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Davis + Henderson Income Fund Reports Revenue and Cash Flow Growth in 2007's First Quarter

Website: www.dhltd.com
TSX Stock Symbol: "DHF.UN"

TORONTO, May 1 /CNW/ - Davis + Henderson achieved year-over-year growth
in revenue and cash flow for the three months ended March 31, 2007.

Highlights

<<
- Revenue increased by $19.2 million, or 26.7%, compared to the same
quarter in 2006. Of this increase, $12.7 million, or 17.6%, related
to the inclusion of Filogix and 9.1% was due to organic growth.

- Net income increased by $1.7 million, or 10.0%, compared to the first
quarter of 2006. This increase reflected the benefit of higher sales,
partially offset by increases in interest and amortization expense
related to the Filogix acquisition. Net income per unit decreased
5.1%, or $0.022 per unit, to $0.415 per unit. Net income per unit
included an expense for amortization of intangible assets related to
the Filogix acquisition of $0.057 per unit.

- Declared distributions in the first quarter of 2007 of $0.388 per
unit were 5.1% higher than in the first quarter of 2006.
>>

Management Commentary

We are pleased with the results of the first quarter of 2007. From a
performance perspective, we benefited from the inclusion of the Filogix
results and from several important organic initiatives. Organic growth in
sales and cash flow in the first quarter was driven by positive results from
successful program initiatives, including our iDefence® and BizAssist™
programs and stronger than expected cheque order volumes.
Looking forward, Davis + Henderson remains committed to its financial
objective of delivering stable and modestly growing distributions. With the
addition of Filogix, we have significantly strengthened our capabilities and
the breadth of services we offer to the Canadian financial services
marketplace. From our established platforms, we look to increase value for our
customers and owners as we seek to build on our programs and achieve our
vision.
For a more detailed discussion of first quarter results and management's
outlook, please see the Management's Discussion and Analysis section of this
report.

Caution Concerning Forward-Looking Statements

Forward-looking statements may also include, without limitation, any
statement relating to future events, conditions or circumstances. Davis +
Henderson cautions you not to place undue reliance upon any such
forward-looking statements, which speak only as of the date they are made.
Risks related to forward-looking statements include, among other things,
challenges presented by declines in the use of cheques by consumers; the
Fund's dependence on a limited number of large financial institutions 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 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.

Conference Call

Davis + Henderson will discuss its financial results for the first
quarter ended March 31, 2007 via conference call at 10:00 a.m. EST (Toronto
time) on Wednesday May 2, 2007. The number to use for this call is
416-644-3421 for Toronto area callers or 1-800-732-0232 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 21226302
followed by the number sign. The rebroadcast will be available until Wednesday
May 16, 2007. 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
2007 should be read in conjunction with MD&A in the Davis + Henderson Income
Fund's (the "Fund" or the "Business" or "Davis + Henderson") Annual Report for
the year ended December 31, 2006, dated February 27, 2007 and the attached
interim unaudited consolidated financial statements. External economic and
industry factors remain substantially unchanged from the annual MD&A and the
Fund's most recently filed Annual Information Form, unless otherwise stated.

STRATEGY

The Fund's financial goal is to deliver stable and modestly growing cash
distributions to unitholders by targeting annual revenue growth in the range
of 3% to 5% and maintaining margins. The Fund has three primary strategies to
meet this financial goal. These are to: enhance the value of the Business'
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.
To advance its third key strategy, the Business acquired Filogix and
Advanced Validation Systems Limited Partnership ("AVS" or "AVS L.P."). Among
other services, Filogix provides processing services related to the
origination and underwriting of mortgages in Canada. AVS, under Davis +
Henderson's brand Collateral Guard™, provides lenders with, among other
offerings, personal property search and registration programs across Canada.
The addition of these business interests has created another business platform
for Davis + Henderson.
Late in 2006, the Minister of Finance (Canada) released draft legislation
which, if enacted, would result in certain income trusts, including the Fund,
paying taxes after fiscal 2010, similar to those paid by taxable Canadian
corporations. The payment of such taxes would reduce the cash flow of the
Fund, thereby reducing the amount available for distributions to unitholders.
The proposed changes have caused uncertainty in the capital markets and
variability in the unit prices of many income trusts, including the Fund. This
uncertainty and the related impacts may affect the Fund's ability to make
future acquisitions. Since the announcement of the proposed changes,
management and the Trustees have been monitoring the changes in the income
trust environment and are continuing to review potential impacts on the Fund's
current strategy and the alternatives available to the Fund, consistent with
protecting and enhancing unitholder value. The tax proposals are not law, but
may become law at any time.

FINANCIAL INFORMATION PRESENTATION

The Fund's results for the quarter ended March 31, 2007 include the
results of the Filogix business acquired on June 15, 2006. The inclusion of
Filogix had a significant impact on the financial results and has also
resulted in changes to the form of Davis + Henderson's disclosures.
With the acquisition of Filogix, the Fund now operates in two business
segments, the "Davis + Henderson Segment" and the "Filogix Segment". The Davis
+ Henderson Segment includes the cheque supply program, deposit program,
eSwitch and the personal property search and registration programs, among
other offerings. The Filogix Segment includes services related to the
origination and underwriting of mortgages in Canada, 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 corporation-wide costs.

<<
OPERATING RESULTS FOR THE FIRST QUARTER

Consolidated Statement of Income

(in thousands of Canadian dollars, except per unit amounts, unaudited)

Three months ended
March 31, 2007 March 31, 2006
-------------------------------------------------------------------------
Revenue $ 91,149 $ 71,918
Cost of sales and operating expenses 63,913 51,016
Amortization of capital and other assets 3,706 3,000
-------------------------------------------------------------------------
23,530 17,902

Interest expense 2,230 695
Net unrealized gain on interest rate swaps (324) -
Amortization of intangible assets 3,294 647
Minority interest 109 -
-------------------------------------------------------------------------
Net income $ 18,221 $ 16,560
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net income per unit, basic and diluted $ 0.4146 $ 0.4367
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Operating Results by Business Segment
(in thousands of Canadian dollars, unaudited)

Three months ended March 31, 2007
-------------------------------------------------------------------------
Davis +
Henderson Filogix
Segment Segment Corporate Consolidated
-------------------------------------------------------------------------
Revenue $ 78,497 $ 12,652 $ - $ 91,149
Cost of sales
and operating
expenses 54,486 8,748 679 63,913
Amortization of
capital and
other assets 2,377 1,329 - 3,706
-------------------------------------------------------------------------
21,634 2,575 (679) 23,530

Revenue

Total revenue for the first quarter of 2007 was $91.1 million, an
increase of $19.2 million, or 26.7%, compared to the first quarter of 2006.
The inclusion of the Filogix Segment accounted for $12.7 million of the
increase, with the balance of the increase, $6.5 million, attributable to the
Davis + Henderson Segment.
Revenue for the Davis + Henderson Segment increased by 9.1%
year-over-year. This is higher than the Business' overall long-term objective
of growing revenue in the 3% to 5% range and is primarily related to
successful program initiatives introduced in 2006, including product and
service enhancements such as iDefence® and BizAssist™ and stronger than
expected order volume including the benefit of accelerated reorders related to
changes in the imaging standard on cheques as further discussed below.
Historically, cheque order volumes have, on average, been declining by
low single digit percentages annually as a result of declining cheque usage.
In 2006 and in the first quarter of 2007, the Davis + Henderson Segment did
not experience this decline and overall cheque order volume was generally
comparable to prior year levels. These stronger than anticipated order volumes
are believed to be the result of increased customer promotional activities and
programs, the continuing movement of consumers to orders with fewer cheques
and increased orders related to branch mergers or system conversion
activities. In addition, during the first quarter of 2007, management
estimates that the Business received incremental orders contributing
approximately $2.0 million of revenue related to one particular financial
institution that advised its customers of the July 1, 2007 date for converting
cheques to the new imaging formats. Management believes this customer
communication accelerated reorders that would otherwise have been received in
future periods pursuant to normal reorder cycles. Management continues to
believe that declining cheque usage will continue to contribute to declining
cheque orders as it has in the past.
As well, during the first quarter of 2007, the Business also benefited
from its increased ownership of the AVS business, the expansion of the
personal property search and registration programs to two additional financial
institutions and continued growth in eSwitch volume related to customer
promotional programs. These initiatives, while still small relative to the
cheque program and Filogix revenue, continue to grow and enhance the value of
the Business' service offerings.
Revenue for the Filogix Segment in the first quarter of 2007 was stronger
than expected with continued year-over-year growth in fees related to mortgage
origination and underwriting services. Management believes that these higher
than anticipated revenues are the result of the continuing high level of sales
activity in the real estate market. Market forecasters have generally expected
a gradual market slowdown in 2007 and as such, this growth in the Filogix
Segment may not continue in future quarters.

Cost of Sales and Operating Expenses

On a consolidated basis, cost of sales and operating expenses for the
first quarter of 2007 increased by $12.9 million, or 25.3%, when compared to
the first quarter of 2006. The addition of the Filogix Segment accounted for
$8.7 million of the increase. The remaining $4.2 million is related to the
Davis + Henderson Segment and to corporate expenses.
Of the 8.1% year-over-year increase for the Davis + Henderson Segment and
corporate expenses, more than one half was related to increased revenues as
described above and to revenue generating initiatives being implemented. The
balance of the increase was primarily a result of increased spending on
information technology costs related to infrastructure upgrade initiatives and
increased support costs related to enhancing the Business' overall computing
environment.
Cost of sales and operating expenses of the Filogix Segment during the
period since acquisition were consistent with expectations and reflected
continued spending on product enhancements.
While Davis + Henderson operates primarily in Canada, the Business also
services a U.S. subsidiary of one of our Canadian customers. All revenue and
substantially all expenses relating to our 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.

Other Expenses and Net Income

Amortization of capital and other assets on a consolidated level
increased by $0.7 million, or 23.5%, to $3.7 million when comparing the first
quarter of 2007 to the same quarter in 2006. The inclusion of the Filogix
Segment, which contributed $1.3 million to the increase, was partially offset
by a decline in expense in the Davis + Henderson Segment of $0.6 million,
relating to certain capital and other assets having become fully amortized.
Net interest expense of $2.2 million incurred in the first quarter of
2007 increased by $1.5 million compared to the comparable 2006 period. This
increase reflected the drawdown of additional debt for the acquisition of the
Filogix business late in the second quarter of 2006. Included in this balance
is $0.2 million of amortization of net losses in fair market value of
interest-rate swaps that were deferred prior to January 1, 2007. Commencing
January 1, 2007, the Business no longer designates its interest-rate swaps as
hedges for accounting purposes.
An unrealized gain in interest rate swaps of $0.3 million reflects the
recognition of the change in fair market value of the interest-rates swaps
during the first quarter of 2007. This unrealized gain is recognized in income
as these swaps are no longer designated as hedges for accounting purposes. For
further discussion on the amortization of net losses in fair market value and
the net gain or loss from change in fair value of interest-rate swaps, see the
Comprehensive Income section below.
Amortization of intangibles increased by $2.6 million to $3.3 million
when comparing the first quarter of 2007 to the first quarter of 2006. This
increase was primarily related to incremental intangible assets arising on the
purchase of the Filogix business. These intangible assets consist of rights
related to customer relationships, brand names and proprietary software and
are amortized on a straight-line basis over periods ranging between 10 and 15
years.
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 are not anticipated to be
subject to taxes as long as all taxable income generated by the Fund is paid
to unitholders in the form of distributions. Accordingly, there are no
provisions for income taxes recorded. In 2006, the Minister of Finance
(Canada) released draft legislation that could result in the Fund paying taxes
on distributions made, starting in 2011. For additional information see Income
Tax Matters under the Business Risk section of the Company's 2006 Annual
Report dated February 27, 2007.
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.
During the second quarter of 2006, the Fund increased its ownership in
AVS to 75%. The acceleration of the ownership interest in AVS was initiated by
the Business so as to better serve customers on an integrated basis. With the
increased ownership, the Business now fully consolidates the results of AVS.
The minority interest recorded in the consolidated statement of income
represents the 25% interest in the earnings of AVS that do not accrue to the
Business.
Net income of $18.2 million for the first quarter of 2007 represents an
increase of $1.7 million, or 10.0%, when compared to the first quarter of
2006. On a per unit basis, net income decreased by $0.0221 per unit to $0.4146
per unit. The per unit decrease reflects the negative impact of an increase in
amortization of intangible assets of $0.0565 per unit related to intangible
assets recorded on the acquisition of Filogix.

Comprehensive Income

On January 1, 2007, the Business adopted the Canadian Institute of
Chartered Accountants (CICA) handbook sections 3855 "Financial Instruments -
Recognition and Measurement", 1530 "Comprehensive Income " and 3251 "Equity".
The standards require that all financial assets be classified as trading,
designated at fair value, available for sale, held to maturity, or loans and
receivables. In addition, the standards require that all financial assets,
including all derivatives, be measured at fair value with the exception of
loans and receivables, debt securities classified as held-to-maturity, and
available-for-sale equities that do not have quoted market values in an active
market. As required, these standards have been applied on a prospective basis
and accordingly, the recording of an adjustment to opening Deficit and the
recognition of Accumulated Other Comprehensive Income (Loss) ("AOCI") have
been made. As a result, the Deficit balance decreased by $0.1 million and AOCI
increased by $2.2 million. Prior period balances have not been restated.
The Business expects to continue to enter into interest-rate swaps for
the purpose of hedging interest rates.
During the quarter ended March 31, 2007, the Business recognized
$0.2 million of comprehensive income reflecting the amortization of previously
deferred net losses charged to net income as discussed above.

<<
EIGHT QUARTER CONSOLIDATED STATEMENT OF INCOME - SUMMARY
(in thousands, except per unit amounts, unaudited)

2007 2006
Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Revenue $ 91,149 $ 87,932 $ 87,966 $ 75,900 $ 71,918
Net income $ 18,221 $ 16,467 $ 15,785 $ 17,717 $ 16,560
-------------------------------------------------------------------------
Net income per unit $ 0.4146 $ 0.3747 $ 0.3592 $ 0.4477 $ 0.4367
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average
units outstanding 43,947 43,947 43,947 39,576 37,921
-------------------------------------------------------------------------
-------------------------------------------------------------------------

2005
Q4 Q3 Q2
-----------------------------------------------------
Revenue $ 69,232 $ 69,845 $ 71,226
Net income $ 14,982 $ 15,292 $ 15,922
-----------------------------------------------------
Net income per unit $ 0.3951 $ 0.4033 $ 0.4199
-----------------------------------------------------
-----------------------------------------------------
Weighted average
units outstanding 37,921 37,921 37,921
-----------------------------------------------------
-----------------------------------------------------
>>

The Fund has generally reported quarterly revenues that are stable and
growing on a year-over-year basis. The significant increases in revenue from
the second to the third quarter of 2006 are primarily a result of the
inclusion of the Filogix Segment revenue beginning in mid-June 2006.
Net income has been trending consistently with changing revenue. Net
income per unit has generally increased consistent with increases in revenue,
except, commencing in the third quarter of 2006 and continuing thereafter,
when as a result of the acquisition of Filogix, as previously described, the
Business incurred increased amortization of intangible assets expense.
Going forward, management believes that the combined 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, with lower results in the first quarter of each
year. In the first quarter of 2007, Filogix revenue was stronger than
expected.

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 including the amount of cash available for distribution
to unitholders, repayment of debt and other investing activities. Certain
subtotals presented within the cash flows table below, such as "Adjusted cash
flows from operating activities", "Distributable cash after maintenance
capital and contract payments", "Distributable cash after all capital and
contract payments" and "Distributable cash after all capital, contract
payments and distributions paid", are not defined terms under Canadian
generally accepted accounting principles ("GAAP"). These subtotals are used by
management as measures of internal performance and as a supplement to the
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 statement of cash flows.
Further, the Fund's method of calculating each measure 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, 2007 March 31, 2006
-------------------------------------------------------------------------
Cash flows from operating activities $ 21,674 $ 18,358

Add:
Changes in non-cash working capital and
other items 3,399 1,849
-------------------------------------------------------------------------
Adjusted cash flows from operating
activities (Note 2) 25,073 20,207

Less:
Expenditures on maintenance capital 1,889 1,545
Contract payments, maintenance 1,517 1,250
-------------------------------------------------------------------------
Distributable cash after maintenance capital
and contract payments (Note 1) 21,667 17,412

Less:
Expenditures on growth capital 183 -
Contract payments, non-maintenance - -
-------------------------------------------------------------------------
Distributable cash after all capital and
contract payments (Note 1) 21,484 17,412

Less:
Distributions paid during period 16,875 13,879
-------------------------------------------------------------------------
Distributable cash after all capital, contract
payments and distributions paid 4,609 3,533

Changes in non-cash working capital and other
items (Note 2) (3,399) (1,849)
Cash flows used in acquisition of businesses 91 (547)
-------------------------------------------------------------------------
Increase in cash and cash equivalents for the
period $ 1,301 $ 1,137
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>

Note 1 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. Maintenance expenditures also include recurring fixed
customer contract payments that are made annually over the life of the
contract. 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. Non-maintenance
capital expenditures are defined as expenditures, which are expected to
increase future operating cash flows of the Business, that are infrequent
and include non-maintenance contract payments, which are payment
obligations under certain long-term customer contracts.

Note 2 Changes in non-cash working capital and certain other balance
sheet items have been excluded from 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 from adjusted cash flow from
operations. For details, see the Changes in Non-Cash Working Capital and
Other Items section.

<<
Summary of Cash Flows per Unit
(in Canadian dollars, unaudited)

Three months ended
March 31, 2007 March 31, 2006 % Change
-------------------------------------------------------------------------
Adjusted cash flows from
operating activities $ 0.5705 $ 0.5329 7.1%
Distributable cash after
maintenance capital and
contract payments $ 0.4930 $ 0.4592 7.4%
Distributable cash after
all capital and contract
payments $ 0.4889 $ 0.4592 6.5%
Distributions paid during
period $ 0.3840 $ 0.3660 4.9%
Distributions declared
during period $ 0.3880 $ 0.3690 5.1%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>

During the first quarter of 2007, the Business generated $25.1 million in
adjusted cash flow from operating activities, an increase of $4.9 million
compared to the first quarter of 2006. This increase is primarily due to the
inclusion of the Filogix business, net of increased interest expense, and, in
general, increases in cash flow from the organic growth initiatives and higher
than expected order volume within the Davis + Henderson Segment, as previously
described.

<<
Summary of Capital Expenditures by Segment
(in thousands of Canadian dollars, unaudited)

Three months ended
March 31, 2007 March 31, 2006
-------------------------------------------------------------------------

DAVIS + HENDERSON SEGMENT
Maintenance capital expenditures $ 578 $ 1,545
Maintenance contract payments 1,517 1,250
Growth capital expenditures - -
Non-maintenance capital expenditures - -
Non-maintenance contract payments - -
-------------------------------------------------------------------------
$ 2,095 $ 2,795
-------------------------------------------------------------------------
-------------------------------------------------------------------------

FILOGIX SEGMENT
Maintenance capital expenditures $ 1,311 n/a
Maintenance contract payments - n/a
Growth capital expenditures 183 n/a
Non-maintenance capital expenditures - n/a
Non-maintenance contract payments - n/a
-------------------------------------------------------------------------
$ 1,494 n/a
-------------------------------------------------------------------------
-------------------------------------------------------------------------

CONSOLIDATED
Maintenance capital expenditures $ 1,889 $ 1,545
Maintenance contract payments 1,517 1,250
Growth capital expenditures 183 -
Non-maintenance capital expenditures - -
Non-maintenance contract payments - -
-------------------------------------------------------------------------
$ 3,589 $ 2,795
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>

The table above sets out capital expenditures and payments under customer
contracts. The Business has various payment obligations under customer
contracts. Certain long-term customer contracts provide for fixed contract or
program initiation payments to be made, and these are treated as
non-maintenance capital because they are not regularly recurring
disbursements. Other fixed customer contract payments are made annually over
the life of the contract and therefore are treated as recurring maintenance
capital. 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.
The level of capital expenditures in the Davis + Henderson Segment in
2007 is expected to be similar to the expenditure levels in 2006. Maintenance
capital expenditures in the Davis + Henderson Segment for the quarter ended
March 31, 2007 have decreased year-over-year by $1.0 million as a result of
timing of expenditures. This reduction is not indicative of the full-year
expenditure program. Maintenance capital expenditures in the Filogix Segment
of $1.3 million were disproportionately large relative to the annual plan due
to timing between quarters.
Growth expenditures of $0.2 million made in the Filogix Segment in the
first quarter of 2007 relate to hardware and software acquired to support the
implementation of new underwriting service customers.
The Business' capital program provides for continued expenditures to be
funded by cash flows from operations. The Business' 2007 capital program is
expected to be approximately $12 million to $13 million of which $2 million to
$3 million is expected to be growth capital. Most of the increase arises as a
result of including a full-year capital program for the Filogix business. The
level of investment in 2007 required to maintain and sustain the productive
capacity of the Business is expected to be comparable to the annualized
expenditures in 2006.

Distributions

The Fund paid distributions of $16.9 million ($0.3840 per unit) during
the first quarter of 2007 compared to $13.9 million ($0.3660 per unit) in the
first quarter of 2006. In June 2006, the Fund issued 6,026,000 additional
units to finance the Filogix acquisition. On a per unit basis, distributions
paid increased by 4.9% when comparing the first quarters of 2007 and 2006.
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 5.1% for the quarter ended March 31, 2007.
On an annualized basis, the monthly distribution rate for March 2007 was
$1.58 per unit as compared to $1.50 per unit annualized in March 2006,
representing an increase of 5.6%.
The estimated tax allocation of distributions declared for 2007 is 100%
"other income", as was the case for all of 2006.
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, 2007 and May 1, 2007, 43,946,792 trust units were
outstanding. This reflects the issuance of an additional 6,026,000 trust units
on June 15, 2006 in exchange for subscription receipts issued on June 6, 2006,
which was the first new issuance of units by the Fund since April 2, 2002.

<<
Changes in Non-Cash Working Capital and Other Items
(in thousands of Canadian dollars, unaudited)

Three months ended
March 31, 2007 March 31, 2006
-------------------------------------------------------------------------
Minority interest $ 109 $ -
Decrease in non-cash working capital items (3,526) (1,875)
Changes in other operating assets and
liabilities 18 26
-------------------------------------------------------------------------
Changes in non-cash working capital and other
items $ (3,399) $ (1,849)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>

The decrease in non-cash working capital items for the three months ended
March 31, 2007 was primarily related to the payment of certain accruals,
including performance based compensation which is paid annually in the first
quarter of every year.

Cash Flows Used in Acquisition of Business

Cash flows relating to the acquisition of the AVS business and customer
service contracts reflect minor purchase price adjustments for interests
previously acquired by the Business.

Cash Balances and Long-term Indebtedness

The Business has continued to generate operating cash flow in excess of
distributions, capital expenditures and contractual obligations. Management
expects to use a portion of any future excess flow to pay down debt during
2007 and, in April 2007, the Fund made a voluntary debt payment of $2 million.
At March 31, 2007, cash and cash equivalents totalled $7.1 million,
compared to $5.8 million at December 31, 2006.
Total debt facilities available at March 31, 2007 and December 31, 2006
were $170.0 million and include a $120.0 million non-revolving term loan and a
$50.0 million revolving term credit facility. As of March 31, 2007 and
December 31, 2006, the Business had drawn $120.0 million under the
non-revolving term loan and $25.0 million under the revolving term credit
facility. The Business is permitted to draw on the revolving facility's
available balance of $25.0 million to fund capital expenditures or for other
general corporate purposes.
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, 2007, the Fund had interest-rate swap hedge contracts in
place with certain of its lenders, such that the borrowing rates on 91% 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 - Interest rate swaps
-------------------------------------------------------------------------
Maturity Date Notional Amount Asset Liability Interest Rate(1)
-------------------------------------------------------------------------

June 30, 2007 $ 12,000 $ 14 $ - 5.140%
June 30, 2008 12,000 16 - 5.410%
January 4, 2009 10,000 121 - 4.880%
July 15, 2009 20,000 - 269 6.063%
July 15, 2010 33,000 - 609 6.065%
June 15, 2011 20,000 - 421 5.935%
June 15, 2011 25,000 - 336 5.935%
-------------------------------------------------------------------------
$ 132,000 $ 151 $ 1,635
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) The listed interest rates are inclusive of banker's 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.
>>

The Fund would have to pay the fair value of $1.6 million ($2.0 million
at December 31, 2006) if it were to close out four of the contracts and would
receive $0.2 million ($0.2 million at December 31, 2006) on the closing of the
other three contracts, as set out on the balance sheet. It is not the present
intention of the Fund to close out these contracts. As at March 31, 2007,
consistent with the new accounting pronouncements implemented with effect from
January 1, 2007, the fair value of the interest-rate swaps is now recorded on
the balance sheet. For a further description of this accounting treatment, see
the Comprehensive Income section.
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 5.77% as at March 31, 2007.
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.
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, debt repayments and other reserves.
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. Taxable income may be less than distributable cash if the Business has
excess tax deductions it can utilize to reduce taxable income.
Historically, Davis + Henderson has paid distributions below the level of
distributable cash generated, using the excess to pay down debt and to fund
acquisitions. It has been possible to pay less than 100% of its distributable
cash generated to unitholders and not pay taxes within the trust as the
Business had excess tax deductions available to reduce taxable income. These
excess tax deductions diminish each year and, if the Business continues to
generate growing cash flow, the Fund will need to pay out a higher proportion
of the distributable cash it generates to unitholders in order not to pay
taxes in the trust.

BUSINESS RISKS

For a comprehensive discussion of risks, please refer to the Fund's most
recently filed Annual Information Form and Annual Report available on SEDAR at
www.sedar.com.
On October 31, 2006, the Minister of Finance (Canada) announced the "Tax
Fairness Plan" and tabled a Notice of Ways and Means Motion that proposes to
significantly change the income tax treatment of most publicly traded trusts
and partnerships (other than certain real estate investment trusts) and the
distributions and allocations, as the case may be, from these entities to
their investors. On March 29, 2007, the Minister of Finance (Canada)
introduced Bill C-52 in the House of Commons to implement these proposals.
Under the proposals, certain income earned by these entities will be taxed in
a manner similar to income earned by a corporation and distributions or
allocations of such income made by these entities to investors will be taxed
in a manner similar to dividends from taxable Canadian corporations. The
deemed dividend will be eligible for the enhanced dividend tax credit if paid
or allocated to a resident of Canada. These proposals will generally be
effective beginning in the 2011 taxation year for trusts and partnerships that
were publicly traded prior to November 1, 2006, such as the Fund. However, the
proposals will apply immediately in any taxation year ending after 2006 if the
income trust does not comply with the guidelines concerning "normal growth"
released by the Department of Finance on December 15, 2006 as may be amended
from time to time, unless the excess growth arose as a result of a prescribed
transaction. Under these guidelines, an income trust such as the Fund will be
limited as to the amount of new units it can issue after October 31, 2006 in
order to avoid becoming subject to these proposals prior to the 2011 taxation
year. The payment of such taxes would reduce the cash flow of the Fund thereby
reducing the amount available for distributions to the Fund's unitholders.
Additionally, in spite of recent recovery in value, uncertainty in the capital
markets reflected in price variability in income trust units, including the
Funds, may impact the Fund's ability to make future acquisitions.
Since the announcement of the proposed changes, management of Davis +
Henderson and the Trustees have been monitoring the changes in the income
trust environment and are continuing to review potential impacts on the Fund's
current strategy and the alternatives available to the Fund, consistent with
protecting and enhancing unitholder value. The tax proposals may become law
during 2007. Until the final legislation implementing the proposed changes
becomes law, the exact impact of the changes to the Fund is unknown.

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.
If the draft legislation to tax distributions of certain mutual fund
trusts, as previously described,is enacted in 2007, the Fund will be subject
to taxation in future periods and as such will commence to account for future
income taxes through the recognition of future tax balances. On-going changes
to future tax balances will be recognized in the Consolidated Statement of
Income. Additionally, if enacted, this change may affect the carrying value of
certain of the Fund's assets including goodwill. GAAP requires accounting for
changes in tax legislation only upon substantial enactment.

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, 2007, 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, revenues are expected to grow in excess of
the targeted range as a result of the consolidation of the Filogix business
acquired on June 15, 2006.
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.
In 2006, Davis + Henderson made a significant investment with the
acquisition of the Filogix business. This strategically aligned acquisition
added another significant platform for the Business and in 2007 is
contributing to growth in the overall business of the Fund.
The Business' operational plans include many initiatives which, when
combined, are intended to allow us to meet our objectives. Examples include
further implementations and enhancements of our iDefence, BizAssist and
eSwitch programs relating to the chequing account. Relating to lending
markets, the Business looks to gain market share from its personal property
search and registration programs and by increasing volumes related to mortgage
origination and underwriting services.
The Business' capital program provides for continued expenditures to be
funded by cash flows from operations. The Business' 2007 capital program is
expected to be approximately $12 million to $13 million, of which $2 million
to $3 million is expected to be growth capital. Most of the increase over the
2006 expenditures of $9.9 million arises as a result of including a full year
capital program for the Filogix business.
Late in 2006, the Minister of Finance (Canada) released draft legislation
which, if enacted, would result in certain income trusts, including the Fund,
paying taxes after fiscal 2010, similar to those paid by taxable Canadian
corporations. The payment of such taxes would reduce the cash flow of the
Fund, thereby reducing the amount available for distributions to unitholders.
The proposed changes have caused uncertainty in the capital markets and
variability in the unit prices of many income trusts, including the Fund. This
uncertainty and the related impacts may affect the Fund's ability to make
future acquisitions. Since the announcement of the proposed changes,
management and the Trustees have been monitoring the changes in the income
trust environment and are continuing to review potential impacts on the Fund's
current strategy and the alternatives available to the Fund, consistent with
protecting and enhancing unitholder value. The tax proposals are not law, but
may become law at any time.

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.

<<
CONSOLIDATED BALANCE SHEETS
(in thousands of Canadian dollars, unaudited)

-------------------------------------------------------------------------
March 31, December 31,
2007 2006
-------------------------------------------------------------------------

ASSETS
Current Assets:
Cash and cash equivalents $ 7,089 $ 5,788
Accounts receivable 18,386 18,299
Inventory 4,767 5,238
Prepaid expenses 3,179 3,920
-------------------------------------------------------------------------
33,421 33,245
Capital assets (note 3) 31,601 32,567
Other assets (note 4) 8,933 7,369
Interest rate swaps (note 8) 151 -
Intangible assets (note 5) 127,252 130,546
Goodwill (note 6) 438,502 438,546
-------------------------------------------------------------------------
$639,860 $642,273
-------------------------------------------------------------------------
-------------------------------------------------------------------------

LIABILITIES AND UNITHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 32,271 $ 36,600
Distributions payable to unitholders 5,801 5,625
Current portion of disbursement obligations
on customer contracts (note 7) 2,962 2,195
-----------------------------------------------------------------------
41,034 44,420

Disbursement obligations on customer
contracts (note 7) 2,212 2,195
Long-term indebtedness (note 8) 145,000 145,000
Other long-term liabilities (note 9) 2,469 2,520
Interest rate swaps (note 8) 1,635 -
Minority interest 372 263
-------------------------------------------------------------------------
192,722 194,398
Unitholders' Equity:
Trust units (note 10) 474,585 474,585
Deficit (25,424) (26,710)
Accumulated other comprehensive income (loss) (2,023) -
-------------------------------------------------------------------------
447,138 447,875

Commitments (note 11)
-------------------------------------------------------------------------
$639,860 $642,273
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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, 2007 March 31, 2006
-------------------------------------------------------------------------

Revenue $ 91,149 $ 71,918
Cost of sales and operating expenses 63,913 51,016
Amortization of capital and other assets 3,706 3,000
-------------------------------------------------------------------------
23,530 17,902

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands of Canadian dollars, unaudited)

-------------------------------------------------------------------------
Three months ended
March 31, 2007 March 31, 2006
-------------------------------------------------------------------------

Net income $ 18,221 $ 16,560

Other comprehensive income:

Amortization of transitional adjustment
to net income 176 -
-------------------------------------------------------------------------

Other comprehensive income $ 176 $ -
-------------------------------------------------------------------------

Total comprehensive income $ 18,397 $ 16,560
-------------------------------------------------------------------------
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, 2007 March 31, 2006
-------------------------------------------------------------------------

Deficit:
Deficit, beginning of period $(26,710) $(31,049)
Transitional adjustment on adoption of
financial instruments standards 116 -
Net income 18,221 16,560
Distributions (17,051) (13,993)
-------------------------------------------------------------------------
Deficit, end of period (25,424) (28,482)

Accumulated Other Comprehensive Income (Loss):
Accumulated other comprehensive income (loss),
beginning of period - -
Transitional adjustment on adoption of
financial instruments standards (2,199) -
Other comprehensive income :
Amortization of transitional adjustment
to net income 176 -
-------------------------------------------------------------------------
Accumulated other comprehensive income (loss),
end of period (2,023) -
-------------------------------------------------------------------------
Deficit and accumulated other comprehensive
income (loss), end of period $(27,447) $(28,482)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated
financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of Canadian dollars, unaudited)

-------------------------------------------------------------------------
Three months ended
March 31, 2007 March 31, 2006
-------------------------------------------------------------------------

Cash and cash equivalents provided by
(used in):

OPERATING ACTIVITIES
Net income $ 18,221 $ 16,560
Add:
Amortization of capital assets 3,038 1,914
Amortization of other assets 668 1,086
Amortization of intangible assets 3,294 647
Amortization of transitional adjustment
in interest expense 176 -
Net unrealized gain on interest rate swaps (324) -
Minority interest 109 -
-------------------------------------------------------------------------
25,182 20,207

Decrease in non-cash working capital items (3,526) (1,875)
Changes in other operating assets and
liabilities 18 26
-------------------------------------------------------------------------
21,674 18,358
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Distributions paid to unitholders (16,875) (13,879)
-------------------------------------------------------------------------
(16,875) (13,879)
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Expenditures on capital assets (2,072) (1,545)
Payments pursuant to long-term supply contracts (1,517) (1,250)
Acquisitions and acquisition adjustments 91 (547)
-------------------------------------------------------------------------
(3,498) (3,342)
-------------------------------------------------------------------------
Increase in cash and cash equivalents
for the period 1,301 1,137
Cash and cash equivalents, beginning of
period 5,788 8,304
-------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 7,089 $ 9,441
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Supplementary information:
Cash interest paid $ 2,072 $ 845
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated
financial statements.

Notes to Consolidated Financial Statements
Three months ended March 31, 2007 and 2006
(in thousands of Canadian dollars, except unit and per unit amounts,
unaudited)

1. SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements have been prepared using the
following accounting policies generally accepted in Canada and follow the
same accounting policies and their method of application as the Fund's
consolidated financial statements for the year ended December 31, 2006,
which are included in the 2006 Annual Report along with changes in
accounting policies that became effective January 1, 2007. They do not
conform in all respects with disclosures required for annual financial
statements and should be read in conjunction with the audited
consolidated financial statements of the Fund for the year ended
December 31, 2006.

2. INCOME TAXES

Income earned by the Fund that is distributed annually to unitholders is
not subject to taxation in the Fund, but is taxed at the individual
unitholder level.

The Fund does not recognize any future tax assets or liabilities on
temporary differences between the carrying amount of the balance sheet
items and their corresponding tax basis because the Fund is committed to
distribute to its unitholders, all or virtually all of its taxable income
and taxable gains. The Fund intends to continue to meet the "mutual fund
trust" requirements under the Income Tax Act (Canada) and there is no
indication that the Fund will fail to meet those requirements. As at
December 31, 2006, the excess of the carrying value of the Fund's assets
and liabilities, excluding goodwill, over their tax basis is
approximately $112.0 million (2005 - $(6.3) million) of which
$130.5 million (2005 - $6.9 million) is related to the carrying value of
intangible assets over their tax basis. The tax basis of goodwill as at
December 31, 2006 was $157.8 million (2005 - $169.7 million).

On December 21, 2006 the Minister of Finance (Canada) released draft
legislation (the "Proposals") relating to the federal income taxation of
publicly-traded trusts and partnerships. On March 29, 2007, the Minister
of Finance (Canada) introduced Bill C-52 in the House of Commons to
implement these Proposals. The Proposals are contemplated to 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 or after 2011.

Certain distributions attributable to a SIFT will not be deductible in
computing the SIFT's taxable income, and the SIFT will be subject to tax
on such distributions 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 Proposals. If enacted, the Fund
would be subject to taxes on certain income earned from investments in
its subsidiaries. The Fund would also be required to recognize future
income tax assets and liabilities with respect to the temporary
differences of its assets and liabilities and those of its subsidiaries
that are expected to reverse in or after 2011.

3. CAPITAL ASSETS

March 31, 2007
-------------------------------------------------------------------------
Accumulated
Cost amortization Net
-------------------------------------------------------------------------
Machinery and equipment $ 15,127 $ 6,970 $ 8,157
Computer equipment and
software 38,046 17,373 20,673
Furniture, fixtures and
leasehold improvements 7,898 5,127 2,771
-------------------------------------------------------------------------
$ 61,071 $ 29,470 $ 31,601
-------------------------------------------------------------------------
-------------------------------------------------------------------------

December 31, 2006
-------------------------------------------------------------------------
Accumulated
Cost amortization Net
-------------------------------------------------------------------------
Machinery and equipment $ 15,014 $ 6,689 $ 8,325
Computer equipment and
software 36,211 14,827 21,384
Furniture, fixtures and
leasehold improvements 7,774 4,916 2,858
-------------------------------------------------------------------------
$ 58,999 $ 26,432 $ 32,567
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Amortization during the three months ended March 31, 2007 was $3,038 (Q1
2006 - $1,914).

4. OTHER ASSETS

March 31, December 31,
2007 2006
-------------------------------------------------------------------------
Cost:
Long-term supply contracts $ 12,051 $ 9,750
Deferred finance costs 1,451 1,451
Other 370 370
-------------------------------------------------------------------------
13,872 11,571

Accumulated amortization (4,939) (4,202)
-------------------------------------------------------------------------
$ 8,933 $ 7,369
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Amortization during the three months ended March 31, 2007 on long-term
supply contracts and deferred finance fees was $668 (Q1 2006 - $1,086)
and $69 (Q1 2006 - nil), respectively. Amortization of deferred finance
fees is recognized as interest expense.

5. INTANGIBLE ASSETS

March 31, December 31,
2007 2006
-------------------------------------------------------------------------
Cost:
Cheque supply outsourcing contracts $ 16,329 $ 16,329
Customer service contracts 3,669 3,669
Proprietary software 41,993 41,993
Brand names 8,400 8,400
Customer relationships 77,887 77,887
-------------------------------------------------------------------------
148,278 148,278
Accumulated amortization (21,026) (17,732)
-------------------------------------------------------------------------
$ 127,252 $ 130,546
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Amortization during the three months ended March 31, 2007 was $ 3,294 (Q1
2006 - $647).

6. GOODWILL

March 31, December 31,
2007 2006
-------------------------------------------------------------------------
Balance, beginning of period $ 438,546 $ 361,288
Goodwill acquired during the period:
AVS acquisition (44) 5,318
Filogix acquisition - 71,940
-------------------------------------------------------------------------
Balance, end of period $ 438,502 $ 438,546
-------------------------------------------------------------------------
-------------------------------------------------------------------------

7. DISBURSEMENT OBLIGATIONS ON CUSTOMER CONTRACTS

March 31, December 31,
2007 2006
-------------------------------------------------------------------------
Current portion $ 2,962 $ 2,195
Long-term portion 2,212 2,195
-------------------------------------------------------------------------
Total disbursement obligations on customer
contracts $ 5,174 $ 4,390
-------------------------------------------------------------------------

The Fund has fixed customer contract disbursement obligations payable
as of March 31, 2007 as follows:

2007 $ 1,445
2008 2,962
2009 767
-------------------------------------------------------------------------
$ 5,174
-------------------------------------------------------------------------
-------------------------------------------------------------------------

8. LONG-TERM INDEBTEDNESS

March 31, December 31,
2007 2006
-------------------------------------------------------------------------

Non-revolving term loan $ 120,000 $ 120,000
Revolving credit facility 25,000 25,000
-------------------------------------------------------------------------
$ 145,000 $ 145,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------

The Fund has $170.0 million of available term credit facilities due
June 15, 2011 (December 31, 2006 - $170.0 million), consisting of a
$120.0 million non-revolving term loan and a $50.0 million revolving
credit facility. 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 interests 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, 2007, the Fund was in
compliance with all of its financial covenants and financial condition
tests.

As of March 31, 2007, the Fund has entered into interest-rate swap hedge
contracts with its lenders, such that the borrowing rates on
$132.0 million, or 91.0%, of its outstanding term indebtedness are
effectively fixed at interest rates and for periods shown in the
following table:

Fair value - Interest rate swaps
-------------------------------------------------------------------------
Maturity Date Notional Amount Asset Liability Interest Rate(1)
-------------------------------------------------------------------------
June 30, 2007 $ 12,000 $ 14 $ - 5.140%
June 30, 2008 12,000 16 - 5.410%
January 4, 2009 10,000 121 - 4.880%
July 15, 2009 20,000 - 269 6.063%
July 15, 2010 33,000 - 609 6.065%
June 15, 2011 20,000 - 421 5.935%
June 15, 2011 25,000 - 336 5.935%
-------------------------------------------------------------------------
$ 132,000 $ 151 $ 1,635
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) The listed interest rates are inclusive of banker's 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, 2007, the Fund would have to pay the fair value of
$1.6 million ($2.0 million at December 31, 2006) if it were to close out
four of the contracts and would receive $0.2 million ($0.2 million at
December 31, 2006) on the closing of the balance of the contracts as set
out on the balance sheet.

9. OTHER LONG-TERM LIABILITIES

March 31, December 31,
2007 2006
-------------------------------------------------------------------------

Deferred compensation program $ 1,682 $ 1,659
Employee future benefits 787 861
-------------------------------------------------------------------------
$ 2,469 $ 2,520
-------------------------------------------------------------------------
-------------------------------------------------------------------------

The deferred compensation program 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, 2007 was $0.5 million (Q1 2006 - $0.4 million).

The Fund's non-pension post-retirement benefit plan provides certain
health care, life insurance and dental benefits to eligible employees.
Terms of the plan were amended effective January 1, 2005, resulting in a
reduction in obligations of $1.8 million and actuarial losses of
$1.6 million. Reductions in obligations from the plan amendment are being
amortized over three-and-one-half years and the actuarial losses are
being amortized over six years.

10. 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,
2007 2006
-------------------------------------------------------------------------

Balance, beginning of period $ 474,585 $ 365,385
Units issued - 109,200
-------------------------------------------------------------------------
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, 2007 was 43,946,792 (Q1 2006 - 37,920,792).

11. COMMITMENTS

As of March 31, 2007, the Fund has annual lease obligations with respect
to real estate, vehicles and equipment as follows for the years ending:

2007 $ 3,201
2008 3,405
2009 2,589
2010 2,577
2011 1,072
Thereafter 583
-------------------------------------------------------------------------
$ 13,427
-------------------------------------------------------------------------
-------------------------------------------------------------------------

12. RELATED PARTY TRANSACTIONS

A Trustee of the Fund serves as Chairman of the Board of Canada Post
Corporation, one of the Company's major suppliers. Total purchases from
this supplier during the three months ended March 31, 2007 were $6,044
(Q1 2006 - $5,922). As at March 31, 2007, $1,405 (December 31, 2006 -
$1,285) was owing to Canada Post Corporation. This amount has been
included in accounts payable and accrued liabilities.

13. SIGNIFICANT CUSTOMERS

For the three months ended March 31, 2007, the Fund earned 78% (Q1 2006 -
83%) of its revenue from its seven largest customers. Five of these
customers individually accounted for greater than 10% but not more than
17% of the Fund's total revenue.

14. 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, eSwitch® and
the personal property search and registration programs, among other
offerings. The Filogix Segment includes services related to the
origination and underwriting of mortgages in Canada, 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 June 15, 2006, the Fund operated in one segment, the Davis +
Henderson Segment.

Summarized financial information for the three months ended March 31,
2007 are as follows:

Three months ended
March 31, 2007
-------------------------------------------------------------------------
Davis +
Henderson Filogix
Segment Segment Corporate Consolidated
-------------------------------------------------------------------------
Revenue $ 78,497 $ 12,652 $ - $ 91,149
Cost of sales and
operating expenses 54,486 8,748 679 63,913
Amortization of
capital and other
assets 2,377 1,329 - 3,706
-------------------------------------------------------------------------
21,634 2,575 (679) 23,530

Interest expense - - 2,230 2,230
Net unrealized gain
on interest rate
swaps - - (324) (324)
Amortization of
intangible assets 811 2,483 - 3,294
Minority interest 109 - - 109
-------------------------------------------------------------------------
Net income $ 20,714 $ 92 $ (2,585) $ 18,221
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital and
other assets
expenditures $ 2,095 $ 1,494 $ - $ 3,589
Intangible assets $ 7,000 $ 120,252 $ - $ 127,252
Goodwill $ 366,562 $ 71,940 $ - $ 438,502
Total assets $ 445,686 $ 187,085 $ 7,089 $ 639,860
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-------------------------------------------------------------------------

For the Davis + Henderson Segment, five customers individually accounted
for greater than 10% but not more than 19% of the Davis + Henderson
Segment revenue. For the Filogix Segment, three customers individually
accounted for greater than 10% but not more than 16% of the Filogix
Segment revenue.

Supplementary Information

-------------------------------------------------------------------------
(in thousands of Three Three Three Three Three
Canadian dollars, months months months months months
except per unit ended ended ended ended ended
amounts, March December September June March
unaudited) 31, 2007 31, 2006 30, 2006 30, 2006 31, 2006
-------------------------------------------------------------------------
Revenue $ 91,149 $ 87,932 $ 87,966 $ 75,900 $ 71,918
Cost of sales and
operating expenses 63,913 62,034 62,754 52,989 51,016
Amortization of
capital and
other assets 3,706 3,902 3,752 3,286 3,000
-------------------------------------------------------------------------
23,530 21,996 21,460 19,625 17,902
Interest expense 2,230 2,186 2,248 887 695
Net unrealized
gain on interest
rate swaps (324) - - - -
Amortization of
intangible assets 3,294 3,254 3,339 996 647
Minority interest 109 89 88 25 -
-------------------------------------------------------------------------
Net income $ 18,221 $ 16,467 $ 15,785 $ 17,717 $ 16,560
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Cash flows from
operating
activities $ 21,674 $ 22,111 $ 22,786 $ 26,498 $ 18,358
Change in non-cash
working capital
items 3,526 1,671 268 (4,424) 1,875
Minority interest (109) (89) (88) (25) -
Changes in other
operating assets
and liabilities (18) (70) (90) (50) (26)
-------------------------------------------------------------------------
Adjusted cash flows
from operations(2) 25,073 23,623 22,876 21,999 20,207

Less:
Expenditures on
maintenance
capital 1,889 1,912 997 1,377 1,545
Contract payments,
maintenance 1,517 20 800 625 1,250
-------------------------------------------------------------------------
Distributable cash
after maintenance
capital and
contract
payments(1) 21,667 21,691 21,079 19,997 17,412

Less:
Expenditures on
growth capital(3) 183 34 884 411 -
Expenditures on
non-maintenace
capital - - - - -
Contract payments,
non-maintenance - - - - -
-------------------------------------------------------------------------
Distributable cash
after all capital
and contract
payments $ 21,484 $ 21,657 $ 20,195 $ 19,586 $ 17,412
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Summary of Cash Flows Per Unit

-------------------------------------------------------------------------
Adjusted cash flows from
operating activities $ 0.5705 $ 0.5375 $ 0.5205 $ 0.5559 $ 0.5329
Distributable cash after
maintenance capital
and contract payments $ 0.4930 $ 0.4936 $ 0.4796 $ 0.5053 $ 0.4592
Distributable cash
after all capital and
contract payments $ 0.4889 $ 0.4928 $ 0.4595 $ 0.4949 $ 0.4592
Distributions paid
during period $ 0.3840 $ 0.3780 $ 0.3750 $ 0.3750 $ 0.3660
Distributions declared
during period $ 0.3880 $ 0.3810 $ 0.3750 $ 0.3750 $ 0.3690
-------------------------------------------------------------------------

(1) 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. Maintenance expenditures also include
recurring fixed customer contract payments that are made annually
over the life of the contract. 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. Non-maintenance capital expenditures are
defined as expenditures, which are expected to increase future
operating cash flows of the Business, that are infrequent and include
non-maintenance contract payments which are payment obligations under
certain long-term customer contracts.

(2) Changes in non-cash working capital and certain other balance sheet
items have been excluded from 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 from adjusted cash flow from
operations.

(3) For the quarter ending June 30, 2006, approximately $0.4 million
pertaining to Filogix capital expenditures has been classified as
growth capital rather than maintenance capital.

Condensed Consolidated Balance Sheet
-------------------------------------------------------------------------
(in thousands of
Canadian dollars, March December September June March
unaudited) 31, 2007 31, 2006 30, 2006 30, 2006 31, 2006
-------------------------------------------------------------------------
Cash and cash
equivalents $ 7,089 $ 5,788 $ 8,893 $ 4,607 $ 9,441
Other current
assets 26,332 27,457 27,384 28,834 17,136
Capital and other
assets 40,685 39,936 41,908 42,701 29,220
Goodwill and other
intangible assets 565,754 569,092 572,215 575,635 369,131

-------------------------------------------------------------------------
$ 639,860 $ 642,273 $ 650,400 $ 651,777 $ 424,928
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Payables and other
current
liabilities $ 41,034 $ 44,420 $ 47,100 $ 48,064 $ 32,697
Other long-term
liabilities 6,316 4,715 4,797 4,604 5,328
Long-term
indebtedness 145,000 145,000 150,000 150,000 50,000
Minority interest 372 263 351 263 -
Unitholders' equity 447,138 447,875 448,152 448,846 336,903

Distribution History
-------------------------------------------------------------------------
Distributions
per unit(1)
Month 2007 2006 2005 2004 2003 2002 2001
-------------------------------------------------------------------------
January $0.1280 $0.1220 $0.1200 $0.1150 $0.1117 $0.1083 $ -
February 0.1280 0.1220 0.1200 0.1150 0.1117 0.1083 -
March 0.1320 0.1250 0.1200 0.1168 0.1117 0.1083 -
April - 0.1250 0.1200 0.1168 0.1133 0.1083 -
May - 0.1250 0.1200 0.1168 0.1133 0.1083 -
June - 0.1250 0.1200 0.1168 0.1133 0.1083 -
July - 0.1250 0.1200 0.1168 0.1133 0.1117 -
August - 0.1250 0.1220 0.1168 0.1133 0.1117 -
September - 0.1250 0.1220 0.1168 0.1133 0.1117 -
October - 0.1250 0.1220 0.1168 0.1150 0.1117 -
November - 0.1280 0.1220 0.1200 0.1150 0.1117 -
December(2) - 0.1280 0.1220 0.1200 0.1150 0.1117 0.0427
-------------------------------------------------------- ----------------
$0.3880 $1.5000 $1.4500 $1.4044 $1.3599 $1.3200 $0.0427
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Monthly distributions are made to unitholders of record on the last
business day of each month and are paid within 31 days following each
month end.
(2) Distributions paid in 2001 are in respect of the 12 calendar days
from December 20, 2001 to December 31, 2001.

Tax Allocation of Distributions

-------------------------------------------------------------------------
2007 2006 2005 2004 2003 2002

-------------------------------------------------------------------------
Dividend income 0.0% 0.0% 0.0% 15.0% 19.5% 16.9%
Other income 100.0% 100.0% 91.6% 75.2% 69.5% 71.5%
Return of
capital 0.0% 0.0% 8.4% 9.8% 11.0% 11.6%
-------------------------------------------------------------------------
Total
distributions
for the period 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
-------------------------------------------------------------------------

The above tax allocation of distributions for 2007 represents an estimate
based on the total expected distributions for the year ended December 31,
2007.

Other Statistics
(in thousands, except per unit amounts)

Quarter ended ------------------- 2007 - Q1 2006 - Q4 - Q3 - Q2 - Q1 2005 - Q4 - Q3 - Q2 - Q1 2004 - Q4 - Q3 - Q2 - Q1 2003 - Q4 - Q3 - Q2 - Q1 2002 - Q4 - Q3 - Q2 - Q1 >> Number
Trading price range of of units Market
units (TSX: "DHF.UN") Average outstanding capitaliz-
------------------------- daily at quarter ation at
High Low Close volume end quarter end
------------------------------------------------------
$ 17.19 $ 15.00 $ 16.60 87 43,947 729,517
19.80 13.80 15.46 143 43,947 679,417
19.49 17.21 19.19 96 43,947 843,339
21.99 16.99 17.70 100 43,947 777,858
23.18 19.50 21.50 61 37,921 815,297
24.00 16.32 23.19 92 37,921 879,383
24.07 19.50 21.19 88 37,921 803,542
22.85 19.58 20.92 61 37,921 793,303
23.25 19.65 22.00 67 37,921 834,257
23.25 18.80 22.70 81 37,921 860,802
19.62 16.75 19.45 58 37,921 737,559
19.34 15.05 18.00 93 37,921 682,574
19.40 16.71 19.40 92 37,921 735,663
17.50 15.10 17.45 67 37,921 661,718
15.65 14.52 15.30 99 37,921 580,188
15.20 12.91 15.00 82 37,921 568,812
13.69 12.48 12.94 92 37,921 490,695
13.25 11.22 12.86 139 37,921 487,661
12.13 10.45 12.10 165 37,921 458,842
11.25 10.00 10.95 176 37,921 415,233
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