Davis + Henderson Income Fund Reports Third Quarter 2007 Results; Announces Intention to Issue a Special Distribution and to Increase Monthly Distributions

TORONTO, Oct. 30, 2007 (Canada NewsWire via COMTEX News Network) — TSX Stock Symbol: “DHF.UN”.

Website: www.dhltd.com

Davis + Henderson Income Fund reported increases in revenue and cash flow for the three and nine months ended September 30, 2007 as the positive impact of program enhancements, strong activity in the mortgage and real estate markets and, for the first half of the year, higher than anticipated cheque order volumes, combined to produce above-target performance.

Today, Davis + Henderson declared a one-time special distribution of $0.20 per unit payable on November 30, 2007 to unitholders of record on November 15, 2007. The Fund also announced its intention to increase its distributions for the month of November 2007, payable on December 31, 2007, to $0.143 per unit (equivalent to $1.72 per unit annualized) subject to normal course regulatory requirements. This represents an 8.3% increase in the monthly distributions over distributions declared for the month of October 2007.

The increase in distributions recognizes the above-target year-to-date performance, the strong financial position of the Business and the need for the Fund to pay distributions sufficient to ensure the Fund itself is not taxable.

Further discussions can be found in the Management Discussion’s and Analysis.

<<
Third quarter Highlights

- Revenue increased by $6.7 million, or 7.6%, to $94.7 million
compared to the same quarter in 2006. This increase was the result of
a $4.1 million, or 5.6%, increase for the Davis + Henderson segment
and a $2.6 million, or 17.5%, increase for the Filogix Segment over
the comparable prior year period.

- Net income per unit increased to $0.4750, or 32.3%, compared to the
third quarter of 2006.

- Declared distributions in the third quarter of 2007 of $0.3960 per
unit were 5.6% higher than in the third quarter of 2006.

Nine-Month Highlights

- Revenue increased by $52.0 million, or 22.1%, to $287.8 million
compared to the same period in 2006. Of this increase, $30.4 million
was driven by the inclusion of a full nine months of results for the
Filogix Segment in 2007 compared with three and one half months in
2006 and by strong growth in origination fees in the Filogix Segment.
The Davis + Henderson Segment reported above expected revenue growth
of 9.9%, or $21.6 million, compared with the same period in 2006.

- Net income per unit increased to $1.4931, or 20.8%, compared to the
first nine months of 2006.

- Declared distributions for the first nine months of 2007 of
$1.1800 per unit were 5.5% higher than in the first nine months
of 2006.

>>

Management Commentary

The inclusion of the Filogix results for the full nine months of 2007, as compared to approximately three and a half months in 2006, had a significant impact on revenue and cash flows to date this year. As well, during the first nine months of 2007, the Business continued to benefit from solid contributions related to program initiatives, such as iDefence(R) and BizAssist(R).

Additionally, two other significant factors contributed to above-target revenue growth for the nine-month period: (1) cheque order volumes were stronger than anticipated, including incremental reorders related to the changes in imaging standards on cheques; and (2) record real estate activity in 2007 has significantly increased mortgage origination and underwriting fees within the Filogix Segment. While both of these factors have influenced year-to-date results, they were less pronounced in the third quarter and in particular, cheque order volumes in the third quarter were directionally more in line with historical experience.

The increased reorder activity levels that lifted revenue in 2007 may contribute to reduced reorder volumes in future quarters, as consumers delay orders due to their recent cheque supply replenishments. Accordingly, while revenue growth to date in 2007 has been higher than the long-term growth objective, revenue growth in 2008 may be less than the 3% to 5% long-term objective.

Looking forward, Davis + Henderson remains committed to its long-term financial objective of growing distributions based on achieving revenue 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 third quarter results and management’s outlook in this press release, please see the Management’s Discussion and Analysis.

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 third quarter ended September 30, 2007 via conference call at 10:00 a.m. EST (Toronto time) on Wednesday October 31, 2007. The number to use for this call is 416-644-3423 for Toronto area callers or 1-800-731-6941 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 21249265 followed by the number sign. The rebroadcast will be available until Wednesday, November 14, 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 third 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 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 as part of its first strategy, 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(R), 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 CollateralGuard(TM), 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 would result in certain income trusts, including the Fund, paying taxes after fiscal 2010, similar to those paid by taxable Canadian corporations. These proposed amendments were enacted on June 22, 2007. 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. These 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, management and the Trustees have monitored the changes in the income trust environment 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’s results for the quarter ended September 30, 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 THIRD QUARTER

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

                                    Three months                 Nine months
                                           ended                       ended
                      September 30, September 30, September 30, September 30,
                              2007          2006          2007          2006
    -------------------------------------------------------------------------
    Revenue             $   94,676    $   87,966    $  287,817    $  235,784
    Cost of sales and
     operating expenses     63,425        62,754       194,211       166,759
    Amortization of
     capital and other
     assets                  3,884         3,752        11,335        10,038
    -------------------------------------------------------------------------
                            27,367        21,460        82,271        58,987

    Interest expense         1,982         2,248         6,333         3,830
    Net unrealized loss
     (gain) on interest
     rate swaps                957             -        (1,563)            -
    Amortization of
     intangible assets       3,347         3,339         9,912         4,982
    Minority interest          205            88           518           113
    -------------------------------------------------------------------------
    Income before
     income taxes           20,876        15,785        67,071        50,062
    Future income taxes
     expense                     -             -         1,454             -
    -------------------------------------------------------------------------
    Net income          $   20,876    $   15,785    $   65,617    $   50,062
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Net income per unit,
     basic and diluted  $   0.4750    $   0.3592    $   1.4931    $   1.2364
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    The results of the nine months ended September 30, 2006 included
    financial results of Filogix for the period of June 15, 2006 to
    September 30, 2006.

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

                                                          Three months ended
    -------------------------------------------------------------------------
                       Davis + Henderson Segment             Filogix Segment
                     ---------------------------- ---------------------------
                      Sep 30, 2007  Sep 30, 2006  Sep 30, 2007  Sep 30, 2006
    -------------------------------------------------------------------------
    Revenue             $   77,164    $   73,061    $   17,512    $   14,905
    Percentage change         5.6%                       17.5%

    Cost of sales and
     operating expenses     54,138        51,381         8,721        10,898
    Amortization of
     capital and other
     assets                  2,495         2,656         1,389         1,096
    -------------------------------------------------------------------------
                            20,531        19,024         7,402         2,911
    Percentage change         7.9%                      154.3%

    Interest expense             -             -             -             -
    Net unrealized loss
     on interest rate
     swaps                       -             -             -             -
    Amortization of
     intangible assets         864           855         2,483         2,484
    Minority interest          205            88             -             -
    -------------------------------------------------------------------------
    Income before
     income taxes           19,462        18,081         4,919           427
    Future income
     taxes expense               -             -             -             -
    -------------------------------------------------------------------------
    Net income          $   19,462    $   18,081    $    4,919    $      427
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                                          Three months ended
    -------------------------------------------------------------------------
                                       Corporate                Consolidated
                      --------------------------- ---------------------------
                      Sep 30, 2007  Sep 30, 2006  Sep 30, 2007  Sep 30, 2006
    -------------------------------------------------------------------------
    Revenue             $        -    $        -    $   94,676    $   87,966
    Percentage change            -                        7.6%

    Cost of sales and
     operating expenses        566           475        63,425        62,754
    Amortization of
     capital and other
     assets                      -             -         3,884         3,752
    -------------------------------------------------------------------------
                              (566)         (475)       27,367        21,460
    Percentage change        19.2%                       27.5%

    Interest expense         1,982         2,248         1,982         2,248
    Net unrealized loss
     (gain) on interest
     rate swaps                957             -           957             -
    Amortization of
     intangible assets           -             -         3,347         3,339
    Minority interest            -             -           205            88
    -------------------------------------------------------------------------
    Income before
     income taxes           (3,505)       (2,723)       20,876        15,785
    Future income
     taxes expense               -             -             -             -
    -------------------------------------------------------------------------
    Net income          $   (3,505)   $   (2,723)   $   20,876    $   15,785
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                                           Nine months ended
    -------------------------------------------------------------------------
                       Davis + Henderson Segment             Filogix Segment
                     ---------------------------- ---------------------------
                      Sep 30, 2007  Sep 30, 2006  Sep 30, 2007  Sep 30, 2006
    -------------------------------------------------------------------------
    Revenue             $  239,845    $  218,251    $   47,972    $   17,533
    Percentage change         9.9%                      Note 1

    Cost of sales and
     operating expenses    166,007       152,718        26,289        12,572
    Amortization of
     capital and
     other assets            7,161         8,747         4,174         1,291
    -------------------------------------------------------------------------
                            66,677        56,786        17,509         3,670
    Percentage change        17.4%                      Note 1

    Interest expense             -             -             -             -
    Net unrealized loss
     (gain) on interest
     rate swaps                  -             -             -             -
    Amortization of
     intangible assets       2,463         2,113         7,449         2,869
    Minority interest          518           113             -             -
    -------------------------------------------------------------------------
    Income before
     income taxes           63,696        54,560        10,060           801
    Future income
     taxes expense               -             -             -             -
    -------------------------------------------------------------------------
    Net Income          $   63,696    $   54,560    $   10,060    $      801
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                                           Nine months ended
    -------------------------------------------------------------------------
                                       Corporate                Consolidated
                     ---------------------------- ---------------------------
                      Sep 30, 2007  Sep 30, 2006  Sep 30, 2007  Sep 30, 2006
    -------------------------------------------------------------------------
    Revenue             $        -    $        -    $  287,817    $  235,784
    Percentage change            -                       22.1%
    Cost of sales and
     operating expenses      1,915         1,469       194,211       166,759
    Amortization of
     capital and
     other assets                -             -        11,335        10,038
    -------------------------------------------------------------------------
                            (1,915)       (1,469)       82,271        58,987
    Percentage change        30.4%                       39.5%

    Interest expense         6,333         3,830         6,333         3,830
    Net unrealized loss
     (gain) on interest
     rate swaps             (1,563)            -        (1,563)            -
    Amortization of
     intangible assets           -             -         9,912         4,982
    Minority interest            -             -           518           113
    -------------------------------------------------------------------------
    Income before
     income taxes           (6,685)       (5,299)       67,071        50,062
    Future income
     taxes expense           1,454             -         1,454             -
    -------------------------------------------------------------------------
    Net Income          $   (8,139)   $   (5,299)   $   65,617    $   50,062
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Note 1: The results of the nine months ended September 30, 2006 included
    financial results of Filogix for the period of June 15, 2006 to
    September 30, 2006 and accordingly, the year-over-year growth percentages
    are not provided as they do not compare equivalent time periods.
    >>

 

Revenue

Total revenue for the third quarter of 2007 increased by $6.7 million, or 7.6%, to $94.7 million when compared to the third quarter of 2006. This increase reflects a $4.1 million, or 5.6%, increase for the Davis + Henderson Segment and a $2.6 million, or 17.5%, increase for the Filogix Segment over the comparable 2006 period.

For the nine-month period ended September 30, 2007, total revenue increased by $52.0 million, or 22.1%, when compared to the first nine months of 2006. The Davis + Henderson Segment contributed $21.6 million to this increase with the remaining balance of $30.4 million attributable to the Filogix Segment. The significant growth in the Filogix Segment was due to the inclusion of a full nine months of results for the Filogix Segment in 2007 versus only a partial period in 2006 (commencing on the date of acquisition on June 15, 2006) and from strong activity in the mortgage and real estate market.

The revenue growth rates achieved by the Business for both the three-month and the nine-month periods were higher than the long-term objective of 3% to 5%, even after considering the impact of the short reporting period for the Filogix Segment in 2006.

Within the Davis + Henderson Segment, during the three and nine month periods, growth was provided by contributions related to program initiatives, such as iDefence(R) and BizAssist(R) and to a lesser extent, from increased ownership of the AVS business, the expansion of personal property search and registration programs and growth in eSwitch volumes related to customer promotional programs. In addition, stronger than expected cheque order volumes including incremental reorders related to the changes in imaging standards on cheques contributed to growth rates exceeding the Fund’s overall long-term objectives.

Historically, cheque order volumes have, on average, declined annually by low single digit percentages as a result of declining cheque usage. In the first nine months of 2007, the Davis + Henderson Segment did not experience this decline and, for the first six months of 2007, overall cheque order volume was higher than in the prior year. These stronger than anticipated order volumes are believed to be the result of increased customer promotional activities, the continuing movement of consumers to orders with fewer cheques and changes in the imaging standards required for cheques produced in Canada, which generated incremental and accelerated reorders. In the first quarter of 2007, these incremental reorders related primarily to one financial institution, but during the second quarter, orders were increasing from many of our financial institution customers. In the third quarter, order activity was directionally more in line with historical experience and management believes there were fewer accelerated reorders. Management further believes that many of these accelerated reorders would otherwise have been received in future periods pursuant to normal reorder cycles.

As well, management believes that declining cheque usage will continue to contribute to declining cheque orders as it has in the past. Additionally, it is believed that the acceleration of reorders, as described above, may contribute to higher than historically observed average declines in future quarters, reducing revenues in such periods.

During the three and nine-month periods, the Filogix Segment’s revenue was stronger than expected as the Business benefited from the strong real estate market, although the impact was less pronounced in the third quarter of 2007. Including 2006 revenue earned by Filogix prior to its acquisition by the Fund, origination services revenue, which represent a substantial share of overall revenues, was up 27.8% year-over-year for the three-month period ended September 30, 2007, and 34.6% year-over-year for the nine-month period. Total revenue for the third quarter of 2007 for the Filogix Segment was up 17.5% compared with the same quarter in 2006, reflecting growth in the origination and other transaction based revenues and reduced revenues from project implementation and customization services, which were significantly lower in 2007 as compared to 2006.

Cost of Sales and Operating Expenses

On a consolidated basis, cost of sales and operating expenses for the third quarter of 2007 increased by $0.7 million, or 1.1%, compared to the third quarter of 2006. Direct and operating expenses for the Davis + Henderson Segment and corporate expenses increased by $2.9 million, or 5.5%, partially offset by a $2.2 million, or 20.0%, decrease in expenses for the Filogix Segment.

Most of the Davis + Henderson Segment and corporate year-over-year expense increase of 5.5% was related to increased revenues and to project implementation costs in 2007.

Filogix operating costs, in general, are not directly correlated with increases or decreases in revenues. The year-over-year decrease in operating costs during the third quarter of 2007 compared to the third of quarter 2006 is primarily attributed to large project costs incurred in 2006. Certain of these costs were billable to customers as described above.

For the first nine months of 2007, consolidated cost of sales and operating expenses increased by $27.5 million, or 16.5%, when compared to the first nine months of 2006. The Filogix Segment accounted for $13.7 million of the increase and the Davis + Henderson Segment, along with corporate expenses, accounted for the remaining $13.8 million.

While most of the expense increase in the Davis + Henderson Segment related directly to revenue growth, the segment also had increased spending on information technology related to infrastructure upgrade initiatives, enhancing the overall internal computing environment and project implementations.

The expense increase in the Filogix Segment for the nine-month period was largely a result of its inclusion for nine months in 2007 versus three and half months in 2006. Within the Filogix Segment, margins were stronger in 2007 compared to 2006 and stronger than expectations. During 2007, Filogix benefited from strong growth in origination revenues with relatively unchanged expenses from quarter to quarter in 2007. The Business expects to increase expenses within the Filogix Segment in support of further product enhancements and strengthening the general delivery capabilities of the Business. The increased expenses will commence in the fourth quarter of 2007 and will continue to grow in 2008. Accordingly, margins are expected to be reduced from the level recorded in 2007.

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.

Other Expenses and Net Income

Amortization of capital and other assets on a consolidated level increased by $0.1 million, or 3.5%, to $3.9 million compared to the third quarter of 2006. Increased capital asset amortization in the Filogix Segment of $0.3 million was related to capital additions. This increase was partially offset by a decline in expense in the Davis + Henderson Segment of $0.2 million, related to certain capital and other assets having become fully amortized. Similarly, for the first nine months of 2007, amortization of capital and other assets on a consolidated basis was $11.3 million, an increase of $1.3 million compared to the first nine months of 2006, with the Filogix Segment increase of $2.9 million partially offset by a decrease in amortization for the Davis + Henderson Segment of $1.6 million, as described above.

Interest expense decreased by $0.3 million for the third quarter of 2007 compared to the same quarter in the prior year reflecting $20.0 million of debt repayments made over the past twelve months. For the first nine months of 2007, interest expense was $2.5 million higher than the comparable 2006 period. This increase reflected the draw down of additional debt for the acquisition of the Filogix business late in the second quarter of 2006. Included in these increases were $0.2 million and $0.5 million, respectively for the third quarter and first nine months of 2007, 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 loss on interest-rate swaps of $1.0 million was recognized for the third quarter of 2007 reflecting mark-to-market adjustments related to generally lower interest rates at September 30, 2007 compared to June 30, 2007. An unrealized gain on interest-rate swaps of $1.6 million was recognized for the nine months ended September 30, 2007 reflecting the change in fair value of the interest-rate swaps during such period. These unrealized gains and losses were 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 Changes in Accounting Policy section.

Amortization of intangibles in the third quarter of 2007 is comparable with the same quarter last year but increased by $4.9 million during the first nine months of 2007 when compared to the first nine months of 2006. This increase for the nine-month period 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 from 10 to 15 years.

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.

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 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 distributions at a rate of 31.5%. As the new tax rules were enacted late 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. Accordingly, the Fund recognized a future income tax liability and a corresponding non-cash future income tax expense of $1.5 million during the second quarter of 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.

Net income of $20.9 million for the third quarter of 2007 represents an increase of $5.1 million compared to the third quarter of 2006. Net income of $0.4750 per unit increased by $0.1158 per unit. For the nine-month period ended September 30, 2007, net income was $65.6 million, or $1.4931 per unit. This represents an increase of $15.6 million, or $0.2567 per unit.

 

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

                                                          2007          2006
                                Q3            Q2            Q1            Q4
    -------------------------------------------------------------------------
    Revenue             $   94,676    $  101,992    $   91,149    $   87,932
    Net income          $   20,876    $   26,520    $   18,221    $   16,467
    -------------------------------------------------------------------------
    Net income per unit $   0.4750    $   0.6035    $   0.4146    $   0.3747
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Weighted average
     units outstanding      43,947        43,947        43,947        43,947
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                                          2006          2005
                                Q3            Q2            Q1            Q4
    -------------------------------------------------------------------------
    Revenue             $   87,966    $   75,900    $   71,918    $   69,232
    Net income          $   15,785    $   17,717    $   16,560    $   14,982
    -------------------------------------------------------------------------
    Net income per unit $   0.3592    $   0.4477    $   0.4367    $   0.3951
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Weighted average
     units outstanding      43,947        39,576        37,921        37,921
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    >>

 

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 most 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.

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 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 cash flows table below, such as “Adjusted cash flows from operating activities”, and “Adjusted cash flows after capital assets and contract expenditures” 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           Nine months ended
                     September  30, September 30, September 30, September 30,
                              2007          2006          2007          2006
    -------------------------------------------------------------------------
    Cash flows from
     operating
     activities         $   28,802    $   22,786    $   85,260    $   67,643
    Add (deduct):
      Changes in non-cash
       working capital
       and other
       items (Note 1)          425            90         2,010        (2,561)
    -------------------------------------------------------------------------
    Adjusted cash flows
     from operating
     activities             29,227        22,876        87,270        65,082
    Less:
      Expenditures on
       capital assets
       - maintenance
       (Note 2)              2,705           997         7,549         3,919
      Expenditures on
       capital assets
       - growth (Note 2)        68           884           251         1,295
      Contract payments
       (Note 3)              1,825           800         3,342         2,676
    -------------------------------------------------------------------------
    Adjusted cash flows
     after capital assets
     and contract payments
     (Note 2)               24,629        20,195        76,128        57,192
    Distributions paid
     to unitholders         17,403        16,479        51,681        44,579
    -------------------------------------------------------------------------
    Adjusted cash flows
     after capital,
     contract payments
     and distributions
     paid                    7,226         3,716        24,447        12,613
    Changes in non-cash
     working capital and
     other items (Note 1)     (425)          (90)       (2,010)        2,561
    Distributions paid
     to minority interest     (255)            -          (255)            -
    Cash flows provided
     by (used in) other
     financing activities   (5,000)            -       (15,000)      207,749
    Cash flows used in
     acquisition of
     businesses and
     customer service
     contracts                (837)          660          (746)     (222,334)
    -------------------------------------------------------------------------
    Increase in cash and
     cash equivalents
     for the period     $      709    $    4,286    $    6,436    $      589
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    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           Nine months ended
                      September 30, September 30, September 30, September 30,
                              2007          2006          2007          2006
    -------------------------------------------------------------------------
    Adjusted cash flows
     from operating
     activities         $   0.6651    $   0.5205    $   1.9858    $   1.6073
    Adjusted cash flows
     after capital
     expenditures and
     contract payments  $   0.5604    $   0.4595    $   1.7323    $   1.4125
    Distributions paid
     to unitholders     $   0.3960    $   0.3750    $   1.1760    $   1.1160
    Distributions
     declared during
     period             $   0.3960    $   0.3750    $   1.1800    $   1.1190
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                                           Per unit % change
    -------------------------------------------------------------------------
                                      Three months ended   Nine months ended
                                      September 30, 2007  September 30, 2007
                                                     vs.                 vs.
                                      September 30, 2006  September 30, 2006
    -------------------------------------------------------------------------
    Adjusted cash flows from operating
     activities                                    27.8%               23.5%
    Adjusted cash flows after capital
     expenditures and contract payments            22.0%               22.6%
    Distributions paid to unitholders               5.6%                5.4%
    Distributions declared during period            5.6%                5.5%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    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 and nine-month periods ended
September 30, 2007 and for the years ended December 31, 2006 and 2005.

    (in thousands of Canadian dollars, unaudited)

                      Three months   Nine months
                             ended         ended    Year ended    Year ended
                      September 30, September 30,  December 31,  December 31,
                              2007          2007          2006          2005
    -------------------------------------------------------------------------
    Cash flows from
     operating
     activities         $   28,802    $   85,260    $   89,753    $   76,844
    Net income          $   20,876    $   65,617    $   66,529    $   60,751
    Distributions paid
     to unitholders     $   17,403    $   51,681    $   61,191    $   54,910
    Excess of cash flows
     from operating
     activities over
     cash distributions
     paid               $   11,399    $   33,579    $   28,562    $   21,934
    Excess of net income
     over cash
     distributions paid $    3,473    $   13,936    $    5,338    $    5,841
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    >>

 

Excess cash flows from operating activities over cash distributions paid have been used to fund capital expenditures, pay down debt and to fund acquisitions.

Capital Asset Expenditures

Total capital asset expenditures for the third quarter of 2007 were $2.8 million, an increase of $0.9 million, compared to the third quarter of 2006. The Filogix Segment accounted for $0.1 million of the increase, with the balance of the increase, $0.8 million, attributable to the Davis + Henderson Segment.

For the first nine months of 2007, total capital expenditures increased by $2.6 million compared to the first nine months of 2006. The Filogix Segment accounted for $1.9 million of the increase and the Davis + Henderson Segment accounted for $0.7 million of the increase.

The Business’ 2007 capital program is expected to be in the range of $14.0 million to $16.0 million. Most of the increase in 2007 over 2006 arises as a result of including a full-year capital program for the Filogix Segment and also reflects continued investment in both the Davis + Henderson and the Filogix Segments’ technology infrastructure. The level of investment in 2008 required to maintain, sustain and grow the productive capacity of the Business is expected to be comparable to the 2007 expenditures. The Business’ capital program provides for continued expenditures to be funded by cash flows from operations.

Distributions

The Fund paid distributions of $17.4 million ($0.3960 per unit) during the third quarter of 2007 and $51.7 million ($1.1760 per unit) in the first nine months of 2007 compared to $16.5 million ($0.3750 per unit) and $44.6 million ($1.1160 per unit), respectively, for the same periods in 2006. In June 2006, the Fund issued 6,026,000 additional units to finance the Filogix acquisition. On a per unit basis for the three and nine months ended September 30, 2007, distributions paid increased by 5.6% and 5.4%, respectively, when compared to the same periods in 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 5.6% and 5.5% for the three and nine-month periods ended September 30, 2007 respectively.

On an annualized basis, the monthly distribution rate for September 2007 was $1.58 per unit as compared to $1.50 per unit annualized in September 2006, representing an increase of 5.6%.

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.

As previously referred to above, Davis + Henderson has recorded higher than expected revenues, cash flow and net income in 2007 due to a number of factors including incremental cheque orders and a stronger than anticipated mortgage and real estate market. As a result, and in recognition of the Fund’s intention to pay distributions sufficient to ensure no taxable income remains within the Fund, the Fund has declared a one-time special distribution in the amount of $0.20 per unit payable on November 30, 2007 to unit holders of record on November 15, 2007. In addition, the Fund has announced its intent to increase its regular monthly distribution for November, payable on December 31, 2007 to $0.143 per unit (equivalent to $1.72 per unit annualized) subject to normal course regulatory requirements. This represents an 8.3% increase in distributions declared over the month of October 2007.

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 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 September 30, 2007 and October 30, 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           Nine months ended
                      September 30, September 30, September 30, September 30,
                              2007          2006          2007          2006
    -------------------------------------------------------------------------
    Minority interest   $      205    $       88    $      518    $      113
    Decrease (increase)
     in non-cash working
     capital items            (701)         (268)       (2,707)        2,281
    Changes in other
     operating assets
     and liabilities            71            90           179           167
    -------------------------------------------------------------------------
    Changes in non-cash
     working capital
     and other items    $     (425)   $      (90)   $   (2,010)   $    2,561
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    >>

 

The increase in non-cash working capital items for the three months ended September 30, 2007 was primarily related to decreases in trade payables reflecting normal course timing differences of when payments are made.

The increase for the nine-month period ended September 30, 2007 was primarily related to an increase in trade receivables in the Filogix Segment reflecting the increase in revenue between the fourth quarter of 2006 and the third quarter of 2007, consistent with expected seasonal fluctuations, and is expected to reverse in the upcoming periods.

Cash Balances and Long-term Indebtedness

At September 30, 2007, cash and cash equivalents totalled $12.2 million, compared to $5.8 million at December 31, 2006. The Business has continued to generate operating cash flow in excess of distributions, capital expenditures and contractual obligations.

The balance of long-term indebtedness as at September 30, 2007 was $130.0 million. During the third quarter and year-to-date in 2007, the Business made voluntary debt payments totalling $5.0 million and $15.0 million, respectively. Management expects to continue to use a portion of any future excess cash flow to pay down debt. The long-term indebtedness is recorded on the Balance Sheet net of $1.0 million of unamortized deferred financing fees.

Total debt facilities available at September 30, 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 September 30, 2007, 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 September 30, 2007, 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 - Interest rate swaps
    -------------------------------------------------------------------------
    Maturity Date         Notional         Asset     Liability      Interest
                            Amount                                   Rate(1)
    -------------------------------------------------------------------------
    June 30, 2008       $   12,000    $       40    $        -        5.035%
    January 4, 2009         10,000           129             -        4.505%
    July 15, 2009           20,000             -           110        5.688%
    July 15, 2010           33,000             -           209        5.690%
    June 15, 2011           20,000             -            53        5.560%
    June 15, 2011           25,000             -            42        5.560%
    -------------------------------------------------------------------------
                        $  120,000    $      169    $      414
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (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.
    >>

 

Pursuant to 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 Changes in Accounting Policy section.

At September 30, 2007, the Fund would pay the fair value of $0.2 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 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 5.51% as at September 30, 2007.

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.

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”.

These 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.

On June 12, 2007, with the third reading of Bill C-52, which contained the new tax rules regarding the taxation of income trusts, including the Fund, the new tax rules were considered to be substantively enacted under Canadian GAAP. As a result, the Fund commenced accounting for tax changes in its June 30, 2007 interim reporting. A future income tax liability of $1.5 million was recognized with a corresponding amount flowing through the Fund’s income for the quarter ended June 30, 2007. The liability represents estimated temporary differences at June 30, 2007 that are expected to reverse starting in the fiscal year 2011.

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 September 30, 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, in part, as a result of the consolidation of the Filogix business. Also, as previously described, two additional factors have contributed in 2007 to organic growth exceeding the targeted range: the incremental revenue in the first half of 2007 from accelerated cheque reorders related to the changes in imaging standards; and, the record real estate and mortgage activity in 2007 which has, to date, contributed to strong growth in fee revenue in the Filogix Segment. The increased reorder activity levels experienced earlier in 2007 may, in future quarters, contribute to higher than historically observed average volume declines as consumers delay orders due to recent cheque supply replenishments. Additionally, the increased activity within the real estate and mortgage markets may not be sustained due to the historical 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 the chequing account. 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. The 2007 capital program is expected to be in the range of $14.0 million to $16.0 million, as is the 2008 expenditure program.

Late in 2006, the Minister of Finance (Canada) released draft legislation, which would result in certain income trusts, including the Fund, paying taxes after fiscal 2010, similar to those paid by taxable Canadian corporations. These proposed amendments were enacted on June 22, 2007. 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. These 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, management and the Trustees have monitored the changes in the income trust environment 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.

 

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

    -------------------------------------------------------------------------
                                                  September 30,  December 31,
                                                          2007          2006
    -------------------------------------------------------------------------
    ASSETS
    Current Assets:
      Cash and cash equivalents                     $   12,224    $    5,788
      Accounts receivable                               21,731        18,299
      Inventory                                          4,765         5,238
      Prepaid expenses                                   3,148         3,920
    -------------------------------------------------------------------------
                                                        41,868        33,245

    Capital assets (note 3)                             31,097        32,567
    Other assets (note 4)                                6,783         6,147
    Interest rate swaps (note 8 )                          169             -
    Intangible assets (note 5)                         121,471       130,546
    Goodwill (note 6)                                  438,502       438,546
    -------------------------------------------------------------------------
                                                    $  639,890    $  641,051
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    LIABILITIES AND UNITHOLDERS' EQUITY
    Current Liabilities:
      Accounts payable and accrued liabilities      $  36,402    $    36,600
      Distributions payable to unitholders              5,801          5,625
      Current portion of disbursement obligations
       on customer contracts (note 7)                   2,962          2,195
    -------------------------------------------------------------------------
                                                       45,165         44,420

    Disbursement obligations on customer
     contracts (note 7)                                   787          2,195
    Long-term indebtedness (note 8 )                  128,985        143,778
    Other long-term liabilities (note 9)                2,492          2,520
    Interest rate swaps (note 8 )                         414              -
    Future income taxes (note 2)                        1,454              -
    Minority interest                                     526            263
    -------------------------------------------------------------------------
                                                      179,823        193,176

    Unitholders' Equity:
      Trust units (note 10)                           474,585        474,585
      Deficit                                         (12,834)       (26,710)
      Accumulated other comprehensive income
       (loss)                                          (1,684)             -
    -------------------------------------------------------------------------
                                                      460,067        447,875

    Commitments (note 11)
    -------------------------------------------------------------------------
                                                    $ 639,890     $  641,051
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The accompanying notes are an integral part of these consolidated
    financial statements.

    CONSOLIDATED STATEMENTS OF INCOME
    (in thousands of Canadian dollars, except per unit amounts, unaudited)

    -------------------------------------------------------------------------
                              Three months ended           Nine months ended
                      September 30, September 30, September 30, September 30,
                              2007          2006          2007          2006
    -------------------------------------------------------------------------
    Revenue             $   94,676    $   87,966    $  287,817    $  235,784
    Cost of sales and
     operating expenses     63,425        62,754       194,211       166,759
    Amortization of
     capital and
     other assets            3,884         3,752        11,335        10,038
    -------------------------------------------------------------------------
                            27,367        21,460        82,271        58,987

    Interest expense         1,982         2,248         6,333         3,830
    Net unrealized loss
     (gain) on interest
     rate swaps                957             -        (1,563)            -
    Amortization of
     intangible assets       3,347         3,339         9,912         4,982
    Minority interest          205            88           518           113
    -------------------------------------------------------------------------

    Income before
     income taxes           20,876        15,785        67,071        50,062
    Future income
     taxes expense               -             -         1,454             -
    -------------------------------------------------------------------------
    Net income          $   20,876    $   15,785    $   65,617    $   50,062
    -------------------------------------------------------------------------
    Net income per
     unit, basic
     and diluted        $   0.4750    $   0.3592    $   1.4931    $   1.2364
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The accompanying notes are an integral part of these consolidated
    financial statements.

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

                              Three months ended           Nine months ended
                      September 30, September 30, September 30, September 30,
                              2007          2006          2007          2006
    -------------------------------------------------------------------------
    Net income          $   20,876    $   15,785    $   65,617    $   50,062

    Other comprehensive
     income:
      Amortization of
       transitional
       adjustment to
       net income              163             -           515             -
    -------------------------------------------------------------------------
    Total comprehensive
     income             $   21,039    $   15,785    $   66,132    $   50,062
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The accompanying notes are an integral part of these consolidated
    financial statements.

    CONSOLIDATED STATEMENTS OF DEFICIT AND ACCUMULATED
    OTHER COMPREHENSIVE INCOME (LOSS)
    (in thousands of Canadian dollars, unaudited)

                              Three months ended           Nine months ended
                      September 30, September 30, September 30, September 30,
                              2007          2006          2007          2006
    -------------------------------------------------------------------------

    DEFICIT
    Deficit, beginning
     of period          $  (16,307)   $  (25,739)   $  (26,710)   $  (31,049)
    Transitional
     adjustment on
     adoption of
     financial
     instruments
     standards                   -             -           116             -
    Net income              20,876        15,785        65,617        50,062
    Distributions          (17,403)      (16,479)      (51,857)      (45,446)
    -------------------------------------------------------------------------
    Deficit, end of
     period                (12,834)      (26,433)      (12,834)      (26,433)
    -------------------------------------------------------------------------

    ACCUMULATED OTHER
     COMPREHENSIVE INCOME
     (LOSS)
    Accumulated other
     comprehensive
     income (loss),
     beginning of period    (1,847)            -             -             -

    Transitional
     adjustment on
     adoption of
     financial
     instruments
     standards                   -             -        (2,199)            -

    Other comprehensive
     income :
      Amortization of
       transitional
       adjustment to
       net income              163             -           515             -
    -------------------------------------------------------------------------
    Accumulated other
     comprehensive
     income (loss),
     end of period          (1,684)            -        (1,684)            -
    -------------------------------------------------------------------------
    Deficit and
     accumulated other
     comprehensive
     income (loss),
     end of period      $  (14,518)   $  (26,433)   $  (14,518)   $  (26,433)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The accompanying notes are an integral part of these consolidated
    financial statements.

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

                              Three months ended           Nine months ended
                      September 30, September 30, September 30, September 30,
                              2007          2006          2007          2006
    -------------------------------------------------------------------------

    Cash and cash
     equivalents
     provided by
     (used in):

    OPERATING ACTIVITIES
    Net income          $   20,876    $   15,785    $   65,617    $   50,062
    Add:
      Amortization of
       capital assets        3,096         3,083         9,270         7,196
      Amortization of
       other assets            788           669         2,065         2,842
      Amortization of
       intangible assets     3,347         3,339         9,912         4,982
      Amortization of
       transitional
       adjustment in
       interest expense        163             -           515             -
       Net unrealized
        loss (gain) on
        interest rate
        swaps                  957             -        (1,563)            -
       Future income
        taxes expense            -             -         1,454             -
       Minority interest       205            88           518           113
    -------------------------------------------------------------------------
                            29,432        22,964        87,788        65,195

    Decrease (increase)
     in non-cash working
     capital items            (701)         (268)       (2,707)        2,281
    Changes in other
     operating assets
     and liabilities            71            90           179           167
    -------------------------------------------------------------------------
                            28,802        22,786        85,260        67,643
    -------------------------------------------------------------------------

    FINANCING ACTIVITIES
    Gross proceeds from
     issuance of
     trust units                 -             -             -       116,000
    Issuance costs               -             -             -        (6,800)
    Proceeds from
     (repayment of)
     long-term
     indebtedness           (5,000)            -       (15,000)      100,000
    Financing fees               -             -             -        (1,451)
    Distributions
     paid to minority
     interest                 (255)            -          (255)            -
    Distributions
     paid to
     unitholders           (17,403)      (16,479)      (51,681)      (44,579)
    -------------------------------------------------------------------------
                           (22,658)      (16,479)      (66,936)      163,170
    -------------------------------------------------------------------------

    INVESTING ACTIVITIES
    Expenditures on
     capital assets         (2,773)       (1,881)       (7,800)       (5,214)
    Payments pursuant
     to long-term
     supply contracts       (1,825)         (800)       (3,342)       (2,676)
    Acquisition of
     businesses                  -           660            91      (222,334)
    Acquisition of
     customer service
     contracts                (837)            -          (837)            -
    -------------------------------------------------------------------------
                            (5,435)       (2,021)      (11,888)     (230,224)
    -------------------------------------------------------------------------

    Increase in
     cash and cash
     equivalents for
     the period                709         4,286         6,436           589
    Cash and cash
     equivalents,
     beginning of
     period                 11,515         4,607         5,788         8,304
    -------------------------------------------------------------------------
    Cash and cash
     equivalents,
     end of period      $   12,224    $    8,893    $   12,224    $    8,893
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Supplementary
     information:
      Cash interest
       paid             $    1,836    $    2,336    $    5,924    $    4,468
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Notes to Consolidated Financial Statements
    Three and nine months ended September 30, 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 that is currently 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.

    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.

    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 legislation. Accordingly, the Fund
    will be subject to taxes on distributions of certain income earned from
    investments in its subsidiaries made after 2010. 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 subsidiaries that
    are expected to reverse in or after 2011. The Fund expects that its
    distributions 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 then.

    Significant components of the Fund's future tax liabilities and assets
    with respect to its investments in certain partnership and trust
    subsidiaries as of September 30, 2007 are as follows:

                                                          September 30, 2007
    -------------------------------------------------------------------------
    Future income tax assets:
      Intangible assets less than tax values                      $   12,001
      Valuation allowance                                            (12,001)
    -------------------------------------------------------------------------
      Total future tax assets                                              -
    -------------------------------------------------------------------------

    Future income tax liabilities:
       Capital assets greater than tax values                          1,454
    -------------------------------------------------------------------------
       Total future tax liabilities                                    1,454
    -------------------------------------------------------------------------
    Net future income tax liabilities                             $    1,454
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    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 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.

    3.  CAPITAL ASSETS

                                                          September 30, 2007
    -------------------------------------------------------------------------
                                                    Accumulated
                                              Cost amortization          Net
    -------------------------------------------------------------------------
    Machinery and equipment             $   15,138   $    7,477   $    7,661
    Computer equipment and software         43,409       22,446       20,963
    Furniture, fixtures and
     leasehold improvements                  8,031        5,558        2,473
    -------------------------------------------------------------------------
                                        $   66,578   $   35,481   $   31,097
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                                           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 quarter ended September 30, 2007 was
    $3,096 (Q3 2006 - $3,083) and during the nine months ended September 30,
    2007 was $9,270 (nine months ended September 30, 2006 - $7,196). Fully
    amortized capital assets removed from the accounts during the quarter
    ended September 30, 2007 was $127 and the nine months ended September 30,
    2007 was $221 (Q3 2006 and the nine months ended September 30, 2006 -
    nil).

    4.  OTHER ASSETS

                                                   September 30, December 31,
                                                           2007         2006
    -------------------------------------------------------------------------
    Cost:
      Long-term supply contracts                     $   12,451   $    9,750
      Other                                                 370          370
    -------------------------------------------------------------------------
                                                         12,821       10,120

    Accumulated amortization                             (6,038)      (3,973)
    -------------------------------------------------------------------------
                                                     $    6,783    $   6,147
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Amortization during the quarter ended September 30, 2007 on long-term
    supply contracts was $788 (Q3 2006 - $669) and during the nine months
    ended September 30, 2007 was $2,065 (nine months ended
    September 30, 2006 - $2,842).

    5.  INTANGIBLE ASSETS

                                                   September 30, December 31,
                                                           2007         2006
    -------------------------------------------------------------------------
    Cost:
      Cheque supply outsourcing contracts            $   16,329   $   16,329
      Customer service contracts                          4,506        3,669
      Proprietary software                               41,993       41,993
      Brand names                                         8,400        8,400
      Customer relationships                             77,887       77,887
    -------------------------------------------------------------------------
                                                        149,115      148,278
    Accumulated amortization                            (27,644)     (17,732)
    -------------------------------------------------------------------------
                                                     $  121,471   $  130,546
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Amortization during the quarter ended September 30, 2007 was
    $3,347 (Q3 2006 - $3,339) and during the nine months ended September 30,
    2007 was $9,912 (nine months ended September 30, 2006 - $4,982).

    6.  GOODWILL

                                                   September 30, 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

                                                   September 30, December 31,
                                                           2007         2006
    -------------------------------------------------------------------------
    Current portion                                  $    2,962   $    2,195
    Long-term portion                                       787        2,195
    -------------------------------------------------------------------------
    Total disbursement obligations
     on customer contracts                           $    3,749   $    4,390
    -------------------------------------------------------------------------

    The Fund has fixed customer contract disbursement obligations payable as
    of September 30, 2007 as follows:

    2007                                                          $       20
    2008                                                               2,962
    2009                                                                 767

    -------------------------------------------------------------------------
                                                                  $    3,749
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    8.      LONG-TERM INDEBTEDNESS

                                                   September 30, December 31,
                                                           2007         2006
    -------------------------------------------------------------------------
    Non-revolving term loan                          $  120,000   $  120,000
    Revolving credit facility                            10,000       25,000
    -------------------------------------------------------------------------
                                                        130,000      145,000
    Deferred finance costs                               (1,015)      (1,222)
    -------------------------------------------------------------------------
                                                     $  128,985   $  143,778
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    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 September 30, 2007, the Fund was in
    compliance with all of its financial covenants and financial condition
    tests.

    As of September 30, 2007, the Fund has entered into interest-rate swap
    hedge 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:

    -------------------------------------------------------------------------
    Maturity Date     Notional Amount        Asset    Liability     Interest
                                                                    Rate (1)
    -------------------------------------------------------------------------
      June 30, 2008        $   12,000   $       40   $        -       5.035%
      January 4, 2009          10,000          129            -       4.505%
      July 15, 2009            20,000            -           110      5.688%
      July 15, 2010            33,000            -           209      5.690%
      June 15, 2011            20,000            -            53      5.560%
      June 15, 2011            25,000            -            42      5.560%
    -------------------------------------------------------------------------
                           $  120,000   $      169   $       414
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (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.

    Deferred finance costs relate to the renewal and amendment of long-term
    indebtedness on June 15, 2006. Amortization of deferred finance costs
    during the quarter ended September 30, 2007 was $69 (Q3 2006 - $73) and
    during the nine months ended September 30, 2007 was $207 (nine months
    ended September 30, 2006 - $97). Amortization of deferred finance costs
    is recognized as interest expense using the effective interest method.

    9.  OTHER LONG-TERM LIABILITIES

                                                   September 30, December 31,
                                                           2007         2006
    -------------------------------------------------------------------------
    Deferred compensation program                    $    1,855   $    1,659
    Employee future benefits                                637          861
    -------------------------------------------------------------------------
                                                     $    2,492   $    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 quarter
    ended September 30, 2007 was $0.4 million (Q3 2006 - $0.2 million) and
    $1.3 million for the nine months ended September 30, 2007 (nine months
    ended September 30, 2006 - $1.0 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:

                                                   September 30, 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 quarter ended
    and the nine months ended September 30, 2007 was 43,946,792
    (Q3 2006 - 43,946,792 and for the nine months ended September 30, 2006 -
    40,490,704).

    11. COMMITMENTS

    As of September 30, 2007, the Fund has annual lease obligations with
    respect to real estate, vehicles and equipment as follows for the years
    ending:

    2007                                                           $   1,061
    2008                                                               3,916
    2009                                                               3,144
    2010                                                               3,040
    2011                                                               1,523
    Thereafter                                                           803
    -------------------------------------------------------------------------
                                                                   $  13,487
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    12. SIGNIFICANT CUSTOMERS

    For both the quarter and the nine months ended September 30, 2007, the
    Fund earned 78% (Q3 2006 - 76% and for the nine months ended September
    30, 2006 - 80%) of its revenue from its seven largest customers. For the
    quarter ended September 30, 2007, four of these customers individually
    accounted for greater than 10% but not more than 17% of the Fund's total
    revenue. For the nine months ended September 30, 2007, five of these
    customers individually accounted for greater than 10%, but not more than
    17% of the Fund's total revenue.

    13. 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(R) 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.

    The business of Filogix is seasonal and varies according to the funding
    of residential mortgages and real estate activity in general. This may
    result in an increase in the quarter-to-quarter seasonality of the Fund's
    consolidated revenues and cash flows.

    Summarized financial information for the three and nine months ended
    September 30, 2007 are as follows:

                                                          Three months ended
    -------------------------------------------------------------------------
                       Davis + Henderson Segment             Filogix Segment
                      --------------------------- ---------------------------
                      Sep 30, 2007  Sep 30, 2006  Sep 30, 2007  Sep 30, 2006
    -------------------------------------------------------------------------

    Revenue            $    77,164   $    73,061   $    17,512   $    14,905
    Cost of sales and
     operating expenses     54,138        51,381         8,721        10,898
    Amortization of
     capital and other
     assets                  2,495         2,656         1,389         1,096
    -------------------------------------------------------------------------
                            20,531        19,024         7,402         2,911

    Interest expense             -             -             -             -
    Net unrealized loss (gain)
     on interest rate swaps      -             -             -             -
    Amortization of
     intangible assets         864           855         2,483         2,484
    Minority interest          205            88             -             -
    -------------------------------------------------------------------------
    Income before
     income taxes           19,462        18,081         4,919           427
    Future income
     taxes expense               -             -             -             -
    -------------------------------------------------------------------------
    Net income         $    19,462   $    18,081   $     4,919   $       427
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Capital and other
     assets
     expenditures      $     2,869   $     1,487   $     1,729   $     1,194
    Intangible assets  $     6,184   $     8,217   $   115,287   $   125,219
    Goodwill           $   366,562   $   365,555   $    71,940   $    73,224
    Total assets       $   447,240   $   419,275   $   180,426   $   220,878
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                                          Three months ended
    -------------------------------------------------------------------------
                                       Corporate                Consolidated
                      --------------------------- ---------------------------
                      Sep 30, 2007  Sep 30, 2006  Sep 30, 2007  Sep 30, 2006
    -------------------------------------------------------------------------

    Revenue             $        -   $         -    $   94,676    $   87,966
    Cost of sales and
     operating expenses        566           475        63,425        62,754
    Amortization of
     capital and other
     assets                      -             -         3,884         3,752
    -------------------------------------------------------------------------
                              (566)         (475)       27,367        21,460

    Interest expense         1,982         2,248         1,982         2,248
    Net unrealized loss (gain)
     on interest rate
     swaps                     957             -           957             -
    Amortization of
     intangible assets           -             -         3,347         3,339
    Minority interest            -             -           205            88
    -------------------------------------------------------------------------
    Income before
     income taxes           (3,505)       (2,723)       20,876        15,785
    Future income taxes
     expense                     -             -             -             -
    -------------------------------------------------------------------------
    Net income          $   (3,505)  $    (2,723)  $    20,876   $    15,785
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Capital and other
     asset
     expenditures       $        -   $         -   $     4,598   $     2,681
    Intangible assets   $        -   $         -   $   121,471   $   133,436
    Goodwill            $        -   $         -   $   438,502   $   438,779
    Total assets        $   12,224   $     8,893   $   639,890   $   649,046
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    For the quarter ended September 30, 2007, the Davis + Henderson Segment
    had five 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 18% of the Filogix Segment revenue.

                                                           Nine months ended
    -------------------------------------------------------------------------
                       Davis + Henderson Segment             Filogix Segment
                      --------------------------- ---------------------------
                      Sep 30, 2007  Sep 30, 2006  Sep 30, 2007  Sep 30, 2006
    -------------------------------------------------------------------------

    Revenue             $  239,845    $  218,251    $   47,972    $   17,533
    Cost of sales and
     operating expenses    166,007       152,718        26,289        12,572
    Amortization of
     capital and other
     assets                  7,161         8,747         4,174         1,291
    -------------------------------------------------------------------------
                            66,677        56,786        17,509         3,670

    Interest expense             -             -             -             -
    Net unrealized
     loss (gain) on
     interest rate swaps         -             -             -             -
    Amortization of
     intangible assets       2,463         2,113         7,449         2,869
    Minority interest          518           113             -             -
    -------------------------------------------------------------------------
    Income before
     income taxes           63,696        54,560        10,060           801
    Future income taxes
     expense                     -             -             -             -
    -------------------------------------------------------------------------
    Net Income          $   63,696    $   54,560    $   10,060    $      801
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Capital and other
     asset expenditures $    7,106    $    6,169    $    4,036    $    1,721
    Intangible assets   $    6,184    $    8,217    $  115,287    $  125,219
    Goodwill            $  366,562    $  365,555    $   71,940    $   73,224
    Total assets        $  447,240    $  419,275    $  180,426    $  220,878
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                                           Nine months ended
    -------------------------------------------------------------------------
                                       Corporate                Consolidated
                      --------------------------- ---------------------------
                      Sep 30, 2007  Sep 30, 2006  Sep 30, 2007  Sep 30, 2006
    -------------------------------------------------------------------------
    Revenue             $        -    $        -    $  287,817    $  235,784
    Cost of sales and
     operating expenses      1,915         1,469       194,211       166,759
    Amortization of
     capital and other
     assets                      -             -        11,335        10,038
    -------------------------------------------------------------------------
                            (1,915)       (1,469)       82,271        58,987

    Interest expense         6,333         3,830         6,333         3,830
    Net unrealized
     loss (gain) on
     interest rate swaps    (1,563)            -        (1,563)            -
    Amortization of
     intangible assets           -             -         9,912         4,982
    Minority interest            -             -           518           113
    -------------------------------------------------------------------------
    Income before
     income taxes           (6,685)       (5,299)       67,071        50,062
    Future income taxes
     expense                 1,454             -         1,454             -
    -------------------------------------------------------------------------
    Net Income          $   (8,139)   $   (5,299)   $   65,617    $   50,062
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Capital and other
     asset expenditures $        -    $        -    $   11,142    $    7,890
    Intangible assets   $        -    $        -    $  121,471    $  133,436
    Goodwill            $        -    $        -    $  438,502    $  438,779
    Total assets        $   12,224    $    8,893    $  639,890    $  649,046
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    For the nine months ended September 30, 2007, the Davis + Henderson
    Segment had five 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 16% of the Filogix Segment revenue.

    14. COMPARATIVE FIGURES

    Certain comparative figures have been reclassified to conform to the
    current period's presentation.

    SUPPLEMENTARY FINANCIAL INFORMATION

    Consolidated Operating Results by Period

    -------------------------------------------------------------------------
                               Three     Three     Three     Three     Three
    (in thousands of          months    months    months    months    months
     Canadian dollars,         ended     ended     ended     ended     ended
     except per unit       September      June     March  December September
     amounts, unaudited)    30, 2007  30, 2007  31, 2007  31, 2006  30, 2006
    -------------------------------------------------------------------------

    Revenue                 $ 94,676  $101,992  $ 91,149  $ 87,932  $ 87,966
    Cost of sales and
     operating expenses       63,425    66,873    63,913    62,034    62,754
    Amortization of capital
     and other assets          3,884     3,745     3,706     3,902     3,752
    -------------------------------------------------------------------------
                              27,367    31,374    23,530    21,996    21,460
    Interest expense           1,982     2,121     2,230     2,186     2,248
    Net unrealized loss
     (gain) on interest
     rate swaps                  957    (2,196)     (324)        -         -
    Amortization of
     intangible assets         3,347     3,271     3,294     3,254     3,339
    Future income taxes
     expense                       -     1,454         -         -         -
    Minority interest            205       204       109        89        88
    -------------------------------------------------------------------------
    Net income              $ 20,876  $ 26,520  $ 18,221  $ 16,467  $ 15,785
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Cash flows from
     operating activities   $ 28,802  $ 34,784  $ 21,674  $ 22,111  $ 22,786
    Changes in non-cash
     working capital and
     other items(1)              425    (1,814)    3,399     1,512        90
    -------------------------------------------------------------------------
    Adjusted cash flows
     from operating
     activities               29,227    32,970    25,073    23,623    22,876

    Less:
      Capital asset
       expenditures and
       contract payments       4,598     2,955     3,589     1,966     2,681
    -------------------------------------------------------------------------
    Adjusted cash flows
     after capital assets
     and contract payments    24,629    30,015    21,484    21,657    20,195

    Distributions paid
     to unitholders           17,403    17,403    16,875    16,732    16,479
    -------------------------------------------------------------------------
    Adjusted cash flows
     after capital,
     contract payments and
     distributions paid        7,226    12,612     4,609     4,925     3,716

    Changes in non-cash
     working capital and
     other items(1)             (425)    1,814    (3,399)   (1,512)      (90)
    Distributions paid to
     minority interest          (255)        -         -         -         -
    Cash flows provided by
     (used in) other
     financing activities     (5,000)  (10,000)        -    (5,000)        -
    Cash flows used in
     acquisition of
     businesses and
     customer service
     contracts                  (837)        -        91    (1,518)      660
    -------------------------------------------------------------------------

    Increase (decrease) in
     cash and cash
     equivalents for the
     period                 $    709  $  4,426  $  1,301  $ (3,105) $  4,286
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (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.

    Summary of Cash Flows Per Unit

    -------------------------------------------------------------------------
                               Three     Three     Three     Three     Three
                              months    months    months    months    months
                               ended     ended     ended     ended     ended
    (in Canadian dollars,  September      June     March  December September
     unaudited)             30, 2007  30, 2007  31, 2007  31, 2006  30, 2006
    -------------------------------------------------------------------------
    Adjusted cash flows
     from operating
     activities             $ 0.6651  $ 0.7502  $ 0.5705  $ 0.5375  $ 0.5205
    Adjusted cash flows
     after capital asset
     expenditures and
     contract payments      $ 0.5604  $ 0.6830  $ 0.4889  $ 0.4928  $ 0.4595
    Distributions paid
     to unitholders         $ 0.3960  $ 0.3960  $ 0.3840  $ 0.3780  $ 0.3750
    Distributions declared
     during period          $ 0.3960  $ 0.3960  $ 0.3880  $ 0.3810  $ 0.3750
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Condensed Consolidated Balance Sheet

    -------------------------------------------------------------------------
    (in thousands of
     Canadian dollars      September      June     March  December September
     unaudited)             30, 2007  30, 2007  31, 2007  31, 2006  30, 2006
    -------------------------------------------------------------------------
    Cash and cash
     equivalents            $ 12,224  $ 11,515  $  7,089  $  5,788  $  8,893
    Other current assets      29,644    29,772    26,332    27,457    27,384
    Capital and other
     assets                   38,049    39,303    39,532    38,714    40,554
    Goodwill and other
     intangible assets       559,973   562,483   565,754   569,092   572,215

    -------------------------------------------------------------------------
                            $639,890  $643,073  $638,707  $641,051  $649,046
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Payables and other
     current liabilities    $ 45,165  $ 45,994  $ 41,034  $ 44,420  $ 47,100
    Other long-term
     liabilities               5,673     6,732     6,688     4,978     5,148
    Long-term indebtedness   128,985   133,916   143,847   143,778   148,646
    Unitholders' equity      460,067   456,431   447,138   447,875   448,152

    -------------------------------------------------------------------------
                            $639,890  $643,073  $638,707  $641,051  $649,046
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    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       0.1320   0.1250   0.1200   0.1168   0.1133   0.1083        -
    May         0.1320   0.1250   0.1200   0.1168   0.1133   0.1083        -
    June        0.1320   0.1250   0.1200   0.1168   0.1133   0.1083        -
    July        0.1320   0.1250   0.1200   0.1168   0.1133   0.1117        -
    August      0.1320   0.1250   0.1220   0.1168   0.1133   0.1117        -
    September   0.1320   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
    -------------------------------------------------------------------------
               $1.1800  $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 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%
    -------------------------------------------------------------------------
                         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)

                                                           Number     Market
                 Trading price range of units            of units    capital-
                       (TSX: "DHF.UN")                   outstand-   ization
      Quarter   -------------------------------  Average   ing at         at
        ended       High        Low      Close    daily   quarter    quarter
                                                 volume       end        end
    -------------------------------------------------------------------------
    2007 - 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

SOURCE: Davis + Henderson Income Fund

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