 - $15,840) adjusted to remove amortization of intangible
assets (Q1 2008 - $3,448), unrealized losses on interest-rate swaps
(Q1 2008 - $2,344), and amortization of net losses in fair market value
of interest-rate swaps (Q1 2008 - $107) that were deferred prior to
January 1, 2007 and which are included in interest expense. In each case,
these adjustments are non-cash items.
>>
Excess cash flows from operating activities over cash distributions paid
have historically been used to fund capital expenditures, reduce debt and to
fund acquisitions. In the first quarter of 2008, cash flow from operating
activities was less than cash distributions paid as $9.0 million of cash was
applied to fund working capital. The application of this cash largely reflects
the reversing of approximately $7.0 million of incremental cash flow from
changes in working capital balances generated in the fourth quarter of 2007.
Net income was less than cash distributions paid in the first quarter of
2008 as a result of deducting non-cash costs such as amortization of
intangibles and mark-to-market adjustment for interest-rate swaps. In order to
remove the impact of these items we have additionally reported adjusted net
income.
Expenditures on Capital Assets and Contract Payments
Total capital asset expenditures for the first quarter of 2008 were
$1.0 million a decrease of $1.1 million, compared to the first quarter of
2007. This decrease, attributed to the Filogix Segment, reflects the timing of
capital project expenditures, and does not reflect a change in the overall
capital expenditures program for the year.
The level of investment in 2008 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 $13.0 million to
$15.0 million similar to the level of expenditures made in fiscal 2007. The
Business' capital program provides for continued expenditures to be funded by
cash flows from operations.
Distributions
The Fund paid distributions of $18.9 million ($0.4290 per unit) during
the first quarter of 2008 compared to $16.9 million ($0.3840 per unit) in the
same period in 2007. On a per unit basis for the three months ended March 31,
2008, distributions paid increased by 11.7% when compared to the same period
in 2007.
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. On a declared basis, the year-over-year increase in
distributions per unit was 10.6%.
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 Fund announced its intent to increase its regular monthly
distribution for May 2008, payable on June 30, 2008, to $0.1533 per unit
(equivalent to $1.84 per unit annualized), subject to normal course regulatory
requirements. This represents a 7.2% increase over distributions declared for
the month of April 2008, which were equivalent to $1.72 per unit annualized.
This increase in distributions recognizes the recent performance of the
business, expectations of future performance and the need for the Fund to pay
distributions sufficient to ensure the Fund itself is not taxable.
If the Business continues to generate growing cash flow and net income,
and in combination with expected diminishing deductions for tax purposes, the
Fund may pay out a higher proportion of the cash flows it generates to
unitholders in order not to pay taxes in the trust.
The estimated tax allocation of distributions expected to be declared for
2008 is 100% "other income", as was the case for all of 2007.
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, 2008 and the date of this report, 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,
2008 2007
-------------------------------------------------------------------------
Minority interest $ - $ 109
Change in non-cash working capital items (9,092) (3,526)
Changes in other operating assets and
liabilities 55 18
-------------------------------------------------------------------------
Changes in non-cash working capital
and other items $ (9,037) $ (3,399)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
The increase in non-cash working capital items for the first quarter was
primarily related to decreases in trade payables reflecting normal course
timing differences of when payments are made, including payments made for
capital asset purchases in the later portion of 2007. In particular, in the
fourth quarter of 2007, the Business had $7.0 million of incremental cash flow
generated from changes in working capital balances. These timing differences
largely reversed in the first quarter of 2008.
Cash Balances and Long-term Indebtedness
At March 31, 2008, cash and cash equivalents totalled $4.0 million,
compared to $13.1 million at December 31, 2007.
The balance of long-term indebtedness as at March 31, 2008 and
December 31, 2007 was $130.0 million. During the previous 12 months, the
Business made voluntary debt payments totalling $15.0 million. The long-term
indebtedness is recorded on the Balance Sheet net of $0.9 million of
unamortized deferred financing fees.
Management expects to continue to use a portion of any future excess cash
flow to pay down debt and fund acquisitions.
Total debt facilities available at March 31, 2008 and December 31, 2007
were $170.0 million, comprised of a $120.0 million non-revolving term loan and
a $50.0 million revolving term credit facility. As of March 31, 2008, the
Business had drawn $120.0 million under its non-revolving term loan and
$10.0 million under the revolving term credit facility. The Business is
permitted to draw on the revolving facility's available balance of
$40.0 million to fund capital expenditures or for other general corporate
purposes. The credit facilities mature on June 15, 2011.
The Credit Agreement for the Business 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, Limited
Partnership to the Fund during each rolling, four-quarter period.
Davis + Henderson was in compliance with all of its financial covenants and
financial condition tests as of the end of its latest quarterly period. A copy
of the Credit Agreement is available on SEDAR at www.sedar.com.
As of March 31, 2008, the Fund had interest-rate swap hedge contracts in
place with certain of its lenders, such that the borrowing rates on 92.3% 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
-------------------------------------------------------------------------
Interest
Maturity Date Notional Amount Asset Liability Rate(1)
-------------------------------------------------------------------------
June 30, 2008 $ 12,000 $ - $ 16 5.035%
January 4, 2009 10,000 - 14 4.505%
July 15, 2009 20,000 - 455 5.688%
July 15, 2010 33,000 - 1,161 5.690%
June 15, 2011 20,000 - 981 5.560%
June 15, 2011 25,000 - 785 5.560%
-------------------------------------------------------------------------
$ 120,000 $ - $ 3,412
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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.
>>
At March 31, 2008, the Fund would have had to pay the fair value of
$3.4 million if it were to close out all of its swap contracts. It is not the
present intention of the Fund to close out these contracts. The Fund expects
to continue to enter into interest-rate swaps for the purpose of hedging its
exposure to 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 banker's 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 5.40% as at March 31, 2008.
The Fund intends to make monthly cash distributions of its adjusted cash
flows after capital asset and contract expenditures, as defined in the Fund's
Declaration of Trust, subject to working capital requirements, debt repayments
and other reserves.
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, capital expenditures, contractual
obligations and anticipated distributions.
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,
2008, the Fund adopted the following CICA Handbook sections: Section 3031,
Inventories and Going Concern - Amendments to Section 1400, General Standards
of Financial Statement Presentation.
Section 3031, which replaces Section 3030 with the same title,
establishes that inventories should be measured at the lower of cost and net
realizable value, with guidance on the determination of cost. The impact of
adoption of this new standard on the January 1, 2008 Fund's consolidated
financial statements was a nominal amount and therefore was charged to the
income statement.
Section 1400, General Standards of Financial Statement Presentation, was
amended to require management, when preparing financial statements, to make an
assessment of an entity's ability to continue as a going concern. Any material
uncertainties related to events or conditions that may cast doubt upon the
entity's ability to continue as a going concern must be disclosed. Management
does not believe that there are any material uncertainties related to events
or conditions that may cast significant doubt upon the Fund's ability to
continue as a going concern.
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, 2008 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 distributions through growing revenue in the 3% to 5% range
and maintaining margins. In 2007, revenue grew in excess of the targeted
range. In 2008, revenue growth may fall below the targeted range, as increased
reorder activity levels experienced early in 2007 may, particularly in the
first half of 2008, contribute to higher than historically observed average
volume declines as consumers delay orders due to recent cheque supply
replenishments. Additionally, increased activity in 2007 within the real
estate and mortgage markets may not be sustained in 2008 due to the cyclical
nature of those markets. The combined impact of these factors may result in
revenue growth in 2008 being below the targeted long-term range of 3% to 5%.
In addition, while the Fund's long-term objective is to modestly grow
distributions supported by growing revenue, distribution levels can be
influenced by the level of taxable income generated in the Fund as the Fund is
subject to income taxes on taxable income that is not distributed to its
unitholders. Deductions for tax purposes that were previously available to the
Fund have been diminishing and, as a result, the Fund may pay out a greater
proportion of its cash flows to unitholders than in previous periods.
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 its
volumes related to mortgage origination and underwriting services.
The Business' current U.S. cheque supply contract will expire at the end
of 2008 and it is not expected to be renewed. Contributions from this business
are relatively modest and its expiration will not have a significant impact on
overall operations and, more specifically, cash flows.
The Business' capital program provides for continued expenditures to be
funded by cash flows from operations. Consistent with 2007, the 2008 capital
program is expected to be in the range of $13.0 million to $15.0 million.
Recent 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 institutions and
dependence on their acceptance of new programs; strategic initiatives being
undertaken to meet the Fund's financial objective, 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,
2008 2007
-------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,034 $ 13,148
Accounts receivable 17,461 17,860
Inventory (note 2) 4,736 5,316
Prepaid expenses 3,185 2,973
-------------------------------------------------------------------------
29,416 39,297
Capital assets (note 3) 30,316 32,199
Other assets (note 4) 4,913 5,964
Interest-rate swaps (note 9) - 105
Intangible assets (note 5) 115,980 118,085
Goodwill (note 6) 441,193 438,502
-------------------------------------------------------------------------
$ 621,818 $ 634,152
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND UNITHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 29,995 $ 39,870
Distributions payable to unitholders 6,284 6,284
Current portion of disbursement obligations
on customer contracts (note 7) 2,212 2,962
-------------------------------------------------------------------------
38,491 49,116
Disbursement obligations on customer
contracts (note 7) - 767
Long-term indebtedness (note 8) 129,123 129,054
Interest-rate swaps (note 9) 3,412 1,173
Other long-term liabilities (note 10) 2,414 2,558
Future income tax liability (note 11) 1,591 1,591
Minority interest - 200
-------------------------------------------------------------------------
175,031 184,459
Unitholders' equity:
Trust units (note 12) 474,585 474,585
Deficit (26,384) (23,371)
Accumulated other comprehensive income (loss) (1,414) (1,521)
-------------------------------------------------------------------------
446,787 449,693
Commitments (note 13)
-------------------------------------------------------------------------
$ 621,818 $ 634,152
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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,
2008 2007
-------------------------------------------------------------------------
Revenue $ 89,088 $ 91,149
Cost of sales and operating expenses (note 2) 62,206 64,278
Amortization of capital and other assets 3,387 3,341
-------------------------------------------------------------------------
23,495 23,530
Interest expense 1,863 2,230
Net unrealized loss (gain) on interest-rate swaps 2,344 (324)
Amortization of intangible assets 3,448 3,294
Minority interest - 109
-------------------------------------------------------------------------
Net income $ 15,840 $ 18,221
-------------------------------------------------------------------------
Net income per unit, basic and diluted $ 0.3604 $ 0.4146
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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,
2008 2007
-------------------------------------------------------------------------
Net income $ 15,840 $ 18,221
Other comprehensive income:
Amortization of mark-to-market adjustment of
interest-rate swaps 107 176
-------------------------------------------------------------------------
Total comprehensive income $ 15,947 $ 18,397
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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,
2008 2007
-------------------------------------------------------------------------
DEFICIT
Deficit, beginning of period $ (23,371) $ (26,710)
Mark-to-market adjustment of interest-rate
swaps - 116
Net income 15,840 18,221
Distributions (18,853) (17,051)
-------------------------------------------------------------------------
Deficit, end of period (26,384) (25,424)
-------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss),
beginning of period (1,521) -
Mark-to-market adjustment of interest-rate swaps - (2,199)
Other comprehensive income:
Amortization of mark-to-market adjustment of
interest-rate swaps 107 176
-------------------------------------------------------------------------
Accumulated other comprehensive income (loss),
end of period(1) (1,414) (2,023)
-------------------------------------------------------------------------
Deficit and accumulated other comprehensive
income (loss), end of period $ (27,798) $ (27,447)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated
financial statements.
(1) Accumulated other comprehensive income (loss) consists of cumulative
net gains and losses that were deferred prior to January 1, 2007 when
hedge accounting was used by the fund.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of Canadian dollars, unaudited)
-------------------------------------------------------------------------
Three months ended
March 31, March 31,
2008 2007
-------------------------------------------------------------------------
Cash and cash equivalents provided by (used in):
OPERATING ACTIVITIES
Net income $ 15,840 $ 18,221
Add:
Amortization of capital assets 2,466 2,673
Amortization of capital assets included
in cost of sales 434 365
Amortization of other assets 921 668
Amortization of intangible assets 3,448 3,294
Amortization of mark-to-market adjustment
of interest-rate swaps 107 176
Net unrealized loss (gain) on interest-rate swaps 2,344 (324)
Minority interest - 109
-------------------------------------------------------------------------
25,560 25,182
Increase in non-cash working capital items (9,092) (3,526)
Changes in other operating assets and liabilities 55 18
-------------------------------------------------------------------------
16,523 21,674
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Distributions paid to unitholders (18,853) (16,875)
-------------------------------------------------------------------------
(18,853) (16,875)
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Expenditures on capital assets (1,017) (2,072)
Payments pursuant to long-term supply contracts (1,517) (1,517)
Acquisition of businesses (note 1) (4,250) 91
-------------------------------------------------------------------------
(6,784) (3,498)
-------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents for the period (9,114) 1,301
Cash and cash equivalents, beginning of period 13,148 5,788
-------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 4,034 $ 7,089
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplementary information:
Cash interest paid $ 1,568 $ 2,072
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated
financial statements.
Davis + Henderson Income Fund
Notes to Consolidated Financial Statements
Three months ended March 31, 2008 and 2007
(in thousands of Canadian dollars, except unit and per unit amounts,
unaudited)
1. ACQUISITIONS
a. Filogix Business
On June 15, 2006, the Fund completed an agreement to indirectly acquire
all the outstanding partnership units of Filogix L.P. through the
acquisition of Filogix Holdings Inc. Filogix L.P. provides, among other
offerings, processing services related to the origination and
underwriting of mortgages in Canada.
This acquisition was made for a consideration of $214.2 million of which
$128.1 million was allocated to intangible assets, $71.9 million to
goodwill, and the remaining balance to net assets. Intangible assets
consist of proprietary software, brand names and customer relationships.
The purchase price and related transaction costs were financed with net
proceeds of $109.2 million from the issuance of Trust units and
$98.5 million from the drawdown of debt, net of financing fees, with the
balance from cash on hand.
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 75% of 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 working capital.
The acquisition was made with available cash on hand.
2. INVENTORY
March 31, December 31,
2008 2007
-------------------------------------------------------------------------
Raw materials $ 1,936 $ 2,202
Work-in-process 1,838 2,152
Finished goods 962 962
-------------------------------------------------------------------------
$ 4,736 $ 5,316
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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, 2008 was $12,488 (Q1 2007 - $13,894).
3. CAPITAL ASSETS
March 31, 2008
-------------------------------------------------------------------------
Accumulated
Cost amortization Net
-------------------------------------------------------------------------
Machinery and equipment $ 15,117 $ 7,844 $ 7,273
Computer equipment and software 42,112 21,491 20,621
Furniture, fixtures and leasehold
improvements 8,462 6,040 2,422
-------------------------------------------------------------------------
$ 65,691 $ 35,375 $ 30,316
-------------------------------------------------------------------------
-------------------------------------------------------------------------
December 31, 2007
-------------------------------------------------------------------------
Accumulated
Cost amortization Net
-------------------------------------------------------------------------
Machinery and equipment $ 15,191 $ 7,679 $ 7,512
Computer equipment and software 47,044 24,887 22,157
Furniture, fixtures and leasehold
improvements 8,324 5,794 2,530
-------------------------------------------------------------------------
$ 70,559 $ 38,360 $ 32,199
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Amortization during the three months ended March 31, 2008 was $2,900 (Q1
2007 - $3,038), of which $434 (Q1 2007 - $365) is included in cost of
sales. Fully amortized capital assets removed from the accounts during
the three months ended March 31, 2008 were $5,885 (Q1 2007 - nil).
4. OTHER ASSETS
March 31, December 31,
2008 2007
-------------------------------------------------------------------------
Cost:
Long-term supply contracts $ 8,863 $ 12,581
Other 370 370
-------------------------------------------------------------------------
9,233 12,951
Accumulated amortization (4,320) (6,987)
-------------------------------------------------------------------------
$ 4,913 $ 5,964
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Amortization during the three months ended March 31, 2008 on long-term
supply contracts was $921 (Q1 2007 - $668). Fully amortized assets
removed from the accounts during the three months ended March 31, 2008
were $3,588 (Q1 2007 - nil).
5. INTANGIBLE ASSETS
March 31, December 31,
2008 2007
-------------------------------------------------------------------------
Cost:
Cheque supply outsourcing contracts $ 16,329 $ 16,329
Customer service contracts 5,849 4,506
Proprietary software 41,993 41,993
Brand names 8,400 8,400
Customer relationships 77,887 77,887
-------------------------------------------------------------------------
150,458 149,115
Accumulated amortization (34,478) (31,030)
-------------------------------------------------------------------------
$ 115,980 $ 118,085
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Amortization during the three months ended March 31, 2008 was $3,448 (Q1
2007 - $3,294).
6. GOODWILL
March 31, December 31,
2008 2007
-------------------------------------------------------------------------
Balance, beginning of period $ 438,502 $ 438,546
Goodwill acquired during the period:
AVS acquisition 2,691 (44)
-------------------------------------------------------------------------
Balance, end of period $ 441,193 $ 438,502
-------------------------------------------------------------------------
-------------------------------------------------------------------------
7. DISBURSEMENT OBLIGATIONS ON CUSTOMER CONTRACTS
March 31, December 31,
2008 2007
-------------------------------------------------------------------------
Current portion $ 2,212 $ 2,962
Long-term portion - 767
-------------------------------------------------------------------------
Total disbursement obligations on customer
contracts $ 2,212 $ 3,729
-------------------------------------------------------------------------
The Fund has fixed customer contract
disbursement obligations payable as of
March 31, 2008 as follows:
2008 $ 1,445
2009 767
-------------------------------------------------------------------------
$ 2,212
-------------------------------------------------------------------------
-------------------------------------------------------------------------
8. LONG-TERM INDEBTEDNESS
March 31, December 31,
2008 2007
-------------------------------------------------------------------------
Non-revolving term loan $ 120,000 $ 120,000
Revolving credit facility 10,000 10,000
-------------------------------------------------------------------------
130,000 130,000
Deferred finance costs (877) (946)
-------------------------------------------------------------------------
$ 129,123 $ 129,054
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Fund has $170.0 million of available term credit facilities due
June 15, 2011 (December 31, 2007 - $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, 2008, 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, 2008 was $69 (Q1 2007 - $69).
Amortization of deferred finance costs is recognized as interest expense
using the effective interest method.
9. 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, 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, 2008. As the sensitivity is hypothetical, it
should be used with caution.
+ 100 bps - 100 bps
-------------------------------------------------------------------------
Increase (decrease) in interest expense $ 25 $ (25)
Change to net unrealized (gain) loss on
interest-rate swaps (2,500) 2,500
-------------------------------------------------------------------------
Increase (decrease) in net income $ 2,475 $ (2,475)
-------------------------------------------------------------------------
Increase (decrease) in total
comprehensive income $ 2,475 $ (2,475)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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,
2008, the Fund has entered into interest-rate swap contracts with its
lenders, such that the borrowing rates on $120.0 million, or 92.3%, 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
-------------------------------------------------------------------------
Notional Interest
Maturity date Amount Asset Liability rate(1)
-------------------------------------------------------------------------
June 30, 2008 $ 12,000 $ - $ 16 5.035%
January 4, 2009 10,000 - 14 4.505%
July 15, 2009 20,000 - 455 5.688%
July 15, 2010 33,000 - 1,161 5.690%
June 15, 2011 20,000 - 981 5.560%
June 15, 2011 25,000 - 785 5.560%
-------------------------------------------------------------------------
$ 120,000 $ - $ 3,412
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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.
10. OTHER LONG-TERM LIABILITIES
March 31, December 31,
2008 2007
-------------------------------------------------------------------------
Deferred compensation program $ 1,928 $ 1,997
Employee future benefits 486 561
-------------------------------------------------------------------------
$ 2,414 $ 2,558
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The deferred compensation program, which commenced in 2003, is a five-
year long-term incentive plan for management, subject to certain
performance criteria and vesting terms, payable after December 31, 2008.
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, 2008 was $0.6 million (Q1 2007 - $0.5 million).
11. INCOME TAXES
The Fund is a mutual fund trust for income tax purposes. As such, the
Fund is subject to current income taxes on any amount not allocated to
unitholders. As all current taxable income will be allocated to the
unitholders, no provision for current income taxes has been made in these
consolidated financial statements. Current income tax liabilities
relating to distributions of the Fund are taxed in the hands of the
unitholders.
On June 22, 2007, legislation (the "SIFT Rules") relating to the federal
income taxation of publicly listed or traded trusts (such as income
trusts and real estate investment trusts) and partnerships received royal
assent. The SIFT Rules apply to a publicly traded trust that is a
specified investment flow-through entity (a "SIFT") which existed before
November 1, 2006 ("Existing Trust"), commencing with taxation years
ending in 2011, assuming transitional rules apply.
Certain distributions of a SIFT will not be deductible in computing the
SIFT's taxable income, and the SIFT will be subject to tax on its income
distributed at a rate that is substantially equivalent to the general tax
rate applicable to Canadian corporations. Distributions paid by a SIFT as
returns of capital will not be subject to this tax. There will be
circumstances where an Existing Trust may lose its transitional relief
where its equity capital grows beyond certain dollar limits measured by
reference to the Existing Trust's market capitalization at the close of
trading on October 31, 2006.
The Fund is a SIFT as defined in the legislation, and under the existing
SIFT Rules certain flow-through subsidiaries of the Fund themselves may
also be within the definition of a SIFT. Even if it is determined that
these flow-through subsidiaries of the Fund meet the definition of a
SIFT, there would be no impact on the future tax assets and liabilities
of the Fund. On December 20, 2007, the Minister of Finance announced his
intention to introduce technical amendments to the SIFT Rules under which
certain flow-through subsidiaries of a SIFT, which would include those of
the Fund, will not themselves be SIFTs.
Commencing January 1, 2011, the Fund will be subject to tax on its income
distributed. The Fund is also required to recognize future income tax
assets and liabilities with respect to the temporary differences between
the carrying amount and tax bases of its assets and liabilities and those
of its flow-through subsidiaries that are expected to reverse in or after
2011. 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 the temporary differences expected to reverse prior to 2011.
Significant components of the Fund's future tax liabilities and assets
with respect to the consolidated carrying values related to its
investments in certain partnership and trust subsidiaries that are
expected to reverse after 2010 are as follows:
March 31, December 31,
2008 2007
-------------------------------------------------------------------------
Future income tax assets:
Intangible assets less than tax values $ 11,043 $ 10,854
Loss carryforwards 1,636 1,636
Valuation allowance (12,679) (12,490)
-------------------------------------------------------------------------
Total future tax assets - -
-------------------------------------------------------------------------
Future income tax liabilities:
Capital assets greater than tax values 1,591 1,591
-------------------------------------------------------------------------
Total future tax liabilities 1,591 1,591
-------------------------------------------------------------------------
Net future income tax liabilities $ 1,591 $ 1,591
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Fund does not expect the temporary difference between the carrying
amount and tax base of intangible assets to reverse in the foreseeable
future and accordingly has reduced the future income tax asset by a
valuation allowance for the full amount. A corporate subsidiary of the
Fund has losses available for carry forward. The Fund does not expect to
realize the benefit of these losses in the foreseeable future and
accordingly has reduced the future income tax asset by a valuation
allowance for the full amount.
No future tax liability has been provided for the temporary difference
related to goodwill since this amount is not deductible for tax and is
therefore specifically exempt from the recognition requirements.
12. TRUST UNITS
An unlimited number of trust units may be issued by the Fund pursuant to
the Fund's Declaration of Trust. Each unit is transferable and represents
an equal, undivided beneficial interest in any distributions from the
Fund and in the net assets of the Fund. All units are of the same class
with equal rights and privileges and are not subject to future calls or
assessments. Each unit entitles the holder to one vote at all meetings of
unitholders and a pro rata share of distributions declared by the Fund.
The Fund intends to make monthly cash distributions of its distributable
cash, as defined in the Fund's Declaration of Trust, subject to working
capital requirements and other reserves. The net proceeds from the
issuance of trust units and the number of units outstanding are as
follows:
March 31, December 31,
2008 2007
-------------------------------------------------------------------------
Balance, beginning of period $ 474,585 $ 474,585
Units issued - -
-------------------------------------------------------------------------
Balance, end of period $ 474,585 $ 474,585
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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, 2008 was 43,946,792 (Q1 2007 - 43,946,792).
13. COMMITMENTS
As of March 31, 2008, the Fund has annual lease obligations with respect
to real estate, vehicles and equipment as follows:
2008 $ 3,744
2009 3,183
2010 3,040
2011 1,523
2012 796
Thereafter 305
-------------------------------------------------------------------------
$ 12,591
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 (as compared to many corporate entities) 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, 2008, this ratio was calculated at 1.11 (Q1
2007 - 1.40). 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. SIGNIFICANT CUSTOMERS
For the three months ended March 31, 2008, the Fund earned 80% (Q1 2007 -
78%) of its consolidated revenue from its seven largest customers. 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 (for the three months ended March 31, 2007, five of
these customers individually accounted for greater than 10%, but not more
than 17% of the Fund's total revenue).
16. 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 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 costs incurred by the Fund for the operation of a
public entity. Corporate assets consist primarily of cash and cash
equivalents.
Prior to January 1, 2008, the personal property, search and registration
programs were operated and reported as part of the Davis + Henderson
Segment. Effective January 1, 2008, these programs are operated and
reported as part of the Filogix Segment.
In circumstances where there is a change in the composition of reportable
segments, CICA Handbook Section 1701, Segment Disclosures, requires
restatement of corresponding information for earlier periods if
practical. If information is not restated, the entity is required to
disclose the results for the current period under both the old basis and
the new basis of segmentation. As it is not practical to extract costs
relating to the personal property, search and registration programs for
periods prior to January 1, 2008, in accordance with the CICA Handbook
Section 1701, Segment Disclosures, the Fund has presented the segment
information for the current period both under the old basis and the new
basis of segmentation.
Summarized financial information for the three months ended March 31,
2008 are as follows:
Three months ended March 31,
-------------------------------------------------------------------------
Davis +
Henderson Segment Filogix Segment
------------------------ ------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Revenue $ 74,724 $ 78,497 $ 14,364 $ 12,652
Cost of sales and
operating expenses 50,543 54,851 11,071 8,748
Amortization of capital
and other assets 2,150 2,012 1,237 1,329
-------------------------------------------------------------------------
22,031 21,634 2,056 2,575
Interest expense - - - -
Net unrealized loss (gain)
on interest-rate swaps - - - -
Amortization of
intangible assets 724 811 2,724 2,483
Minority interest - - - -
-------------------------------------------------------------------------
Net income $ 21,307 $ 20,823 $ (668) $ 92
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital and other
assets expenditures $ 2,465 $ 2,095 $ 69 $ 1,494
Intangible assets $ 4,559 $ 7,000 $ 111,421 $ 120,252
Goodwill $ 359,385 $ 366,562 $ 81,808 $ 71,940
Total assets $ 428,015 $ 444,533 $ 190,290 $ 187,085
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended March 31,
-------------------------------------------------------------------------
Corporate Consolidated
------------------------ ------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Revenue $ - $ - $ 89,088 $ 91,149
Cost of sales and
operating expenses 592 679 62,206 64,278
Amortization of capital
and other assets - 3,387 3,341
-------------------------------------------------------------------------
(592) (679) 23,495 23,530
Interest expense 1,863 2,230 1,863 2,230
Net unrealized loss (gain)
on interest-rate swaps 2,344 (324) 2,344 (324)
Amortization of
intangible assets - - 3,448 3,294
Minority interest - 109 - 109
-------------------------------------------------------------------------
Net income $ (4,799) $ (2,694) $ 15,840 $ 18,221
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital and other
assets expenditures $ - $ - $ 2,534 $ 3,589
Intangible assets $ - $ - $ 115,980 $ 127,252
Goodwill $ - $ - $ 441,193 $ 438,502
Total assets $ 4,034 $ 7,089 $ 621,818 $ 638,707
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Effective January 1, 2008, the results of the personal property, search
and registration programs are included as part of the results of the
Filogix Segment. Prior to this date, the results were included as part of
the Davis + Henderson Segment. Please refer to the table on the following
page for presentation of current period results under both the new and
old basis of segmentation.
The following table illustrates the reporting under the new and old basis
of segmentation for the three months ended March 31, 2008.
Three months ended March 31,
-------------------------------------------------------------------------
Davis +
Henderson Segment Filogix Segment
------------------------ ------------------------
New Basis Old Basis New Basis Old Basis
----------- ----------- ----------- -----------
2008 2008 2008 2008
-------------------------------------------------------------------------
Revenue $ 74,724 $ 75,649 $ 14,364 $ 13,439
Cost of sales and
operating expenses 50,543 51,336 11,071 10,278
Amortization of capital
and other assets 2,150 2,150 1,237 1,237
-------------------------------------------------------------------------
22,031 22,163 2,056 1,924
Interest expense - - - -
Net unrealized loss (gain)
on interest-rate swaps - - - -
Amortization of
intangible assets 724 965 2,724 2,483
Minority interest - - - -
-------------------------------------------------------------------------
Net income $ 21,307 $ 21,198 $ (668) $ (559)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital and other
assets expenditures $ 2,465 $ 2,465 $ 69 $ 69
Intangible assets $ 4,559 $ 4,559 $ 111,421 $ 111,421
Goodwill $ 359,385 $ 359,385 $ 81,808 $ 81,808
Total assets $ 427,494 $ 427,494 $ 190,290 $ 190,290
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended March 31,
-------------------------------------------------------------------------
Corporate Consolidated
------------------------ ------------------------
New Basis Old Basis New Basis Old Basis
----------- ----------- ----------- -----------
2008 2008 2008 2008
-------------------------------------------------------------------------
Revenue $ - $ - $ 89,088 $ 89,088
Cost of sales and
operating expenses 592 592 62,206 62,206
Amortization of capital
and other assets - - 3,387 3,387
-------------------------------------------------------------------------
(592) (592) 23,495 23,495
Interest expense 1,863 1,863 1,863 1,863
Net unrealized loss (gain)
on interest-rate swaps 2,344 2,344 2,344 2,344
Amortization of
intangible assets - - 3,448 3,448
Minority interest - - - -
-------------------------------------------------------------------------
Net income $ (4,799) $ (4,799) $ 15,840 $ 15,840
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital and other
assets expenditures $ - $ - $ 2,534 $ 2,534
Intangible assets $ - $ - $ 115,980 $ 115,980
Goodwill $ - $ - $ 441,193 $ 441,193
Total assets $ 4,034 $ 4,034 $ 621,818 $ 621,818
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The results presented under the old basis for the Davis + Henderson and
Filogix Segments remove from the current period results, the impact of
the change in the reporting of the personal property, search and
registration programs.
For the three months ended March 31, 2008, the 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
(for the three months ended March 31, 2007, the Davis + Henderson Segment
had five customers that individually accounted for greater than 10% but
not more than 19% of the Davis + Henderson Segment revenue and the
Filogix Segment had three customers that individually accounted for
greater than 10% but not more than 16% of the Filogix Segment revenue).
17. 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
(in thousands of Three months months Three Three
Canadian dollars, months ended ended months months
except per unit ended December September ended ended
amounts, March 31, 31, 30, June 30, March 31,
unaudited) 2008 2007(2) 2007(2) 2007(2) 2007(2)
-------------------------------------------------------------------------
Revenue $ 89,088 $ 90,934 $ 94,676 $ 101,992 $ 91,149
Cost of sales and
operating expenses 62,206 64,582 63,813 67,250 64,278
Amortization of
capital and other
assets 3,387 3,647 3,496 3,368 3,341
-------------------------------------------------------------------------
23,495 22,705 27,367 31,374 23,530
Interest expense 1,863 1,876 1,982 2,121 2,230
Net unrealized
loss (gain) on
interest-rate
swaps 2,344 823 957 (2,196) (324)
Amortization of
intangible assets 3,448 3,386 3,347 3,271 3,294
Future income tax
expense (recovery) - 137 - 1,454 -
Minority interest - (139) 205 204 109
-------------------------------------------------------------------------
Net income $ 15,840 $ 16,622 $ 20,876 $ 26,520 $ 18,221
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash flows from
operating
activities $ 16,523 $ 32,141 $ 28,802 $ 34,784 $ 21,674
Changes in non-cash
working capital
and other items(1) 9,037 (6,959) 425 (1,814) 3,399
-------------------------------------------------------------------------
Adjusted cash flows
from operating
activities 25,560 25,182 29,227 32,970 25,073
Less:
Capital asset
expenditures and
contract payments 2,534 4,354 4,598 2,955 3,589
-------------------------------------------------------------------------
Adjusted cash flows
after capital asset
expenditures and
contract payments 23,026 20,828 24,629 30,015 21,484
Distributions paid
to unitholders 18,853 26,676 17,403 17,403 16,875
-------------------------------------------------------------------------
4,173 (5,848) 7,226 12,612 4,609
Cash flows provided
by (used in) other
financing
activities - - (5,000) (10,000) -
Cash flows used in
acquisition of
businesses and
customer service
contracts (4,250) - (837) - 91
Changes in non-cash
working capital
and other items(1) (9,037) 6,959 (425) 1,814 (3,399)
Distributions paid
to minority
interest - (187) (255) - -
-------------------------------------------------------------------------
Increase (decrease)
in cash and cash
equivalents for
the period $ (9,114) $ 924 $ 709 $ 4,426 $ 1,301
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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. Minority interest and
changes to other long-term liabilities are deducted to arrive at
adjusted cash flows.
(2) Certain comparative figures have been reclassified to conform to the
current period's presentation.
Summary of Cash Flows Per Unit
-------------------------------------------------------------------------
Three Three Three Three Three
months months months months months
(in Canadian ended ended ended ended ended
dollars, March 31, December September June 30, March 31,
unaudited) 2008 31, 2007 30, 2007 2007 2007
-------------------------------------------------------------------------
Adjusted cash
flows from
operating
activities $ 0.5816 $ 0.5730 $ 0.6651 $ 0.7502 $ 0.5705
Adjusted cash
flows after
capital asset
expenditures and
contract payments $ 0.5240 $ 0.4739 $ 0.5604 $ 0.6830 $ 0.4889
Distributions paid
to unitholders $ 0.4290 $ 0.6070 $ 0.3960 $ 0.3960 $ 0.3840
Distributions
declared
during period $ 0.4290 $ 0.6180 $ 0.3960 $ 0.3960 $ 0.3880
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Condensed Consolidated Balance Sheet
-------------------------------------------------------------------------
(in thousands of
Canadian dollars, March 31, December September June 30, March 31,
unaudited) 2008 31, 2007 30, 2007 2007 2007
-------------------------------------------------------------------------
Cash and cash
equivalents $ 4,034 $ 13,148 $ 12,224 $ 11,515 $ 7,089
Other current
assets 25,382 26,149 29,644 29,772 26,332
Capital and other
assets 35,229 38,268 38,049 39,303 39,532
Goodwill and other
intangible assets 557,173 556,587 559,973 562,483 565,754
-------------------------------------------------------------------------
$ 621,818 $ 634,152 $ 639,890 $ 643,073 $ 638,707
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Payables and
other current
liabilities $ 38,491 $ 49,116 $ 45,165 $ 45,994 $ 41,034
Other long-term
liabilities 7,417 6,289 5,673 6,732 6,688
Long-term
indebtedness 129,123 129,054 128,985 133,916 143,847
Unitholders'
equity 446,787 449,693 460,067 456,431 447,138
-------------------------------------------------------------------------
$ 621,818 $ 634,152 $ 639,890 $ 643,073 $ 638,707
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distribution History
-------------------------------------------------------------------------
Distributions per unit(1)
Month 2008 2007 2006 2005 2004 2003
-------------------------------------------------------------------------
January $0.1430 $0.1280 $0.1220 $0.1200 $0.1150 $0.1117
February 0.1430 0.1280 0.1220 0.1200 0.1150 0.1117
March 0.1430 0.1320 0.1250 0.1200 0.1168 0.1117
April - 0.1320 0.1250 0.1200 0.1168 0.1133
May - 0.1320 0.1250 0.1200 0.1168 0.1133
June - 0.1320 0.1250 0.1200 0.1168 0.1133
July - 0.1320 0.1250 0.1200 0.1168 0.1133
August - 0.1320 0.1250 0.1220 0.1168 0.1133
September - 0.1320 0.1250 0.1220 0.1168 0.1133
October - 0.1320 0.1250 0.1220 0.1168 0.1150
November(2) - 0.3430 0.1280 0.1220 0.1200 0.1150
December(3) - 0.1430 0.1280 0.1220 0.1200 0.1150
-------------------------------------------------------------------------
$0.4290 $1.7980 $1.5000 $1.4500 $1.4044 $1.3599
-------------------------------------------------------------------------
-------------------------------------------------------------------------
---------------------------------
Distributions per unit(1)
Month 2002 2001
---------------------------------
January $0.1083 $ -
February 0.1083 -
March 0.1083 -
April 0.1083 -
May 0.1083 -
June 0.1083 -
July 0.1117 -
August 0.1117 -
September 0.1117 -
October 0.1117 -
November(2) 0.1117 -
December(3) 0.1117 0.0427
---------------------------------
$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.
Tax Allocation of Distributions
-------------------------------------------------------------------------
2008 2007 2006 2005 2004 2003 2002
-------------------------------------------------------------------------
Dividend income 0.0% 0.0% 0.0% 0.0% 15.0% 19.5% 16.9%
Other income 100.0% 100.0% 100.0% 91.6% 75.2% 69.5% 71.5%
Return of capital 0.0% 0.0% 0.0% 8.4% 9.8% 11.0% 11.6%
-------------------------------------------------------------------------
100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
-------------------------------------------------------------------------
The above tax allocation of distributions for 2008 represents an estimate
based on the total expected distributions for the year
ended December 31, 2008.
Other Statistics
(in thousands, except per unit amounts)
Number of Market
Trading price range of units capitali-
Quarter units (TSX: "DHF.UN") Average outstanding zation
-------------------------- daily at quarter at quarter
High Low Close volume end end
-------------------------------------------------------------------------
2008 - 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 and its predecessors have been serving the Canadian
financial services industry since 1875. Through integrated service offerings,
Davis + Henderson is a market leader in providing programs to customers who
offer chequing account and lending services within Canada. Davis + Henderson
Income Fund is listed on the Toronto Stock Exchange, 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
