Davis +Henderson Reports Fourth Quarter, Year-End 2010 Results

TORONTO, Mar. 8, 2011 (Canada NewsWire via COMTEX) – Davis + Henderson (“D+H” or the “Business” or the “Company”) today reported solid financial results for the three and twelve months ended December 31, 2010 that were consistent with expectations and we are satisfied with these results given the changes within the markets we service and in the context of our strategic agenda. Overall, revenue growth for the year ended December 31, 2010, compared to the year ended December 31, 2009, was primarily attributable to the inclusion of Resolve, which was acquired mid-way through 2009.

For the year overall, we financially benefited from the inclusion of Resolve service offerings and, through the latter portion of 2009 and into 2010, from stronger volumes within our lending and loan servicing areas. During the fourth quarter we had revenue increases within most major service areas. In many instances, these increases did not substantially impact earnings as expenses increased in support of the revenue increases. Additionally, we recorded a $6.2 million restructuring charge, consistent with expectation, and incurred increases in other integration based items with the result that EBITDA(1) was lower than the prior comparable period. As previously expressed, we are satisfied with these results overall.

Fourth Quarter Highlights

<<
-   Revenue was $160.5 million, an increase of $8.9 million, or 5.9%,
compared to the same quarter in 2009.

-   EBITDA was $29.5 million, a decrease of $7.6 million, or 20.5%,
compared to $37.1 million for the same quarter in 2009. The fourth
quarter of 2010 included a $6.2 million restructuring charge.

-   Adjusted income(1) was $20.4 million ($0.3834 per unit), a decrease
of $8.8 million, or 30.1%, as compared to $29.2 million ($0.5488 per
unit) for the same quarter in 2009. Adjusted income and Adjusted
income per unit for 2010 both included a restructuring charge of
$6.2 million ($0.1177 per unit).

-   Net income was $12.9 million ($0.2415 per unit), a year-over-year
decrease of $12.7 million, or 49.8%, compared to $25.6 million
($0.4809 per unit) for the same quarter in 2009. Net income and net
income per unit included the restructuring charges, as well as non-
cash items related to mark-to-market adjustments on interest-rate
swaps, future income taxes and amortization of acquisition
intangibles related to business acquisitions.

-   Cash distributions paid for the fourth quarter of 2010 were $0.4599
per unit, unchanged from the same quarter in 2009.

————————
(1) Davis + Henderson reports several non-GAAP measures, including
EBITDA and Adjusted income used above. Adjusted income is calculated
as net income, adjusted to remove the results of discontinued
operations and the non-cash impacts of mark-to-market gains and
losses on derivative instruments, future income taxes and
amortization of intangibles from acquisitions. These items are
excluded in calculating Adjusted income as they are not considered
indicative of the financial performance of the Business for the
period being reviewed. Any non-GAAP measures should be considered in
context with the GAAP financial presentation and should not be
considered in isolation or as a substitute for GAAP net earnings or
cash flow. Further, Davis + Henderson’s measures may be calculated
differently from similarly titled measures of other companies. See
Non-GAAP Measures for a more complete description of these terms.

>>

2010 Highlights

<<
-   Revenue was $640.4 million, an increase of $166.5 million, or 35.1%,
compared to 2009.

-   EBITDA was $149.4 million, an increase of $13.8 million, or 10.2%,
compared to 2009. The increase in EBITDA of 10.2% relative to the
increase in revenue of 35.1% reflected the inclusion of acquired
Resolve service offerings that contributed lower margins as a
percentage of revenues as compared to other D+H services.
Additionally, EBITDA was impacted by the previously described
restructuring charge which for all of 2010 was $8.4 million.

-   Adjusted income was $115.1 million, an increase of $5.6 million, or
5.1%, compared to $109.5 million for 2009. Adjusted income per unit
was $2.1617, a decrease of 5.3%, compared to $2.2820 per unit for
2009. Adjusted income per unit was impacted by the issuance of
9,286,581 trust units for the Resolve acquisition and the
restructuring charge of $8.4 million ($0.1583 per unit).

-   Net income was $82.5 million, a year-over-year decrease of
$12.5 million, or 13.1% compared to $95.0 million for 2009. Net
income per unit was $1.5503, a decrease of 21.7% compared to $1.9808
per unit for the same period in 2009. As described above, the
decreases in both net income and net income per unit include the
previously announced restructuring charge, as well as non-cash items
including mark-to-market adjustments on interest-rate swaps, future
income taxes and amortization of intangible assets related to
business acquisitions. Net income per unit was also impacted by the
issuance of 9,286,581 trust units for the Resolve acquisition.

-   Cash distributions paid in 2010 were $1.8396 per unit, unchanged from
2009.

-   On October 7, 2010, the Business sold a non-strategic component of
its contact centre business and as such, the results of these
operations are presented as discontinued operations for both current
and prior periods presented.
>>

During the year there were several highlights related to our strategic agenda, including (i) our announcement of operational integration efforts that are designed to strengthen our service capabilities and improve our effectiveness, (ii) the divestiture of a non-core business acquired as part of our Resolve acquisition, (iii) the announcement of the acquisition of ASSET Inc. (completed in January, 2011) and (iv) the approval and completion of our corporate conversion. Together, these initiatives position the Business to continue to grow and strategically diversify consistent with our vision.

For a more detailed discussion of the results and management’s outlook please see Management’s Discussion and Analysis below.

Caution Concerning Forward-looking Statements

This news release contains certain statements that constitute forward-looking information within the meaning of applicable securities laws (“forward-looking statements”). Statements concerning Davis + Henderson’s objectives, goals, strategies, intentions, plans, beliefs, expectations and estimates, and the business, operations, financial performance and condition of Davis + Henderson are forward-looking statements. The words “believe”, “expect”, “anticipate”, “estimate”, “intend”, “may”, “will”, “would” and similar expressions and the negative of such expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements are subject to important assumptions, including the following specific assumptions: the ability of Davis + Henderson to meet its revenue and EBITDA targets; general industry and economic conditions; changes in Davis + Henderson’s relationship with its customers and suppliers; pricing pressures and other competitive factors. Davis + Henderson has also made certain macroeconomic and general industry assumptions in the preparation of such forward-looking statements. While Davis + Henderson considers these factors and assumptions to be reasonable based on information currently available, they may prove to be incorrect.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Business, or developments in Davis + Henderson’s industry, to differ materially from the anticipated results, performance, achievements or developments expressed or implied by such forward-looking statements.

Risks related to forward-looking statements include, among other things, challenges presented by declines in the use of cheques by consumers; the pace of adoption by consumers of other payment means such as electronic person-to-person payments; the Fund’s dependence on a limited number of large financial institution customers and dependence on their acceptance of new programs; strategic initiatives being undertaken to meet the Fund’s financial objective; stability and growth in the real estate, mortgage and lending markets; as well as general market conditions, including economic and interest rate dynamics and investor interest in, and government regulations relating to, Income Trusts. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Forward-looking statements are based on management’s current plans, estimates, projections, beliefs and opinions, and Davis + Henderson does not undertake any obligation to update forward-looking statements should assumptions related to these plans, estimates, projections, beliefs and opinions change except as required by applicable securities laws.

Conference Call

Davis + Henderson will discuss its financial results for the three and twelve months ended December 31, 2010 via conference call at 10:00 a.m. EST (Toronto time) on Wednesday, March 9, 2011. The number to use for this call is 647-427-7450 for Toronto area callers or 1-888-231-8191 for all other callers. The conference call will be hosted by Bob Cronin, Chief Executive Officer and by Brian Kyle, Chief Financial Officer. The conference call will also be available on the web by accessing CNW Group’s website www.newswire.ca/webcast/. For anyone unable to listen to the scheduled call, the rebroadcast number will be: 416-849-0833 for Toronto area callers, or 1-800-642-1687 for all other callers, with Encore Password 44637985. The rebroadcast will be available until Wednesday, March 23, 2011. An archive recording of the conference call will also be available at the above noted web address for one month following the call and a text version of the call will be available at www.dhltd.com.

ADDITIONAL 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 fourth quarter of 2010 and year ended December 31, 2010 should be read in conjunction with MD&A in the Fund’s Annual Report for the year ended December 31, 2009, dated March 2, 2010, the Short Form Prospectus, dated May 30, 2006, and the attached unaudited consolidated financial statements. External economic and industry factors remain substantially unchanged from the annual MD&A and the Short Form Prospectus, unless otherwise stated.

Effective January 1, 2011, pursuant to a plan of arrangement (“the Arrangement”), the Fund’s income trust structure was converted to a corporate structure and the publicly traded corporation is now named Davis + Henderson Corporation (the “Corporation”). This conversion was approved at a meeting of unitholders held on June 17, 2010, at which unitholders approved the Arrangement by a vote of 99.8%. The information circular in respect of this meeting, which provided a detailed outline of the conversion is available on SEDAR at www.sedar.com. Under the Arrangement, unitholders of the Fund received, on a tax deferred, roll-over basis, one common share of the Corporation, for each unit of the Fund held. Common shares of Davis + Henderson Corporation commenced trading on the Toronto Stock Exchange on January 4, 2011, under the symbol DH.

In conjunction with the conversion, the Company also undertook an internal reorganization to simplify its business operations by consolidating the various businesses it had previously operated as separate legal entities. The combined business now primarily operates within D+H Limited Partnership. The conversion was treated as a change in business form and was accounted for as a continuity of interests. As such, the carrying amounts of assets, liabilities and unitholders’ equity in the consolidated financial statements of the Fund immediately before the conversion remained the same as the carrying values of Davis + Henderson Corporation immediately after the conversion.

Commencing in 2011, as a corporation, the Business is subject to corporate taxes. We had previously announced our intention to pay quarterly dividends commencing in 2011 at an initial annualized rate of $1.20 per share. Also as previously announced, D+H intends to declare a special dividend of $0.15 per share in early March 2011. The special dividend payment date is expected to be at the end of March 2011. Consequently, for the first quarter of 2011, it is expected that the Business will pay approximately $0.30 per share of distributions comprised of a $0.1533 per unit distribution paid on January 31, 2011 and a $0.15 per share dividend paid in March 2011. Subsequently, it is our intention to pay regular quarterly dividends at a rate of $0.30 per share (equivalent to $1.20 per share annualized) with the intended initial regular quarterly dividend being declared in May 2011 and paid in June 2011. Actual dividends declared will be subject to the discretion of the D+H Board of Directors and may vary from the intentions stated. Among other items, in determining actual dividends declared, the Board of Directors will consider the financial performance, capital plans, acquisition plans, expectations of future economic conditions and other factors.

In addition, on January 18, 2011, D+H announced the completion of its acquisition of substantially all the assets of ASSET Inc. (“ASSET”) for a purchase price of $76 million payable in cash, which D+H financed with an extension of its current credit facilities. ASSET is Canada’s largest provider of technology based asset recovery and insolvency management solutions to the Canadian financial services industry. On behalf of lenders, ASSET uses web-enabled platforms to manage the recovery process around loans provided for moveable property and provides solutions to support real property recovery, unsecured debt recovery, insolvency process management, and personal property lien search and registration services. This acquisition furthers D+H’s strategy of being a leading provider of integrated solutions to the financial services industry and, in particular, deepens the Corporation’s capabilities across the broader lending spectrum.

Notwithstanding the structural and distribution changes described above, the strategies and objectives of the Business remain unchanged.

STRATEGY

Davis + Henderson is a leading solutions provider to the financial services marketplace. We have several market-leading service offerings within Canada, including our cheque supply program, the servicing of student loans, the provision of registration and related services for secured loan products and the delivery of lending technology solutions within the mortgage market. We also offer broader technology solutions in the commercial lending, small business lending and leasing area, as well as servicing solutions within the credit card market and other outsourced services in a number of specialty areas.

Davis + Henderson’s strategy is to establish market leading positions within well defined and growing service areas in the financial services marketplace and to further expand our service offerings by enhancing the activities that we perform on behalf of our customers. We expect to advance this strategy through internal (or organic) initiatives, as well as by partnering with third parties and by way of selective acquisitions. Davis + Henderson’s long-term financial objective is to deliver sustainable and growing earnings through continued organic revenue growth and by way of strategic acquisitions. The Business has three primary strategies to meet its objectives. These are to: (i) evolve and enhance the value of the cheque supply program and services to the chequing account; (ii) extend our technology supported services related to personal, student and commercial lending and leasing markets; and (iii) pursue opportunities in other areas within the financial services marketplace.

Over the past several years, D+H has executed this strategy by evolving our programs to the chequing account, completing several acquisitions, including Advanced Validation Systems (“AVS”) in 2005, Filogix in 2006, Cyence in 2008, Resolve in 2009 and ASSET in January 2011, and by further enhancing our services and capabilities. As a result, we offer a diverse range of market-leading services.

FINANCIAL INFORMATION PRESENTATION

Between 2006 and the second quarter of 2009, the Business operated as, and reported upon, two business segments, the “D+H Segment” and the “Filogix Segment”. Subsequent to the completion of the Resolve acquisition, the Business announced that it would move to a single integrated operation in order to better serve customers and maximize efficiencies. The Business is now managed along functional lines and operating decisions and performance assessment is aligned with these functions. As such, the Business now reports as a single segment. Revenue pertaining to major service areas and expenses pertaining to significant categories have been presented to reflect how management operates the Business.

OPERATING RESULTS FOR THE FOURTH QUARTER

Overview

D+H had solid operating performance in the fourth quarter of 2010 that was consistent with our expectations and we are satisfied with these results given market conditions and the activities undertaken related to our strategic initiatives. Overall, the Business had growth in revenues in the fourth quarter of 2010 over the same period in 2009 but given changes in product mix and increases in certain expenses, including the previously announced restructuring charges, EBITDA was lower as compared to the comparable period in 2009. Specifically, the Business recorded a restructuring charge of $6.2 million in the fourth quarter of 2010 as part of a total restructuring charge for 2010 of $8.4 million. This restructuring, announced in October 2010 is designed to improve the Business’ effectiveness and efficiency as well as to better position the new integrated and larger Business going forward. For a more detailed description on revenues and expenses, see the comments below.

<<
Consolidated Operating and Financial Results
(in thousands of Canadian dollars, except per unit amounts, unaudited)

Quarter ended
December 31,
2010       2009
————————————————————————-
Revenue                                             $ 160,457  $ 151,521
Expenses                                              124,733    114,467
Restructuring charges(4)                                6,268          -
————————————————————————-
EBITDA(1)                                              29,456     37,054

Amortization of capital assets and non-acquisition
intangibles                                            5,643      4,514
Interest expense                                        3,405      3,326
————————————————————————-
Adjusted income(1)                                     20,408     29,214

Amortization of mark-to-market adjustment
of interest-rate swaps                                    52        103
Net unrealized loss (gain) on derivative
instruments(2)                                        (2,848)    (1,620)
Future income tax expense (recovery)                    2,620     (2,605)
Amortization of intangibles from acquisitions           7,108      7,330
————————————————————————-

Income from continuing operations                      13,476     26,006
Income (loss) from discontinued operations,
net of taxes(3)                                         (620)      (405)
————————————————————————-

Net income                                          $  12,856  $  25,601

————————————————————————-
————————————————————————-

Adjusted income per unit, basic and diluted(1)      $  0.3834  $  0.5488

Net income per unit, basic and diluted              $  0.2415  $  0.4809

————————————————————————-
————————————————————————-

Quarter ended
December 31,
2010 vs. 2009
% change
————————————————————————-

Revenue                                                             5.9%
EBITDA(1)                                                         -20.5%
Adjusted income per unit(1)                                       -30.1%
Net income per unit                                               -49.8%

————————————————————————-
————————————————————————-

(1) EBITDA and Adjusted income are non-GAAP terms. See Non-GAAP Measures
for a more complete description of these terms.

(2) The Business enters into derivative contracts to fix the interest
rates and foreign exchange rates on a significant portion of its
outstanding bank debt and foreign currency transactions, which are
relatively minor, respectively. For accounting purposes, these
derivative instruments do not qualify for hedge accounting treatment
and, accordingly, any change in the fair value of these contracts is
recorded through income. Provided the Business does not cancel its
derivative contracts prior to maturity, the amounts represent a non-
cash unrealized gain or loss that will subsequently reverse through
income. The Company has historically held its derivative contracts to
maturity.

(3) On October 7, 2010, the Business sold a non-strategic component of
its contact centre business and as such, these divested operations
are presented as discontinued operations for both current and prior
periods presented.

(4) Restructuring charges of $6.2 million ($0.1177 per unit) relate to
further integration and transformation initiatives designed to better
position the Business going forward to serve customers and improve
the effectiveness, efficiency and scalability of operations.
>>

Revenue

Consolidated revenue for the fourth quarter of 2010 was $160.5 million, an increase of $8.9 million, or 5.9%, compared to the same quarter in 2009. Increase in revenue was due to modest increases in several service areas and by specific customer-driven project initiatives that increased both revenues and expenses during the quarter as compared to the previous year.

Services delivered by the Business are subject to seasonality, particularly relating to fees earned in connection with mortgage origination services and automobile loan registration services, which are typically stronger in the second and third quarters than in the first and fourth quarters, as was the case in 2010.

(in thousands of Canadian dollars, unaudited)

<<
Quarter ended
December 31,
2010       2009
————————————————————————-
Revenue
Programs to the chequing account                  $  73,020  $  71,787
Loan servicing                                       32,926     29,554
Loan registration technology services                23,930     21,729
Lending technology services                          19,946     17,527
Other(1)                                             10,635     10,924

————————————————————————-
$ 160,457  $ 151,521
————————————————————————-
————————————————————————-

(1) Excluded for the current and comparative periods are the discontinued
operations that were sold on October 7, 2010.
>>

Revenue for the fourth quarter from programs to the chequing account was $73.0 million, an increase of $1.2 million, or 1.7%, compared to the same quarter in 2009. The modest increase was primarily attributable to program changes and product and service enhancements that increased average order values partially offset by cheque order volume reductions. Management believes that the long-term historical trend related to current cheque order decline is relatively unchanged and continues to be in the low single digit range, however, there has been more volatility in order volumes in recent periods.

Revenue for the fourth quarter of 2010 from loan servicing, which includes student loan administration services and credit card servicing was $32.9 million, an increase of $3.4 million, or 11.4%, compared to the same quarter in 2009. Revenue from student loan administrative services, which comprise the largest portion of revenues within this service area was relatively unchanged as compared to the fourth quarter of 2009. Revenues in this area are expected to be relatively stable over the short-term with modestly growing volumes and new program initiatives being offset by reduced pricing related to particular contracts. The majority of the revenue increase in this service area is attributed to the credit card servicing area, and in turn, primarily related to specific customer projects. These projects increased both revenues and expenses with minimal impact on profitability.

Loan registration technology services revenue for the fourth quarter of 2010 was $23.9 million, an increase of $2.2 million, or 10.1%, compared to the same quarter in 2009. Services in this area are directed toward supporting personal and commercial lending activity within Canada. Volumes in this area can be variable, and in general change in line with the changes in the overall Canadian economic environment, particularly as it relates to servicing customers within the automotive lending area. During the fourth quarter, the Business experienced increases in registration revenue as compared to the same period in 2009, however, much of the increase was related to recovery of third-party costs that do not provide increased contributions. In general, volumes were stronger in the latter portion of 2009 and into 2010 as compared to the latter part of 2010. This service area typically experiences seasonality and generally has stronger volumes during the second and third quarters as compared to the first and fourth quarters as consumers typically purchase and finance cars in the spring and summer.

Revenue for the fourth quarter of 2010 from lending technology services, which includes services to the mortgage market and other credit markets was $19.9 million, an increase of $2.4 million, or 13.8%, compared to the same quarter in 2009. The increase during the fourth quarter was higher than had been expected and was partially due to the strong Canadian real estate and mortgage markets, which provided a year-over-year increase of 7% in mortgage origination service fees. This fourth quarter increase of 7% compares to an average increase of 18% during the first nine months of 2010. In general, industry analysts expect the housing and mortgage markets to further settle as compared to earlier periods in 2010. Also during the quarter, we had increases in professional services fees associated with specific customer projects. In general, the Company incurs substantial costs to support the professional services activities.

Other revenue for the fourth quarter of 2010 was $10.6 million, as compared to $10.9 million for the same period in 2009, and is comprised of a number of smaller service offerings. In general, revenues from these service areas change due to customer specific and some seasonal activities, with such changes not material to overall consolidated earnings. On October 7, 2010, the Business sold a non-strategic component of its contact centre business and as such, these divested operations are presented as discontinued operations in both current and prior periods presented. Accordingly, the revenues relating to this part of the Business of $0.3 million for the fourth quarter of 2010 and $4.7 million for the comparative period in 2009 have been removed from reported consolidated revenue.

Expenses(1)

On a consolidated basis, expenses for the fourth quarter of 2010 of $124.7 million increased by $10.3 million, or 9.0%, compared to the same quarter in 2009. The increase primarily reflects the higher costs in support of increased revenue as described above and the ongoing costs of integrating the businesses, reduced by continued cost management activities and integration savings.

<<
Quarter ended
December 31,
(in thousands of Canadian dollars, unaudited)            2010       2009
————————————————————————-

Employee compensation and benefits                  $  50,556  $  49,053
Non-compensation direct expenses(2)                    47,774  $  44,087
Other operating expenses(3)                            21,591     17,101
Occupancy costs                                         4,812      4,226

————————————————————————-
$ 124,733  $ 114,467
————————————————————————-
————————————————————————-

(1) Excluded from the current and comparative periods are the
discontinued operations that were sold on October 7, 2010.

(2) Non-compensation direct expenses include materials, shipping, selling
expenses and third party direct disbursements. For the three months
ended December 31, 2009, to be consistent with comparative periods
presented, some expenses have been reclassified to Non-compensation
direct expenses from Other operating expenses. There was no change in
total expenses related to this reclassification.

(3) Other operating expenses include communication costs, licensing fees,
professional fees and expenses not included in other categories.
>>

Employee compensation and benefits costs of $50.6 million for the fourth quarter of 2010 modestly increased by $1.5 million, or 3.1%, compared to the same quarter in 2009, with the increase primarily due to a general increase in compensation levels and increases in project-related activities, partially offset by integration savings.

Non-compensation direct expenses were $47.8 million for the fourth quarter of 2010, an increase of $3.7 million, or 8.4%, compared to the same quarter in 2009. In general, these expenses directionally change with revenue changes. The increase in expenses also reflects costs in connection with the cheque supply programs which can vary by quarter and by customer in accordance with our contractual obligations.

Other operating expenses were $21.6 million, an increase of $4.5 million, or 26.3% compared to the same quarter in 2009. In general, these increases were primarily attributable to the engagement of contractors in support of the previously mentioned customer project activities and to the ongoing costs of integration partially offset by cost management activities.

Occupancy costs for the fourth quarter of 2010 were $4.8 million, an increase of $0.6 million, or 13.9%, compared to the same quarter in 2009. This increase was mainly due to higher operating and maintenance costs as well as a portion of facility costs no longer being allocated to the discontinued operations in the fourth quarter of 2010.

Restructuring Charges

D+H recorded a restructuring charge of $6.2 million during the fourth quarter of 2010. This charge, together with a charge of $2.2 million recorded in the third quarter of 2010 is consistent with the range of $7.0 – $9.0 million previously announced. These charges relate to integration and transformation initiatives designed to better position the Business going forward to serve customers and improve the effectiveness, efficiency and scalability of our operations. These initiatives are a result of the Company completing four acquisitions over the past four years which led to expanded service offerings and operations. The integration activities consist of items that include the consolidation of facilities, centralization of certain functions and operations, elimination of management duplication and repositioning of personnel related to the integrated business, among other items. As a result of these activities we expect to both better position the Company to grow and to achieve annualized savings in the range of $3.0 – $4.0 million by the end of 2012.

EBITDA

EBITDA during the fourth quarter of 2010, including the $6.2 million restructuring charge, was $29.5 million, a decrease of $7.6 million, or 20.5%, compared to the same quarter in 2009. As previously described, in addition to the impact of the restructuring charges, EBITDA also decreased due to increases in expenses supporting revenue growth and other integration activities.

In general, the later periods of 2009 and the first portion of 2010 provided stronger than normal volumes for D+H as the economy moved out of the recession and, in particular, lending activity increased. Additionally, the Business now experiences increases in seasonality with the second and third quarter volumes generally being stronger than the first and fourth quarters.

Other Expenses

Amortization of Capital and Non-acquisition Intangibles

Amortization of capital and non-acquisition intangible assets during the fourth quarter of 2010 increased by $1.1 million, or 25.0% compared to the fourth quarter of 2009. This increase is related to the capital additions throughout 2010, including the significant additions in the fourth quarter of 2010.

Interest Expense

Interest expense for the fourth quarter of 2010 modestly increased by $0.1 million compared to the same quarter last year, with slight increases in interest rates being offset by reduced borrowings.

Net Unrealized Loss (Gain) on Derivative Instruments

A net unrealized gain of $2.8 million on interest-rate swaps and foreign currency contracts was recognized in the fourth quarter of 2010 (Q4 2009 – $1.6 million net unrealized gain) reflecting mark-to-market adjustments related to changes in market interest rates at December 31, compared to September 30. These unrealized gains and losses are recognized in income because these swaps are not designated as hedges for accounting purposes. In general, a loss on interest-rate swaps is recorded when rates decrease as compared to previous periods and a gain is recorded when rates increase. Provided the Business does not cancel its interest-rate swaps, the unrealized amounts represent a non-cash unrealized gain or loss that will subsequently reverse through income as the related swaps mature. The Company has historically held its derivative contracts to maturity.

Future Income Tax Expense (Recovery)

In the fourth quarter of 2010, the Fund recorded a future tax expense from continuing operations of $2.6 million (Q4 2009 – $2.6 million recovery). This future tax expense related to the addition of capital assets for which tax depreciation exceeded accounting depreciation and was partially offset by a future tax recovery related to the amortization of intangibles for accounting purposes. In both instances, the expense and recovery are non-cash items.

Amortization of Intangibles from Acquisitions

Amortization of acquisition related intangibles for the fourth quarter of 2010 decreased by $0.2 million, as compared to the same period in 2009 due to changes in asset classification upon the finalization of the Resolve purchase price equation.

Income (loss) from Discontinued Operations

On October 7, 2010, D+H announced the sale of the non-strategic portion of its contact centre business, which primarily served non-core markets of D+H. Consequently, the results of operations related to this part of the Business have been classified as discontinued operations for both current and comparative periods. Refer to the Divestiture section in the MD&A for further details.

Net Income

Net income of $12.9 million for the fourth quarter of 2010 decreased by $12.7 million, or 49.8%, compared to the same period in 2009. On a per unit basis, net income decreased by 49.8% to $0.2415 per unit, compared to the fourth quarter of 2009 . The decreases are primarily attributable to the restructuring charge recorded during the current period, the non-cash changes in the future income taxes and to a lesser extent, the reduced EBITDA, all as described above.

Adjusted income, which excludes the (1) non-cash impacts of mark-to-market gains and losses on derivative instruments, future income taxes and amortization of intangibles from acquisitions, and (2) discontinued operations, was $20.4 million for the fourth quarter of 2010, a decrease of $8.8 million. Of this decrease, $6.2 million relates to the restructuring charge, described above.

CASH FLOW AND LIQUIDITY

The following table is derived from, and should be read in conjunction with, the Consolidated Statements of Cash Flows and includes non-GAAP measures. Management believes this supplementary disclosure provides useful additional information related to the cash flows of the Fund, repayment of debt and other investing activities. See Non-GAAP Measures for a discussion of non-GAAP terms used.

Summary of Cash Flows(1)

(in thousands of Canadian dollars, unaudited)

<<
Quarter ended
December 31,
2010       2009
————————————————————————-

Cash flows from operating activities                $  42,916  $  40,575

Add:
Changes in non-cash working capital and
other items(2)                                     (17,703)    (7,357)
————————————————————————-

Adjusted cash flows from operating
activities                                            25,213     33,218

Less:
Asset expenditures(3)                                12,166      5,113
Contract payments(4)                                  1,750         20
————————————————————————-

Adjusted cash flows after asset expenditures and
contract payments                                     11,297     28,085

Less:
Distributions paid to unitholders                    24,482     24,482
————————————————————————-

(13,185)     3,603

Cash flows provided by (used in repayment of)
long-term indebtedness                                (6,000)    (6,000)
Fair value of acquisitions                                  -     (1,449)
Cash flows from sale of discontinued operations         1,602          -
Changes in non-cash working capital and
other items(2)                                        17,703      7,357
————————————————————————-

Increase (decrease) in cash and cash equivalents
for the period                                     $     120  $   3,511
————————————————————————-
————————————————————————-

(1) The subtotals in this table are not consistent with GAAP and
accordingly are considered non-GAAP measures. See Non-GAAP Measures
for a discussion of non-GAAP terms used.

(2) Changes in non-cash working capital and certain other balance sheet
items have been excluded from adjusted cash flows from operating
activities so as to remove the effects of timing differences in cash
receipts and cash disbursements, which generally reverse themselves,
but can vary significantly across quarters and may include
obligations for unusual items such as the restructuring charges.
Specifically, over the next several quarters, the Business will make
payments related to the restructuring charges. For details, see the
Changes in Non-Cash Working Capital and Other Items section.

(3) Asset expenditures include both maintenance asset expenditures and
growth asset expenditures. Maintenance asset expenditures for the
quarter ended December 31, 2010 were $10.6 million. Maintenance asset
expenditures are defined by the Fund as asset expenditures necessary
to maintain and sustain the current productive capacity of the
Business or generally improve the efficiency of the Business. Growth
asset expenditures for the quarter ended December 31, 2010 were
$3.3 million. Growth asset expenditures are defined by the Fund as
asset expenditures that increase the productive capacity of the
Business with a reasonable expectation of an increase in cash flow.
The distinction between growth and maintenance asset expenditures
will become less relevant to management in the future as D+H converts
to a corporation.

(4) The Business has various payment obligations under customer and
partner contracts, which include fixed contract or program initiation
payments and annual payments payable over the life of the contract.
The aggregate of all contract payments, both fixed and variable,
reflects, among other things, the high degree of integration and
sharing between D+H and its customers and partners of the many
activities related to ordering, data handling, customer service,
customer access and other activities.
>>

Summary of Cash Flows per Unit

(in Canadian dollars, unaudited)

<<
Quarter ended
December 31,
2010      2009 % change
————————————————————————-
Adjusted cash flows from operating
activities                                  $ 0.4736  $ 0.6240   -24.1%
Adjusted cash flows after asset
expenditures and contract payments          $ 0.2122  $ 0.5276   -59.8%
Cash distributions paid to unitholders       $ 0.4599  $ 0.4599     0.0%
Distributions declared during period         $ 0.4599  $ 0.4599     0.0%
————————————————————————-
————————————————————————-
>>

Cash Flows, Income and Distributions Paid

The following table compares cash flows from operating activities and income to distributions paid:

<<
Quarter
ended
December 31,
(in thousands of Canadian dollars, unaudited)          2010          2009
————————————————————————-
Cash flows from operating activities                $  42,916  $  40,575
Net income                                          $  12,856  $  25,601
Adjusted income(1)                                  $  20,408  $  29,214
Distributions paid during period                    $  24,482  $  24,482
Excess (shortfall) of cash flows from operating
activities over cash distributions paid            $  18,434  $  16,093
Excess (shortfall) of net income over cash
distributions paid                                 $ (11,626) $   1,119
Excess (shortfall) of Adjusted income over cash
distributions paid                                 $  (4,074) $   4,732
————————————————————————-
————————————————————————-

(1) Adjusted income is a non-GAAP term. See Non-GAAP Measures for a more
complete description of this term.
>>

Historically, excess cash flows from operating activities over cash distributions paid have been used to fund capital expenditures, pay down debt and to fund acquisitions. Distributions may exceed net income as a result of significant non-cash charges recorded through income including amortization of intangible assets related to acquisitions and future income taxes.

Over the next several quarters, payments will be made related to restructuring activities pertaining to the operational integration of the Business which will reduce cash flows otherwise generated within the Business.

Expenditures on Capital Assets and Contract Payments

Compared to the same period in 2009, total capital asset expenditures increased by $7.1 million to $12.2 million in the fourth quarter of 2010. Fixed contract payments increased by $1.7 million in the fourth quarter of 2010 compared to 2009. The increase in capital expenditures over 2009 relates to the increased size of operations since the acquisition of Resolve in July 2009 and the Company’s plans for further integration activities. Capital spend in the latter part of 2010 was higher due to the timing of expenditures relating to the additional initiatives designed to save costs and improve delivery within the integrated business and to support revenue growth through the building of technology products. The changes in fixed contract payments relate to timing of when payments are made. The capital spend for the year was consistent with expectations.

The Business’ capital program provides for continued expenditures to be funded by cash flows from operations.

Distributions

The Trustees of the Fund establish distribution levels of the Fund with reference to its financial position, historical results, projected performance of the Business and funds required for potential acquisitions.

The Fund paid cash distributions of $0.4599 per unit ( $24.5 million) during the fourth quarter of 2010, which remained the same for the comparative period in 2009. For the fourth quarter of 2010, both distributions declared and paid per unit were unchanged.

On an annualized basis, the monthly cash distribution rate for December 2010 was $1.84 per unit, unchanged from December 2009.

Changes in Non-Cash Working Capital and Other Items

(in thousands of Canadian dollars, unaudited)

<<
Quarter ended
December 31,
2010       2009
————————————————————————-

Decrease (increase) in non-cash working
capital items                                      $  17,921  $   4,855
Decrease (increase) in other operating assets and
liabilities                                             (218)     2,502
————————————————————————-

Decrease (increase) in non-cash working capital and
other items                                        $  17,703  $   7,357
————————————————————————-
————————————————————————-
>>

The net decrease in non-cash working capital items for the fourth quarter of 2010 is primarily attributable to the increase in trade payables due to normal course timing differences and to amounts related to the restructuring charge previously described. Although some of the restructuring charges were paid during 2010, significant amounts are to be paid in future periods, which will reduce the balance sheet obligations and reduce cash otherwise available.

The Company expects to experience a continuing increase in the volatility of non-cash working capital due to the nature and timing of services rendered in connection with the businesses recently acquired.

Divestiture

On October 7, 2010, D+H announced the sale of this part of the Business, which primarily served non-core markets of D+H, for proceeds approximately equal to the working capital and certain assets of the operations sold. The results of these operations were classified as discontinued operations for both current and comparative periods.

The transaction fees and other transition costs relating to the disposition were recognized as part of the final purchase price allocation for Resolve.

2010 OPERATING RESULTS

Overview

Davis + Henderson had a solid year in 2010 in relation to the execution of its strategic plan and in the context of variable economic and market conditions. As an overall summary, when comparing the results of 2010 to 2009, there were large year-over-year increase in revenues and expenses that were primarily due to the inclusion of Resolve, which was acquired during the third quarter of 2009. The Business also benefited from increase in revenues from several service areas as more fully described below. Additionally, the Business continued its integration and transformation activities, following the Resolve acquisition. These activities had the effect of increasing expenses, including those related to the $8.4 million restructuring charges, but are expected to provide subsequent cost savings and enhanced effectiveness within the Business.

In addition, on October 7, 2010, the Business sold a non-strategic component of its contact centre business and as such, the results of these operations are presented as discontinued operations for both current and prior periods presented.

The following table is derived from, and should be read in conjunction with, the Consolidated Statements of Income and includes non-GAAP measures. Management believes this supplementary disclosure provides useful additional information. See Non-GAAP Measures section for a discussion of non-GAAP terms used. Effective July 27, 2009, the consolidated results include those of Resolve.

Operating and Financial Results(1)

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

<<
Year ended
December 31,
2010       2009       2008
————————————————————————-
Revenue                                  $ 640,374  $ 473,852  $ 367,231
Expenses                                   482,578    338,334    245,678
Restructuring charges(2)                     8,428          -          -
————————————————————————-
EBITDA(3)                                  149,368    135,518    121,553

Amortization of capital assets and
non-acquisition intangibles                20,304     16,517     15,538
Interest expense                            13,988      9,541      6,847
————————————————————————-

Adjusted income(3)                         115,076    109,460     99,168

Amortization of mark-to-market adjustment
of interest-rate swaps                        396        478        561
Net unrealized loss (gain) on derivative
instruments(4)                             (1,199)    (4,145)     5,691
Future income tax expense (recovery)         3,239     (2,372)     1,217
Amortization of intangibles from
acquisitions                               28,288     20,087     13,716
————————————————————————-

Income from continuing operations           84,352     95,412     77,983
Income (loss) from discontinued
operations, net of taxes(5)                (1,826)      (398)       465
————————————————————————-

Net income                                  82,526     95,014     78,448
————————————————————————-
————————————————————————-

Adjusted income per unit, basic and
diluted(3)                              $  2.1617  $  2.2820  $  2.2565

Net income per unit, basic and diluted   $  1.5503  $  1.9808  $  1.7851
————————————————————————-
————————————————————————-

————————————————————————-
2010 vs.   2009 vs.
2009       2008
% change   % change
————————————————————————-
Revenue                                                 35.1%      29.0%
EBITDA(3)                                               10.2%      11.5%
Adjusted income per unit(3)                             -5.3%       1.1%
Net income per unit                                    -21.7%      11.0%
————————————————————————-
————————————————————————-

(1) The results for 2009 include those of Resolve, effective from the
date of acquisition of July 27, 2009.

(2) Restructuring charges of $8.4 million ($0.1583 per unit) relate to
further integration and transformation initiatives designed to better
position the Business going forward to serve customers and improve
the effectiveness and efficiency of operations.

(3) EBITDA and Adjusted income are non-GAAP terms. See Non-GAAP Measures
for a more complete description of these terms.

(4) The Business enters into derivative contracts to fix the interest
rates and foreign exchange rates on a significant portion of its
outstanding bank debt and foreign currency transactions, which are
relatively minor, respectively. For accounting purposes, these
derivative instruments do not qualify for hedge accounting treatment
and, accordingly, any change in the fair value of these contracts is
recorded through income. Provided the Business does not cancel its
derivative contracts prior to maturity, the amounts represent a non-
cash unrealized gain or loss that will subsequently reverse through
income. The Company has historically held its derivative contracts to
maturity.

(5) On October 7, 2010, the Business sold a non-strategic component of
its contact centre business and as such, the results of these
operations are presented as discontinued operations for both current
and prior periods presented. Discontinued operations for 2008 relate
to services previously provided under a U.S. cheque supply contract.
>>

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

Revenue(1)

Total consolidated revenue for the year ended December 31, 2010 was $640.4 million, an increase of $166.5 million, or 35.1%, compared to 2009 with the increase primarily due to the inclusion of Resolve (effective July 27, 2009) and from modest increases in several service areas. Revenue by major service area is summarized in the table below.

<<
Year ended
December 31,
2010       2009
————————————————————————-
Revenue
Programs to the chequing account                  $ 293,838  $ 288,557
Loan servicing                                      125,752     50,645
Loan registration technology services               102,342     41,785
Lending technology services                          77,281     69,244
Other(1)                                             41,161     23,621
————————————————————————-
$ 640,374  $ 473,852
————————————————————————-
————————————————————————-

(1) Excluded from the current and comparative periods are the
discontinued operations that were sold on October 7, 2010.
>>

Revenue for the year ended December 31, 2010 from programs to the chequing account was $293.8 million, an increase of $5.3 million, or 1.8%, compared to 2009. The modest increase was primarily attributable to program changes and product and service enhancements that increased average order values and offset the impact of order volume declines. Management believes that the long-term historical trend related to current cheque order decline is relatively unchanged and continues to be in the low single digit range, however, there has been more volatility in order volumes in recent periods.

Revenue for 2010 from loan servicing, which includes student loan administration services and credit card servicing was $125.8 million. There were no meaningful comparable results in 2009 as this service area relates to the Resolve business which was acquired in the third quarter of 2009. Revenue from student loan administrative services, which comprise the largest portion of revenues within this service area, is expected to be relatively stable over the short-term with modestly growing volumes and new program initiatives being offset by reduced pricing related to particular contracts. The 2010 results from student loan administration services also benefited from strong performance incentives which can be earned under contracts within the service area. Loan servicing revenues in 2010 within the credit card servicing area also benefited from delivery of services to a new customer and from project services delivered to an existing customer.

Loan registration technology services revenue for 2010 was $102.3 million. There were no meaningful comparable results in 2009. This service area includes the personal property search and registration (“PPSA”) business acquired with the Resolve acquisition and the PPSA program historically operated by D+H. In both instances our services are directed toward supporting personal and commercial lending activity within Canada. Volumes in this area can be variable, and in general change in line with the changes in the overall Canadian economic environment, particularly as it relates to servicing customers within the automotive lending area. In general, volumes were stronger in the latter portion of 2009 and early periods in 2010, compared to the latter part of 2010.

Revenue for 2010 from lending technology services, which includes services to the mortgage market and other credit markets was $77.3 million, an increase of $8.0 million, or 11.6%, compared to 2009. The majority of the increase in 2010 from this service area relates to higher mortgage origination service fees which increased by 15% on a year-over-year basis. In general, industry analysts expect the housing and mortgage markets to moderate in 2011 as compared to 2010.

Other revenue is comprised of a number of smaller service offerings. In general, revenues from these service areas change due to customer specific and some seasonal activities, with such changes not material to overall consolidated earnings.

On October 7, 2010, the Business sold a non-strategic component of its contact centre business and as such, the results of these operations are presented as discontinued operations in both current and prior periods presented. Accordingly, the revenues relating to this part of the Business for both 2010 and 2009 of $13.8 million and $7.9 million respectively, have been removed from reported consolidated revenue.

The following table reflects the current relative size of each of the major service areas as a percentage of total revenue on an annualized basis:

<<
Allocation of Revenue by Service Area                          % Revenue
————————————————————————-
Revenue
Programs to the chequing account                                   46%
Loan servicing                                                     20%
Loan registration technology services                              16%
Lending technology services                                        12%
Other                                                               6%

————————————————————————-
100%
————————————————————————-
>>

Expenses(1)

For 2010, on a consolidated basis, expenses of $482.6 million increased by $144.2 million, or 42.6%, compared to 2009. The increases primarily reflected the inclusion of Resolve. The changes also reflect the ongoing costs of integrating the businesses, reduced by continued cost management activities and integration savings.

<<
Year ended
December 31,
(in thousands of Canadian dollars, unaudited)            2010       2009
————————————————————————-

Employee compensation and benefits                  $ 193,481  $ 134,585
Non-compensation direct expenses(2)                   191,213    147,845
Other operating expenses(3)                            80,027     44,678
Occupancy costs(4)                                     17,857     11,226

————————————————————————-
$ 482,578  $ 338,334
————————————————————————-
————————————————————————-

(1) Excluded from the current and comparative periods are the
discontinued operations that were sold on October 7, 2010 and the
restructuring charge, further described below.

(2) Non-compensation direct expenses include materials, shipping, selling
expenses and third party direct disbursements. For the year ended
December 31, 2009, to be consistent with comparative periods
presented, some expenses have been reclassified from Other operating
expenses to Non-compensation direct expenses. There was no change in
total expenses related to this reclassification.

(3) Other operating expenses include communication costs, licensing fees,
professional fees and expenses not included in other categories.

(4) For the year ended December 31, 2010, some expenses have been
reclassified from Other operating expenses to Occupancy costs. There
was no change in total expenses related to this reclassification.
>>

For 2010, employee compensation and benefit costs were $193.5 million, an increase of $58.9 million, or 43.8% compared to 2009, with the increase primarily due to the inclusion of Resolve expenses. Resolve service offerings, such as loan servicing, contact centre services and other process outsourcing services are more employee intensive than other D+H service areas.

Non-compensation direct expenses were $191.2 million for 2010, an increase of $43.4 million, or 29.3% compared to 2009. The increase was mainly due to the inclusion of Resolve expenses. In general, these expenses directionally change with revenue changes.

For 2010, other operating expenses were $80.0 million, an increase of $35.3 million, or 79.1% compared to 2009. These increases were primarily attributable to the inclusion of Resolve expenses and to a lesser extent, the ongoing costs of integration partially offset by cost management activities.

Occupancy costs for 2010 were $17.9 million, an increase of $6.6 million, or 59.1%, compared to 2009. The increase in occupancy costs was mainly due to the inclusion of Resolve facilities, which as described above, are employee intensive service businesses.

Restructuring Charges

D+H recorded a restructuring charge of $8.4 million during the year ended December 31, 2010. This charge is consistent with the range of $7.0 – $9.0 million previously announced. These charges relate to integration and transformation initiatives designed to better position the Business going forward to serve customers and improve the effectiveness, efficiency and scalability of our operations. These initiatives are a result of the Company completing four acquisitions over the past four years which led to expanded service offerings and operations. The integration activities consist of items that include the consolidation of facilities, centralization of certain functions and operations, elimination of management duplication and repositioning of personnel related to the integrated business, among other items. As a result of these activities we expect to both better position the Company to grow and to achieve annualized savings in the range of $3.0 – $4.0 million by the end of 2012.

EBITDA

EBITDA for 2010 was $149.4 million, an increase of $13.8 million, or 10.2% compared to 2009. For 2010, EBITDA as a percentage of revenue was 23.3% compared to 28.6% for 2009, with the change primarily attributed to the full year inclusion of Resolve service areas that contribute lower margins than the historical D+H service areas, as well as an increase in integration and investment expenses including the restructuring charge.

Other Expenses

Amortization of Capital and Non-acquisition Intangibles

Amortization of capital and non-acquisition intangible assets during 2010 increased by $3.8 million, or 22.9% compared to 2009. These increases were primarily related to the inclusion of amortization related to assets acquired from the Resolve business and to capital additions during 2010.

Interest Expense

Interest expense for 2010 increased by $4.4 million compared to 2009 due to an increase in the level of outstanding debt related to the acquisition of Resolve, as well as the write-off of certain unamortized financing costs during 2010. In June 2010, the Business renewed its bank credit facilities and also issued a new seven-year Bond. Certain unamortized financing fees totalling $0.4 million were written off in 2010 in connection with the renewal of the credit facilities and changes made to the syndicate. This write-off is included in interest expense for 2010.

Net Unrealized Loss (Gain) on Derivative Instruments

A net unrealized gain of $1.2 million was recorded in 2010 (2009 – unrealized gain of $4.1 million) reflecting mark-to-market adjustments related to changes in market interest rates at December 31, 2010, compared to December 31, 2009. These unrealized gains and losses are recognized in income because these swaps are not designated as hedges for accounting purposes. In general, a loss on interest-rate swaps is recorded when rates decrease as compared to previous periods and a gain is recorded when rates increase. The unrealized gains in 2009 and 2010 recovered the unrealized losses recorded in earlier periods. Provided the Business does not cancel its interest-rate swaps, the unrealized amounts represent a non-cash unrealized gain or loss that will subsequently reverse through income as the related swaps mature. The Company has historically held its derivative contracts to maturity.

Future Income Tax Expense (Recovery)

For 2010, the Fund recorded a future tax expense from continuing operations of $3.2 million (2009 – $2.6 million recovery). This future tax expense related to the addition of capital assets for which tax depreciation exceeded accounting depreciation and was partially offset by a future tax recovery related to the amortization of intangibles for accounting purposes.

Amortization of Intangibles from Acquisitions

Amortization of acquisition related intangibles for 2010 increased by $8.2 million as compared to 2009 due to the incremental intangible assets from the acquisition of Resolve on July 27, 2009.

Income (loss) from Discontinued Operations

On October 7, 2010, the Business sold a non-strategic component of its contact centre business and as such, the results of these operations are presented as discontinued operations for both current and prior periods presented. Refer to the Divestiture section in the MD&A for further details.

Net Income

For 2010, net income of $82.5 million decreased by $12.5 million, or 13.1% compared to 2009. The decrease in net income in 2010 relates to the changes in non-cash mark-to-market adjustments on interest-rate swaps, non-cash taxes and amortization of intangible assets related to business acquisitions and to the impact of the $8.4 million restructuring charge. Net income per unit of $1.5503 decreased by 21.7% for the same reasons as described above and due to the impact of the issuance of 9,286,581 trust units for the Resolve acquisition.

Adjusted income, which excludes the (1) non-cash impacts of mark-to-market gains and losses on derivative instruments, future income taxes and amortization of intangibles from acquisitions, and (2) discontinued operations, was $115.1 million for 2010, a 5.1% increase over 2009. This increase includes the impact of the $8.4 million ( $0.1583 per unit) restructuring charge. On a per unit basis, reflecting the issuance of 9,286,581 units upon the acquisition of Resolve, Adjusted income per unit of $2.1617 decreased by 5.3% compared to 2009.

EIGHT QUARTER CONSOLIDATED STATEMENT OF INCOME – SUMMARY

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

<<
2010
Q4         Q3         Q2         Q1
————————————————————————-

Revenue                       $ 160,457  $ 161,900  $ 164,319  $ 153,698
Expenses                        124,733    121,311    120,545    115,989
Restructuring charges(4)          6,268      2,160          -          -
————————————————————————-
EBITDA(1)                      29,456     38,429     43,774     37,709

Amortization of capital assets
and non-acquisition
intangibles                      5,643      5,030      4,962      4,669
Interest expense                  3,405      3,517      3,692      3,374

————————————————————————-
Adjusted income(1)               20,408     29,882     35,120     29,666

Amortization of mark-to-market
adjustment of interest-rate
swaps                               52         52        103        189
Net unrealized loss (gain) on
derivative instruments(2)       (2,848)     1,514      1,694     (1,559)
Future income tax expense
(recovery)                       2,620       (645)       603        661
Amortization of intangibles
from acquisition                 7,108      6,925      7,158      7,097
————————————————————————-
Income from continuing
operations                      13,476     22,036     25,562     23,278
Income (loss) from
discontinued operations, net
of taxes(3)                       (620)      (465)      (531)      (210)
————————————————————————-

Net income                    $  12,856  $  21,571  $  25,031  $  23,068

————————————————————————-
————————————————————————-
Adjusted income per unit,
basic and diluted(1)         $  0.3834  $  0.5613  $  0.6597  $  0.5572

Net income per unit, basic
and diluted                  $  0.2415  $  0.4052  $  0.4702  $  0.4333
————————————————————————-
————————————————————————-

2009
Q4         Q3         Q2         Q1
————————————————————————-

Revenue                       $ 151,521  $ 139,245  $  94,557  $  88,529
Expenses                        114,467    101,696     62,080     60,091
Restructuring charges(4)              -          -          -          -
————————————————————————-
EBITDA(1)                      37,054     37,549     32,477     28,438

Amortization of capital assets
and non-acquisition
intangibles                      4,514      4,505      3,679      3,819
Interest expense                  3,326      2,681      1,787      1,747

————————————————————————-
Adjusted income(1)               29,214     30,363     27,011     22,872

Amortization of mark-to-market
adjustment of interest-rate
swaps                              103        103        136        136
Net unrealized loss (gain) on
derivative instruments(2)       (1,620)    (1,647)    (1,069)       191
Future income tax expense
(recovery)                      (2,605)     1,015       (718)       (64)
Amortization of intangibles
from acquisition                 7,330      5,942      3,441      3,374
————————————————————————-
Income from continuing
operations                      26,006     24,950     25,221     19,235
Income (loss) from
discontinued operations, net
of taxes(3)                       (405)         7          -          -
————————————————————————-

Net income                    $  25,601  $  24,957  $  25,221  $  19,235

————————————————————————-
————————————————————————-
Adjusted income per unit,
basic and diluted(1)         $  0.5488  $  0.6000  $  0.6146  $  0.5204

Net income per unit, basic
and diluted                  $  0.4809  $  0.4931  $  0.5739  $  0.4377
————————————————————————-
————————————————————————-

(1) EBITDA and Adjusted income are non-GAAP terms. See Non-GAAP Measures
for a more complete description of these terms.

(2) The Business enters into derivative contracts to fix the interest
rates and foreign exchange rates on a significant portion of its
outstanding bank debt and foreign currency transactions, which are
relatively minor, respectively. For accounting purposes, these
derivative instruments do not qualify for hedge accounting treatment.
Accordingly, any change in the fair value of these contracts is
recorded through income. Provided the Business does not cancel its
derivative contracts prior to maturity, the amounts represent a non-
cash unrealized gain or loss that will subsequently reverse through
income. The Company has historically held its derivative contracts to
maturity.

(3) On October 7, 2010, the Business sold a non-strategic component of
its contact centre business and as such, these divested operations
are presented as discontinued operations in both current and prior
periods presented.

(4) Restructuring charges relate to further integration and
transformation initiatives designed to better position the Business
going forward to serve customers and improve the effectiveness,
efficiency and scalability of operations.
>>

The Business has generally reported quarterly revenues that are stable and growing when measured on a year-over-year basis, however more recent changes generally in the economic environment, the housing and mortgage markets and the auto lending markets specifically, have increased volatility. Measured on a sequential quarter-to-quarter basis, revenues can also vary due to seasonality and are generally stronger in the second and third quarters. The acquisition of the Resolve business has resulted in a substantial increase in all reported balances since the acquisition on July 27, 2009, except per unit amounts, which were additionally impacted by the issuance of 9,286,581 additional units of Davis + Henderson to fund the Resolve acquisition.

Adjusted income per unit has generally been trending consistently with changing revenue, however, recent quarters were additionally impacted by the restructuring charges and integration activities. Adjusted income excludes the results of the discontinued operations and includes the impact of the restructuring charge previously described. Net income has been more variable as it has been affected by the variability in non-cash items such as mark-to-market adjustments on interest-rate swaps, amortization of intangibles from acquisitions and changes in future income tax provisions.

SELECTED BALANCE SHEET INFORMATION

(in thousands of Canadian dollars, unaudited)

<<
Year ended
December 31,
2010       2009       2008
————————————————————————-
Total assets                             $ 933,521  $ 941,555  $ 663,906
————————————————————————-
Total long-term liabilities              $ 266,810  $ 278,801  $ 165,106
————————————————————————-
>>

Total assets of $933.5 million at December 31, 2010 decreased by $8.0 million compared with total assets at December 31, 2009, primarily as a result of amortization of intangible assets. The increase in total assets between December 31, 2008 and December 31, 2009 was primarily a result of the acquisition of Resolve in July 2009.

Long-term liabilities at December 31, 2010 decreased by $12.0 million compared to 2009 and the decrease was primarily due to repayments made under the credit facilities in 2010. The increase in long-term liabilities between December 31, 2008 and December 31, 2009 was principally due to the increase in credit facilities in order to assume the debt obligations within Resolve and adjustments to future tax liabilities.

CASH FLOW AND LIQUIDITY

The following table is derived from, and should be read in conjunction with, the Consolidated Statements of Cash Flows and includes non-GAAP measures. Management believes this supplementary disclosure provides useful additional information related to the cash flows of the Fund, repayment of debt and other investing activities. See Non-GAAP Measures for a discussion of non-GAAP terms used.

Summary of Cash Flows(1)

(in thousands of Canadian dollars, unaudited)

<<
Year ended
December 31,
2010       2009       2008
————————————————————————-

Cash flows from operating activities     $ 137,253  $ 119,722  $ 116,062

Add (deduct):
Changes in non-cash working capital
and other items(2)                       (4,223)     5,780       (594)
————————————————————————-

Adjusted cash flows from operating
activities                                133,030    125,502    115,468

Less:
Asset expenditures(3)                     26,797     11,668     10,218
Contract payments(4)                       3,467      3,137      3,220
————————————————————————-

Adjusted cash flows after asset
expenditures and contract payments(3)     102,766    110,697    102,030

Distributions paid to unitholders           97,928     87,962     78,580
————————————————————————-
4,838     22,735     23,450

Cash flows provided by (used in repayment
of) long-term indebtedness                (11,000)   (11,948)    18,000
Cash flows used in issuance costs           (2,564)    (2,321)         -
Fair value of acquisitions                     167    (10,874)   (43,126)
Cash flows from sale of discontinued
operations                                  1,602          -          -
Changes in non-cash working capital and
other items(2)                              4,223     (5,780)       594
————————————————————————-

Increase (decrease) in cash and cash
equivalents for the year                $  (2,734) $  (8,188) $  (1,082)
————————————————————————-
————————————————————————-

(1) The subtotals in this table are not consistent with GAAP and
accordingly are considered non-GAAP measures. See Non-GAAP Measures
for a discussion of non-GAAP terms used.

(2) Changes in non-cash working capital and certain other balance sheet
items have been excluded from adjusted cash flows from operating
activities so as to remove the effects of timing differences in cash
receipts and cash disbursements, which generally reverse themselves,
but can vary significantly across quarters and may include
obligations for unusual items such as restructuring charges.
Specifically, for the next several quarters, the Business will make
payments related to the restructuring charges. For details, see the
Changes in Non-Cash Working Capital and Other Items section.

(3) Asset expenditures include both maintenance asset expenditures and
growth asset expenditures. Maintenance asset expenditures for the
year ended December 31, 2010 were $20.6 million. Maintenance asset
expenditures are defined by the Fund as asset expenditures necessary
to maintain and sustain the current productive capacity of the
Business or generally improve the efficiency of the Business. Growth
asset expenditures for 2010 were $9.7 million. Growth asset
expenditures are defined by the Fund as asset expenditures that
increase the productive capacity of the Business with a reasonable
expectation of an increase in cash flow. The distinction between
growth and maintenance asset expenditures will become less relevant
to management in the future as D+H converts to a corporation.

(4) The Business has various payment obligations under customer and
partner contracts, which include fixed contract or program initiation
payments and annual payments payable over the life of the contract.
The aggregate of all contract payments, both fixed and variable,
reflects, among other things, the high degree of integration and
sharing between D+H and its customers and partners of the many
activities related to ordering, data handling, customer service,
customer access and other activities.
>>

Summary of Cash Flows per Unit

(in Canadian dollars, unaudited)

<<
Year ended
December 31,
2010       2009       2008
————————————————————————-

Adjusted cash flows from operating
activities                              $  2.4990  $  2.6165  $  2.6275
Adjusted cash flows after asset
expenditures and contract payments      $  1.9305  $  2.3078  $  2.3217
Cash distributions paid to unitholders   $  1.8396  $  1.8396  $  1.7881
Distributions declared during year(1)    $  1.8396  $  1.8396  $  1.8384
————————————————————————-
————————————————————————-

(1) Includes a special non-cash distribution in 2008 of $0.04 per unit.

————————————————————————-
2010 vs.   2009 vs.
2009       2008
% change   % change
————————————————————————-

Adjusted cash flows from operating activities           -4.5%      -0.4%
Adjusted cash flows after capital expenditures
and contract payments                                 -16.3%      -0.6%
Cash distributions paid to unitholders                   0.0%       2.9%
Distributions declared during year(1)                    0.0%       0.1%
————————————————————————-
————————————————————————-

(1) Includes a special non-cash distribution in 2008 of $0.04 per unit.
>>

Cash Flows, Income and Distributions Paid

The following table compares cash flows from operating activities and income to distributions paid:

<<
Year ended
(in thousands of Canadian                                  December 31,
dollars, unaudited)                          2010       2009       2008
————————————————————————-

Cash flows from operating activities     $ 137,253  $ 119,722  $ 116,062
Net income                               $  82,526  $  95,014  $  78,448
Adjusted income(1)                       $ 115,076  $ 108,923  $  99,168
Distributions paid during year           $  97,928  $  87,962  $  78,580
Excess (shortfall) of cash flows from
operating activities over cash
distributions paid                      $  39,325  $  31,760  $  37,482
Excess (shortfall) of net income over
cash distributions paid                 $ (15,402) $   7,052  $    (132)
Excess (shortfall) of Adjusted income
over cash distributions paid            $  17,148  $  20,961  $  20,588
————————————————————————-
————————————————————————-

(1) Adjusted income is a non-GAAP term. See Non-GAAP Measures for a more
complete description of this term.
>>

Historically, excess cash flows from operating activities over cash distributions paid have been used to fund capital expenditures, pay down debt and to fund acquisitions. Distributions may exceed net income as a result of significant non-cash charges recorded through income, including amortization of intangible assets related to acquisitions and future income taxes.

Expenditures on Capital Assets and Contract Payments

Compared to 2009, total capital asset expenditures increased by $15.5 million to $30.3 million for 2010. The increase in capital expenditures over 2009 relates to the increased size of operations since the acquisition of Resolve in July 2009 and to capital applied in relation to the Fund’s integration activities.

The Business’ capital program provides for continued expenditures to be funded by cash flows from operations.

Distributions

The Trustees of the Fund establish distribution levels of the Fund with reference to its financial position, historical results, projected performance of the Business and funds required for potential acquisitions.

The Fund paid cash distributions of $1.8396 per unit ($97.9 million) for 2010, compared to $1.8396 per unit ($88.0 million) in 2009. The increase in total distributions in 2010 reflects the issuance of 9,286,581 units on July 27, 2009, in connection with the Resolve acquisition. For 2010, both distributions declared and paid per unit were unchanged.

In general, mutual fund trusts, like the Fund, must distribute all their taxable income to their unitholders in order not to pay income taxes in the trust.

The tax allocation of distributions declared for 2010 is 100% “other income”, as was the case for all of 2009.

The Fund may issue an unlimited number of trust units. Each trust unit is transferable and represents an equal, undivided beneficial interest in any distribution from the Fund and the net assets of the Fund. All units are of the same class with equal rights and privileges and are not subject to future calls or assessments. Each unit entitles the holder to one vote at all meetings of unitholders. As at December 31, 2010, the total number of trust units outstanding was 53,233,373, which was the same as at December 31, 2009. This reflects an issuance of 9,286,581 trust units on July 27, 2009 in exchange for all the outstanding units of Resolve.

As previously discussed, the Fund’s income trust structure was converted into a corporate structure on January 1, 2011. Under the Arrangement, unitholders of the Fund received, on a tax deferred, roll-over basis, one common share of the Corporation, for each unit of the Fund held. As at March 8, 2011, the number of shares outstanding was 53,233,373.

Commencing in 2011, as a corporation, the Business is subject to corporate taxes. We had previously announced our intention to pay quarterly dividends commencing in 2011 at an initial annualized rate of $1.20 per share. Also as previously announced, D+H intends to declare a special dividend of $0.15 per share in early March 2011. The special dividend payment date is expected to be at the end of March 2011. Consequently, for the first quarter of 2011, it is expected that the Business will pay approximately $0.30 per share of distributions comprised of a $0.1533 per unit distribution paid on January 31, 2011 and a $0.15 per share dividend paid in March 2011. Subsequently, it is our intention to pay regular quarterly dividends at a rate of $0.30 per share (equivalent to $1.20 per share annualized) with the intended initial regular quarterly dividend being declared in May 2011 and paid in June 2011.

Changes in Non-Cash Working Capital and Other Items

(in thousands of Canadian dollars, unaudited)

<<
Year ended
December 31,
2010       2009       2008
————————————————————————-

Decrease (increase) in non-cash working
capital items                               1,574     (8,443)     1,933
Decrease (increase) in other operating
assets and liabilities                      2,649      2,663     (1,339)
————————————————————————-

Decrease (increase) in non-cash working
capital and other items                 $   4,223  $  (5,780) $     594
————————————————————————-
————————————————————————-
>>

The net decrease in non-cash working capital items in 2010 was primarily related to the increase in trade payables due to normal course timing of payments which were partially offset by an increase in trade receivables attributable to higher revenues and normal course timing differences.

The net increase in non-cash working capital in 2009 was primarily a result of a decrease in payables reflecting normal course timing differences of when payments were made, payments under certain multi-year compensation programs and severance payments made earlier in the year partially offset by a decrease in receivables due to normal course timing differences.

The Company expects to experience a continuing increase in the volatility of non-cash working capital due to the nature and timing of services rendered in connection with the businesses acquired recently.

Acquisitions

With the acquisition of Resolve in 2009, the Business significantly advanced its strategy by expanding its service offerings within the financial services industry, by establishing market leading positions in several niche markets and by increasing its overall servicing capabilities. The acquisition was funded through the issuance of Davis + Henderson units in exchange for all the outstanding units of Resolve, valued at $119.5 million (net of after-tax issuance costs of $0.6 million), and the assumption of Resolve debt. Including transaction costs and estimated restructuring costs, the total cost of the acquisition (excluding assumed debt) was approximately $130.5 million. During 2010, management completed its assessment of the valuation of the assets acquired and liabilities assumed for this acquisition including finalizing related restructuring charges.

Subsequent to December 31, 2010, the Business acquired the assets and operations of ASSET Inc. for approximately $76 million excluding fees and transaction costs adjustments. This acquisition was funded through utilizing an extension of the Company’s secured credit facilities.

Divestiture

On October 7, 2010, D+H announced the sale of its non-strategic contact centre operations acquired as part of the Resolve acquisition, which primarily served non-core markets of D+H, for proceeds approximately equal to the working capital and certain assets of the operations sold. These operations have been classified as discontinued operations for the comparative periods presented.

The transaction fees and other transition costs relating to the disposition were recognized as part of the final purchase price allocation for Resolve.

Cash Balances and Long-Term Indebtedness

At December 31, 2010, cash and cash equivalents totalled $1.1 million, compared to $3.9 million at December 31, 2009. The long-term indebtedness as at December 31, 2010, before deducting unamortized deferred finance fees, was $199.0 million compared to $210.0 million at December 31, 2009 and consisted of drawings under a Fifth Amended and Restated Credit Agreement dated June 30, 2010 (“Credit Agreement”) of $149.0 million and fixed-rate Bonds issued under a Note Purchase and Private Shelf Agreement dated June 30, 2010 (“Note Purchase Agreement”) of $50.0 million. The long-term indebtedness is recorded on the Balance Sheet, net of unamortized deferred financing fees of $2.8 million as at December 31, 2010. During 2010, the Business made net repayments of $11.0 million on its long-term indebtedness.

Total senior secured credit facilities at December 31, 2010 were $220.0 million, consisting of a non-revolving term loan of $130.0 million and a revolving term credit facility of $90.0 million that each mature on June 30, 2013. As of December 31, 2010, the Business had drawn $130.0 million under the non-revolving term loan and $19.0 million under the revolving term credit facility. The Business is permitted to draw on the revolving facility’s available balance of $71.0 million to fund capital expenditures or for other general purposes. The Credit Agreement contains a number of covenants and restrictions, including the requirement to meet certain financial ratios and financial condition tests. The financial covenants include a leverage test, a fixed charge coverage ratio test and a limit on the maximum amount of distributions that may be made by Davis + Henderson, Limited Partnership to the Fund during each rolling four-quarter period. Davis + Henderson was in compliance with all of its financial covenants and financial condition tests as of the end of its latest quarterly period. A copy of the Credit Agreement is available at www.sedar.com.

The Business has $50.0 million of Bonds issued under the senior secured Note Purchase Agreement at a fixed-interest rate of 5.99% until maturity on June 30, 2017. The Bonds rank equally in all respects with amounts outstanding under the Credit Agreement, any related hedging contracts and cash management facilities and benefit from the same financial covenants as exist under the Credit Agreement described above. The Note Purchase Agreement is available at www.sedar.com.

To reduce liquidity risk, management has historically renewed the terms of the Fund’s long-term indebtedness in advance of its maturity dates and the Fund has maintained financial ratios that are conservative compared to financial covenants applicable to the financing arrangements. To enhance its liquidity position, in prior years the Fund has made numerous voluntary payments on its outstanding long-term indebtedness and a portion of its committed term credit facilities remain undrawn. Further, the Credit Agreement and the Note Purchase Agreement provide for additional uncommitted credit arrangements of up to $150.0 million and additional Bonds under the uncommitted shelf note facility of up to $30.0 million with the use of these arrangements subject to the prior approval of the relevant lenders with any fees, spreads and other additional terms to be negotiated at that time.

The Fund looks to hedge against increases in market interest rates by utilizing interest-rate swaps. In respect of interest-rate swap hedge contracts with its lenders, as of December 31, 2010 the Fund’s borrowing rates on the outstanding long-term indebtedness under the Credit Agreement are effectively fixed at the interest rates and for the time periods ending as outlined in the following table :

<<
(in thousands of Canadian dollars, unaudited)
————————————————————————-
Fair value of
interest-rate swaps
————————
Interest
Maturity Date           Notional Amount      Asset  Liability     Rate(1)
————————————————————————-
January 5, 2011               $  22,000  $       -  $      39     1.980%
June 15, 2011                    20,000          -        443     4.685%
June 15, 2011                    25,000          -        554     4.685%
December 18, 2014                25,000          -        364     2.720%
March 18, 2015                   25,000          -        549     2.940%
March 20, 2017                   25,000          -        798     3.350%
March 20, 2017                   20,000          -        656     3.366%
————————————————————————-
$ 162,000  $       -  $   3,403
————————————————————————-
————————————————————————-

(1) The listed interest rates exclude bankers’ acceptance fees and prime-
rate spreads currently in effect. Such fees and spreads could
increase or decrease depending on the Fund’s financial leverage as
compared to certain levels specified in the Credit Agreement. As of
December 31, 2010, the Fund’s long-term bank indebtedness was subject
to bankers’ acceptance fees of 2.50% over the applicable BA rate and
prime rate spreads of 1.50% over the prime rate.
>>

As at December 31, 2010, the Fund would have to pay the fair value of $3.4 million if it were to close out all of the interest-rate swap contracts as set out on the balance sheet. It is not the present intention of management to close out these contracts and the Company has historically held its derivative contracts to maturity. The Fund expects to continue to enter into interest-rate swaps for the purpose of hedging interest rates.

As of December 31, 2010, the average effective interest rate on the Fund’s total indebtedness is approximately 5.7%.

Cash flows from operations, together with cash balances on hand and unutilized term credit facilities are expected to be sufficient to fund the Business’ operating requirements, asset expenditures, contractual obligations and anticipated distributions.

Contractual Obligations – Payments Due by Period

The table below presents the contractual obligations of the Business as at December 31, 2010 and the timing of the expected payments.

<<
————————————————————————-
(in thousands of
Canadian dollars,            Less than      1 – 3      4 – 5    After 5
unaudited)            Total     1 year      years      years      years
————————————————————————-

Long-term
indebtedness        199,000          -    149,000          -     50,000

Operating leases      48,334     10,730     20,804      7,709      9,091

Employee future
benefits              5,003        298        895        597      3,213

Contractual supplier
obligation            1,394          4      1,046        344          -

Obligations relating
to deferred
compensation program  1,934          -      1,934          -          -
————————————————————————-
$ 255,665  $  11,032  $ 173,679  $   8,649  $  62,304
————————————————————————-
————————————————————————-
>>

Long-term Indebtedness

Total senior secured credit facilities at December 31, 2010 were $220.0 million, consisting of a non-revolving term loan of $130.0 million and a revolving term credit facility of $90.0 million that each mature on June 30, 2013. As of December 31, 2010, the Business had drawn $130.0 million under the non-revolving term loan and $19.0 million under the revolving term credit facility. The credit facilities do not require the Fund to make any principal payments prior to their stated maturities.

The Business also has $50.0 million of Bonds issued under the senior secured Note Purchase Agreement at a fixed-interest rate of 5.99% until maturity on June 30, 2017.

Operating Leases

The Business rents facilities, equipment and vehicles under various operating leases. As of December 31, 2010, minimum payments under these operating leases totalled $48.3 million.

Employee Future Benefits

Obligations relating to employee future benefits relate to the Fund’s non-pension post-retirement benefit plans. The latest actuarial valuation of the post-retirement benefit plans was performed as of December 31, 2010.

Contractual Supplier Obligation

The contractual supplier obligation relates to payments to be made for a customized software package.

Deferred Compensation Program

The Business provides multi-year performance based compensation plans to its senior executives. These include a cash award component and a cash-settled unit-based compensation component. Both the cash component and the cash-settled unit-based compensation component awarded at the grant date are subject to a three year target for compound annual growth in adjusted income.

Non-GAAP Measures

The information presented within the tables in this MD&A include certain adjusted financial measures such as “EBITDA” (Earnings before interest, taxes, depreciation and amortization), “Adjusted income” (net income before certain non-cash charges and discontinued operations) and “Adjusted cash flow after capital expenditures and contract payments”, all of which are not defined terms under Canadian generally accepted accounting principles (“GAAP”). These non-GAAP financial measures are derived from, and should be read in conjunction with, the Consolidated Statements of Income and the Consolidated Statements of Cash Flow. Management believes these supplementary disclosures provide useful additional information related to the operating results of the Fund.

Management uses these subtotals as measures of financial performance and as a supplement to the Consolidated Statements of Income and Consolidated Statements of Cash Flow. Investors are cautioned that these measures should not be construed as an alternative to using net income as a measure of profitability or as an alternative to the GAAP Consolidated Statements of Income or other GAAP statements. Further, the Fund’s method of calculating each balance may not be comparable to calculations used by other Income Trusts bearing the same description.

EBITDA

In addition to its use by management as an internal measure of financial performance, EBITDA is used to measure (with adjustments) compliance with certain financial covenants under the Fund’s credit facility. EBITDA is also widely used by the Fund and others in assessing performance and value of a business. EBITDA has limitations as an analytical tool, and the reader should not consider it in isolation or as a substitute for analysis of results as reported under GAAP.

Adjusted Income

Adjusted income is used as a measure of internal performance similar to net income, but is calculated after removing the impacts of discontinued operations and certain non-cash items such as mark-to-market adjustments on derivative instruments, amortization of intangibles from acquisition and changes in future income tax provisions. These items are excluded in calculating Adjusted income as they are not considered indicative of the financial performance of the Business for the period being reviewed.

Adjusted Cash Flows from Operating Activities and Adjusted Cash Flows after Asset Expenditures and Contract Payments

Certain subtotals presented within the cash flows table above, such as “Adjusted cash flows from operating activities” and “Adjusted cash flows after asset expenditures and contract payments”, are not defined terms under GAAP. Management uses these subtotals as measures of internal performance and as a supplement to the Consolidated Statements of Cash Flows.

OUTLOOK

Davis + Henderson’s long-term financial objective is to deliver sustainable and growing earnings through continued organic revenue growth and by way of strategic acquisitions. For 2009 and 2010, revenue was substantially higher due to the inclusion of the results of Resolve. Future comparative periods will fully include the Resolve results. On January 17, 2011, the Company completed the acquisition of ASSET which will again increase revenues and expenses of future periods as compared to previous periods.

In the immediate future, we will focus on executing our organic growth initiatives, integrating the Business and continuing to diligently manage costs. Beyond the immediate term, we believe that our market leadership and combined capabilities will solidly position D+H in the markets we serve and allow us to grow consistent with our long-term objectives.

As set out in our statement of strategy, we look to grow our Business through a combination of organic initiatives, partnering with third parties and by way of selective acquisitions. Our organic initiatives are many and include: (i) the ongoing enhancement and evolution of our cheque program through the addition of value-added service enhancements (such as our IDefence(R) and BizAssist(R) programs), (ii) the expansion of our current services within the student lending, commercial and personal lending areas (including the mortgage, credit card and personal property markets), (iii) selling and delivering our lending technology services to new customers and (iv) combining the capabilities of D+H together with those of the recently acquired Resolve and ASSET businesses to develop new service offerings for our financial institution customers. Our acquisition strategy focuses on acquiring companies that extend or add to the services that we provide within the financial services marketplace. Our acquisition plans may involve extending beyond the Canadian market consistent with the expansion strategies of our major Canadian customers.

With the inclusion of several new service areas over the last several years, we expect to experience some level of increase in variability in year-over-year quarterly revenues, earnings and cash flows, due to: (i) volume variances within the lien registration service area; (ii) variability in professional services work; (iii) variability in fees relating to mortgage origination services revenues due to recent significant variability in the housing market, and (iv) fees and expenses incurred in connection with acquisitions and related business integration activities. The Company believes that, in general, revenues in the latter part of 2009 and early 2010 benefited from stronger volumes as housing and mortgage markets, and auto and personal lending markets increased following earlier contractions. For the fourth quarter and for the next several quarters, our results will compare to these earlier periods that featured strong activity in real estate, mortgage and other lending markets where activity is now expected to moderate.

For 2010, with a full-year inclusion of Resolve and various integration and transformation initiatives, the consolidated capital spend was approximately $30 million. For 2011, we anticipate that our capital spending will be similar to 2010.

Effective January 1, 2011, pursuant to the Arrangement, the Fund’s income trust structure was converted to a corporate structure and the publicly traded corporation is now named Davis + Henderson Corporation. This conversion was approved at a meeting of unitholders held on June 17, 2010, at which unitholders approved the Arrangement by a vote of 99.8%. The information circular in respect of this meeting, which provided a detailed outline of the conversion is available on SEDAR at www.sedar.com. Under the Arrangement, unitholders of the Fund received, on a tax deferred, roll-over basis, one common share of the Corporation, for each unit of the Fund held. Common shares of Davis + Henderson Corporation commenced trading on the Toronto Stock Exchange on January 4, 2011, under the symbol DH.

In conjunction with the conversion, the Company also undertook an internal reorganization to simplify its business operations by consolidating the various businesses it operates through separate legal entities, arising as a consequence of recent acquisitions, into a single operating entity. The businesses were combined and will operate as D+H Limited Partnership. As a result of this reorganization and the utilization of loss carry-forward balances, it is anticipated that the Corporation will commence paying cash taxes in 2013.

Commencing in 2011, as a corporation, the Business is subject to corporate taxes. We have previously announced our intention to pay quarterly dividends commencing in 2011 at an initial annualized rate of $1.20 per share. Also as previously announced, D+H intends to declare a special dividend of $0.15 per share in early March 2011. The special dividend payment date is expected to be at the end of March 2011. Consequently, for the first quarter of 2011, it is expected that the Business will pay approximately $0.30 per share of distributions comprised of a $0.1533 per unit distribution paid on January 31, 2011 and a $0.15 per share dividend paid in March 2011. Subsequently, it is our intention to pay regular quarterly dividends at a rate of $0.30 per share (equivalent to $1.20 per share annualized) with the intended regular quarterly dividend being declared in May 2011 and paid in June 2011. Actual dividends declared will be subject to the discretion of the D+H Board of Directors and may vary from the intentions stated. Among other items, in determining actual dividends declared, the Board of Directors will consider the financial performance, capital plans, acquisition plans, expectations of future economic conditions and other factors.

Historically, as an income trust, Davis + Henderson had delivered stable and growing distributions to owners. As a result of the proposed changes in taxation affecting income trusts, distributions had been held constant for a period of time. With the conversion to a corporation now complete, we look to increase dividends as the business grows.

Notwithstanding the structural and distribution changes described above, the strategies and objectives of the Business remain unchanged.

Caution Concerning Forward-Looking Statements

This MD&A contains certain statements that constitute forward-looking information within the meaning of applicable securities laws (“forward-looking statements”). Statements concerning Davis + Henderson’s objectives, goals, strategies, intentions, plans, beliefs, expectations and estimates, and the business, operations, financial performance and condition of Davis + Henderson are forward-looking statements. The words “believe”, “expect”, “anticipate”, “estimate”, “intend”, “may”, “will”, “would” and similar expressions and the negative of such expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements are subject to important assumptions, including the following specific assumptions: the ability of Davis + Henderson to meet its revenue and EBITDA targets; general industry and economic conditions; changes in Davis + Henderson’s relationship with its customers and suppliers; pricing pressures and other competitive factors. Davis + Henderson has also made certain macroeconomic and general industry assumptions in the preparation of such forward-looking statements. While Davis + Henderson considers these factors and assumptions to be reasonable based on information currently available, they may prove to be incorrect.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Business, or developments in Davis + Henderson’s industry, to differ materially from the anticipated results, performance, achievements or developments expressed or implied by such forward-looking statements.

Risks related to forward-looking statements include, among other things, challenges presented by declines in the use of cheques by consumers; the Fund’s dependence on a limited number of large financial institution customers and dependence on their acceptance of new programs; strategic initiatives being undertaken to meet the Fund’s financial objective; stability and growth in the real estate, mortgage and lending markets; as well as general market conditions, including economic and interest rate dynamics and investor interest in, and government regulations relating to, Income Trusts. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Forward-looking statements are based on management’s current plans, estimates, projections, beliefs and opinions, and Davis + Henderson does not undertake any obligation to update forward-looking statements should assumptions related to these plans, estimates, projections, beliefs and opinions change except as required by applicable securities laws.

ADDITIONAL INFORMATION

Additional information relating to the Fund, including the Fund’s most recently filed Annual Information Form, is available on SEDAR at www.sedar.com.

<<
CONSOLIDATED BALANCE SHEETS
December 31, 2010 and 2009
(in thousands of Canadian dollars)

2010       2009
————————————————————————-

ASSETS
Current assets:
Cash and cash equivalents                         $   1,144  $   3,878
Accounts receivable (note 3)                         63,902     57,251
Inventory (note 4)                                    6,006      6,197
Prepaid expenses                                      7,552      6,156
Future income tax asset – current (note 11)           2,464      3,274
————————————————————————-
81,068     76,756

Future income tax asset (note 11)                      26,085     21,425
Capital assets (note 5)                                32,289     33,296
Fair value of derivatives (note 9)                          -        456
Intangible assets (note 6)                            266,837    289,774
Goodwill (note 7)                                     527,242    519,848

————————————————————————-
$ 933,521  $ 941,555
————————————————————————-
————————————————————————-

LIABILITIES AND UNITHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities          $  91,927  $  72,274
Distributions payable to unitholders                  8,161      8,161
Deferred revenue – current                            6,338      7,028

————————————————————————-
106,426     87,463

Long-term indebtedness (note 8)                       196,215    208,463
Fair value of derivatives (note 9)                      3,403      4,733
Deferred revenue – non-current                          9,226      9,510
Other long-term liabilities (note 10)                   8,327      7,161
Future income tax liability (note 11)                  49,639     48,934

————————————————————————-
373,236    366,264

Unitholders’ equity:
Trust units (note 12)                               595,859    595,859
Deficit                                             (35,488)   (20,086)
Accumulated other comprehensive income (loss)           (86)      (482)
————————————————————————-
560,285    575,291
Commitments (note 14)
Subsquent events (note 19)
————————————————————————-
$ 933,521  $ 941,555
————————————————————————-
————————————————————————-

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

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

Quarter ended          Years ended
December 31,          December 31,
2010       2009       2010       2009
————————————————————————-

Revenue (note 16)             $ 160,457  $ 151,521  $ 640,374  $ 473,852
Cost of sales and operating
expenses (note 4)              125,116    114,800    484,046    339,616
Restructuring charges (note 17)   6,268          -      8,428          -
Amortization of capital assets
(note 5)                         2,023      1,811      7,689      6,075
————————————————————————-
27,050     34,910    140,211    128,161

Interest expense                  3,457      3,429     14,384     10,019
Net unrealized loss (gain) on
derivative instruments          (2,848)    (1,620)    (1,199)    (4,145)
Amortization of intangible
assets (note 6)                 10,345      9,700     39,435     29,247
————————————————————————-
Income from continuing
operations before income taxes  16,096     23,401     87,591     93,040

Future income tax expense
(recovery) (note 11)             2,620     (2,605)     3,239     (2,371)
————————————————————————-
Income from continuing
operations                      13,476     26,006     84,352     95,411

Loss from discontinued
operations, net of taxes
(note 11, 18)                     (620)      (405)    (1,826)      (397)
————————————————————————-
Net income                    $  12,856  $  25,601  $  82,526  $  95,014
————————————————————————-
Net income per unit, basic
and diluted                  $  0.2415  $  0.4809  $  1.5503  $  1.9808
————————————————————————-
————————————————————————-

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

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

Quarter ended          Year ended
December 31,          December 31,
2010       2009       2010       2009
————————————————————————-

Net income                    $  12,856  $  25,601  $  82,526  $  95,014

Other comprehensive income:
Amortization of mark-to-market
adjustment of interest-rate
swaps                               52        103        396        478
————————————————————————-
Total comprehensive income    $  12,908  $  25,704  $  82,922  $  95,492
————————————————————————-
————————————————————————-

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

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

Quarter ended          Year ended
December 31,          December 31,
2010       2009       2010       2009
————————————————————————-

Deficit
Deficit, beginning of period  $ (23,862) $ (21,205) $ (20,086) $ (25,714)
Net income                       12,856     25,601     82,526     95,014
Distributions                   (24,482)   (24,482)   (97,928)   (89,386)
————————————————————————-
Deficit, end of period          (35,488)   (20,086)   (35,488)   (20,086)
————————————————————————-

Accumulated Other Comprehensive
Income (Loss)

Accumulated other comprehensive
income (loss), beginning of
period                            (138)      (585)      (482)      (960)
Other comprehensive income :
Amortization of mark-to-market
adjustment of interest-rate
swaps                               52        103        396        478
————————————————————————-
Accumulated other comprehensive
income (loss), end of period(1)    (86)      (482)       (86)      (482)
————————————————————————-
Deficit and accumulated other
comprehensive income (loss),
end of period                $ (35,574) $ (20,568) $ (35,574) $ (20,568)
————————————————————————-
————————————————————————-

(1) Accumulated other comprehensive income (loss) consists of cumulative
net gains and losses that were deferred prior to January 1, 2007
when hedge accounting was used by the Fund.

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

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

Quarter ended          Year ended
December 31,          December 31,
2010       2009       2010       2009
————————————————————————-

Cash and cash equivalents provided
by (used in):

OPERATING ACTIVITIES
Net income from continuing
operations                   $  13,476  $  26,006  $  84,352  $  95,411
Add:
Amortization of capital
assets                         2,023      1,811      7,689      6,075
Amortization of capital
assets included in cost
of sales                         383        333      1,468      1,282
Amortization of intangible
assets                        10,345      9,700     39,435     29,247
Amortization of mark-to-
market adjustment of
interest-rate swaps               52        103        396        478
Net unrealized loss (gain)
on derivative instruments     (2,848)    (1,620)    (1,199)    (4,145)
Future income tax expense
(recovery)                     2,620     (2,605)     3,239     (2,371)
————————————————————————-
26,051     33,728    135,380    125,977

Decrease (increase) in non-
cash working capital items      17,921      4,855      1,574     (8,443)
Changes in other operating
assets and liabilities            (218)     2,502      2,649      2,663
Cash flows from discontinued
operations                        (838)      (510)    (2,350)      (475)
————————————————————————-
42,916     40,575    137,253    119,722
————————————————————————-

FINANCING ACTIVITIES
Repayment of long-term
indebtedness                    (8,900)    (6,000)   (73,900)   (87,948)
Proceeds from long-term
indebtedness                     2,900          -     62,900     76,000
Issuance costs of long-
term indebtedness                    -          -     (2,564)    (1,621)
Issuance costs of trust units         -          -          -       (700)
Distributions paid to
unitholders                    (24,482)   (24,482)   (97,928)   (87,962)
————————————————————————-
(30,482)   (30,482)  (111,492)  (102,231)
————————————————————————-
INVESTING ACTIVITIES
Expenditures on capital
assets, non-acquisition
intangible assets and long-
term contracts                 (13,916)    (5,133)   (30,264)   (14,805)
Acquisition of businesses
and acquisition adjustments          -     (1,011)       167    (10,436)
Payments related to customer
service contract                     -       (438)         -       (438)
Cash flows from sale of
discontinued operations          1,602          -      1,602          -
————————————————————————-
(12,314)    (6,582)   (28,495)   (25,679)
————————————————————————-

Increase (decrease) in cash
and cash equivalents for the
period                             120      3,511     (2,734)    (8,188)
Cash and cash equivalents,
beginning of period              1,024        367      3,878     12,066
————————————————————————-
Cash and cash equivalents,
end of period                $   1,144  $   3,878  $   1,144  $   3,878
————————————————————————-
————————————————————————-
Supplementary information:
Cash interest paid          $   3,179  $   2,880  $  12,995  $   9,033
————————————————————————-
————————————————————————-

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

>>

<<

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2010 and 2009
(in thousands of Canadian dollars, except unit and per unit amounts,
unaudited)

NATURE OF BUSINESS

Davis + Henderson Income Fund (the “Fund” or “Company” or “Davis +
Henderson” or “D+H” or the “Business”) is a limited-purpose trust, formed
under the laws of the Province of Ontario by a declaration of trust dated
November 6, 2001 and as amended and restated on July 23, 2004. The Fund
holds indirectly all of the partnership units of Davis + Henderson,
Limited Partnership (“Davis + Henderson L.P.”) and its subsidiaries
including Filogix Limited Partnership (“Filogix L.P.”), Filogix Inc.,
Cyence International Inc. (“Cyence”) and Resolve Corporation (“Resolve”).

1.  SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements have been prepared using Canadian
Generally Accepted Accounting Principles.

2.  ACQUISITION

Resolve Business

On July 27, 2009, the Fund acquired all of the outstanding units of
Resolve Business Outsourcing Income Fund through the exchange of 0.285
trust units of the Fund for each unit of Resolve Business Outsourcing
Income Fund. A total of 9,286,581 Fund trust units were issued for this
exchange.

Resolve is a leading provider in Canada of student loan administration
services, credit card portfolio management services, and search and
registration services, among other offerings. The net assets acquired and
consideration given were as follows:

Net assets acquired, at fair value:
Current assets                                               $  55,362
Capital and other assets                                        16,425
Intangible assets                                              160,396
Future income tax asset                                         27,152
Payables and other current liabilities                         (74,123)
Future income tax liability                                    (45,100)
Long-term indebtedness                                         (73,812)
Other long-term liabilities                                     (6,800)

————————————————————————-
59,500
Goodwill                                                          71,026
————————————————————————-
Total                                                          $ 130,526
————————————————————————-
————————————————————————-
Consideration for 100% ownership:

Units issued                                                 $ 120,094
Acquisition costs, net of cash acquired of $3,212               10,432
————————————————————————-
Total                                                        $ 130,526
————————————————————————-
————————————————————————-

The value of the Fund’s trust units issued on acquisition reflects the
unit’s average trading price over a five-day period surrounding the
Fund’s announcement to acquire Resolve Business Outsourcing Income Fund
on June 3, 2009. The acquisition costs of $13.6 million, which included
transaction and restructuring costs were reduced by Resolve’s cash on
hand of $3.2 million at the date of acquisition. In addition, the Fund
also incurred after tax costs of $0.6 million to issue additional trust
units.

During the year ended December 31, 2010, management completed its
assessment of the valuation of the assets acquired and liabilities
assumed for this acquisition and the purchase price allocation shown
above has been finalized. An adjustment to the purchase price allocation
of approximately $7.4 million (net of taxes) was recorded during the year
that included adjustments relating to changes in estimated tax attributes
of Resolve resulting from information that became available during the
year, severances, transaction fees and other transition costs relating to
the disposition of the non-strategic part of the contact centre
operations, estimated liabilities related to the consolidation of
facilities and the finalization of other liabilities as at the
acquisition date. The adjustments also included revaluation of customer
relationship intangibles which resulted in a reduction of intangible
assets.

3.  ACCOUNTS RECEIVABLE

2010       2009
————————————————————————-
Trade receivables                                   $  63,270  $  56,073
Other receivables                                         632      1,178
————————————————————————-
$  63,902  $  57,251
————————————————————————-
————————————————————————-

Allowance for doubtful accounts recorded as at December 31, 2010 was $985
(2009 – $614). Past due accounts as at December 31, 2010 were $918 (2009
- $919).

4.  INVENTORY

2010       2009
————————————————————————-
Raw materials                                       $   2,364  $   2,457
Work-in-process                                         1,647      1,322
Finished goods                                          1,995      2,418
————————————————————————-
$   6,006  $   6,197
————————————————————————-
————————————————————————-

Raw materials primarily consist of paper but also include foil, hologram
and ink. Work-in-process consists of base stock, which refers to sheets
of cheque stock with non-personalized background print, and manufacturer
coupons. Finished goods primarily consist of retail products, labels,
accessories, security bags and corporate seals.

Inventory that was recognized as cost of sales during the three months
ended December 31, 2010 was $10,888 (Q4 2009 – $9,627) and year ended
December 31, 2010 was $42,031 (2009 – $42,715). The amount of write-down
of inventories recognized as an expense during the three months ended
December 31, 2010 was $18 (Q4 2009 – $45) and year ended December 31,
2010 was $158 (2009 – $189).

5.  CAPITAL ASSETS

2010
————————————————————————-
Furniture,
fixtures
and lease-
Machinery                  hold
Land and        and   Computer    improve
buildings  equipment  equipment      ments      Total
————————————————————————-
Cost
Balance at
January 1, 2010   $   2,975  $  19,971  $  25,589  $  12,798  $  61,333
Additions                  -        708      8,046        856      9,610
Other movements(1)      (834)         -     (3,730)    (1,719)    (6,283)
————————————————————————-
At December 31,
2010              $   2,141  $  20,679  $  29,905  $  11,935  $  64,660
————————————————————————-
————————————————————————-

Depreciation and
impairment losses
Balance at
January 1, 2010   $      45  $   9,998  $  10,617  $   7,377  $  28,037
Amortization             226      1,920      5,413      1,598      9,157
Other movements(1)       (12)         -     (3,590)    (1,221)    (4,823)
————————————————————————-
At December 31,
2010              $     259  $  11,918  $  12,440  $   7,754  $  32,371
————————————————————————-
————————————————————————-

Net carrying
amount
At December 31,
2010              $   1,882  $   8,761  $  17,465  $   4,181  $  32,289
————————————————————————-
————————————————————————-

2009
————————————————————————-
Furniture,
fixtures
and lease-
Machinery                  hold
Land and        and   Computer    improve
buildings  equipment  equipment      ments      Total
————————————————————————-
Cost
Balance at
January 1, 2009   $       -  $  15,589  $  18,491  $   9,048  $  43,128
Additions              2,975      4,414      8,971      4,039     20,399
Other movements(1)         -        (32)    (1,873)      (289)    (2,194)
————————————————————————-
At December 31,
2009              $   2,975  $  19,971  $  25,589  $  12,798  $  61,333
————————————————————————-
————————————————————————-

Depreciation and
impairment losses
Balance at
January 1, 2009   $       -  $   8,609  $   7,438  $   6,617  $  22,664
Amortization(2)           45      1,421      4,879      1,042      7,387
Other movements(1)         -        (32)    (1,700)      (282)    (2,014)
————————————————————————-
At  December 31,
2009              $      45  $   9,998  $  10,617  $   7,377  $  28,037
————————————————————————-
————————————————————————-

Net carrying
amount
At December 31,
2009              $   2,930  $   9,973  $  14,972  $   5,421  $  33,296
————————————————————————-
————————————————————————-
(1) Other movements relate to fully amortized assets removed from the
accounts and assets removed and classified as discontinued
operations.
(2) Amortization for the year ended December 31, 2009 includes $30 of
amortization related to discontinued operations.

6.  INTANGIBLE ASSETS

2010
—————————————————
Contracts              Software
———  ———————
Internally
Purchased  Developed
—————————————————
Cost
At January 1, 2010  $  6,799   $ 29,814   $ 14,126
Additions              3,606      6,101     10,960
Other movements(1)    (3,537)   (19,313)       322
—————————————————
At December 31,
2010                  6,868     16,602     25,408
—————————————————
—————————————————

Amortization and
impairment loss
At January 1, 2010  $  4,693   $ 19,261   $  4,674
Amortization           2,336      5,162      3,648
Other movements(1)    (3,537)   (18,420)    (1,002)
—————————————————
At December 31,
2010                  3,492      6,003      7,320
—————————————————
—————————————————

Net carrying amount
At December 31,
2010               $  3,376   $ 10,599   $ 18,088
—————————————————
—————————————————

2010
————————————————————————-
Acquisition of business        Total
——————————————– ———-
Customer
Proprietary      Brand   relation-
Contracts   software      names      ships
————————————————————————-
Cost
At January 1, 2010  $    438   $ 70,500   $ 10,900   $232,935   $365,512
Additions                  -          -          -          -     20,667
Other movements(1)         -          -          -     (4,600)   (27,128)
————————————————————————-
At December 31,
2010                    438     70,500     10,900    228,335    359,051
————————————————————————-
————————————————————————-

Amortization and
impairment loss
At January 1, 2010  $     37   $ 17,149   $  2,180   $ 27,744   $ 75,738
Amortization             417      7,329        729     19,814     39,435
Other movements(1)      (219)         -          -        219    (22,959)
————————————————————————-
At December 31,
2010                    235     24,478      2,909     47,777     92,214
————————————————————————-
————————————————————————-

Net carrying amount
At December 31,
2010               $    203   $ 46,022   $  7,991   $180,558   $266,837
————————————————————————-
————————————————————————-

2009
—————————————————
Contracts              Software
———  ———————
Internally
Purchased  Developed
—————————————————
Cost
At January 1, 2009  $  8,761   $ 21,727   $ 10,676
Additions              1,600     10,510      4,883
Other movements(1)    (3,562)    (2,423)    (1,433)
—————————————————
At December 31,
2009               $  6,799   $ 29,814   $ 14,126
—————————————————
—————————————————

Amortization and
impairment loss
At January 1, 2009  $  5,414   $ 17,393   $  4,194
Amortization(2)        2,841      4,368      1,983
Other movements(1)    (3,562)    (2,500)    (1,503)
—————————————————
At December 31,
2009               $  4,693   $ 19,261   $  4,674
—————————————————
—————————————————

Net carrying amount
At December 31,
2009               $  2,106   $ 10,553   $  9,452
—————————————————
—————————————————

2009
————————————————————————-
Acquisition of business        Total
——————————————– ———-
Customer
Proprietary      Brand   relation-
Contracts   software      names      ships
————————————————————————-
Cost
At January 1, 2009  $  1,201   $ 56,093   $ 10,900   $107,064   $216,422
Additions                438     14,600          -    142,200    174,231
Other movements(1)    (1,201)      (193)         -    (16,329)   (25,141)
————————————————————————-
At December 31,
2009               $    438   $ 70,500   $ 10,900   $232,935   $365,512
————————————————————————-
————————————————————————-

Amortization and
impairment loss
At January 1, 2009  $    864   $ 11,017   $  1,452   $ 31,413   $ 71,747
Amortization(2)          374      6,325        728     12,660     29,279
Other movements(1)    (1,201)      (193)         -    (16,329)   (25,288)
————————————————————————-
At December 31,
2009               $     37   $ 17,149   $  2,180   $ 27,744   $ 75,738
————————————————————————-
————————————————————————-

Net carrying amount
At December 31,
2009               $    401   $ 53,351   $  8,720   $205,191   $289,774
————————————————————————-
————————————————————————-

(1) Other movements relate to fully amortized assets removed from the
accounts, revaluation of certain customer relationship intangibles in
Resolve which resulted in a reduction of intangibles and assets
removed and classified as discontinued operations.
(2) Amortization for the year ended December 31, 2009 includes $32 of
amortization related to discontinued operations.

7.  GOODWILL

2010       2009
————————————————————————-
Balance, beginning of year                          $ 519,848  $ 458,989
Goodwill additions and adjustments during the year:
Cyence                                                    -     (1,417)
Resolve                                               7,394     63,632
Filogix                                                   -     (1,356)
————————————————————————-
Balance, end of year                                $ 527,242  $ 519,848
————————————————————————-
————————————————————————-

A net adjustment of $7.4 million was made to goodwill in Resolve during
the year ended December 31, 2010. These adjustments related to
revaluation of certain customer relationship contracts, changes in
estimated tax attributes of Resolve resulting from information that
became available during the period and the purchase price adjustments for
Resolve relating to severances, estimated loss on disposition of the non-
strategic part of the contact centre operations, estimated liabilities
related to consolidation of facilities and finalization of other
liabilities as at the acquisition date. These adjustments were recorded
net of taxes.

8.  LONG-TERM INDEBTEDNESS

2010       2009
————————————————————————-
Non-revolving term loan                             $ 130,000  $ 190,000
Drawings under revolving credit facility               19,000     20,000
————————————————————————-
149,000    210,000
Series A 5.99% Bonds due June 30, 2017                 50,000          -
————————————————————————-
199,000    210,000
Deferred finance costs                                 (2,785)    (1,537)
————————————————————————-
$ 196,215  $ 208,463
————————————————————————-
————————————————————————-

As at December 31, 2010, the Fund had $220 million of senior secured
credit facilities consisting of a non-revolving term loan of $130 million
and a revolving term credit facility of $90 million each maturing on June
30, 2013. As of December 31, 2010, $19 million was drawn under the
revolving term credit facility and $130 million was drawn under the non-
revolving term loan. The credit facilities do not require the Fund to
make any principal payments prior to June 30, 2013. The credit facilities
bear interest at rates that depend on certain financial ratios of the
Fund and vary in accordance with borrowing rates in Canada. The credit
facilities, including any derivative contracts and cash management
facilities provided by the lenders, are guaranteed by all entities within
the Fund’s corporate structure and are secured in first priority by
substantially all of the Fund’s assets and by a pledge of the Fund’s
indirect ownership interests in Davis + Henderson L.P. and its other
operating subsidiary entities. The Credit Agreement contains a number of
covenants and restrictions including the requirement to meet certain
financial ratios and financial condition tests and, as at December 31,
2010, the Fund was in compliance with all of its financial covenants and
financial condition tests. The carrying value of long-term indebtedness
approximates its fair value as it bears interest at floating rates that
reset in most cases within three months and in all cases within one year.

The Fund has $50.0 million of Bonds issued under the senior secured Note
Purchase and Private Shelf Agreement at a fixed-interest rate of 5.99%
until maturity on June 30, 2017. The Bonds rank equally in all respects
with amounts outstanding under the Credit Agreement and any related
hedging contracts and cash management facilities and benefit from the
same financial covenants that exist under the Credit Agreement described
above.

Deferred finance costs relate to amendments to the Credit Agreement and
entering into the Note Purchase and Private Shelf Agreement dated June
30, 2010. Amortization of deferred finance costs during the year ended
December 31, 2010 was $1.1 million ( 2009 – $0.8 million). Amortization
of deferred finance costs is recognized over the terms of the credit
facilities and Bonds as interest expense using the effective interest
method. During the year ended December 31, 2010, certain unamortized
financing fees of $0.4 million were written off in connection with the
renewal of the credit facilities and changes in the syndicate. The
remaining balance is amortized over the term of the amended credit
facilities.

In addition to the credit facilities and Bonds described above, the Fund
also has unsecured obligations outstanding pursuant to letters of credit
and performance guarantees aggregating to $5 million.

9.  FINANCIAL INSTRUMENTS

Recognition and Measurement

The Fund’s financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities,
distributions payable to unitholders, interest-rate swaps, foreign
exchange contracts, and long-term indebtedness. The Fund does not enter
into financial instruments for trading or speculative purposes. As such,
financial assets are classified as loans and receivables. Financial
liabilities other than derivatives are recorded at amortized cost.
Initially, all financial assets and financial liabilities other than
derivatives must be recorded on the balance sheet at fair value.
Subsequent measurement is determined by the classification of each
financial asset and financial liability. All derivatives are classified
as held-for-trading and recorded at fair value in the consolidated
balance sheet. Transaction costs related to financial instruments are
generally capitalized and then amortized over the expected life of the
financial instrument using the effective interest method.

Credit Risk

The Fund’s financial assets that are exposed to credit risk
consist primarily of cash and cash equivalents, accounts receivable,
foreign exchange contracts and interest-rate swaps. The Fund, in its
normal course of business, is exposed to credit risk from its customers.
The Fund is exposed to credit loss in the event of non-performance by
counterparties to the interest-rate swaps and foreign exchange contracts.
Risks associated with concentrations of credit risk with respect to
accounts receivable, foreign exchange contracts and interest-rate swaps
are limited due to the credit rating of the applicable customers serviced
by the Fund and hedge counterparties utilized by the Fund and by the
generally short payment terms and frequent settlement of foreign exchange
and swap differences.

Market Risk

The Fund is subject to interest-rate risks as its credit facilities bear
interest at rates that depend on certain financial ratios of the Fund and
vary in accordance with borrowing rates in Canada and the United States.

The following table presents a sensitivity analysis to changes in market
interest rates and their potential impact on the Fund for the year ended
December 31, 2010. As the sensitivity is hypothetical, it should be used
with caution.

————————————————————————-
+ 100 bps   -100 bps
————————————————————————-
Increase (decrease) in interest expense            $        -  $       -
Change to net unrealized (gain) loss on
interest-rate swaps                                   (4,400)     4,400
————————————————————————-

Increase (decrease) in net income                  $    4,400  $  (4,400)
————————————————————————-

Increase (decrease) in total comprehensive
income                                            $    4,400  $  (4,400)
————————————————————————-
————————————————————————-

The Fund manages its interest-rate risks through the use of interest-rate
swaps for some of its outstanding long-term indebtedness and by way of
the issuance of fixed-interest-rate Bonds.

As at December 31, 2010, the following fixed-paying interest-rate swaps
were outstanding:

————————————————————————-
Fair value of
interest-rate swaps
———————  Interest
Maturity Date           Notional Amount      Asset  Liability     Rate(1)
————————————————————————-
January 5, 2011               $  22,000 $        – $       39     1.980%
June 15, 2011                    20,000          -        443     4.685%
June 15, 2011                    25,000          -        554     4.685%
December 18, 2014                25,000          -        364     2.720%
March 18, 2015                   25,000          -        549     2.940%
March 20, 2017                   25,000          -        798     3.350%
March 20, 2017                   20,000          -        656     3.366%
————————————————————————-
$ 162,000  $       -  $   3,403
————————————————————————-
————————————————————————-

(1) The listed interest rates exclude bankers’ acceptance fees and prime-
rate spreads currently in effect. Such fees and spreads could
increase or decrease depending on the Fund’s financial leverage as
compared to certain levels specified in the Credit Agreement. As of
December 31, 2010, the Fund’s long-term bank indebtedness was subject
to bankers’ acceptance fees of 2.50% over the applicable BA rate and
prime rate spreads of 1.50% over the prime rate.

Liquidity Risk

The Fund has outstanding long-term indebtedness of $199 million,
consisting of bank indebtedness of $149 million with a maturity date of
June 30, 2013 and fixed-interest-rate Bonds of $50 million maturing June
30, 2017. The degree to which the Fund is leveraged may reduce its
ability to obtain additional financing for working capital and to finance
investments to maintain and grow the current levels of cash flows from
operations. The Fund may be unable to extend the maturity date of the
credit facilities or to refinance outstanding indebtedness.

Management, to reduce liquidity risk, has historically renewed the terms
of the Fund’s long-term indebtedness in advance of its maturity dates and
the Fund has maintained financial ratios that are conservative compared
to financial covenants applicable to the financing arrangements. To
enhance its liquidity position, in prior years the Fund has made numerous
voluntary payments on its outstanding long-term indebtedness and a
portion of its committed term credit facilities remain undrawn. Further,
the Credit Agreement and the Note Purchase and Private Shelf Agreement
provide for additional uncommitted credit arrangements of up to $150
million and Bonds (under an uncommitted shelf facility) of up to $30
million with the use of these arrangements subject to the prior approval
of the relevant lenders and fees, spreads and other terms to be
negotiated at that time.

Management measures liquidity risk through comparisons of current
financial ratios with financial covenants contained in the Credit
Agreement and the Note Purchase and Private Shelf Agreement.

Fair Value Hierarchy

The Fund values instruments carried at fair value using quoted market
prices, where available. Quoted market prices represent a Level 1
valuation. When quoted market prices are not available, the Fund
maximizes the use of observable inputs within valuation models. When all
significant inputs are observable, the valuation is classified as Level
2. Valuations that require a significant use of unobservable inputs are
considered Level 3. The following table outlines the fair value hierarchy
of instruments carried at fair value:

2010
————————————————————————-
Level 1    Level 2    Level 3      Total

Assets:
Derivative instruments       $      -   $      -   $      -   $      -
————————————————————————-
$      -   $      -   $      -   $      -
————————————————————————-
————————————————————————-

Liabilities:
Derivative instruments       $      -   $  3,403   $      -   $  3,403
————————————————————————-
$      -   $  3,403   $      -   $  3,403
————————————————————————-
————————————————————————-

The Level 2 financial instruments recorded in the Fund’s balance sheet
include interest-rate swaps and foreign exchange contracts. There has
been no movement between the levels during 2010.

Hedge Accounting

Where derivatives are held for risk management purposes or when
transactions meet the criteria, including documentation requirements,
specified in the CICA Handbook Section 3865, hedge accounting is applied
to the risks being hedged. When hedge accounting is not applied, the
change in the fair value of the derivative is recognized in income,
including instruments used for economic hedging purposes that do not meet
the requirements for hedge accounting.

Effective January 1, 2007, the Fund ceased applying hedge accounting on
the outstanding interest-rate swaps and foreign exchange contracts.

Derivative Financial Instruments

Derivatives are carried at fair value and are reported as assets where
they have a positive fair value and liabilities where they have a
negative fair value. Derivatives may be embedded in other financial
instruments or contracts. Derivatives embedded in other financial
instruments are valued as separate derivatives when their economic
characteristics and risks are not clearly and closely related to those of
the host contract unless such contracts relate to normal course
operations and qualify for the normal purchase and sale exemption in
accordance with the standards.

Accumulated Other Comprehensive Income (Loss)

When applicable, changes in the fair value of cash flow hedging
instruments are recorded in accumulated other comprehensive income (loss)
until recognized in the consolidated statement of income. Accumulated
other comprehensive income (loss) forms part of unitholders’ equity.

10. OTHER LONG-TERM LIABILITIES

2010       2009
————————————————————————-

Deferred compensation program                       $   1,934  $     845

Employee future benefits                                5,003      4,987
Contractual supplier obligation                         1,390      1,319
Capital lease                                               -         10
————————————————————————-
$   8,327  $   7,161
————————————————————————-
————————————————————————-

The deferred compensation program, which commenced on January 1, 2009, is
a long-term incentive plan that includes a cash award component and a
cash-settled unit-based compensation component. Both the cash component
and the cash-settled unit-based compensation component awarded at the
grant date are subject to a three year target for compound annual growth
in adjusted income.

Employee future benefits consist of defined contribution pension plans
and non-pension post-retirement benefit plans. Obligations relating to
employee future benefits relate to the non-pension post-retirement
benefit plan. The Fund’s non-pension post-retirement benefit plans are
defined benefit plans funded on a cash basis by contributions from the
Fund, which covers certain medical costs of a limited number of
employees. The Fund measures its accrued benefit obligation and the fair
value of the plan for accounting purposes as at December 31 of each year.
The latest actuarial valuation of the post-retirement benefit plan was
performed as at December 31, 2010. The next valuation will be performed
in 2011.

The Fund’s principal pension plans are defined contribution pension plans
that provide pensions to substantially all eligible employees. Total
expense for the Fund’s defined contribution pension plan for the year
ended December 31, 2010 was $2.9 million (2009 – $2.2 million).

The components of post-retirement benefit obligation recognized are as
follows:

2010       2009
————————————————————————-

Change in post-retirement benefit obligation
Balance at beginning of year                      $   3,950  $     707
Acquisition of Resolve                                    -      3,392
Current service costs                                    56         89
Interest cost                                           212        248
Plan amendments                                           -        (71)
Benefits paid                                          (198)      (159)
Actuarial loss (gain)                                   372       (256)
————————————————————————-
Balance at end of year                                4,392      3,950
————————————————————————-

Funded status
Balance of post-retirement benefit obligation         4,392      3,950
Unamortized net actuarial loss                          470        884
Unamortized past service benefits                       141        153
————————————————————————-
Accrued non-pension post-retirement benefit
liability                                        $   5,003  $   4,987
————————————————————————-
————————————————————————-

Actuarial assumptions:
Accrued benefit obligation
Discount rate                                        5.50%      6.50%
Rate of compensation increase                        2.00%      2.00%
Initial weighted average health-care
trend rate                                        7.19%      7.30%
Ultimate weighted average health-care
trend rate                                        4.28%      4.50%
Year the rate reaches the ultimate trend rate      2029       2029
Net benefit plan expense
Discount rate                                        6.50%      7.25%
Rate of compensation increase                        2.00%      3.05%
Initial weighted average health-care trend rate      7.25%      8.39%
Ultimate weighted average health care trend rate     4.50%      4.71%
Year the rate reaches the ultimate trend rate        2029       2029
————————————————————————-
————————————————————————-

Effects of change in assumed health cost trend
rates:
1% increase:
Effect on total service and interest cost
components                                     $      27  $      38
Effect on post-retirement accrued benefit
obligation                                           321        434
1% decrease:
Effect on total service and interest cost
components                                           (24)       (31)
Effect on post-retirement accrued benefit
obligation                                          (284)       357
————————————————————————-
————————————————————————-

The contractual supplier obligation, expiring in May 31, 2013 relates to
payments to be made for a customized software package. The total
liability is $1.4 million of which a minimal amount relates to current
liabilities.

11. INCOME TAXES

The Fund is a mutual fund trust for income tax purposes and will be a
specified investment flow through trust (“SIFT”) for years commencing
after 2010. As such, the Fund is subject to current income taxes on any
taxable income of its corporate subsidiaries, on any of its taxable
income for its flow-through subsidiaries not distributed to unitholders
prior to January 1, 2011 and on all taxable income subsequent to December
31, 2010. The Fund’s income distributed will not be subject to tax prior
to 2011 and accordingly has not provided for future income taxes on its
temporary differences and those of its flow-through subsidiary trust and
partnerships expected to reverse prior to 2011 as it is considered tax
exempt for accounting purposes. Taxable income distributed by the Fund to
its unitholders will be taxable income of those unitholders.

Significant components of the Fund’s future tax assets and liabilities
with respect to differences between the consolidated carrying values and
the related tax bases of the assets and liabilities within certain
partnership, trust and corporate subsidiaries are as follows:

2010       2009
————————————————————————-
Future income tax assets:
Capital assets less than tax values               $       -  $   2,935
Intangible assets less than tax values               10,559     10,284
Tax losses available for future periods              24,402     19,289
Accrued and other liabilities                         7,877      6,088
————————————————————————-
42,838     38,596
Valuation allowance                                 (14,289)   (13,897)
————————————————————————-
Total future tax asset                               28,549     24,699

Future income tax liabilities:
Capital assets greater than tax values               10,974      3,208
Intangible assets greater than tax values            38,665     45,726
————————————————————————-
Total future tax liabilities                         49,639     48,934

————————————————————————-
Net future income tax liabilities                   $  21,090  $  24,235
————————————————————————-
————————————————————————-

The Fund does not expect the temporary differences between the carrying
amount and tax base of certain intangible assets to reverse in the
foreseeable future and accordingly has reduced the related future income
tax asset by a valuation allowance of $10,559.

The Fund also does not expect to realize the benefit of certain net
operating losses carry-forwards of certain Canadian and U.S. corporate
subsidiaries in the foreseeable future and accordingly has not recognized
a future income tax asset for such losses by recording a valuation
allowance of $3,730.

No future tax liability has been provided for the taxable temporary
difference related to goodwill since this amount is not deductible for
tax purposes and is therefore specifically exempt from the recognition
requirements.

As at December 31, 2010, certain Canadian and U.S. corporate subsidiaries
of the Fund had $89,404 of net operating losses for income tax purposes.
These losses will begin to expire commencing in fiscal 2022. The
deductibility of losses of a U.S. corporate subsidiary of approximately
$4,890 is subject to annual limitations.

One of the Fund’s Canadian corporate subsidiaries also had $75,849 of
capital losses for income tax purposes. The benefit of these losses,
which do not expire, has not been recognized above because management
does not expect to utilize these losses in the foreseeable future.

The provision for future income taxes of $2,597 ($3,239 expense relating
to continuing operations and $642 recovery related to discontinued
operations) in the consolidated statement of income represents an
effective rate difference than the Canadian Corporate statutory rate of
31% (2009 – 33%).  The differences are as follows:

2010       2009
————————————————————————-
Income before income taxes                          $  85,123  $  92,503

Income taxes at statutory rates of 31%
(2009 -33%)                                           26,388     30,526

Increase (decrease) resulting from:
Impact of income distributed to unitholders         (25,905)   (30,774)
Change in future tax rates and reversal of
timing differences                                     508     (2,225)
Change in valuation allowance                           875        (82)
Other Items                                             731         44
————————————————————————-
Future income tax (recovery) expense                $   2,597  $  (2,511)
————————————————————————-
————————————————————————-

12. TRUST UNITS

An unlimited number of trust units may be issued by the Fund pursuant to
the Fund’s Declaration of Trust. Each unit is transferable and represents
an equal, undivided beneficial interest in any distributions from the
Fund and in the net assets of the Fund. All units are of the same class
with equal rights and privileges and are not subject to future calls or
assessments. Each unit entitles the holder to one vote at all meetings of
unitholders and a pro rata share of distributions declared by the Fund.
The net proceeds from the issuance of trust units and the number of units
outstanding are as follows:

2010          2009
————————————————————————-
Balance, beginning of year                    $    595,859  $    476,343

Units issued                                             -       119,516
————————————————————————-
Balance, end of year                          $    595,859  $    595,859
————————————————————————-
————————————————————————-
Units outstanding, end of year                  53,233,373    53,233,373
————————————————————————-

The weighted average number of units outstanding during the year ended
December 31, 2010 was 53,233,373 (2009 – 47,966,736).

13. CAPITAL

The Fund views its capital as the combination of its indebtedness and
equity balances. In general, the overall capital of the Fund is evaluated
and determined in the context of its financial objectives and its
strategic plan.

While the Fund carries a level of cash on hand, this amount is modest in
relation to its overall capital and is generally in an amount determined
in reference to its pending distribution obligations and short-term
changes in non-cash working capital balances.

With respect to its level of indebtedness, the Fund determines the
appropriate level in the context of its cash flow and overall business
risks. Generally, the Fund has maintained low level of indebtedness
relative to cash flow in order to provide increased financial flexibility
and to provide increased protection for unitholders relative to their
expectation of distributions. Additionally, the Fund has historically
generated cash flow in excess of distributions and has used a portion of
such excess to pay down indebtedness. The Fund would consider increasing
its level of indebtedness relative to cash flow to assist in the
financing of an acquisition.

The Fund’s indebtedness is subject to a number of covenants and
restrictions including the requirement to meet certain financial ratios
and financial condition tests at a subsidiary level. One such ratio is
the “Senior Funded Debt / EBITDA Ratio” as defined in the Credit
Agreement. The maximum ratio allowed for a 12-month trailing period is
2.50. For the 12-month trailing period ended December 31, 2010, this
ratio was calculated at 1.30 (12-month trailing period ended December 31,
2009 – 1.27). Management also uses this ratio as a key indicator in
managing the Fund’s capital.

With respect to its equity, the current level of capital is considered
adequate in the context of current operations and the present strategic
plan of the Fund. The equity component of capital increases primarily
based upon the income of the business less the distributions paid. Any
major acquisition would be financed in part with additional equity.

14. COMMITMENTS

As at December 31, 2010, the Fund has lease obligations with respect to
real estate, vehicles and equipment as follows:

2011                           10,730
2012                            7,883
2013                            6,996
2014                            5,925
2015                            4,300
Thereafter                     12,500
————————————–
48,334
————————————–
————————————–

15. SIGNIFICANT CUSTOMERS

For the three months ended December 31, 2010, the Fund earned 64% of its
consolidated revenue from its seven largest customers (Q4 2009 – 64%).
For the three months ended December 31, 2010, three of these customers
individually accounted for greater than 10%, but not more than 14% of the
Fund’s total revenue (for the three months ended December 31, 2009, three
of these customers individually accounted for greater than 10%, but not
more than 13% of the Fund’s total revenue).

For the year ended December 31, 2010, the Fund earned 65% of its
consolidated revenue from its seven largest customers (2009 – 67%). For
the year ended December 31, 2010, three of these customers individually
accounted for greater than 10%, but not more than 14% of the Fund’s total
revenue (2009 – three of these customers individually accounted for
greater than 10%, but not more than 15% of the Fund’s total revenue).

16. SEGMENTED INFORMATION

The Fund had previously operated and reported upon two business segments,
the “D+H Segment” and the “Filogix Segment”. Subsequent to the completion
of the Resolve acquisition in July 2009, the Fund announced that it would
move to a single integrated operation in order to better serve customers
and maximize effectiveness. The business is now managed along functional
lines and operating decisions and performance assessment is aligned with
these functions. As such, commencing in 2009, the Fund reports its
business as a single segment and all prior year segment information has
been restated.

Revenue pertaining to major service areas for the quarter and year ended
December 31, 2010 and 2009 are as follows:

Quarter ended          Year ended
December 31,          December 31,
2010       2009       2010       2009
————————————————————————-
Revenue
Programs to the chequing
account                    $  73,020  $  71,787  $ 293,838  $ 288,557
Loan servicing                 32,926     29,554    125,752     50,645
Loan registration
technology services           23,930     21,729    102,342     41,785
Lending technology
services                      19,946     17,527     77,281     69,244
Other(1)                       10,635     10,924     41,161     23,621
————————————————————————-
$ 160,457  $ 151,521  $ 640,374  $ 473,852
————————————————————————-

(1) Excluded from the current and comparative periods are the
discontinued operations that were sold on October 7, 2010.

17. RESTRUCTURING CHARGES

During the year ended December 31, 2010, the Fund recorded a
restructuring charge of $8,428 relating to severances, consolidation of
facilities, contract termination and consulting costs as part of the
integration and transformation activities designed to better position the
Business going forward to serve customers and improve the effectiveness,
efficiency and scalability of operations. These initiatives are a result
of the Fund completing four acquisitions over the past four years which
led to expanded service offerings and operations. The integration
activities consist of items that include the consolidation of facilities,
centralization of certain functions and operations, elimination of
management duplication, repositioning of personnel related to the
integrated business and enhancing the scalability of operations, among
other items.

The following table summarizes the total restructuring charges incurred
during the year ended December 31, 2010:

———————————————–
Facilities
Consolidation
Employee  and Contract
Termination  Termination Consulting
Costs        Costs       Costs      Total
————————————————————————-

Provision balance at
January 1, 2010            $        -   $       -  $       -  $       -
Expense during the year        4,077       2,353      1,998      8,428
Cash payments during
the year                        (84)       (116)      (224)      (424)
————————————————————————-
Provision balance at
December 31, 2010          $    3,993   $   2,237  $   1,774  $   8,004
————————————————————————-
————————————————————————-

18. DISCONTINUED OPERATIONS

On October 7, 2010 D+H sold its non-strategic contact centre operations
acquired as part of the Resolve acquisition. These operations have been
classified as discontinued operations for both current and comparative
periods presented.

Revenue attributable to the discontinued operations during the quarter
and the year ended December 31, 2010 was $317 and $13,799 (Q4 2009 -
$4,694; 2009 – $7,912). In prior periods, revenue related to the
discontinued operations was reported as part of the “Other” category in
the revenue disclosure by service area.

Income taxes attributable to the discontinued operations during the
quarter and year ended December 31, 2010 was a recovery of $218 and $642
(Q4 2009 – $142 recovery; 2009 – $140 recovery).

Per unit information relating to the discontinued operations is as
follows:

Quarter ended          Year ended
December 31,          December 31,
2010       2009       2010       2009
————————————————————————-

Loss from discontinued
operations, per unit,
basic and diluted            $ (0.0116) $ (0.0076) $ (0.0343) $ (0.0083)
Income from continuing
operations, per unit,
basic and diluted               0.2530     0.4885     1.5847     1.9891
————————————————————————-
Net income per unit,
basic and diluted            $  0.2415  $  0.4809  $  1.5503  $  1.9808
————————————————————————-
————————————————————————-

19. SUBSEQUENT EVENTS

Conversion from an Income Trust to a Corporation

On January 4, 2011, the Company announced the completion of the
previously announced plan of arrangement (the “Arrangement”) pursuant to
which the Fund’s income trust structure was converted into a dividend
paying publicly traded corporation named Davis + Henderson Corporation,
effective January 1, 2011.

The Company followed the guidelines included in IFRS to reflect the
impact of the Fund’s conversion to a Corporation. The conversion was
treated as a change in business form and was accounted for as a
continuity of interests. As such, the carrying amounts of assets,
liabilities and unitholders’ equity in the consolidated financial
statements of the Company immediately before the conversion remained the
same as the carrying values of Davis + Henderson Corporation immediately
after the conversion. Effective January 1, 2011, the share capital of
Davis + Henderson Corporation in respect of the common shares were
reduced by the deficit outstanding as at December 31, 2010.

In conjunction with the conversion, the Company also undertook an
internal reorganization to simplify its business operations by
consolidating the various businesses it operates through separate legal
entities, arising as a consequence of recent acquisitions, into a single
operating entity. The businesses were combined and will operate as D+H
Limited Partnership.

Acquisition

On January 18, 2011, D+H announced the completion of its acquisition of
substantially all the assets of ASSET Inc. (“ASSET”) for a purchase price
of $76 million payable in cash, which D+H financed with an extension of
its current credit facilities. ASSET is Canada’s largest provider of
technology based asset recovery and insolvency management solutions to
the Canadian financial services industry. On behalf of lenders, ASSET
uses web-enabled platforms to manage the recovery process around loans
provided for moveable property and provides solutions to support real
property recovery, unsecured debt recovery, insolvency process
management, and personal property lien search and registration services.

20. COMPARATIVE FIGURES

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

SUPPLEMENTARY FINANCIAL INFORMATION

Consolidated Operating Results by Period

————————————————————————-
Three      Three      Three
Year     months     months     months
ended      ended      ended      ended
(in thousands of Canadian      December   December  September    June 30,
dollars, unaudited)           31, 2010   31, 2010   30, 2010       2010
————————————————————————-
Revenue                      $640,374    160,457   $161,900   $164,319
Expenses                      482,578    124,733    121,311    120,545
Restructuring charges(5)          8,428      6,268      2,160          -
————————————————————————-
EBITDA(1)                       149,368     29,456     38,429     43,774

Amortization of capital
assets and non-acquisition
intangibles                   20,304      5,643      5,030      4,962
Interest expense               13,988      3,405      3,517      3,692
Minority interest                   -          -          -          -
————————————————————————-
Adjusted income(1)              115,076     20,408     29,882     35,120
————————————————————————-

Amortization of mark-to-market
adjustment of interest-rate
swaps                            396         52         52        103
Net unrealized loss (gain) on
derivative instruments(2)       (1,199)    (2,848)     1,514      1,694
Future income tax expense
(recovery)                     3,239      2,620       (645)       603
Amortization of intangibles
from acquisition              28,288      7,108      6,925      7,158
————————————————————————-

Income from continuing
operations                    84,352     13,476     22,036     25,562
Income (loss) from
discontinued operations,
net of taxes(6)                 (1,826)      (620)      (465)      (531)
————————————————————————-

Net income                    $ 82,526   $ 12,856   $ 21,571   $ 25,031

————————————————————————-
————————————————————————-

Cash flows from operating
activities                     137,253     42,916     36,743     36,613
Changes in non-cash working
capital
and other items(3)               (4,223)   (17,703)    (2,419)     2,792
————————————————————————-
Adjusted cash flows from
operating activities           133,030     25,213     34,324     39,405

Less:
Asset expenditures and
contract payments(4)          30,264     13,916      7,079      5,293

————————————————————————-
Adjusted cash flows after asset
expenditures and contract
payments                       102,766     11,297     27,245     34,112

Distributions paid to
unitholders                     97,928     24,482     24,482     24,482

————————————————————————-

4,838    (13,185)     2,763      9,630

Cash flows provided by (used
in) other financing
activities                     (13,564)    (6,000)    (5,000)    (7,564)
Fair value of acquisitions          167          -        167          -
Fair value of trust units
issued                               -          -          -          -
Changes in non-cash working
capital and other items(3)       4,223     17,703      2,419     (2,792)
Cash flows from sale of
discontinued operations          1,602      1,602          -          -
Distributions paid to
minority interest                    -          -          -          -

————————————————————————-

Increase (decrease) in cash
and cash equivalents for
the period                    $ (2,734)  $    120   $    349   $   (726)

————————————————————————-
————————————————————————-

————————————————————————-
Three                 Three      Three
months       Year     months     months
ended      ended      ended      ended
(in thousands of Canadian      March 31,  December   December  September
dollars, unaudited)               2010   31, 2009   31, 2009   30, 2009
————————————————————————-
Revenue                      $153,698   $473,852   $151,521   $139,245
Expenses                      115,989    338,334    114,467    101,696
Restructuring charges(5)              -          -          -          -
————————————————————————-
EBITDA(1)                        37,709    135,518     37,054     37,549

Amortization of capital
assets and non-acquisition
intangibles                    4,669     16,517      4,514      4,505
Interest expense                3,374      9,541      3,326      2,681
Minority interest                   -          -          -          -
————————————————————————-
Adjusted income(1)               29,666    109,460     29,214     30,363
————————————————————————-

Amortization of mark-to-market
adjustment of interest-rate
swaps                            189        478        103        103
Net unrealized loss (gain) on
derivative instruments(2)       (1,559)    (4,145)    (1,620)    (1,647)
Future income tax expense
(recovery)                       661     (2,372)    (2,605)     1,015
Amortization of intangibles
from acquisition               7,097     20,087      7,330      5,942
————————————————————————-

Income from continuing
operations                    23,278     95,412     26,006     24,950
Income (loss) from
discontinued operations,
net of taxes(6)                   (210)      (398)      (405)         7
————————————————————————-

Net income                    $ 23,068   $ 95,014   $ 25,601   $ 24,957

————————————————————————-
————————————————————————-

Cash flows from operating
activities                      20,981    119,722   $ 40,575   $ 38,959
Changes in non-cash working
capital
and other items(3)               13,107      5,781     (7,356)    (4,056)
————————————————————————-
Adjusted cash flows from
operating activities            34,088    125,503     33,219     34,903

Less:
Asset expenditures and
contract payments(4)           3,976     14,805      5,133      2,818

————————————————————————-
Adjusted cash flows after asset
expenditures and contract
payments                        30,112    110,698     28,086     32,085

Distributions paid to
unitholders                     24,482     87,962     24,482     23,058

————————————————————————-

5,630     22,736      3,604      9,027

Cash flows provided by (used
in) other financing
activities                       5,000    (13,569)    (6,000)    (5,569)
Fair value of acquisitions            -   (130,968)    (1,449)  (129,682)
Fair value of trust units
issued                               -    119,394          -    119,394
Changes in non-cash working
capital and other items(3)     (13,107)    (5,781)     7,356      4,056
Cash flows from sale of
discontinued operations              -          -          -          -
Distributions paid to
minority interest                    -          -          -          -

————————————————————————-

Increase (decrease) in cash
and cash equivalents for
the period                    $ (2,477)  $ (8,188)  $  3,511   $ (2,774)

————————————————————————-
————————————————————————-

————————————————————————-
Three      Three                 Three
months     months       Year     months
ended      ended      ended      ended
(in thousands of Canadian       June 30,  March 31,  December   December
dollars, unaudited)               2009       2009   31, 2008   31, 2008
————————————————————————-
Revenue                      $ 94,557   $ 88,529   $367,231   $ 89,357
Expenses                       62,080     60,091    245,678     62,413
Restructuring charges(5)              -          -          -          -
————————————————————————-
EBITDA(1)                        32,477     28,438    121,553     26,944

Amortization of capital
assets and non-acquisition
intangibles                    3,679      3,819     15,538      3,800
Interest expense                1,787      1,747      6,847      1,647
Minority interest                   -          -          -          -
————————————————————————-
Adjusted income(1)               27,011     22,872     99,168     21,497
————————————————————————-

Amortization of mark-to-market
adjustment of interest-rate
swaps                            136        136        561        151
Net unrealized loss (gain) on
derivative instruments(2)       (1,069)       191      5,691      3,653
Future income tax expense
(recovery)                      (718)       (64)     1,217        399
Amortization of intangibles
from acquisition               3,441      3,374     13,716      3,409
————————————————————————-

Income from continuing
operations                    25,221     19,235     77,983     13,885
Income (loss) from
discontinued operations,
net of taxes(6)                      -          -        465         51
————————————————————————-

Net income                    $ 25,221   $ 19,235   $ 78,448   $ 13,936

————————————————————————-
————————————————————————-

Cash flows from operating
activities                    $ 27,173   $ 13,015   $116,062   $ 31,806
Changes in non-cash working
capital
and other items(3)                3,517     13,676       (594)    (6,380)
————————————————————————-
Adjusted cash flows from
operating activities            30,690     26,691    115,468     25,426

Less:
Asset expenditures and
contract payments(4)           2,491      4,363     13,438      4,915

————————————————————————-
Adjusted cash flows after asset
expenditures and contract
payments                        28,199     22,328    102,030     20,511

Distributions paid to
unitholders                     20,211     20,211     78,580     20,211

————————————————————————-

7,988      2,117     23,450        300

Cash flows provided by (used
in) other financing
activities                      (2,000)         -     18,000     28,000
Fair value of acquisitions          103         60    (43,126)   (38,876)
Fair value of trust units
issued                               -          -          -          -
Changes in non-cash working
capital and other items(3)      (3,517)   (13,676)       594      6,380
Cash flows from sale of
discontinued operations              -          -          -          -
Distributions paid to
minority interest                    -          -          -          -

————————————————————————-

Increase (decrease) in cash
and cash equivalents for
the period                    $  2,574   $(11,499)  $ (1,082)  $ (4,196)

————————————————————————-
————————————————————————-

————————————————————————-
Three      Three      Three
months     months     months       Year
ended      ended      ended      ended
(in thousands of Canadian     September    June 30,  March 31,  December
dollars, unaudited)           30, 2008       2008       2008   31, 2007
————————————————————————-
Revenue                      $ 95,055   $ 95,407   $ 87,412   $369,726
Expenses                       61,664     61,334     60,267    250,237
Restructuring charges(5)              -          -          -          -
————————————————————————-
EBITDA(1)                        33,391     34,073     27,145    119,489

Amortization of capital
assets and non-acquisition
intangibles                    4,219      3,771      3,748     15,080
Interest expense                1,690      1,754      1,756      7,531
Minority interest                   -          -          -        379
————————————————————————-
Adjusted income(1)               27,482     28,548     21,641     96,499
————————————————————————-

Amortization of mark-to-market
adjustment of interest-rate
swaps                            151        152        107        678
Net unrealized loss (gain) on
derivative instruments(2)          728     (1,034)     2,344       (740)
Future income tax expense
(recovery)                        52        766          -      1,591
Amortization of intangibles
from acquisition               3,412      3,447      3,448     13,298
————————————————————————-

Income from continuing
operations                    23,139     25,217     15,742     81,672
Income (loss) from
discontinued operations,
net of taxes(6)                    167        149         98        567
————————————————————————-

Net income                    $ 23,306   $ 25,366   $ 15,840   $ 82,239

————————————————————————-
————————————————————————-

Cash flows from operating
activities                    $ 35,110   $ 32,623   $ 16,523   $117,401
Changes in non-cash working
capital
and other items(3)               (3,169)       (82)     9,037     (4,949)
————————————————————————-
Adjusted cash flows from
operating activities            31,941     32,541     25,560    112,452

Less:
Asset expenditures and
contract payments(4)           3,027      2,962      2,534     15,496

————————————————————————-
Adjusted cash flows after asset
expenditures and contract
payments                        28,914     29,579     23,026     96,956

Distributions paid to
unitholders                     20,211     19,305     18,853     78,357

————————————————————————-

8,703     10,274      4,173     18,599

Cash flows provided by (used
in) other financing
activities                      (5,000)    (5,000)         -    (15,000)
Fair value of acquisitions            -          -     (4,250)      (746)
Fair value of trust units
issued                               -          -          -          -
Changes in non-cash working
capital and other items(3)       3,169         82     (9,037)     4,949
Cash flows from sale of
discontinued operations              -          -          -          -
Distributions paid to
minority interest                    -          -          -       (442)

————————————————————————-

Increase (decrease) in cash
and cash equivalents for
the period                    $  6,872   $  5,356   $ (9,114)  $  7,360

————————————————————————-
————————————————————————-

—————————————-
Year
ended
(in thousands of Canadian      December
dollars, unaudited)           31, 2006
—————————————-
Revenue                      $317,967
Expenses                      223,562
Restructuring charges(5)              -
—————————————-
EBITDA(1)                        94,405

Amortization of capital
assets and non-acquisition
intangibles                   13,040
Interest expense                6,016
Minority interest                 202
—————————————-
Adjusted income(1)               75,147
—————————————-

Amortization of mark-to-market
adjustment of interest-rate
swaps                              -
Net unrealized loss (gain) on
derivative instruments(2)            -
Future income tax expense
(recovery)                         -
Amortization of intangibles
from acquisition               8,236
—————————————-

Income from continuing
operations                    66,911
Income (loss) from
discontinued operations,
net of taxes(6)                   (382)
—————————————-

Net income                    $ 66,529

—————————————-
—————————————-

Cash flows from operating
activities                    $ 89,753
Changes in non-cash working
capital
and other items(3)               (1,048)
—————————————-
Adjusted cash flows from
operating activities            88,705

Less:
Asset expenditures and
contract payments(4)           9,855

—————————————-
Adjusted cash flows after asset
expenditures and contract
payments                        78,850

Distributions paid to
unitholders                     61,311

—————————————-

17,539

Cash flows provided by (used
in) other financing
activities                     202,749
Fair value of acquisitions     (223,852)
Fair value of trust units
issued                               -
Changes in non-cash working
capital and other items(3)       1,048
Cash flows from sale of
discontinued operations              -
Distributions paid to
minority interest                    -

—————————————-

Increase (decrease) in cash
and cash equivalents for
the period                    $ (2,516)

—————————————-
—————————————-

(1) EBITDA and Adjusted income are non-GAAP terms. See Non-GAAP Measures
for a more complete description of these terms.

(2) The Business enters into derivative contracts to fix the interest
rates and foreign exchange rates on a significant portion of its
outstanding bank debt and foreign currency transactions, which are
relatively minor, respectively. For accounting purposes, these
derivative instruments do not qualify for hedge accounting treatment
and, accordingly, any change in the fair value of these contracts is
recorded through income. Provided the Business does not cancel its
derivative contracts prior to maturity, the amounts represent a non-
cash unrealized gain or loss that will subsequently reverse through
income. The Company has historically held its derivative contracts
to maturity.

(3) Changes in non-cash working capital and certain other balance sheet
items have been excluded from adjusted cash flows from operating
activities so as to remove the effects of timing differences in cash
receipts and cash disbursements, which generally reverse themselves,
but can vary significantly across quarters and to remove certain of
the payments related to the acquisition and related restructuring
activities that were recorded as part of the acquisition. For
details, see the Changes in Non-Cash Working Capital and Other Items
section.

(4) Asset expenditures include both maintenance asset expenditures and
growth asset expenditures. Maintenance asset expenditures are defined
by the Fund as asset expenditures necessary to maintain and sustain
the current productive capacity of the Business or generally improve
the efficiency of the Business. Growth asset expenditures are defined
by the Fund as asset expenditures that increase the productive
capacity of the Business with a reasonable expectation of an increase
in cash flow. The distinction between growth and maintenance asset
expenditures will become less relevant to management in the future as
D+H converts to a corporation.

(5) Restructuring charges relate to further integration and
transformation initiatives designed to better position the business
going forward to serve customers and improve the effectiveness and
efficiency of operations.

(6) On October 7, 2010, the Business sold a non-strategic component of
its contact centre business and as such, the results of these
operations are presented as discontinued operations for both current
and prior periods presented. Discontinued operations for 2008 relate
to services previously provided under a U.S. cheque supply contract.

Summary of Cash Flows Per Unit
————————————————————————-
Three     Three     Three     Three
Year    months    months    months    months
ended     ended     ended     ended     ended
(in Canadian dollars,   December  December September   June 30, March 31,
unaudited)             31, 2010  31, 2010  30, 2010      2010      2010
————————————————————————-
Adjusted income per
unit, basic and
diluted                 $2.1617   $0.3834   $0.5613   $0.6597   $0.5573
Net income per unit,
basic and diluted       $1.5503   $0.2415   $0.4052   $0.4702   $0.4333
Adjusted cash flows
from operating
activities              $2.4989   $0.4736   $0.6448   $0.7402   $0.6403
Adjusted cash flows
after asset
expenditures and
contract payments       $1.9305   $0.2122   $0.5118   $0.6408   $0.5657
Cash distributions paid
to unitholders          $1.8396   $0.4599   $0.4599   $0.4599   $0.4599
Distributions declared
during period           $1.8396   $0.4599   $0.4599   $0.4599   $0.4599
————————————————————————-
————————————————————————-

————————————————————————-
Three    Three      Three    Three
Year    months   months     months   months
ended     ended    ended      ended    ended
(in Canadian dollars,   December  December September   June 30, March 31,
unaudited)             31, 2009  31, 2009  30, 2009      2009      2009
————————————————————————-
Adjusted income per
unit, basic and
diluted                 $2.2820   $0.5488   $0.6000   $0.6146   $0.5204
Net income per unit,
basic and diluted       $1.9808   $0.4809   $0.4931   $0.5739   $0.4377
Adjusted cash flows
from operating
activities              $2.6164   $0.6240   $0.6897   $0.6983   $0.6073
Adjusted cash flows
after asset
expenditures and
contract payments       $2.3078   $0.5276   $0.6340   $0.6417   $0.5081
Cash distributions paid
to unitholders          $1.8396   $0.4599   $0.4599   $0.4599   $0.4599
Distributions declared
during period           $1.8396   $0.4599   $0.4599   $0.4599   $0.4599
————————————————————————-
————————————————————————-

————————————————————————-
Three     Three     Three     Three
Year    months    months    months    months
ended     ended     ended     ended     ended
(in Canadian dollars,   December  December September   June 30, March 31,
unaudited)             31, 2008  31, 2008  30, 2008      2008      2008
————————————————————————-
Adjusted income per
unit, basic and
diluted                 $2.2565   $0.4892   $0.6253   $0.6496   $0.4924
Net income per unit,
basic and diluted       $1.7851   $0.3172   $0.5303   $0.5772   $0.3604
Adjusted cash flows
from operating
activities              $2.6275   $0.5786   $0.7268   $0.7405   $0.5816
Adjusted cash flows
after asset
expenditures and
contract payments       $2.3217   $0.4667   $0.6579   $0.6731   $0.5240
Cash distributions paid
to unitholders          $1.7881   $0.4599   $0.4599   $0.4393   $0.4290
Distributions declared
during period           $1.8384   $0.4999   $0.4599   $0.4496   $0.4290
————————————————————————-
————————————————————————-

——————————————-
Year      Year
ended     ended
(in Canadian dollars,   December  December
unaudited)             31, 2007  31, 2006
——————————————-
Adjusted income per
unit, basic and
diluted                 $2.1959   $1.8164
Net income per unit,
basic and diluted       $1.8713   $1.6081
Adjusted cash flows
from operating
activities              $2.5588   $2.1441
Adjusted cash flows
after asset
expenditures and
contract payments       $2.2062   $1.9059
Cash distributions paid
to unitholders          $1.7830   $1.4940
Distributions declared
during period           $1.7980   $1.5000
——————————————-
——————————————-

Condensed Consolidated Balance Sheet

————————————————————————-
(in thousands of Canadian      December  September    June 30,  March 31,
dollars, unaudited)           31, 2010   30, 2010       2010       2010
————————————————————————-
Cash and cash equivalents      $  1,144   $  1,024   $    675   $  1,401
Other current assets             79,924     81,245     89,034     88,247
Capital and other non-current
assets                          58,374     56,571     54,591     52,848
Intangible assets               266,837    267,938    273,938    279,663
Goodwill                        527,242    527,242    520,364    522,482

————————————————————————-
$933,521   $934,020   $938,602   $944,641
————————————————————————-
————————————————————————-
Payables and other current
liabilities                   $106,426    $88,836    $87,499   $159,873
Other long-term liabilities      70,595     71,270     69,483     66,942
Long-term indebtedness          196,215    202,055    206,902    143,760
Unitholders’ equity             560,285    571,859    574,718    574,066
————————————————————————-
$933,521   $934,020   $938,602   $944,641
————————————————————————-
————————————————————————-

————————————————————————-
(in thousands of Canadian      December  September    June 30,  March 31,
dollars, unaudited)           31, 2009   30, 2009       2009       2009
————————————————————————-
Cash and cash equivalents      $  3,878   $    367   $  3,141   $    567
Other current assets             72,878     85,242     30,078     27,219
Capital and other non-current
assets                          55,177     61,122     24,121     23,772
Intangible assets               289,774    293,623    136,905    140,902
Goodwill                        519,848    516,374    457,636    459,037

————————————————————————-
$941,555   $956,728   $651,881   $651,497
————————————————————————-
————————————————————————-
Payables and other current
liabilities                    $87,463    $93,385    $36,745    $37,464
Other long-term liabilities      70,338     75,165     15,691     17,804
Long-term indebtedness          208,463    214,109    145,470    147,400
Unitholders’ equity             575,291    574,069    453,975    448,829
————————————————————————-
$941,555   $956,728   $651,881   $651,497
————————————————————————-
————————————————————————-

————————————————————————-
(in thousands of Canadian      December  September   June 30,   March 31,
dollars, unaudited)           31, 2008   30, 2008      2008        2008
————————————————————————-
Cash and cash equivalents      $ 12,066   $ 16,262   $  9,390   $  4,034
Other current assets             23,468     25,604     26,847     25,382
Capital and other non-current
assets                          24,708     18,883     19,977     20,394
Intangible assets               144,675    123,270    126,903    130,815
Goodwill                        458,989    441,193    441,193    441,193

————————————————————————-
$663,906   $625,212   $624,310   $621,818
————————————————————————-
————————————————————————-
Payables and other current
liabilities                    $49,101    $44,119    $42,427    $38,491
Other long-term liabilities      17,805      6,038      5,143      7,417
Long-term indebtedness          147,331    119,262    124,193    129,123
Unitholders’ equity             449,669    455,793    452,547    446,787
————————————————————————-
$663,906   $625,212   $624,310   $621,818
————————————————————————-
————————————————————————-

—————————————————
(in thousands of Canadian      December   December
dollars, unaudited)           31, 2007   31, 2006
—————————————————
Cash and cash equivalents      $ 13,148   $  5,788
Other current assets             26,149     27,457
Capital and other non-current
assets                          21,597     20,944
Intangible assets               134,756    148,316
Goodwill                        438,502    438,546

—————————————————
$634,152   $641,051
—————————————————
—————————————————
Payables and other current
liabilities                    $49,116    $44,420
Other long-term liabilities       6,289      4,978
Long-term indebtedness          129,054    143,778
Unitholders’ equity             449,693    447,875
—————————————————
$634,152   $641,051
—————————————————
—————————————————

Distribution History
————————————————————————-

Month                       2010      2009      2008      2007      2006
————————————————————————-
January                  $0.1533   $0.1533   $0.1430   $0.1280   $0.1220
February                  0.1533    0.1533    0.1430    0.1280    0.1220
March                     0.1533    0.1533    0.1430    0.1320    0.1250
April                     0.1533    0.1533    0.1430    0.1320    0.1250
May                       0.1533    0.1533    0.1533    0.1320    0.1250
June                      0.1533    0.1533    0.1533    0.1320    0.1250
July                      0.1533    0.1533    0.1533    0.1320    0.1250
August                    0.1533    0.1533    0.1533    0.1320    0.1250
September                 0.1533    0.1533    0.1533    0.1320    0.1250
October                   0.1533    0.1533    0.1533    0.1320    0.1250
November(2)               0.1533    0.1533    0.1533    0.3430    0.1280
December(3)               0.1533    0.1533    0.1933    0.1430    0.1280
————————————————————————-
$1.8396   $1.8396   $1.8384   $1.7980   $1.5000
————————————————————————-
————————————————————————-

————————————————————————-
Distributions
per unit(1)
Month                       2005      2004      2003      2002      2001
————————————————————————-
January                  $0.1200   $0.1150   $0.1117   $0.1083   $     -
February                  0.1200    0.1150    0.1117    0.1083         -
March                     0.1200    0.1168    0.1117    0.1083         -
April                     0.1200    0.1168    0.1133    0.1083         -
May                       0.1200    0.1168    0.1133    0.1083         -
June                      0.1200    0.1168    0.1133    0.1083         -
July                      0.1200    0.1168    0.1133    0.1117         -
August                    0.1220    0.1168    0.1133    0.1117         -
September                 0.1220    0.1168    0.1133    0.1117         -
October                   0.1220    0.1168    0.1150    0.1117         -
November(2)               0.1220    0.1200    0.1150    0.1117         -
December(3)               0.1220    0.1200    0.1150    0.1117    0.0427
————————————————————————-
$1.4500   $1.4044   $1.3599   $1.3200   $0.0427
————————————————————————-
————————————————————————-
(1) Monthly distributions are made to unitholders of record on the last
business day of each month and are paid within 31 days following each
month end.
(2) November 2007 declared distributions included a special distribution
of $0.20 for unitholders of record on November 15, 2007 and was paid on
November 30, 2007.
(3) Distributions in 2001 are in respect of the 12 calendar days from
December 20, 2001 to December 31, 2001.  December 2008 declared
distributions included a non-cash special distribution of $0.04 for
unitholders of record on December 31, 2008 and was paid on December 31,
2008.

Tax Allocation of Distributions

————————————————————————-
2010   2009   2008   2007   2006   2005   2004   2003   2002
————————————————————————-
Dividend
income      0.0%   0.0%   0.0%   0.0%   0.0%   0.0%  15.0%  19.5%  16.9%
Other
income    100.0% 100.0% 100.0% 100.0% 100.0%  91.6%  75.2%  69.5%  71.5%
Return of
capital     0.0%   0.0%   0.0%   0.0%   0.0%   8.4%   9.8%  11.0%  11.6%
————————————————————————-
100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
————————————————————————-

The above tax allocation of distributions for 2010 represents an estimate
based on the total distributions for the year ended December 31, 2010.

Other Statistics
(in thousands, except per unit amounts)

Number      Market
Trading price range of units          of units    capital-
(TSX: “DHF.UN”)                outstand-     ization
—————————-  Average    ing at          at
Quarter     High       Low     Close     daily   quarter     quarter
volume       end         end
————————————————————————-
2010  – Q4      20.68     18.51    19.83       130    53,233   1,055,618
- Q3      19.25     16.00    19.15       100    53,233   1,019,419
- Q2      18.46     15.16    16.58       118    53,233     882,609
- Q1      18.00     15.59    17.71       161    53,233     942,763
2009  – Q4      16.92     14.05    16.92       177    53,233     900,709
- Q3      14.99     12.25    14.90       182    53,233     793,177
- Q2      14.29     11.51    12.25       126    43,947     538,348
- Q1      16.76     10.40    11.92       104    43,947     523,846
2008  – Q4      17.15     10.30    16.79       117    43,947     737,867
- Q3      16.40     13.50    15.47        93    43,947     679,857
- Q2      17.85     15.53    15.58        83    43,947     684,691
- Q1      21.75     15.77    17.19       107    43,947     755,445
2007  – Q4      22.00     18.75    21.00        98    43,947     922,883
- Q3      20.10     17.14    19.80        78    43,947     870,146
- Q2      19.79     16.30    19.31        90    43,947     848,613
- Q1      17.19     15.00    16.60        87    43,947     729,517
2006  – Q4      19.80     13.80    15.46       143    43,947     679,417
- Q3      19.49     17.21    19.19        96    43,947     843,339
- Q2      21.99     16.99    17.70       100    43,947     777,858
- Q1      23.18     19.50    21.50        61    37,921     815,297
2005  – Q4      24.00     16.32    23.19        92    37,921     879,383
- Q3      24.07     19.50    21.19        88    37,921     803,542
- Q2      22.85     19.58    20.92        61    37,921     793,303
- Q1      23.25     19.65    22.00        67    37,921     834,257
2004  – Q4      23.25     18.80    22.70        81    37,921     860,802
- Q3      19.62     16.75    19.45        58    37,921     737,559
- Q2      19.34     15.05    18.00        93    37,921     682,574
- Q1      19.40     16.71    19.40        92    37,921     735,663
2003  – Q4      17.50     15.10    17.45        67    37,921     661,718
- Q3      15.65     14.52    15.30        99    37,921     580,188
- Q2      15.20     12.91    15.00        82    37,921     568,812
- Q1      13.69     12.48    12.94        92    37,921     490,695
2002  – Q4      13.25     11.22    12.86       139    37,921     487,661
- Q3      12.13     10.45    12.10       165    37,921     458,842
- Q2      11.25     10.00    10.95       176    37,921     415,233
- Q1      11.20     10.11    10.51       149    18,955     199,217
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About Davis + Henderson

Davis + Henderson is a leading solutions provider to the financial services marketplace. Founded in 1875, the company today provides innovative programs, technology products and technology based business services to customers who offer chequing accounts, credit card accounts and personal, commercial, and other lending and leasing products. Davis + Henderson Income Fund is listed on the Toronto Stock Exchange under the symbol DHF.UN. Further information can be found in the disclosure documents filed by Davis + Henderson Income Fund with the securities regulatory authorities, available at www.sedar.com.

SOURCE: Davis + Henderson Corporation

Bob Cronin, Chief Executive Officer, Davis + Henderson, Limited Partnership, (416) 696-7700, extension 5301, bob.cronin@dhltd.com; Brian Kyle, Chief Financial Officer, Davis + Henderson, Limited Partnership, (416) 696-7700, extension 5690, brian.kyle@dhltd.com