D+H Reports First Quarter 2011 Results

Stock Exchange Symbol: DH

Website: www.dhltd.com

TORONTO, May 10 /CNW/ - Davis + Henderson Corporation ("D+H" or the "Business" or the "Company" or the "Corporation") today reported solid financial results for the three months ended March 31, 2011 that were consistent with expectations and we are satisfied with these results given market conditions and in the context of activities undertaken related to our strategic agenda. On January 18, 2011, Davis + Henderson completed the acquisition of ASSET Inc. ("ASSET") and accordingly, the results of ASSET have been included in the consolidated results since that date.

Commencing January 1, 2011, D+H prepares its interim consolidated financial statements and comparative information in accordance with International Financial Reporting Standards ("IFRS"), as issued by the International Accounting Standards Board ("IASB"). During previous reporting periods, D+H's financial statements were prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP").

First Quarter Highlights

    <<
    -   Revenue was $169.5 million, an increase of $13.7 million, or 8.8%,
        compared to the same quarter in 2010.
    -   EBITDA(1) was $37.5 million, a decrease of $0.2 million, or 0.5%,
        compared to $37.7 million for the same quarter in 2010. EBITDA in the
        first quarter of 2011 included $1.8 million of acquisition related
        costs that under IFRS were expensed in the period.
    -   Adjusted net income(1) was $28.5 million ($0.5346 per share) for the
        first quarter of 2011. There is no comparable measure for the same
        period in 2010.
    -   Net income was $36.0 million ($0.6769 per share), a year-over-year
        increase of $13.2 million, or 57.9%, compared to $22.8 million
        ($0.4288 per share) for the same quarter in 2010 and included a non-
        cash tax recovery of $13.5 million that primarily related to D+H's
        conversion to a corporation and IFRS adjustments.
    -   During the first quarter of 2011, the Business paid approximately
        $0.30 per share to its shareholders, comprised of a $0.1533 per unit
        distribution paid on January 31, 2011 (declared on December 31, 2010
        when D+H was an income trust) and a $0.15 per share special dividend
        paid on March 31, 2011. Cash distributions paid during the first
        quarter of 2010 were $0.4599 per unit.
    -   D+H completed the acquisition of ASSET, the Canadian market leader in
        providing asset recovery solutions, and extends the services it
        provides to its lending customers.
    -   D+H also announced in March and completed in April, the acquisition
        of Mortgagebot LLC ("Mortgagebot"), a leader in providing web based
        mortgage point of sale solutions in the United States, serving nearly
        1,000 financial institutions.

    --------------------------------------
    (1) D+H financial results are prepared in accordance with IFRS.  D+H
    reports several non-IFRS financial measures, including EBITDA and
    Adjusted net income used above. Adjusted net income is calculated as net
    income, adjusted to remove certain non-cash charges and certain items of
    note such as acquisition-related expenses and discontinued operations.
    These items are excluded in calculating adjusted net income as they are
    not considered indicative of the financial performance of the Business
    for the period being reviewed. Any non-IFRS financial measures should be
    considered in context with the IFRS financial presentation and should not
    be considered in isolation or as a substitute for IFRS net income or cash
    flow. Further, D+H's measures may be calculated differently from
    similarly titled measures of other companies. See Non-IFRS Financial
    Measures for a more complete description of these terms.
    >>

D+H's unaudited consolidated financial statements for the first quarter of 2011 and accompanying notes to the financial statements and management's discussion & analysis (MD&A) along with the supplementary financial information will be available tomorrow on www.sedar.com.

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 D+H's objectives, goals, strategies, intentions, plans, beliefs, expectations and estimates, and the business, operations, financial performance and condition of D+H 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 D+H to meet its revenue and EBITDA targets; general industry and economic conditions; changes in D+H's relationship with its customers and suppliers; pricing pressures and other competitive factors; the anticipated effect of the acquisition of Mortgagebot on the financial performance of D+H; and the expected benefits arising as a result of the acquisition of Mortgagebot. D+H has also made certain macroeconomic and general industry assumptions in the preparation of such forward-looking statements. While D+H considers these factors and assumptions to be reasonable based on information currently available, there can be no assurance that actual results will be consistent with these forward-looking statements.

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 D+H'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 Company'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 Company'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. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. The documents incorporated by reference herein also identify additional factors that could affect the operating results and performance of the Company. Forward-looking statements are based on management's current plans, estimates, projections, beliefs and opinions, and D+H 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.

All of the forward-looking statements made in this news release and the documents incorporated by reference herein are qualified by these cautionary statements and other cautionary statements or factors contained herein, and there can be no assurance that the actual results or developments will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, the Company.

Conference Call

Davis + Henderson will discuss its financial results for the three months ended March 31, 2011 via conference call at 10:00 a.m. EST (Toronto time) on Wednesday, May 11, 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 61517176. The rebroadcast will be available until Wednesday, May 25, 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 Company, including the Company's most recently filed Annual Information Form, is available on SEDAR at www.sedar.com.

MANAGEMENT'S DISCUSSION AND ANALYSIS

Management's Discussion and Analysis ("MD&A") for the first quarter of 2011 for Davis + Henderson Corporation (the "Company" or the "Business" or "Davis + Henderson" or "D+H" or "we" or "our"), which was formerly known as Davis + Henderson Income Fund, or the "Fund", has been prepared with an effective date of May 10, 2011 and should be read in conjunction with the MD&A in the Annual Report for the year ended December 31, 2010, dated March 8, 2011, and the attached interim unaudited consolidated financial statements for the three months ended March 31, 2011. External economic and industry factors remain substantially unchanged from those described in the annual MD&A and the Corporation's most recently filed Annual Information Form, except as described herein.

Adoption of IFRS

For fiscal years beginning on or after January 1, 2011, Canadian public companies are required to prepare their financial statements in accordance with International Financial Reporting Standards ("IFRS"), as issued by the International Accounting Standards Board ("IASB"). Due to the requirement to present comparative financial information, the effective transition date is January 1, 2010. The three months ended March 31, 2011 is our first reporting period under IFRS and the Company's financial statements for this interim period have been prepared in accordance with IFRS, with 2010 comparative figures and January 1, 2010 opening Consolidated Statement of Financial Position restated to conform to IFRS.

Conversion from an Income Trust to a Corporation

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"). 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. Effective January 1, 2011, the share capital of Davis + Henderson Corporation in respect of the common shares were reduced by the deficit balance of the Fund as at December 31, 2010.

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

STRATEGY

D+H 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, recovery 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.

D+H'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. D+H'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 Resolve Business Outsourcing Income Fund ("Resolve") in 2009, ASSET Inc. ("ASSET") in January 2011, and Mortgagebot LLC ("Mortgagebot") in April 2011, and by further enhancing our services and capabilities. As a result, we offer a diverse range of market-leading services.

For a detailed discussion of the first quarter 2011 results, management's outlook, risk factors and caution concerning forward- looking statements, please see below.

ACCOUNTING PRINCIPLES AND FINANCIAL INFORMATION PRESENTATION

All financial information presented in this MD&A is determined and presented in accordance with IFRS, as issued by the IASB, unless otherwise noted. All prior period information presented as comparatives have been reclassified to reflect the 2010 presentation, unless otherwise noted. All amounts are in Canadian dollars, unless otherwise specified.

Effective January 1, 2011, the Corporation commenced preparing its consolidated financial statements in accordance with IFRS. Prior to January 1, 2011, the consolidated financial statements were prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP"), and therefore, comparative periods for 2010 have been restated to be in accordance with IFRS. Comparative periods presented in this MD&A that are prior to January 1, 2010, have not been restated and have been presented in accordance with Canadian GAAP.

Comparative information presented for periods prior to January 1, 2011 relate to those of the Fund, and the results for the three months ended March 31, 2011 are that of the Corporation. Consequently, throughout this MD&A, any references to distributions, unitholders, and per unit amounts relate to periods prior to January 1, 2011, and any references to dividends, shareholders and per share amounts relate to periods subsequent to January 1, 2011.

Note 25 of the Corporation's financial statements for the three months ended March 31, 2011 contains reconciliations and descriptions of the effect of the transition from Canadian GAAP to IFRS on equity, earnings and comprehensive income including line-by line reconciliations of the statement of financial position as at January 1, 2010, December 31, 2010 and March 31, 2010 as well as statement of income for the three months ended March 31, 2010. The Company previously reported the adjustments that were anticipated in converting from Canadian GAAP to IFRS; with the completion of the IFRS implementation project, the final adjustments have been determined, revised where appropriate, and are reported in Note 25.

OPERATING RESULTS FOR THE FIRST QUARTER - CONSOLIDATED

The following table is derived from, and should be read in conjunction with, the Consolidated Statements of Income and includes non-IFRS financial measures. Management believes this supplementary disclosure provides useful additional information. See Non-IFRS Financial Measures section for a description of non-IFRS terms used.

Effective January 18, 2011, the consolidated results include those of ASSET.

Operating and Financial Results(1)

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

    <<
                                                      Quarter ended March 31,
                                                           2011         2010
    -------------------------------------------------------------------------
    Revenue                                         $   169,548  $   155,829
    Expenses(2)                                         132,045      118,120
    -------------------------------------------------------------------------
    EBITDA(2),(3)                                        37,503       37,709

    Amortization of capital assets and
     non-acquisition intangibles                          5,504        4,669
    Amortization of intangibles from acquisitions         8,092        7,097
    Interest expense                                      3,989        3,374
    Amortization and fair value adjustment on
     derivative instruments(4)                           (1,687)      (1,370)
    Income tax expense (recovery)(6)                    (14,290)         904
    -------------------------------------------------------------------------
    Income from continuing operations                    35,895       23,035
    Income (loss) from discontinued operations,
     net of tax(6)                                          140         (210)
    -------------------------------------------------------------------------

    Net income                                      $    36,035  $    22,825

    Adjustments:
      Non-cash items:
        Amortization of intangibles from acquisitions     8,092
        Amortization and fair value adjustment on
         derivative instruments(4)                       (1,687)
      Other items of note:
        Acquisition-related items(2)                      1,799
        Discontinued operations, net of tax(5)             (140)
      Tax effect of above adjustments (excluding
       discontinued operations)                          (2,133)
      Tax effect of corporate conversion and IFRS
       adjustments(6)                                   (13,509)
    ------------------------------------------------------------

    Adjusted net income(3)                          $    28,457
    ------------------------------------------------------------
    ------------------------------------------------------------

    -------------------------------------------------------------------------
    Adjusted net income per share , basic and
     diluted(3)                                     $    0.5346          n/m

    Net income per share, basic and diluted         $    0.6769  $    0.4288
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                                      Quarter ended March 31,
                                                               2011 vs. 2010
                                                                    % change
    -------------------------------------------------------------------------

    Revenue                                                             8.8%
    EBITDA(2),(3)                                                      -0.5%
    Adjusted net income per share(3)                                     n/m
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    >>

n/m = not measurable

(1) The results for the quarter ended March 31, 2011 include those of ASSET, effective from the date of acquisition of January 18, 2011.

(2) Acquisition-related items consist of transaction costs related to the purchase of businesses and are expensed under IFRS.

(3) EBITDA and Adjusted net income are non-IFRS terms. See Non-IFRS Financial Measures for a more complete description of these terms. Periods prior to January 1, 2011, do not have a comparable measure for Adjusted net income due to the differences in taxation for D+H as an income trust prior to January 1, 2011 and as a corporation subsequent to that date.

(4) Includes (i) amortization of mark-to-market adjustment of interest-rate swaps relating to amortization of cumulative net gains and losses that were deferred prior to January 1, 2007 when hedge accounting was used by the Company and (ii) mark-to-market adjustments of interest-rate swaps that existed as at March 31, 2011 that are not designated as hedges for hedge accounting purposes, for which, any change in the fair value of these contracts is recorded through income.

(5) The Business sold a non-strategic component of its contact centre business in October 2010 and entered into a transition agreement with the buyer, which expired on April 1, 2011. The results of these operations are presented as discontinued operations for both current and prior periods.

(6) In connection with the conversion to a corporation and implementation of IFRS, among other items, the Business recorded a non-cash income tax recovery. On a normalized basis, the Company expects a tax rate in the 26% range.

Overview

D+H had solid operating performance in the first quarter of 2011 that was consistent with our expectations and we are satisfied with these results given market conditions and in the context of activities undertaken related to our strategic agenda. Overall, the Business has growth in revenues and, excluding acquisition related expenses, EBITDA, when comparing the first quarter of 2011 to the same period in 2010. In both instances, this was largely due to the inclusion of ASSET. For a more detailed description on revenues and expenses, see the comments below.

On January 18, 2011, D+H announced the completion of its acquisition of substantially all the assets of ASSET for a purchase price of approximately $76 million payable in cash, and financed with an extension of our credit facilities. ASSET is Canada's largest provider of technology based asset recovery and insolvency management solutions to the Canadian financial services industry. 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.

Revenue

Consolidated revenue for the first quarter of 2011 was $169.5 million, an increase of $13.7 million, or 8.8%, compared to the same quarter in 2010. The increase in revenue was primarily due to the inclusion of ASSET, acquired January 18, 2011, with both increases and decreases in other service areas as described below.

Services delivered by the Business are subject to seasonality, including 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.

(in thousands of Canadian dollars, unaudited)

    <<
                                                      Quarter ended March 31,
                                                           2011         2010
    -------------------------------------------------------------------------
    Revenue
      Programs to the chequing account              $    74,211  $    73,165
      Loan servicing                                     33,272       29,669
      Loan registration and recovery services            36,374       24,978
      Lending technology services                        15,499       17,090
      Other(1)                                           10,192       10,927
    -------------------------------------------------------------------------
                                                    $   169,548  $   155,829
    -------------------------------------------------------------------------
    >>

(1) Excluded for the current and comparative periods are the discontinued operations.

Revenue for the first quarter of 2011 from programs to the chequing account was $74.2 million, an increase of $1.0 million, or 1.4%, compared to the same quarter in 2010. The modest increase was primarily attributable to program changes and product and service enhancements that provided 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 first quarter from loan servicing, which includes student loan administration services and credit card servicing was $33.3 million, an increase of $3.6 million, or 12.1%, compared to the same quarter in 2010. Transaction revenue from student loan administrative services, which comprise the largest portion of revenues within this service area, was relatively unchanged as compared to the first quarter of 2010. 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 initiatives that increased both revenues and expenses with minimal impact on profitability.

Loan registration and recovery services revenue for the first quarter of 2011 was $36.4 million, an increase of $11.4 million, or 45.6%, compared to the same quarter in 2010. This increase is due to the inclusion of ASSET, acquired on January 18, 2011. Overall, services in this area are directed toward supporting personal and commercial lending activity within Canada. Volumes in this area can be variable due to changes in the economy, changes in the auto and auto lending market and due to seasonality. Typically, this service area experiences stronger volumes during the second and third quarters as compared to the first and fourth quarters as consumers more frequently purchase and finance cars in the spring and summer. This historical seasonal trend may be impacted by recent disruptions in the auto market.

Revenue for the first quarter of 2011 from lending technology services, which includes services to the mortgage market and other credit markets was $15.5 million, a decrease of $1.6 million, or 9.3%, compared to the same quarter in 2010. For the first quarter of 2011, transaction related fees increased but were more than offset by several items including reduced professional services revenue, certain contract changes and lower technology licensing fees. In general, industry analysts expect the housing and mortgage markets to further settle in 2011 as compared to 2010.

Other revenue for the first quarter of 2011 was $10.2 million, as compared to $10.9 million for the same period in 2010, and is comprised of a number of smaller service offerings. In general, we expect some reductions in this area as certain customers repatriate currently outsourced activities. On October 7, 2010, the Business sold a non-strategic component of its contact centre business and entered into a transition agreement with the buyer, which expired on April 1, 2011. Accordingly, the revenues relating to these operations under the transition agreement of $0.8 million for the first quarter of 2011 and revenues relating to these operations of $4.7 million for the comparative period in 2010 have been removed from reported consolidated revenue and reported as part of discontinued operations.

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(1)              % Revenue
    ----------------------------------------------------------------
    Revenue
      Programs to the chequing account                          44%
      Loan servicing                                            20%
      Loan registration and recovery services                   21%
      Lending technology services                                9%
      Other                                                      6%
    ----------------------------------------------------------------
                                                               100%
    ----------------------------------------------------------------
    >>

(1) Allocation is based on 12-month rolling revenue from Q2 2010 to Q1 2011.

Expenses(1)

On a consolidated basis, expenses for the first quarter of 2011 of $132.0 million increased by $13.9 million, or 11.8%, compared to the same quarter in 2010. The increase primarily reflects the inclusion of ASSET expenses, higher costs in support of service areas with higher revenues, as described above, and the ongoing costs associated with the transformation and integration activities, reduced by cost management and integration savings.

    <<
                                                      Quarter ended March 31,
    (in thousands of Canadian dollars, unaudited)          2011         2010
    -------------------------------------------------------------------------
    Employee compensation and benefits              $    54,233  $    48,176
    Non-compensation direct expenses(2)                  54,135       47,211
    Other operating expenses(3)                          18,973       18,198
    Occupancy costs                                       4,704        4,535
    -------------------------------------------------------------------------
                                                    $   132,045  $   118,120
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    >>

(1) Excluded from the current and comparative periods are the discontinued operations.

(2) Non-compensation direct expenses include materials, shipping, selling expenses and third party direct disbursements.

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

Employee compensation and benefits costs of $54.2 million for the first quarter of 2011 increased by $6.1 million, or 12.6%, compared to the same quarter in 2010, with the increase primarily related to general increase in compensation levels, inclusion of ASSET expenses and increases in project-related activities, partially offset by apprenticeship program benefits and integration savings.

Non-compensation direct expenses were $54.1 million for the first quarter of 2011, an increase of $6.9 million, or 14.7%, compared to the same quarter in 2010. The increase in expenses reflects the inclusion of ASSET, including third party direct disbursements relating to the ASSET business. In general, these expenses directionally change with revenue changes.

Other operating expenses of $19.0 million, increased by $0.8 million, or 4.3% compared to the same quarter in 2010 with acquisition transaction costs more than offsetting savings in other areas. As described later in this MD&A, effective January 1, 2011, in accordance with IFRS, business acquisition transaction costs not directly attributable to the financing of acquisitions, are expensed in the period incurred.

Occupancy costs for the first quarter of 2011 were $4.7 million, an increase of $0.2 million, or 3.7%, compared to the same quarter in 2010. This increase was mainly due to the inclusion of ASSET facilities.

EBITDA

EBITDA during the first quarter of 2011, was $37.5 million, a decrease of $0.2 million, or 0.5%, compared to the same quarter in 2010. As described above, EBITDA was reduced by $1.8 million of costs associated with acquisition transaction expenses.

Amortization of Capital and Non-acquisition Intangibles

Amortization of capital and non-acquisition intangible assets during the first quarter of 2011 increased by $0.8 million, or 17.9% compared to the first quarter of 2010. This increase primarily related to capital additions during 2010 and to a lesser extent, the inclusion of the ASSET business.

Amortization of Intangibles from Acquisitions

Amortization of acquisition related intangibles for the first quarter of 2011 increased by $1.0 million, as compared to the same period in 2010 mainly due to the amortization of intangibles related to the acquisition of ASSET.

Interest Expense

Interest expense for the first quarter of 2011 increased by $0.6 million compared to the same quarter in 2010, due to increased borrowings in relation to the acquisition of ASSET and slight increases in interest rates.

Amortization and Fair Value Adjustment on Derivative Instruments

A net unrealized gain of $1.7 million on interest-rate swaps was recognized in the first quarter of 2011 (Q1 2010 - $1.4 million net unrealized gain) reflecting mark-to-market adjustments related to changes in market interest rates at March 31, 2011 compared to December 31, 2010. Also included in this unrealized gain is the amortization related to the cumulative gains and losses that were deferred prior to January 1, 2007 when hedge accounting was used by the Company.

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 Company 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 Business has historically held its derivative contracts to maturity.

Effective January 1, 2011, the Company's policy is to adopt hedge accounting prospectively on any new interest-rate swaps entered into subsequent to January 1, 2011. As of March 31, 2011, the Company had not entered into any new interest-rate swaps and the fair value adjustments of the existing interest-rate swaps continue to be recognized in the Consolidated Statement of Income.

Income Tax Expense (Recovery)

In the first quarter of 2011, a non-cash income tax recovery of $14.3 million was recorded (Q1 2010 - $0.9 million expense). This recovery comprises a deferred tax expense related to current income deferred for income tax purposes, that was more than offset by recoveries related to the recognition of a deferred tax asset attributed to the corporate conversion and to tax amounts deducted for accounting purposes in excess of amounts deducted for tax purposes and to a lesser extent, to the change in tax rates on opening deferred tax balances pursuant to IFRS and to the corporate conversion.

Income (loss) from Discontinued Operations

On October 7, 2010, D+H sold the non-strategic portion of its contact centre business, which primarily served non-core markets of D+H and entered into a transition agreement with the buyer, which expired on April 1, 2011. Consequently, the results of operations related to this part of the Business have been classified as discontinued operations for both current and comparative periods.

Net Income

Net income of $36.0 million for the first quarter of 2011 increased by $13.2 million, or 57.9%, compared to the same period in 2010. On a per share basis, net income increased by 57.9% to $0.6769 per share, compared to the first quarter of 2010. The increase is primarily attributable to the deferred income tax recovery recorded during the current quarter.

Adjusted Net Income

Effective January 1, 2011, as a result of the conversion from an income trust structure to a corporate structure, the Business commenced using Adjusted net income as a measure for evaluating its financial results. Adjusted net income is a non-IFRS financial measure. See Non-IFRS Financial Measures for a more complete description of this term. Periods prior to January 1, 2011, do not have a comparable measure for Adjusted net income.

Adjusted net income, which excludes both (i) non-cash impacts of items such as mark-to-market gains and losses on derivative instruments, amortization of intangibles from acquisitions, the tax recovery previously described and (ii) other items of note such as acquisition-related costs, referred to below and discontinued operations, was $28.5 million for the first quarter of 2011. Net income is also adjusted for the tax impact of these adjustments to arrive at Adjusted net income.

Acquisition-related Costs

During the first quarter of 2011, the Corporation recorded acquisition-related costs of $1.8 million. Acquisition-related costs include transaction costs that are incurred in connection with business combinations. IFRS requires any transaction costs not directly attributable to the financing of an acquisition, to be expensed in the period incurred. Under Canadian GAAP, all transaction costs incurred in relation to business combinations were capitalized.

EIGHT QUARTER CONSOLIDATED STATEMENT OF INCOME - SUMMARY(1),(2)

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

    <<
                       ------------------------------------------------------
                                IFRS                   Canadian GAAP
                       ------------------------------------------------------
                            2011       2010                             2010
                       ------------------------------------------------------
                              Q1         Q1         Q4         Q3         Q2
    -------------------------------------------------------------------------
    Revenue            $ 169,548  $ 155,829  $ 160,457  $ 161,900  $ 164,319
    Expenses(3)          132,045    118,120    124,733    121,311    120,545
    Restructuring
     charges                   -          -      6,268      2,160          -
    -------------------------------------------------------------------------

     EBITDA(3),(4)        37,503     37,709     29,456     38,429     43,774

    Amortization of
     capital assets and
     non-acquisition
     intangibles           5,504      4,669      5,643      5,030      4,962
    Amortization of
     intangibles from
     acquisitions          8,092      7,097      7,108      6,925      7,158
    Interest expense       3,989      3,374      3,405      3,517      3,692
    Amortization and
     fair value
     adjustment on
     derivative
     instruments(5)       (1,687)    (1,370)    (2,796)     1,566      1,797
    Income tax expense
     (recovery)          (14,290)       904      2,620       (645)       603
    -------------------------------------------------------------------------

    Income from
     continuing
     operations           35,895     23,035     13,476     22,036     25,562
    Income (loss) from
     discontinued
     operations, net
     of tax(6)               140       (210)      (620)      (465)      (531)
    -------------------------------------------------------------------------

    Net income            36,035  $  22,825  $  12,856  $  21,571  $  25,031

    Adjustments:                  -------------------------------------------
      Non-cash items:
        Amortization of
         intangibles
         from
         acquisitions      8,092
        Amortization
         and fair value
         adjustment on
         derivative
         instruments(5)   (1,687)
      Other items of note:
        Acquisition-
         related
         items(3)          1,799
         Discontinued
          operations, net
          of tax(6)         (140)
      Tax effect of
       adjustments
       (excluding
       discontinued
       operations)        (2,133)
      Tax effect of
       corporate
       conversion and
       IFRS
       adjustments(7)    (13,509)
    -----------------------------
    Adjusted net
     income(4)         $  28,457
    -----------------------------
    -----------------------------

    -------------------------------------------------------------------------
    Adjusted net income
     per share, basic
     and diluted(4)    $  0.5346        n/m        n/m        n/m        n/m
    Net income per
     share, basic and
     diluted           $  0.6769  $  0.4288  $  0.2415  $  0.4052  $  0.4702
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                       --------------------------------
                                 Canadian GAAP
                       --------------------------------
                                                  2009
                       --------------------------------
                              Q4         Q3         Q2
    ---------------------------------------------------
    Revenue            $ 151,521  $ 139,245  $  94,557
    Expenses(3)          114,467    101,696     62,080
    Restructuring
     charges                   -          -          -
    ---------------------------------------------------

     EBITDA(3),(4)        37,054     37,549     32,477

    Amortization of
     capital assets and
     non-acquisition
     intangibles           4,514      4,505      3,679
    Amortization of
     intangibles from
     acquisitions          7,330      5,942      3,441
    Interest expense       3,326      2,681      1,787
    Amortization and
     fair value
     adjustment on
     derivative
     instruments(5)       (1,517)    (1,544)      (933)
    Income tax expense
     (recovery)           (2,605)     1,015       (718)
    ---------------------------------------------------

    Income from
     continuing
     operations           26,006     24,950     25,221
    Income (loss) from
     discontinued
     operations, net
     of tax(6)              (405)         7          -
    ---------------------------------------------------

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

    Adjustments:       --------------------------------
      Non-cash items:
        Amortization of
         intangibles
         from
         acquisitions
        Amortization
         and fair value
         adjustment on
         derivative
         instruments(5)
      Other items of note:
        Acquisition-
         related
         items(3)
        Discontinued
         operations, net
         of tax(6)
      Tax effect of
       adjustments
       (excluding
       discontinued
       operations)
      Tax effect of
       corporate
       conversion and
       IFRS
       adjustments(7)
    -----------------------------
    Adjusted net
     income(4)
    -----------------------------
    -----------------------------

    ---------------------------------------------------
    Adjusted net income
     per share, basic
     and diluted(4)          n/m        n/m        n/m
    Net income per
     share, basic and
     diluted           $  0.4809  $  0.4931  $  0.5739
    ---------------------------------------------------
    ---------------------------------------------------
    >>

n/m = not measurable

(1) Comparative results for the second, third and fourth quarters of 2010 under IFRS will be included in the chart above as the Business reports its quarterly results in 2011. The Business expects adjustments in the subsequent 2010 quarters similar to those reported and described in the first quarter with additional adjustments in the third quarter for reclassification of the restructuring expense to individual line item expenses and the expensing under IFRS of certain amounts that under Canadian GAAP were recorded as part of the Resolve purchase price equation. In the fourth quarter, there will also be a line item reclassification of the restructuring expense, similar to the third quarter.

(2) The results for the quarter 2011 include those of ASSET, effective from the date of acquisition of January 18, 2011. Certain comparative figures have been reclassified and adjusted to conform to the current period's presentation.

(3) Acquisition-related items include transaction costs related to the purchase of businesses and are expensed under IFRS.

(4) EBITDA and Adjusted net income are non-IFRS terms. See Non-IFRS Financial Measures for a more complete description of these terms. Periods prior to January 1, 2011, do not have a comparable measure for Adjusted net income due to the differences in taxation for D+H as an income trust prior to January 1, 2011 and as a corporation subsequent to that date.

(5) Includes (i) amortization of mark-to-market adjustment of interest-rate swaps relating to amortization of cumulative net gains and losses that were deferred prior to January 1, 2007 when hedge accounting was used by the Company and (ii) mark-to-market adjustments of interest-rate swaps that existed as at March 31, 2011 that are not designated as hedges for hedge accounting purposes, for which, any change in the fair value of these contracts is recorded through income.

(6) The Business sold a non-strategic component of its contact centre business in October 2010 and entered into a transition agreement with the buyer, which expired on April 1, 2011. The results of these operations are presented as discontinued operations for both current and prior periods.

(7) In connection with the conversion to a corporation and implementation of IFRS, among other items, the Business recorded a non-cash income tax recovery. On a normalized basis, the Company expects a tax rate in the 26% range.

The Business has generally reported quarterly revenues that are relatively 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 share amounts, which were additionally impacted by the issuance of 9,286,581 additional units of Davis + Henderson Income Fund in the third quarter of 2009 to fund the Resolve acquisition. Additionally, the acquisition of ASSET on January 18, 2011 increased revenues and expenses.

Effective January 1, 2011, as a result of the conversion from an income trust structure to a corporate structure, the Business commenced using Adjusted net income as a measure for evaluating its results. Adjusted net income is a non-IFRS financial measure. See Non-IFRS Financial Measures for a more complete description of this term. Periods prior to January 1, 2011, do not have a comparable measure for Adjusted net income.

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 non-cash tax items.

CASH FLOW AND LIQUIDITY

The following table is derived from, and should be read in conjunction with, the Consolidated Statements of Cash Flows. Management believes this supplementary disclosure provides useful additional information related to the cash flows of the Corporation, repayment of debt and other investing activities.

Summary of Cash Flows

(in thousands of Canadian dollars, unaudited)

    <<

                                                      Quarter ended March 31,
                                                           2011         2010
    -------------------------------------------------------------------------
    Cash and cash equivalents provided by (used in):

    OPERATING ACTIVITIES
    Income from continuing operations               $    35,895  $    23,035
    Depreciation and amortization of assets              13,596       11,766
    Amortization and fair value adjustment of
     derivative instruments                              (1,687)      (1,370)
    Difference in interest expense and cash
     interest paid                                         (196)         306
    Income tax expense (recovery)                       (14,290)         904

    -------------------------------------------------------------------------
                                                         33,318       34,641
    Decrease (increase) in non-cash working
     capital items                                      (15,674)     (14,400)
    Changes in other operating assets and
     liabilities and discontinued operations                104          740

    -------------------------------------------------------------------------
    Net cash from operating activities                   17,748       20,981


    FINANCING ACTIVITIES
    Net change in long-term indebtedness                 81,000        5,000
    Issuance costs of long-term indebtedness             (1,305)           -
    Distributions and dividends paid during the
     period                                             (16,146)     (24,482)
    -------------------------------------------------------------------------
    Net cash from financing activities                   63,549      (19,482)

    INVESTING ACTIVITIES
    Capital expenditures                                 (9,721)      (3,976)
    Acquisition                                         (70,734)           -
    -------------------------------------------------------------------------
    Net cash used in investing activities               (80,455)      (3,976)
    -------------------------------------------------------------------------
    Increase (decrease) in cash and cash
     equivalents for the period                             842       (2,477)
    Cash and cash equivalents, beginning of period        1,144        3,878
    -------------------------------------------------------------------------
    Cash and cash equivalents, end of period        $     1,986  $     1,401
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    >>

Capital Expenditures

Compared to the same period in 2010, total capital expenditures increased by $5.7 million to $9.7 million in the first quarter of 2011. Capital expenditures also include certain contract payments which relate to payment obligations under customer and partner contracts including fixed contract or program initiation payments and annual payments payable over the life of the contract. These contract payments reflect, 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.

The increase in capital expenditures over the same period in 2010 primarily reflects increased integration and upgrade activities, consistent with the higher capital spend in the latter part of 2010, and investing in the building of technology products.

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

Dividends

Commencing in 2011, as a corporation, the Business is subject to corporate taxes. In 2010, we 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 declared a special dividend of $0.15 per share on March 19, 2011, which was paid on March 31, 2011. Consequently, for the first quarter of 2011, the Business paid approximately $0.30 per share comprised of a $0.1533 per unit distribution paid on January 31, 2011 (declared on December 31, 2010) and a $0.1500 per share dividend paid on March 31, 2011. 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 in respect of the quarter ended March 31, 2011 to be declared in May 2011 and paid in June 2011. Dividends payable by D+H to its shareholders are recorded when declared. 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.

For the first quarter of 2010, both cash distributions declared and paid were $0.4599 per unit ($24.5 million).

As at March 31, 2011, 53,233,373 common shares were outstanding (as at May 10, 2011 - 59,233,373 common shares, reflecting the issuance of 6 million shares in April 2011 to fund the Mortgagebot acquisition; as at March 31, 2010 - 53,233,373 trust units).

Changes in Non-Cash Working Capital and Other Items

(in thousands of Canadian dollars, unaudited)

    <<
                                                      Quarter ended March 31,
                                                           2011         2010
    -------------------------------------------------------------------------
    Decrease (increase) in non-cash working
     capital items                                  $   (15,674) $   (14,400)
    Decrease (increase) in other operating assets
     and liabilities                                        (85)         987
    -------------------------------------------------------------------------
    Decrease (increase)  in non-cash working
     capital and other items                        $   (15,759) $   (13,413)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    >>

The net increase in non-cash working capital items for the first quarter of 2011 is attributable to several items, including a decrease in payables due to normal course timing differences and payments related to restructuring charges recorded in 2010 and an increase in trade receivables consistent with the increase in revenues and other normal course timing differences.

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

Acquisitions

During the first quarter of 2011, the Business acquired the assets and operations of ASSET for approximately $76 million, excluding transaction costs. This acquisition was funded through utilizing an extension of the Company's secured credit facilities. Management has not yet completed its assessment and valuation of the assets acquired and liabilities assumed for this acquisition. As a result, the presented purchase information may change. For additional information on the acquisition, refer to Note 8 of the consolidated financial statements of the Group for the three months ended March 31, 2011. ASSET is Canada's largest provider of technology based asset recovery and insolvency management solutions to the Canadian financial services industry.

On April 12, 2011, D+H announced the completion of the acquisition of Mortgagebot for a purchase price of US $231.8 million, excluding transaction costs. The acquisition was funded through the issuance of approximately $121.8 million new equity (6 million common shares at $20.30 per share) and the balance from borrowings. Mortgagebot is a leading provider of web-based mortgage point-of-sale solutions in the United States and provides a wide range of consumer direct, loan officer and branch and call centre mortgage origination solutions for nearly 1,000 banks and credit unions.

Cash Balances and Long-Term Indebtedness

At March 31, 2011, cash and cash equivalents totalled $2.0 million, compared to $1.1 million at December 31, 2010. The long-term indebtedness as at March 31, 2011, before deducting unamortized deferred finance fees, was $280.0 million compared to $199.0 million at December 31, 2010 and consisted of drawings under a Sixth Amended and Restated Credit Agreement dated January 1, 2011 ("Credit Agreement") of $200.0 million and fixed-rate Bonds issued under an Amended and Restated Note Purchase and Private Shelf Agreement dated January 1, 2011 ("Note Purchase Agreement") of $80.0 million. The long-term indebtedness is recorded on the Consolidated Statement of Financial Position, net of unamortized deferred financing fees of $2.7 million as at March 31, 2011. During the first quarter of 2011, the Business made net drawings of $81.0 million on its long-term indebtedness to fund the acquisition of ASSET and to fund working capital changes.

Total committed senior secured credit facilities under the Credit Agreement at March 31, 2011 were $510.0 million, consisting of a non-revolving credit facility of $130.0 million and a revolving term credit facility of $125.0 million that each mature on June 30, 2013, and an additional temporary non-revolving credit facility of $255.0 million which could only be drawn to fund the purchase price of Mortgagebot, if the planned equity financing was unsuccessful. As of March 31, 2011, the Business had drawn $130.0 million under the non-revolving credit facility and $70.0 million under the revolving term credit facility. The Business is permitted to draw on the revolving facility's available balance of $55.0 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 income and capital that may be distributed by Davis + Henderson Corporation to its shareholders during each rolling four-quarter period. The Company 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 $80.0 million of Bonds issued under the senior secured Note Purchase Agreement at a fixed-interest rate of 5.99% for $50.0 million and 5.17% for $30.0 million 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.

Subsequent to March 31, 2011, upon completion of the equity issuance and the acquisition of Mortgagebot, the Business entered into a Seventh Amended and Restated Credit Agreement dated April 12, 2011, under which the Business has available total senior secured credit facilities of $355 million, consisting of a revolving credit facility that matures on April 12, 2016. The Business also entered into a Note Purchase and Private Shelf Agreement pursuant to which the Company issued an additional US$ 63 million of senior secured guaranteed notes.

To reduce liquidity risk, management has historically renewed the terms of the Company's long-term indebtedness in advance of its maturity dates and the Company 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 Company has made numerous voluntary payments on its outstanding long-term indebtedness and a portion of its committed credit facilities remain undrawn. As at March 31, 2011, the Credit Agreement provides for additional uncommitted credit arrangements of up to $115.0 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.

As at May 10, 2011, the Credit Agreement provides for additional uncommitted credit arrangements of up to $150 million and the Note Purchase Agreement provides for an additional uncommitted credit arrangement of up to approximately US$ 37 million with the use of these arrangements subject to the prior approval of the lenders and fees and spreads and other terms to be negotiated at that time.

The Business has historically hedged against increases in market interest rates on certain of its debt by utilizing interest-rate swaps. In respect of interest-rate swap hedge contracts with its lenders, as of March 31, 2011, the Company's borrowing rates on 70.0% of 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
                                              --------------------
                                    Notional                        Interest
    Maturity Date                    Amount     Asset    Liability   Rate(1)
    -------------------------------------------------------------------------
    June 15, 2011                 $  20,000   $      -   $    276     4.685%
    June 15, 2011                    25,000          -        346     4.685%
    December 18, 2014                25,000          -        135     2.720%
    March 18, 2015                   25,000          -        279     2.940%
    March 18, 2017                   25,000          -        339     3.350%
    March 20, 2017                   20,000          -        289     3.366%
    -------------------------------------------------------------------------
                                  $ 140,000   $      -   $  1,664
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    >>

(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 Company's financial leverage as compared to certain levels specified in the Credit Agreement. As of March 31, 2011, the Company'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 March 31, 2011, the Company would have to pay the fair value of $1.7 million if it were to close out all of the interest-rate swap contracts as set out on the Consolidated Statement of Financial Position. It is not the present intention of management to close out these contracts and the Business has historically held its derivative contracts to maturity.

As at March 31, 2011, the average effective interest rate on the Corporation's total indebtedness is approximately 5.5%.

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 dividends.

NON-IFRS FINANCIAL 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 net income" (net income before certain non-cash charges and certain items of note such as acquisition-related expenses and discontinued operations), and "Adjusted net income per share", all of which are not defined terms under IFRS. These non-IFRS financial measures are derived from, and should be read in conjunction with, the Consolidated Statements of Income. See the reconciliation of EBITDA and Adjusted net income to the most directly comparable IFRS measure in the "Operating Results" section of this MD&A.

Management believes these supplementary disclosures provide useful additional information related to the operating results of the Corporation. Management uses these subtotals as measures of financial performance and as a supplement to the Consolidated Statements of Income. 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 IFRS Consolidated Statements of Income or other IFRS statements. Further, D+H's method of calculating each balance may not be comparable to calculations used by other companies 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 Company's credit facility. EBITDA is also widely used by D+H 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 IFRS.

Adjusted Net Income and Adjusted Net Income per Share

Effective January 1, 2011, as a result of the conversion from an income trust structure to a corporate structure, the Business commenced using Adjusted net income and Adjusted net income per share as a measure for evaluating its results. Periods prior to January 1, 2011, do not have a comparable measure.

Adjusted net income is used as a measure of internal performance similar to net income, but is calculated after removing the impacts of certain items that are non-regularly recurring such as acquisition-related expenses, discontinued operations and certain non-cash items such as amortization of intangibles from acquisitions, mark-to-market adjustments on derivative instruments and, in the first quarter of 2011, the non-cash tax recovery as previously described. These items are excluded in calculating Adjusted net income as they are not considered indicative of the financial performance of the Business for the period being reviewed.

CHANGES IN ACCOUNTING POLICY

The Company actively monitors developments in standards as issued by the IASB and the Canadian Accounting Standards Board ("AcSB"), as well as regulatory developments as issued by the Canadian Securities Administrators ("CSA").

Adoption of IFRS

For fiscal years beginning on or after January 1, 2011, Canadian public companies were required to prepare their financial statements in accordance with IFRS, as issued by the IASB. Beginning from the first quarter of 2011, the Company's financial statements are being prepared in accordance with IFRS, with 2010 comparative figures and January 1, 2010 opening Consolidated Statement of Financial Position restated to conform to IFRS.

IFRS implementation plan

The Company has completed the final phase of its IFRS implementation plan. The implementation project consisted of three primary phases: (1) Scoping and Diagnostic Phase, (2) Impact Analysis and Design Phase, and (3) Implementation and Review Phase. As part of this transition plan, the Company completed the following:

    <<
    - Performed a detailed analysis of the current accounting policies and
      practices with all relevant IFRS standards and applicable
      interpretations;
    - Made accounting policy choices, including those under IFRS 1,First-Time
      Adoption of International Financial Reporting Standards ("IFRS 1");
    - Identified and implemented changes required to existing accounting
      policies, data systems, business processes, internal controls over
      financial reporting and disclosure controls;
      - These changes were adequately tested prior to reporting for the first
        quarter of 2011.
      - We have completed the design, implementation and documentation of the
        internal controls over the IFRS changeover process by applying our
        existing control framework. All accounting policy selections and
        changes and transitional impacts to the financial statements were
        subject to review by senior management and the Audit Committee of the
        Board of Directors.
    >>

Some of the key differences identified that were applicable to the Company between Canadian GAAP and IFRS for the opening Consolidated Statement of Financial Position include accounting for business combinations, change in tax rates used to calculate deferred income tax assets and liabilities and recognition of vested past service costs. The differences identified did not have significant effects on the business functions of the Company.

IFRS 1 Exemptions

Upon evaluation of the options under IFRS 1, D+H has elected to use the following exemptions:

Business Combinations

A first-time adopter of IFRS may elect not to apply IFRS 3 retrospectively to business combinations that occurred before the date of transition to IFRSs. The retrospective basis would require restatement of all business combinations that occurred prior to the transition date. The Company has elected not to apply IFRS 3 retrospectively to business combinations that occurred prior to the transition date and such business combinations will not be restated. As a result of applying these exemptions, except as required under IFRS 1, any goodwill arising on such business combinations before the transition date was not adjusted from the carrying value previously determined under Canadian GAAP.

Fair value as deemed cost

IFRS 1 permits measuring, at the date of transition, an item of property, plant and equipment or intangible assets that meet the criteria specified in IAS 38 at either its fair value and using those amounts as deemed cost, or using the historical valuation under previous GAAP. The Company continues to apply the cost model to property, plant and equipment and intangible assets and did not restate to fair value under IFRS. The Company continues to use the historical basis under Canadian GAAP as deemed cost under IFRS at transition date.

Employee Future Benefits

A first-time adopter of IFRS may elect to recognize all cumulative actuarial gains and losses at the date of transition to IFRS, even if it uses the corridor approach for later actuarial gains and losses. The Company elected to apply the exemption at transition date.

Key Differences Identified Between Canadian GAAP and IFRS

The key differences identified by the Company compared to the accounting policies under Canadian GAAP are as follows (Refer to Note 25 of the Corporation's financial statements for the three months ended March 31, 2011 for reconciliations and descriptions of the effect of the transition from Canadian GAAP to IFRS on equity, earnings and comprehensive income including line-by line reconciliations of the statement of financial position as at January 1, 2010, December 31, 2010 and for the three months ended March 31, 2010):

Business Combinations

As described above, the Company has elected under IFRS 1 not to apply IFRS 3 Business Combinations retrospectively to business combinations that occurred prior to the transition date of January 1, 2010.

Employee Future Benefits

Cumulative gains and losses: The Company has elected under IFRS 1 to recognize all cumulative gains and losses related to employee benefits deferred under Canadian GAAP in opening retained earnings at the transition date.

Past service costs: Under IFRS, if past service cost entitlements are not conditional on future service and thus vest immediately, then the expense and the change in the obligation are recognized in full immediately. Under Canadian GAAP, liabilities and expenses for both vested and unvested past service cost are amortized on a straight-line basis over the remaining service period of the employees.

Income Taxes

For the periods prior to January 1, 2011, prior to the conversion of the income trust to a corporate structure, IAS 12 requires that current and deferred tax assets and liabilities are measured at the tax rate applicable to undistributed profits until such time that the distribution becomes payable. Canadian GAAP allows an entity to anticipate future distributions, provided certain conditions are met, and therefore uses the tax rate applicable to distributed profits. Under the tax rules applicable to income trusts, distributions from a unit trust are taxed at corporate tax rates whereas undistributed income is taxed at the top marginal individual income tax rate. As such, the net deferred tax liability of the flow through entities must be recorded under IFRS at the top marginal tax rate for individuals in Ontario, which is approximately 46.4%, as opposed to the corporate tax rate, which is scheduled to be less than 30%.

Impact on internal controls over financial reporting and disclosure controls

The Company completed the assessment of the impact of the conversion to IFRS on internal controls over financial reporting and disclosure controls and determined that its current information technology infrastructure, data systems and reporting capabilities are sufficient to support the Company during and after transition to IFRS.

Post - IFRS Implementation

The post-implementation phase will involve continuous monitoring of changes in IFRS in future periods. The IFRS standard-setting bodies have significant ongoing projects that could impact the IFRS accounting policies that D+H has selected. In particular, there may be additional new or revised standards in relation to revenue recognition, consolidation, financial instruments, hedge accounting, discontinued operations, leases and employee benefits. We have processes in place to ensure that potential changes to the IFRS are monitored and evaluated in a timely manner.

Conversion from an Income Trust to a Corporation

On January 4, 2011, the Company announced the completion of the previously announced plan of 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 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.

Elimination of Deficit

Effective January 1, 2011, the share capital of Davis + Henderson Corporation in respect of the common shares were reduced by the deficit as at December 31, 2010 in accordance with the resolution of the unitholders in connection with the conversion.

Other Changes in Accounting Policy

As previously described, effective January 1, 2011, the Company's policy is to adopt hedge accounting prospectively on any new interest-rate swaps entered into subsequent to January 1, 2011. As of March 31, 2011, the Company had not entered into any new interest-rate swaps and the mark-to-market adjustments of the existing interest-rate swaps continue to be recognized in the Consolidated Statement of Income.

BUSINESS RISKS

For a comprehensive discussion of the business risks, refer to the Company's most recently filed Annual Information Form available on SEDAR at www.sedar.com. Other than the changes described below, risks and uncertainties related to the Corporation have not changed since the filing of the 2010 Annual MD&A and the Annual Information Form.

Postal Interruption

Many of the Corporation's services, including the programs to the chequing account, depend on continued availability of uninterrupted postal delivery service. Specifically, substantially all of Davis + Henderson's completed orders are sent to account holders through Canada Post Corporation's services pursuant to a contract. A prolonged interruption in Canada's postal service could have an adverse affect on D+H's revenues, earnings and cash flow as orders could be delayed or D+H may be required to engage other third-party delivery organizations to deliver completed orders at increased cost.

Risks Relating to the Mortgagebot Business

In connection with the acquisition of Mortgagebot, for a comprehensive discussion of the business and business risks refer to the Company's Prospectus dated April 6, 2011 available on SEDAR at www.sedar.com.

OUTLOOK

D+H's long-term financial objective is to deliver sustainable and growing earnings through continued organic revenue growth and by way of strategic acquisitions. In January and April 2011, respectively, the Company completed the acquisitions of ASSET and Mortgagebot and these acquisitions will increase revenues and expenses of future periods as compared to previous periods.

Additionally, in the immediate future, we will focus on executing our organic growth initiatives, integrating the Business and continuing to diligently manage costs through our transformational and integration initiatives. 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 (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 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 continue to 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 continue 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 and mortgage origination service areas; (ii) variability in professional services work; and (iii) fees and expenses incurred in connection with acquisitions and related business integration activities. The Company believes that, in general, revenues in the early 2010 benefited from stronger volumes as housing and mortgage markets, and auto and personal lending markets increased following earlier contractions. During the first quarter of 2011 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 2011, we anticipate that our capital spending will be in line with 2010, in the range of $30.0 - $33.0 million including the capital requirements for ASSET and Mortgagebot.

For the first quarter of 2011, the Business paid distributions of approximately $0.30 per share comprised of a $0.1533 per unit distribution paid on January 31, 2011 and a $0.15 per share special dividend paid on March 31, 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).

Historically, as an income trust, D+H 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.

Caution Concerning Forward-Looking Statements

This press release contains certain statements that constitute forward-looking information within the meaning of applicable securities laws ("forward-looking statements"). Statements concerning D+H's objectives, goals, strategies, intentions, plans, beliefs, expectations and estimates, and the business, operations, financial performance and condition of D+H 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 D+H to meet its revenue and EBITDA targets; general industry and economic conditions; changes in D+H's relationship with its customers and suppliers; pricing pressures and other competitive factors; the anticipated effect of the acquisition of Mortgagebot on the financial performance of D+H; and the expected benefits arising as a result of the acquisition of Mortgagebot. D+H has also made certain macroeconomic and general industry assumptions in the preparation of such forward-looking statements. While D+H considers these factors and assumptions to be reasonable based on information currently available, there can be no assurance that actual results will be consistent with these forward-looking statements.

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 D+H'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 Company'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 Company'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. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. The documents incorporated by reference herein also identify additional factors that could affect the operating results and performance of the Company. Forward-looking statements are based on management's current plans, estimates, projections, beliefs and opinions, and D+H 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.

All of the forward-looking statements made in this press release and the documents incorporated by reference herein are qualified by these cautionary statements and other cautionary statements or factors contained herein, and there can be no assurance that the actual results or developments will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, the Company.

ADDITIONAL INFORMATION

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

    <<
    CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
    (in thousands of Canadian dollars, unaudited)

                                          March 31, December 31,   January 1,
                                              2011         2010         2010
    -------------------------------------------------------------------------

    ASSETS
    Cash and cash equivalents          $     1,986  $     1,144  $     3,878
    Trade and other receivables             69,882       63,902       57,251
    Inventories                              5,962        6,006        6,197
    Prepayments                              8,061        7,552        6,156
    -------------------------------------------------------------------------
    Total current assets                    85,891       78,604       73,482
    -------------------------------------------------------------------------
    Deferred acquisition costs               2,515            -            -
    Derivative assets held for risk
     management                                  -            -          456
    Deferred tax assets                     38,620       31,079       24,772
    Property, plant and equipment           34,159       32,289       33,296
    Intangible assets                      317,885      266,837      289,774
    Goodwill                               544,053      524,228      519,848
    -------------------------------------------------------------------------
    Total non-current assets               937,232      854,433      868,146
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Total assets                       $ 1,023,123  $   933,037  $   941,628
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    LIABILITIES
    Trade payable and accrued
     liabilities                       $    79,364  $    79,569  $    68,007
    Dividend (distribution) payable              -        8,161        8,161
    Provisions                               8,972       12,358        4,277
    Deferred revenue                         6,169        6,338        7,028
    -------------------------------------------------------------------------
    Total current liabilities               94,505      106,426       87,473
    -------------------------------------------------------------------------

    Loans and borrowings                   277,254      196,215      208,463
    Derivative liabilities held for
     risk management                         1,664        3,403        4,733
    Deferred revenue                         9,272        9,226        9,510
    Other long-term liabilities              6,976        7,290        6,114
    Deferred tax liabilities                50,200       55,327       51,440
    -------------------------------------------------------------------------
    Total non-current liabilities          345,366      271,461      280,260
    -------------------------------------------------------------------------
    Total liabilities                      439,871      377,887      367,733
    -------------------------------------------------------------------------

    EQUITY
    Share capital                          555,236            -            -
    Trust units                                  -      595,859      595,859
    Retained earnings (deficit)             28,050      (40,623)     (21,482)
    Accumulated other comprehensive
     income (loss)                             (34)         (86)        (482)
    -------------------------------------------------------------------------
    Total equity                           583,252      555,150      573,895

    Commitments
    Subsequent events
    -------------------------------------------------------------------------
    Total liabilities and equity       $ 1,023,123  $   933,037  $   941,628
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


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


                                                          Three months ended
                                                       March 31,    March 31,
                                                           2011         2010
    -------------------------------------------------------------------------
    Revenue                                         $   169,548  $   155,829
    Employee compensation and benefits                   54,233       48,176
    Non-compensation direct expenses                     54,135       47,211
    Other operating expenses                             18,973       18,198
    Occupancy costs                                       4,704        4,535
    -------------------------------------------------------------------------
                                                         37,503       37,709

    Depreciation of property, plant and equipment         2,339        2,172
    Amortization of intangible assets                    11,257        9,594
    -------------------------------------------------------------------------
    Results from operating activities                    23,907       25,943

    Finance expenses:
    Amortization and fair value adjustment of
     derivative instruments                              (1,687)      (1,370)
    Interest expense                                      3,989        3,374
    -------------------------------------------------------------------------
    Income from continuing operations before income tax  21,605       23,939

    Income tax expense (recovery)                       (14,290)         904
    -------------------------------------------------------------------------
    Income from continuing operations                    35,895       23,035

    Income (loss) from discontinued operations,
     net of taxes                                           140         (210)
    -------------------------------------------------------------------------
    Net income                                      $    36,035  $    22,825
    -------------------------------------------------------------------------

    Net income per share (unit) from continuing
     operations, basic and diluted                  $    0.6743  $    0.4327
    Net income (loss) per share (unit) from
     discontinued operations, basic and diluted     $    0.0026  $   (0.0039)
    Net income per share (unit), basic and diluted  $    0.6769  $    0.4288
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
    (in thousands of Canadian dollars, unaudited)
                                                          Three months ended
                                                       March 31,    March 31,
                                                           2011         2010
    -------------------------------------------------------------------------

    Net income                                      $    36,035  $    22,825

    Other comprehensive income
    Amortization of mark-to-market adjustment of
     derivative instruments                                  52          189
    -------------------------------------------------------------------------
    Total comprehensive income                      $    36,087  $    23,014
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
    (in thousands of Canadian dollars, unaudited)

                                           Three months ended March 31, 2011
    -------------------------------------------------------------------------
                                            Unrealized
                                                gains/
                                              loses on   Retained
                                      Share  cash flow   earnings      Total
                                    capital     hedges   (deficit)    equity

    Balance at January 1, 2011    $ 595,859  $     (86) $ (40,623) $ 555,150
    Net income for the period             -          -     36,035     36,035
    Amortization of mark-to-market
     adjustment of interest-rate
     swaps                                -         52          -         52
    Plan of Arrangement             (40,623)               40,623          -
    Dividends                             -          -     (7,985)    (7,985)
    -------------------------------------------------------------------------
    Balance at March 31, 2011     $ 555,236  $     (34) $  28,050  $ 583,252
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                           Three months ended March 31, 2010
    -------------------------------------------------------------------------
                                            Unrealized
                                                gains/
                                              loses on   Retained
                                             cash flow   earnings      Total
                                Trust units     hedges   (deficit)    equity

    Balance at January 1, 2010    $ 595,859  $    (482) $ (21,482) $ 573,895
    Net income for the period                              22,825     22,825
    Amortization of mark-to-market
     adjustment of interest-rate
     swaps                                -        189          -        189
    Distributions                         -          -    (24,482)   (24,482)
    -------------------------------------------------------------------------
    Balance at March 31, 2010     $ 595,859  $    (293) $ (23,139) $ 572,427
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


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

                                                          Three months ended
                                                       March 31,    March 31,
                                                           2011         2010
    -------------------------------------------------------------------------

    Cash and cash equivalents provided by (used in):

    OPERATING ACTIVITIES
    Income from continuing operations               $    35,895  $    23,035
    Adjustments for:
      Depreciation of property, plant and equipment       2,339        2,172
      Amortization of intangible assets                  11,257        9,594
      Amortization of mark-to-market adjustment of
       derivative instruments                                52          189
      Net unrealized gain on derivative instruments      (1,739)      (1,559)
      Interest expense                                    3,989        3,374
      Cash interest paid                                 (4,185)      (3,068)
      Non-cash income tax expense (recovery)            (14,290)         904
    -------------------------------------------------------------------------
                                                         33,318       34,641

    Increase in non-cash working capital items          (15,674)     (14,400)
    Changes in other operating assets and liabilities       (85)         987
    Cash flows from (to) discontinued operations            189         (247)
    -------------------------------------------------------------------------
    Net cash from operating activities                   17,748       20,981
    -------------------------------------------------------------------------

    FINANCING ACTIVITIES
    Repayment of long-term indebtedness                 (81,000)      (2,900)
    Proceeds from long-term indebtedness                162,000        7,900
    Issuance costs of long-term indebtedness             (1,305)           -
    Dividends (Distributions) paid                      (16,146)     (24,482)
    -------------------------------------------------------------------------
    Net cash from (used in) financing activities         63,549      (19,482)
    -------------------------------------------------------------------------

    INVESTING ACTIVITIES
    Expenditures on property, plant and equipment        (2,810)        (874)
    Expenditures on intangible assets                    (6,911)      (3,102)
    Acquisition of subsidiary                           (70,734)           -
    -------------------------------------------------------------------------
    Net cash used in investing activities               (80,455)      (3,976)
    -------------------------------------------------------------------------

    Increase (decrease) in cash and cash equivalents
     for the period                                         842       (2,477)
    Cash and cash equivalents, beginning of period        1,144        3,878
    -------------------------------------------------------------------------
    Cash and cash equivalents, end of period        $     1,986  $     1,401
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    >>

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 Corporation is listed on the Toronto Stock Exchange under the symbol DH. Further information can be found in the disclosure documents filed by Davis + Henderson Corporation with the securities regulatory authorities, available at www.sedar.com.

SOURCE Davis + Henderson Corporation

For further information: 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

Profil de l'entreprise

Davis + Henderson Corporation

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