Davis + Henderson Income Fund - MRRS Decision

Decision

Headnote

Mutual Reliance Review System for Exemptive Relief Applications -- National Instrument 51-102 Continuous Disclosure Obligations, s.13.1 -- Application by an issuer for relief from the requirement to include certain financial statements in a business acquisition report (BAR) -- The issuer filed a prospectus that contained financial statements relating to the significant probable acquisition -- acquisition structured for tax-planning purposes as an acquisition of shares of a holding entity -- Relief previously granted from the prospectus requirements relating to significant probable acquisitions to permit the issuer to include audited consolidated financial statements of operating subsidiary in lieu of holding entity -- all material facts in respect of the issuer and the acquisition were provided in the prospectus -- since the time the prospectus was filed, there has not been any change in the business or affairs of the issuer or the acquired business that is material to the issuer -- BAR relief granted consistent with earlier prospectus relief -- Issuer will include in the BAR the financial statements previously included in the prospectus.

Applicable Legislative Provisions

National Instrument 51-102 Continuous Disclosure Obligations, ss. 8.3, 8.4, 13.1.

August 25, 2006

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ALBERTA, SASKATCHEWAN, MANITOBA,

ONTARIO, QUEBEC, NEW BRUNSWICK,

NOVA SCOTIA AND NEWFOUNDLAND

AND LABRADOR

(THE "JURISDICTIONS")

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEW SYSTEM

FOR EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF

DAVIS + HENDERSON INCOME FUND

(THE "FILER")

 

MRRS DECISION DOCUMENT

Background

The local securities regulatory authority or regulator (the "Decision Maker") in each of the Jurisdictions has received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the "Legislation") exempting the Filer from the requirement to include the financial statements and compilation report referred to in paragraph 19 below in the Business Acquisition Report (the "BAR") in connection with the acquisition of Holdco (as defined herein) which was completed on June 15, 2006 (the "Requested Relief").

Under the Mutual Reliance Review System for Exemptive Relief Applications

(a) the Ontario Securities Commission (the "OSC") is the principal regulator for the Filer, and

(b) this MRRS decision document evidences the decision of each Decision Maker.

Interpretation

Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this decision unless they are defined in this decision.

Representations

This decision is based on the following facts represented by the Filer:

1. The Filer was formed under the laws of the Province of Ontario pursuant to a Declaration of Trust dated as of November 6, 2001, as amended and restated on July 23, 2004.

2. The Filer, through its wholly-owned business Davis + Henderson, Limited Partnership ("Davis + Henderson"), generates the majority of its sales from the delivery of the cheque supply program to substantially all of the financial institutions in Canada.

3. The authorized capital of the Filer consists of an unlimited number of units of the Filer ("Units") of which, as of May 30, 2006, 43,946,792 Units were issued and outstanding.

4. The Units are listed and posted for trading on the TSX under the trading symbol "DHF.UN".

5. The Filer is a reporting issuer, or the equivalent, in each of the Jurisdictions and, to the best of its knowledge, is currently not in default of any applicable requirements under the securities legislation in any of the provinces or territories in which it is a reporting issuer.

6. Although the Filer is also a reporting issuer, or the equivalent, in Prince Edward Island, the Yukon, the Northwest Territories and Nunavut, an application is not being made to the securities regulatory authorities in these jurisdictions as we understand that National Instrument 51-102 ("NI 51-102") has not been adopted in these jurisdictions.

7. Although the Filer is also a reporting issuer in British Columbia, an application is not being made in this province as BC Implementing Rule 51-801 ("BCI 51-801"), as amended effective September 19, 2005, exempts issuers from Part 8 of NI 51-102 in British Columbia unless the issuer relies in any other jurisdiction on certain exemptions contained in Multilateral Instrument 11-101 Principal Regulator System as specified in BCI 51-801.

8. The Filer is up to date in the filing of its continuous disclosure obligations.

The Acquisition

9. Pursuant to a share purchase agreement dated May 18, 2006, Davis + Henderson acquired the business conducted by Filogix Inc. ("Filogix") through its purchase of all of the outstanding shares of Filogix Holdings Inc. ("Holdco") for an aggregate purchase price of approximately $212.5 million (the "Acquisition"). Filogix is the leading provider in Canada of information and transaction technology for the residential mortgage and real estate markets.

10. For tax planning purposes, the selling shareholders of Holdco required that the sale of Filogix be effected through a purchase of Holdco.

11. At the time of the Acquisition, Holdco did not have business operations or investments other than shares of Filogix and did not have any material liabilities. It also did not prepare consolidated financial statements. Filogix prepared audited consolidated financial statements. Holdco's unconsolidated financial statement showed its former investment in Filogix. The only material difference between Filogix's consolidated financial statements and a consolidated financial statement of Holdco would have been the allocation in Holdco's statement of the excess purchase price to intangibles and goodwill.

12. The Acquisition was financed in part by the Filer's public offering of 6,026,000 subscription receipts (the "Offering") for gross proceeds of $116,000,500 pursuant to a short form prospectus dated May 30, 2006 (the "Prospectus").

The Prospectus Financial Statement Requirements

13. National Instrument 44-101 ("NI 44-101") sets forth the financial statements that are required to be included in a short form prospectus.

14. Pursuant to a pre-filing request submitted by letter dated May 5, 2006, the Filer sought discretionary relief from the requirement under NI 44-101 that it include audited consolidated financial statements of Holdco in the Prospectus and instead be permitted to include audited consolidated financial statements of Filogix. The relief sought was on the basis that, assuming the Acquisition went ahead, the Filer would have to fair value the assets of Filogix and do its own allocation of the excess purchase price (making the previous allocation irrelevant, given the significant difference in the value of Filogix since its acquisition by Holdco) and, since the new allocation would be reflected in the pro forma financial statements in the Prospectus, the previous allocation would be irrelevant to investors. In reply to the pre-filing request, the OSC confirmed that "the receipt for the final prospectus will evidence that the principal regulator and the non-principal regulators have granted the discretionary relief requested in the pre-filing application."

15. Consistent with the requirements of Item 10 of NI 44-101 but taking into account the discretionary relief, the Prospectus contained the following financial statements in relation to the Acquisition (which was significant at above the 40% level using the tests in Item 10 of NI 44-101 and Part 8 of NI 51-102):

(a) the audited consolidated balance sheet for Filogix as at December 31, 2005 and 2004 and the consolidated statement of earnings and deficit and cash flows for the years then ended; and

(b) unaudited pro forma consolidated balance sheet of the Filer as at March 31, 2006 and unaudited pro forma consolidated statements of income for the three months then ended and for the year ended December 31, 2005 (collectively referred to as the "Prospectus Financial Statements").

16. All material facts in respect of the Filer and Filogix at the time the Prospectus was filed, including the Prospectus Financial Statements, were provided in the Prospectus. To the knowledge of the Filer, since the time the Prospectus was filed on May 30, 2006 there has not been any change in the business or affairs of Davis + Henderson or Filogix that is material to the Filer, taken as a whole.

The Business Acquisition Report Financial Statement Requirements

17. Pursuant to the requirements of Part 8 of NI 51-102, the Filer is required to file a BAR relating to the Acquisition within 75 days after the date of the Acquisition.

18. Using the significance tests set forth in Section 8.3 of NI 51-102, the Acquisition is significant at above the 40% level.

19. To comply with the requirements of Section 8.4 of NI 51-102, the Filer would be required to include the following financial statements in the BAR:

(a) audited consolidated financial statements for Holdco for the years ended December 31, 2005 and 2004;

(b) interim unaudited consolidated financial statements for Holdco for the three month period ended March 31, 2006, together with a comparative interim financial statement for the three month period ended March 31, 2005;

(c) a pro forma consolidated balance sheet for the Filer as at March 31, 2006;

(d) pro forma consolidated statements of income for the Filer for the three months ended March 31, 2006 and for the year ended December 31, 2005; and

(e) a compilation report for the Filer to accompany the Filer's pro forma financial statements.

Decision

The Decision Makers being satisfied that they have the jurisdiction to make this decision and that the relevant test under the Legislation has been met.

The decision of the Decision Makers under the Legislation is that the Requested Relief is granted, provided that the Filer includes in the BAR the Prospectus Financial Statements, together with unaudited consolidated financial statements of Filogix for the three-month periods ended March 31, 2006 and 2005.

"Jo-Anne Matear"
Assistant Director, Corporate Finance