Contrans Income Fund announces fourth quarter results



    WOODSTOCK, ON, March 5 /CNW/ - Contrans Income Fund (TSX. Symbol CSS.UN)

    
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    (unaudited)
    Period ended December 31
    (in millions except                   Three Months         Twelve Months
     per unit amounts)                 2006       2005       2006       2005
    --------------------------------------------------- ---------------------
    Revenue - transportation
     services                     $   103.6  $    90.0  $   399.9  $   342.1
    Revenue - fuel surcharges          12.0        9.5       55.3       43.4
    --------------------------------------------------- ---------------------
    Revenue - total               $   115.6  $    99.5  $   455.2  $   385.5
    --------------------------------------------------- ---------------------
    Earnings before gain on sale
     of land, income taxes and
     discontinued operations      $     7.3  $     6.5  $    34.2  $    28.4
    Gain on sale of land                  -          -        2.9          -
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                                        7.3        6.5       37.1       28.4
    Income taxes                       (0.5)       0.2        1.3        0.9
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    Net income from continuing
     operations                         7.8        6.3       35.8       27.5
    Net income from discontinued
     operations net of tax                -          -          -       1 .0
    --------------------------------------------------- ---------------------
    Net income                    $     7.8  $     6.3  $    35.8  $    28.5
    --------------------------------------------------- ---------------------

    Distributable cash earned
     per unit from:
      Continuing operations before
       proceeds from sale of land $    0.34  $    0.33  $    1.55  $    1.33
      Proceeds from sale of land          -          -       0.13          -
      Discontinued operations             -          -          -       0.14
    --------------------------------------------------- ---------------------
    Total distributable cash
     earned per unit                   0.34       0.33       1.68       1.47
    Distributions declared
     per unit                          0.31       0.31       1.25       1.25
    --------------------------------------------------- ---------------------
    Surplus of distributable
     cash earned per unit over
     distributions declared per
     unit                         $    0.03  $    0.02  $    0.43  $    0.22
    --------------------------------------------------- ---------------------
    --------------------------------------------------- ---------------------

    Payout ratio(1)
      Excluding sale of land            91%        94%        81%        85%
      Including sale of land            91%        94%        74%        85%

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    (1) Payout ratio is calculated by dividing distributable cash earned by
        distributions paid. Neither payout ratio nor distributable cash have
        standardized meanings prescribed under Canadian GAAP and therefore
        they are unlikely to be comparable to similar measures employed by
        other issuers. The data is intended to provide additional information
        and should not be considered in isolation or as a substitute for
        measures of performance prepared in accordance with Canadian GAAP.
        Management believes that these measures help readers assess the
        Fund's performance and the sustainability of its distributions.


    "After achieving another record year in 2005, I would have been quite
pleased to have matched those results in 2006," stated Stan Dunford, Chief
Executive Officer and Chairman of the Board of Contrans Income Fund. "Instead,
we surpassed those results and had yet another record year in 2006. We
continued to grow our business by making some key, strategic acquisitions. In
addition, and far more importantly, we also managed to improve upon one of the
highest profit margins in our history. And this was achieved in spite of some
significant challenges in our markets. To say that I am pleased would be an
understatement."
    "The businesses that we acquired made important contributions to our
success in 2006," continued Mr. Dunford. "Furthermore, with these
acquisitions, we have continued our expansion into specialized areas of
transportation, some of which are less sensitive to fluctuations in general
economic cycles. By broadening our customer base, we have increased market
diversity thus adding stability to our distributions."
    "We believe that the uncertainty over the tax status of income trusts has
not only had a negative impact on the entire sector and investors, but on the
economy in general. The new limits on the amount of equity that a trust can
raise have compounded this effect by further restricting growth. We intend to
continue to operate our business the way we always have in spite of these
burdens and constraints. Our focus will remain on operating intelligently. Our
growth will continue to be measured and selective. Our goal will always be set
on increasing unitholder value."
    "Over the past 10 years Contrans has made 30 acquisitions and today it is
approaching $500 million in annual revenues making it one of the leading
freight transportation companies in Canada. We are proud of the successes of
everyone in our organization, from the owner-operator with a brand new truck
that is paid for to the people that we hired out of school who are now senior
managers. Contrans' success is truly a reflection of our ability to provide
our people with opportunities to realize their full potential."

                    MANAGEMENT'S DISCUSSION AND ANALYSIS

    The consolidated financial statements contained in this annual report,
which have been prepared in accordance with Canadian generally accepted
accounting principles and reported in Canadian funds, detail the performance
and financial position of Contrans Income Fund (the "Fund") for the years
ended December 31, 2006 and 2005. The financial statements should be read in
conjunction with the analysis that follows. A cautionary note regarding non-
GAAP measures and forward-looking statements follows this Management's
Discussion and Analysis of Operations and Financial Condition.


    Financial Highlights

    Years ended December 31
    (in millions except
     per unit amounts)           2006             2005             2004
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    Revenue -
     transportation
     services              $ 399.9  100.0%  $ 342.1  100.0%  $ 323.3  100.0%
    Revenue - fuel
     surcharges               55.3             43.4             24.0
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    Revenue - total          455.2            385.5            347.3
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    Operating expenses
     - net of fuel
     surcharges              309.5   77.4     266.0   77.8     254.4   78.7
    Selling, general
     and administration
     expenses                 38.2    9.6      35.0   10.2      31.3    9.7
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    Earnings before
     amortization, gain
     on sale of land,
     interest, income
     taxes and
     discontinued
     operations (EBITDA)      52.2   13.0      41.1   12.0      37.6   11.6
    Amortization of
     property and
     equipment                13.4    3.4      10.3    3.0       9.7    3.0
    Amortization of
     intangible assets         2.2    0.5       1.3    0.4       1.4    0.4
    Net interest expense       2.4    0.6       1.1    0.3       1.3    0.4
    -------------------------------------------------------------------------
    Earnings before gain
     on sale of land,
     income taxes and
     discontinued
     operations               34.2    8.5      28.4    8.3      25.2    7.8
    Gain on sale of land       2.9    0.7         -      -         -      -
    -------------------------------------------------------------------------
    Earnings before taxes
     and discontinued
     operations (EBT)         37.1    9.2      28.4    8.3      25.2    7.8
    Income taxes               1.3    0.3       0.9    0.3       0.4    0.1
    -------------------------------------------------------------------------
    Net income from
     continuing
     operations               35.8    8.9%     27.5    8.0%     24.8    7.7%
    Income (loss) from
     discontinued
     operations                  -              1.0             (0.3)
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    Net income             $  35.8          $  28.5          $  24.5
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    Earnings (loss) per
     unit - basic
      Continuing
       operations          $  1.26          $  0.98          $  0.91
      Discontinued
       operations                -             0.04            (0.01)
    -------------------------------------------------------------------------
                           $  1.26          $  1.02          $  0.90
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    Earnings (loss) per
     unit - diluted
      Continuing
       operations          $  1.25          $  0.97          $  0.91
      Discontinued
       operations                -             0.04            (0.01)
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                           $  1.25          $  1.01          $  0.90
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    Total assets           $ 260.9          $ 220.5          $ 219.5
    Long-term debt            75.3             40.6             43.0
    Cash                       2.8             46.3             20.7
    Distributions
     declared per unit
      Regular              $  1.25          $  1.25          $  1.25
      Special                    -             0.23                -
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    FOURTH QUARTER RESULTS

    (unaudited)
    Quarters ended December 31
    (in millions except per unit amounts)         2006             2005
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    Revenue - transportation services       $ 103.6  100.0%  $  90.0  100.0%
    Revenue - fuel surcharges                  12.0              9.5
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    Revenue - total                           115.6             99.5
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    Operating expenses net of
     fuel surcharges                           80.6   77.8      69.9   77.7
    Selling, general and administration
     expenses                                  10.6   10.2      10.0   11.1
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    EBITDA                                     12.4   12.0      10.1   11.2
    Amortization of property and equipment      3.5    3.4       2.9    3.2
    Amortization of intangible assets           0.6    0.6       0.4    0.4
    Net interest expense                        1.0    1.0       0.3    0.3
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    EBT                                         7.3    7.0       6.5    7.3
    Income taxes                               (0.5)  (0.5)      0.2    0.2
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    Net income                              $   7.8    7.5%  $   6.3    7.1%
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    Continuing Operations
      Earnings per unit - basic             $  0.27          $  0.23
      Earnings per unit - diluted              0.27             0.22
    -------------------------------------------------------------------------
                                            $  0.27          $  0.22
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    RESULTS FROM CONTINUING OPERATIONS

    Acquisitions generated additional revenues from transportation services
("revenue") of $49.4 million ($17.3 million in the fourth quarter of 2006) and
additional earnings before tax and discontinued operations ("EBT") of
$3.6 million ($1.5 million in the fourth quarter of 2006) compared to the same
periods in 2005. Core operations (operations on hand at the beginning of 2005)
have been adversely affected by the strong Canadian dollar and slowing
economies in Central and Eastern Canada as well as by a cooling of the housing
market. The impact of these factors increased in effect through the second
half of 2006 but were offset by the resumption of operations at UPM, a major
customer of the Fund, after plant shutdowns in 2005 and early 2006. This
resumption in business contributed approximately $8.7 million of additional
revenue in 2006 compared to 2005 ($2.6 million of additional revenue in the
fourth quarter of 2006 compared to 2005). A relatively mild winter also
favourably affected the Fund's 2006 revenues compared to 2005.
    The impact of reduced equipment utilization on operating expenses as a
percentage of revenue was offset in 2006 by rate increases obtained from
customers, lower insurance expenses and reduced maintenance expenses.
Acquisitions added $4.3 million to selling, general and administration costs
("SG&A") during the year compared to 2005 ($2.2 million increase in the fourth
quarter of 2006 compared to the fourth quarter of 2005). SG&A was also higher
due to special tax planning work, severance costs and a provision for a sales
tax assessment that together totalled $1.1 million in 2006 ($0.5 million
higher in the fourth quarter of 2006 compared to the fourth quarter of 2005).
These increases were partially offset by a revision to management's incentive
compensation that reduced SG&A expenses by $1.2 million in the second quarter
and a $0.2 million favourable swing in foreign exchange gains and losses for
the year ($0.5 million in the fourth quarter). The Fund closed one of its
subsidiaries, Fillion Transport Inc., in 2005, at a cost of approximately
$0.8 million.
    Amortization of property and equipment as well as amortization of
intangibles increased in 2006 primarily due to acquisitions. Average net debt
increased during 2006 due to the acquisitions that were made. Net interest
expense increased as a result.
    In the first quarter of 2006, the Fund sold vacant land that exceeded its
foreseeable needs for $3.7 million. This sale resulted in a pre-tax gain of
$2.9 million and a related income tax provision of $0.4 million (net impact of
$0.09 per unit). The land, adjacent to one of the Fund's existing terminals in
Woodstock, Ontario, had been acquired in 2002 and 2003 for potential future
expansion.
    The Fund reorganized its operations in the fourth quarter which
eliminated certain future income tax obligations within its structure. The
effect of this has been reflected in the income tax provision.


    Summary of Quarterly Results
                                          -----------------------------------
    (unaudited)                              First Quarter    Second Quarter
    (in millions except per unit amounts)    2006     2005     2006     2005
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    Revenue - transportation services     $  94.6  $  82.7  $ 102.2  $  86.1
    Revenue - fuel surcharges                12.9      9.0     15.4     11.4
    -------------------------------------------------------------------------
    Revenue                               $ 107.5  $  91.7  $ 117.6  $  97.5
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    Net income from continuing operations $   9.7  $   5.6  $  10.3  $   8.0
    Earnings (loss) from discontinued
     operations                                 -      0.4        -      1.4
    -------------------------------------------------------------------------
    Net income                            $   9.7  $   6.0  $  10.3  $   9.4
    -------------------------------------------------------------------------
    Earnings (loss) per unit - basic
      Continuing operations               $  0.34  $  0.20  $  0.36  $  0.28
      Discontinued operations                   -     0.01        -     0.05
    -------------------------------------------------------------------------
                                          $  0.34  $  0.21  $  0.36  $  0.33
    -------------------------------------------------------------------------
    Earnings (loss) per unit - diluted
      Continuing operations               $  0.34  $  0.20  $  0.36  $  0.28
      Discontinued operations                  -      0.01        -     0.05
    -------------------------------------------------------------------------
                                          $  0.34  $  0.21  $  0.36  $  0.33
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                                          -----------------------------------
    (unaudited)                              Third Quarter    Fourth Quarter
    (in millions except per unit amounts)    2006     2005     2006     2005
    -------------------------------------------------------------------------
    Revenue - transportation services     $  99.5  $  83.3  $ 103.6  $  90.0
    Revenue - fuel surcharges                14.9     13.4     12.0      9.5
    -------------------------------------------------------------------------
    Revenue                               $ 114.4  $  96.7  $ 115.6  $  99.5
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    Net income from continuing operations $   7.9  $   7.5  $   7.8  $   6.3
    Earnings (loss) from discontinued
     operations                                 -     (0.7)       -        -
    -------------------------------------------------------------------------
    Net income                            $   7.9  $   6.8  $   7.8  $   6.3
    -------------------------------------------------------------------------
    Earnings (loss) per unit - basic
      Continuing operations               $  0.28  $  0.27  $  0.27  $  0.23
      Discontinued operations                   -    (0.03)       -        -
    -------------------------------------------------------------------------
                                          $  0.28  $  0.24  $  0.27  $  0.23
    -------------------------------------------------------------------------
    Earnings (loss) per unit - diluted
      Continuing operations               $  0.28  $  0.27  $  0.27  $  0.22
      Discontinued operations                   -    (0.03)       -        -
    -------------------------------------------------------------------------
                                          $  0.28  $  0.24  $  0.27  $  0.22
    -------------------------------------------------------------------------


    SEASONALITY

    Generally, the second quarter is the Fund's strongest period. Volumes
from customers in the construction industry typically build as temperatures
warm in the spring, peak in the autumn and then drop off with winter weather.
Some manufacturing customers close their plants during the summer and many
customers either shut down their production facilities or otherwise reduce
shipments during the Christmas holiday season. Harsh winter weather conditions
hinder traffic and increase operating costs.

    CASH FLOW

    Cash flow from continuing operating activities (before changes in non-
cash working capital balances) amounted to $49.6 million in 2006 compared to
$39.6 million in 2005. This improvement was primarily due to the increase in
net income.
    Non-cash working capital items have increased in 2006 due principally to
a decrease in accounts payable and accrued liabilities and a growth in
receivables. Accounts payable and accrued liabilities decreased as a result of
post-closing payments of $2.5 million relating to businesses acquired by the
Fund. In addition, fourth quarter core business activity levels were lower in
2006 compared to 2005. This reduced amounts owing to owner-operators and
partner carriers by approximately $2.0 million. Receivables have increased due
to the additional revenue contributed by acquisitions and due to an increase
in revenue from fuel surcharges in core operations.
    The Fund paid a special distribution of $6.5 million to unitholders in
the first quarter of 2006 to offset the adverse tax consequences resulting
from the sale of the school bus business in 2005.
    Unitholders increased their participation in the Fund's distribution
reinvestment plan in 2006. This has resulted in an increase in both the number
of units outstanding and the proceeds from the issuance of trust units
compared to 2005.


    UNITHOLDER DISTRIBUTIONS
    Distributable Cash

    (unaudited)
    Periods ended December 31             Three months         Twelve months
    (in thousands except          -------------------------------------------
     per unit amounts)                 2006       2005       2006       2005
    -------------------------------------------------------------------------
    Cash flow from operating
     activities                   $  11,808  $  14,432  $  42,392  $  39,813
    Net change in non-cash
     working capital                    (79)    (4,482)     7,174       (242)
    Proceeds from sale of
     property and equipment           2,485        829      4,888      4,503
    Asset retirement obligations
     - settlements                     (150)        (9)      (250)      (140)
    Maintenance capital
     expenditures                    (4,224)    (1,410)   (10,056)    (6,661)
    -------------------------------------------------------------------------

    Distributable cash from
     continuing operations before
     land proceeds                    9,840      9,360     44,148     37,273
    Distributable cash earned
     from discontinued operations         -          -          -      3,834
    -------------------------------------------------------------------------
    Distributable cash earned
     before land proceeds             9,840      9,360     44,148     41,107
    Proceeds from sale of land            -          -      3,717          -
    -------------------------------------------------------------------------
    Distributable cash earned         9,840      9,360     47,865     41,107
    -------------------------------------------------------------------------
    Distributions declared
    Regular                           8,955      8,800     35,670     35,011
    Special                               -         51          -      6,501
    -------------------------------------------------------------------------
                                      8,955      8,851     35,670     41,512
    -------------------------------------------------------------------------
    Surplus of distributable
     cash earned vs. regular
     distributions declared       $     885  $     560  $  12,195  $   6,096
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Distributable cash earned
     per unit from:
    Continuing operations         $    0.34  $    0.33  $    1.55  $    1.33
    Proceeds from sale of land            -          -       0.13
    Discontinued operations               -          -          -       0.14
    -------------------------------------------------------------------------
                                       0.34       0.33       1.68       1.47
    Distribution declared
     per unit - regular                0.31       0.31       1.25       1.25
    -------------------------------------------------------------------------
    Surplus of distributable
     cash earned vs. regular
     distributions declared       $    0.03  $    0.02  $    0.43  $    0.22
    -------------------------------------------------------------------------
    Weighted average number of
     units outstanding               28,644     28,107     28,513     27,980
    -------------------------------------------------------------------------
    Capital expenditures -
     continuing operations
    Maintenance capital
     expenditures                 $   4,224  $   1,410  $  10,056  $   6,661
    Growth capital expenditures       2,296      4,954     15,707      9,769
    -------------------------------------------------------------------------
    Total capital expenditures    $   6,520  $   6,364  $  25,763  $  16,430
    -------------------------------------------------------------------------


    The amount of distributable cash earned has exceeded distributions to
unitholders in the current year. Management believes that current unitholders
appreciate a stable rate of distributions. Furthermore, the Fund's management
believes that it is necessary to retain this surplus amount of cash since
higher levels of maintenance capital expenditures are anticipated in the
future. Based on the Fund's scope of operations as at December 31, 2006,
management expects that the Fund's average net maintenance capital expenditure
will approximate $13 million per year over the next ten years. The actual
amount that will be expended in a year may vary depending on factors that
include, but are not necessarily limited to, the age and condition of the
fleet, the growth of the Fund's business and changes in government regulations
regarding the weights and dimensions of highway equipment. See also "Forward-
Looking Statements".
    The Fund has invested in a number of growth initiatives in 2006 including
the construction of a new terminal facility in Edmonton, Alberta, at a cost of
$2.1 million, and the purchase of $3.5 million of rolling stock to take
advantage of the economic boom in that region. As part of a strategy to gain
greater market share in the scrap metal transportation business, the Fund has
acquired $2.1 million of new rolling stock for its newly-formed plant services
operation. Due to a change in regulations governing weights and dimensions of
multi-axle trailers, the Fund purchased $2.6 million of new trailing equipment
in advance of the date that the new regulations became effective. With the new
regulations now in effect, the cost of new multi-axle equipment has increased.
Although there was not an immediate need for the equipment when purchased, the
purchases have allowed operations to react more quickly to new opportunities.
The Fund has also expended $5.4 million to meet specialized requirements for
various customers.

    DISTRIBUTABLE CASH EARNED - RECONCILIATION

    Cash used to fund working capital, growth capital expenditures or debt
repayments does not affect amounts that can be distributed to unitholders when
financing is available. Similarly, cash generated by changes in non-cash
working capital is not considered distributable to unitholders. Proceeds from
the sale of retired highway equipment effectively reduce the cost of
maintenance capital expenditures and therefore these proceeds should be
considered when determining what can be distributed to unitholders.
Settlements of asset retirement obligations reflect amounts paid by the Fund,
at the termination of equipment leases, to bring such equipment to a condition
that was stipulated and agreed to in each lease contract. Accordingly, these
settlements need to be considered when determining distributable cash earned
since they are not included in cash provided by operating activities in the
statements of cash flow. Maintenance capital expenditures refer to capital
expenditures that are necessary to sustain current revenue levels.

    LIQUIDITY AND CAPITAL RE

SOURCES (unaudited) As at December 31, 2006 (in millions) ------------------------------------------------------------------------- Cash and cash equivalents $ 2.8 Operating line cash available - continuing operations $ 30.0 Long-term debt available(1) $ 16.0 Current ratio 1.7:1 Total debt (including future tax obligations) to equity ratio 0.9:1 ------------------------------------------------------------------------- (1) Availability expires November 1, 2007 but may be renewed by lender. Draws on this facility can be made for growth purposes only. The Fund requires working capital to meet day-to-day operating activities, to fund maintenance capital expenditures and to pay distributions. In 2007, management expects that the Fund's cash flow from operating activities will be sufficient to meet these requirements. Management believes that the Fund's operating line is adequate to meet seasonal fluctuations in working capital requirements. The trustees of the fund assess the level of distribution each month based on the Fund's actual and expected performance as well as on the expected capital requirements to maintain its fleet over the longer term. The long-term debt facility is available to fund growth opportunities. PROPERTY AND EQUIPMENT (unaudited) Owner- Owned Leased operated Total ------------------------------------------------------------------------- Tractors 323 472 827 1,622 Trailers 1,738 531 107 2,376 Major office and terminal locations 16 4 - 20 ------------------------------------------------------------------------- Owner-operators own their own equipment that the Fund would otherwise have to acquire or source elsewhere. Accordingly, these individuals are effectively a source of capital as well as hauling capacity. CONTRACTUAL OBLIGATIONS (unaudited) ------------------------------------------------------------------------- There- (in $ millions) 2007 2008 2009 2010 2011 after Total ------------------------------------------------------------------------- Long-term debt 0.4 37.8 0.4 0.1 - 36.6 75.3 Lease Obligations 14.4 12.8 9.3 5.2 1.5 - 43.2 ------------------------------------------------------------------------- Total 14.8 50.6 9.7 5.3 1.5 36.6 118.5 ------------------------------------------------------------------------- OUTSTANDING UNITS (unaudited) As at January 31, 2007 (in thousands) ------------------------------------------------------------------------- Subordinate Voting Trust units 22,440 Class A LP units 4,810 Class B LP units 1,468 ------------------------------------------------------------------------- Total 28,718 ------------------------------------------------------------------------- NORMAL COURSE ISSUER BID The Fund announced it would make a normal course issuer bid (the "bid") to purchase up to 1,412,973 of its outstanding Subordinate Voting Trust Units through November 19, 2007. Management intends to buy back these units only if it feels such purchases will benefit remaining unitholders. Units purchased pursuant to the bid will be cancelled. CRITICAL ACCOUNTING ESTIMATES Management is required to make significant estimates and assumptions in preparing its financial statements, the most significant of which are as follows: ------------------------------------------------------------------------- Financial Statement Item Methodology, Assumptions ------------------------------------------------------------------------- Accounts receivable - provisions Specific account analysis performed for doubtful accounts and a general provision is established based on past performance. ------------------------------------------------------------------------- Goodwill and long-lived assets Based on expected future cash flows. - impairment testing Consideration is given to past performance and future conditions that are known, or expected to change, that will affect future cash flows. ------------------------------------------------------------------------- Property, equipment and Based on past performance. intangible assets - useful lives ------------------------------------------------------------------------- Accrued liabilities - matters Accruals for settlement established involving litigation based on information provided by legal counsel or insurance claims professionals. ------------------------------------------------------------------------- Management does not believe that there are changes that are reasonably likely to occur in the assumptions that have been used that will have a material impact on the Fund's financial position, changes in financial condition or results of operations. NEW ACCOUNTING PRONOUNCEMENTS CICA Handbook Section 1530, Comprehensive Income Comprehensive income represents the change in equity (net assets) of an enterprise during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period, except those resulting from investments by and distributions to owners. A statement of comprehensive income will be required in a complete set of financial statements for both interim and annual periods. The new statement will present net income and each component to be recognized in comprehensive income, such as certain gains and losses arising from changes in fair value. This new section applies to interim and annual financial statements relating to fiscal years beginning on or after October 1, 2006. CICA Handbook Section 3251, Equity The current Handbook Section 3250 is to be replaced by this section. This standard incorporates the consequential amendments resulting from the issuance of Handbook Section 1530. CICA Handbook Section 3855, Recognition and Measurement, Financial Instruments Section 3855 prescribes when, how much and by what method a financial asset, financial liability, or non-financial derivative is to be recognized in the financial statements. It also specifies how financial instrument gains and losses are to be presented. This pronouncement applies to interim and annual financial statements relating to fiscal years beginning on or after October 1, 2006. FINANCIAL INSTRUMENTS The Fund from time to time enters into foreign exchange contracts to manage its net exposure to currency fluctuations against the US dollar. As at December 31, 2006, the Fund had contracts with an aggregate value of CAD $4.0 million to sell US funds throughout the first quarter of 2007. The contracts expire on a monthly basis over the period and require the Fund to sell US Dollars at rates between $1.1293 and $1.1632. As at December 31, 2006, the fair value of these contracts was a liability of $0.1 million. TAXATION On October 31, 2006 the Canadian Federal government announced its intention to apply corporate tax to income trusts beginning in 2011. If enacted, the income tax will reduce the net income of the Fund and the amount of cash that will be available to distribute to its unitholders. Had the government of Canada's proposal to tax income trusts been substantively enacted as at December 31, 2006, the Fund would have recognized an additional future income tax charge of approximately $8 million. BUSINESS RISKS The Fund is affected by economic cycles. The Fund provides transportation services to over 6,000 customers in various industries and geographic regions. The Fund's asset-based operations haul freight on van, flatbed, dump, dry bulk and liquid tank trailers. Some of the largest freight customers are in industries where demand for their goods is relatively inelastic. The diversity of the customer base also limits concentration of credit risk. No single customer accounts for more than 10% of the Fund's revenue. Cross-border travel is required to service many customers. Approximately 40% of the total distance travelled by the Fund's trucks is travelled in the US. Accordingly, border crossings and customs clearances affect these shipments. Today's political uncertainties and border security concerns affect cross-border traffic. The Fund participates in professional and industry associations designed to lobby for the transportation industry's interests. In addition, management informs customers about border delays and seeks fair compensation for lost productivity. The Fund is subject to certain foreign exchange risks as it has positive US dollar cash flow. Management manages this risk through foreign exchange contracts, denominating equipment leases in US dollars and through customer negotiations. Changes in the relative value of the Canadian dollar against the US dollar also affect the flow of goods between the two countries as well as competition for freight. Management competes for trans-border freight by providing high levels of service to service-sensitive customers. The Fund's operating entities are subject to lawsuits from accidents and other insurable risks. Management maintains prudent levels of insurance coverage and high safety standards to minimize this exposure. Furthermore, management contracts only with insurers licensed to underwrite in Canada. The Canadian insurance industry is highly regulated with stringent capital and liquidity requirements. The Fund relies primarily on the services of owner-operators and professional drivers. Besides offering competitive rates of pay, management is conscious of the quality of the working environment. In addition, when the Fund lacks its own hauling resources, partner carriers can provide additional capacity. Management has no control over fuel prices. Although the Fund has fuel surcharge programs with most of its customers that offset higher fuel prices, the effectiveness of these programs during times of sudden, significant increases in fuel prices can be diminished. Rapid fluctuations in fuel prices also absorb more management time. Changes in interest rates affect both interest paid on floating rate debt and interest received on surplus cash. As at December 31, 2006, approximately 96% of the Fund's long-term debt had fixed interest rates. CONTROLS AND PROCEDURES Management is responsible for establishing and maintaining adequate internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. The Fund's management, including the Chief Executive Officer and the Chief Financial Officer, assessed the design of the Fund's internal controls over financial reporting as at December 31, 2006 and determined that there were no material weaknesses in the Fund's internal controls over financial reporting and concluded that the Fund's disclosure controls and procedures were effective. No changes were made in the Fund's internal control over financial reporting during the three months ended December 31, 2006, that have materially affected, or are reasonably likely to materially affect, the Fund's internal control over financial reporting. A control system, no matter how well conceived and operated, can provide only reasonable, and not absolute, assurance that the objectives of the control system are met. As a result of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, including instances of fraud, if any, have been detected. The design of any system of controls is also based, in part, upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under future conditions. TRANSACTIONS WITH RELATED PARTIES In 2006, the Fund purchased certain highway tractors for consideration of $0.9 million from Peterbilt of Ontario Inc., a company controlled by the Chairman of the Fund. In addition, $4.2 million was paid by the Fund to Peterbilt of Ontario Inc. in 2006 for tractor repairs, maintenance and lease costs. The Fund also leased certain premises to Peterbilt of Ontario Inc. in 2006 for consideration of $0.2 million. These transactions were carried out in the normal course of business and recorded at the exchange amount, which management believes approximates an arm's length arrangement. USE OF NON-GAAP FINANCIAL MEASURES Management has included certain non-GAAP measures to supplement its consolidated financial statements which are presented in accordance with Canadian GAAP. Non-GAAP measures do not have any standardized meaning prescribed under Canadian GAAP and therefore they are unlikely to be comparable to similar measures employed by other issuers. The data is intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with Canadian GAAP. Management has included these non-GAAP measures for the reasons set forth below. EBITDA, distributable cash, maintenance capital expenditures and growth capital expenditures: Management believes that these measures are useful supplements to the information contained in the Fund's statements of cash flow as they facilitate a greater depth of analysis. Accordingly, these measures can enhance the evaluation of the Fund's historical and prospective operating performances as well as the sustainability of the Fund's distributions. Revenue - transportation services, revenue - fuel surcharges: Management believes that it is important to isolate the effects of fuel surcharges, a volatile source of revenue, when analyzing operating results. Management regards revenue from transportation services as the relevant indicator of business level activity. Accordingly, the percentages in the Financial Highlights table were calculated using revenue from transportation services as a base. In addition, operating expenses are stated after netting fuel surcharges against fuel expenses in the Financial Highlights table. Management believes that this presentation facilitates a better comparison of operating costs between periods. FORWARD-LOOKING STATEMENTS Management's discussion and analysis contains certain forward-looking statements that involve a number of risks and uncertainties. Forward-looking statements relate to future events or future performance and include, but are not limited to, changes in government regulations regarding weights and dimensions of highway equipment, the age and condition of the transportation fleet and the growth of the Fund's business. Often, but not always, forward- looking statements can be identified by terminology such as "may", "will", "should", "expect", "plan", "anticipate", "believe", "estimat e", "predict", "potential", "continue" or the negative of these terms or other comparable terminology. Such statements reflect the current views and estimates of management of the Fund with respect to future events, as of the date such statements are made, and they involve known and unknown risks and uncertainties which may cause actual events or results to differ materially from those expressed or implied by forward-looking statements. In evaluating these statements, readers should specifically consider factors such as the risks outlined under "Risk Factors" in the Fund's Annual Information Form, which is available at www.sedar.com. Although the Fund has attempted to identify important factors that could cause actual events, actions or results to differ materially from those described in the forward-looking statements, there may be other factors that cause such events, actions or results to differ. The Fund undertakes no obligation to update forward-looking statements if circumstances or management's views or estimates change. Accordingly, readers are cautioned not to place undue reliance on forward-looking statements. CONSOLIDATED STATEMENTS OF EARNINGS (in thousands except for per unit amounts) For the years ended December 31 2006 2005 ------------------------------------------------------------------------- Revenue $ 455,246 $ 385,490 Operating expenses 364,875 309,367 Selling, general and administration expenses 38,156 35,017 Amortization of property and equipment 13,388 10,266 Amortization of intangible assets 2,238 1,355 ------------------------------------------------------------------------- 36,589 29,485 Net interest (income) expense - long-term 3,002 2,519 - short-term (635) (1,449) ------------------------------------------------------------------------- Income before Gain on Sale of Land, Income Taxes and Discontinued Operations 34,222 28,415 Gain on sale of land (Note 14) 2,867 - ------------------------------------------------------------------------- Income before Income Taxes and Discontinued Operations 37,089 28,415 Income taxes (Note 7) 1,300 946 ------------------------------------------------------------------------- Net Income from Continuing Operations 35,789 27,469 Income from discontinued operations net of tax (Note 16) - 1,043 ------------------------------------------------------------------------- Net Income $ 35,789 $ 28,512 ------------------------------------------------------------------------- Net income per unit - basic Continuing operations $ 1.26 $ 0.98 Discontinued operations - 0.04 ------------------------------------------------------------------------- $ 1.26 $ 1.02 ------------------------------------------------------------------------- Net income per unit - diluted Continuing operations $ 1.25 $ 0.97 Discontinued operations - 0.04 ------------------------------------------------------------------------- $ 1.25 $ 1.01 ------------------------------------------------------------------------- Weighted average number of units outstanding - basic 28,513 27,980 Weighted average number of units outstanding - diluted 28,643 28,277 ------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (in thousands) For the years ended December 31 2006 2005 ------------------------------------------------------------------------- Retained Earnings - Beginning of Year $ 19,629 $ 32,629 Net income 35,789 28,512 Premium paid on units repurchased (773) - Distributions declared (35,670) (41,512) ------------------------------------------------------------------------- Retained Earnings - End of Year $ 18,975 $ 19,629 ------------------------------------------------------------------------- The accompanying notes are an integral part of these statements. CONSOLIDATED BALANCE SHEETS (in thousands) As at December 31 2006 2005 ------------------------------------------------------------------------- Assets Current Assets Cash and cash equivalents $ 2,844 $ 46,259 Accounts receivable 55,615 45,124 Other current assets 6,389 5,460 ------------------------------------------------------------------------- 64,848 96,843 Property and Equipment (Note 4) 112,747 90,989 Goodwill 56,987 18,318 Intangible Assets (Note 5) 26,314 14,382 ------------------------------------------------------------------------- $ 260,896 $ 220,532 ------------------------------------------------------------------------- Liabilities Current Liabilities Accounts payable and accrued liabilities $ 35,138 $ 29,516 Distributions payable 3,102 9,447 Income taxes payable 87 440 Current portion of long-term debt (Note 6) 420 577 ------------------------------------------------------------------------- 38,747 39,980 Long-Term Debt (Note 6) 74,914 40,038 Asset Retirement Obligations 1,029 939 Future Income Taxes (Note 7) 8,763 7,675 ------------------------------------------------------------------------- 123,453 88,632 ------------------------------------------------------------------------- Unitholders' Equity Contributed surplus 663 413 Trust units (Note 8) 117,805 111,858 Retained earnings 18,975 19,629 ------------------------------------------------------------------------- 137,443 131,900 ------------------------------------------------------------------------- $ 260,896 $ 220,532 ------------------------------------------------------------------------- Commitments and contingencies (Notes 9 and 10) The accompanying notes are an integral part of these statements. Signed on behalf of the Board of Trustees Stan G. Dunford, Trustee Archie M. Leach, C.A., Trustee CONSOLIDATED STATEMENTS OF CASH FLOW (in thousands) For the years ended December 31 2006 2005 ------------------------------------------------------------------------- Cash Provided by (Used in) Operating Activities Net income from continuing operations $ 35,789 $ 27,469 Items not affecting cash: Unit-based compensation cost (Note 8) 288 175 Unrealized foreign exchange loss 64 - Asset retirement obligations - accretion 48 50 Amortization of property and equipment 13,388 10,266 Amortization of intangible assets 2,238 1,355 Future income taxes 755 602 Gain on sale of land (Note 14) (2,867) - Gain on sale of equipment (137) (346) ------------------------------------------------------------------------- 49,566 39,571 Change in non-cash working capital (Note 13) (7,174) 242 ------------------------------------------------------------------------- 42,392 39,813 ------------------------------------------------------------------------- Investing Activities Sale of school bus segment (Note 16) - 55,253 Expended on acquisitions (Note 3) (64,772) (24,948) Asset retirement obligations - settlements (250) (140) Sale of land (Note 14) 3,717 - Sale of equipment 4,888 4,503 Purchase of property and equipment (25,763) (16,430) ------------------------------------------------------------------------- (82,180) 18,238 ------------------------------------------------------------------------- Financing Activities Distributions paid - Regular (35,514) (34,964) - Special (6,501) - Proceeds from long-term debt 34,041 693 Repayment of long-term debt (789) (2,781) Issuance of units 6,413 5,618 Repurchase of units (1,277) - ------------------------------------------------------------------------- (3,627) (31,434) ------------------------------------------------------------------------- Increase (Decrease) in Cash and Cash Equivalents Continuing operations (43,415) 26,617 Discontinued operations (Note 16) - (1,057) Cash and Cash Equivalents - Beginning of Year 46,259 20,699 ------------------------------------------------------------------------- Cash and Cash Equivalents - End of Year $ 2,844 $ 46,259 ------------------------------------------------------------------------- The accompanying notes are an integral part of these statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2006 and 2005 (tabular amounts in thousands except for per unit amounts) ------------------------------------------------------------------------- 1. ORGANIZATION Contrans Income Fund (the "Fund") is an unincorporated, open-ended limited purpose trust established under the laws of the province of Ontario. The Fund was created for the purpose of acquiring and holding investments. The Fund operates in the freight transportation industry. 2. SIGNIFICANT ACCOUNTING POLICIES These financial statements are prepared in accordance with accounting principles generally accepted in Canada. Significant accounting policies adopted by the Fund are as follows: PRINCIPLES OF CONSOLIDATION The purchase method of accounting for business combinations has been used and the accounts of all subsidiaries have been consolidated with those of the Fund. Intercompany balances and transactions have been eliminated upon consolidation. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash on deposit and short-term interest-bearing securities with maturities at purchase date of three months or less. PROPERTY AND EQUIPMENT Property and equipment are valued at acquisition cost less accumulated amortization. Amortization is provided over the estimated service lives of the assets as follows: Buildings - Straight-line over 15 to 40 years Rolling Stock - Tractors - 25% declining balance Trailers - Straight-line over 10 to 15 years Service Vehicles and Other Equipment - 20% to 30% declining balance Management periodically reviews the estimated service lives of these assets and adjusts amortization accordingly. GOODWILL AND INTANGIBLE ASSETS Goodwill is tested for impairment on an annual basis or more frequently, if events or changes in circumstances indicate that the asset might be impaired. Management periodically reviews the estimated lives of intangible assets and adjusts amortization accordingly. Intangible assets are amortized on a straight-line basis over a period of up to 10 years. IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets, including property and equipment and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer amortized. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet. ASSET RETIREMENT OBLIGATIONS The Fund recognizes the fair value of a future asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that results from the acquisition or normal use of the assets. The fair value of the asset retirement obligation is determined using the discounted expected cash flow and accordingly the change in the obligation due to the passage of time is recognized in income as an operating expense. Any change in the obligation due to changes in estimated cash flow is recognized as an adjustment to the carrying amount of the obligation. The Fund concurrently recognizes a corresponding change in the carrying amount of the related long-lived asset. This asset is amortized over the term of the lease agreement. REVENUE RECOGNITION Revenue is recognized upon delivery of goods to customers. INCOME TAXES The Fund is a mutual fund trust as defined under the Income Tax Act (Canada). Pursuant to the Declaration of Trust, all of the taxable income earned directly by the Fund in the period is distributable to unitholders and such distributions are deducted for income tax purposes. Consequently, no provision for income taxes is required for the Fund. Certain of the Fund's subsidiaries are, however, subject to income taxation and provide for income tax obligations based upon statutory corporate tax rates and provide for federal large corporations taxes as necessary. FUTURE INCOME TAXES The liability method is used to account for future income taxes. Under this method, future income tax assets and liabilities are recognized for the estimated income tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective income tax bases. Future income tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to be in effect when the temporary differences are expected to be recovered or settled. The effects of changes in income tax rates are reflected in future income tax assets and liabilities in the period that the rate changes are substantively enacted. FOREIGN CURRENCY Assets and liabilities denominated in foreign currencies are translated to Canadian dollars at exchange rates in effect at the balance sheet dates and non-monetary items are translated at rates of exchange in effect when the assets were acquired or obligations incurred. Expenses incurred in foreign currencies are translated at monthly average rates of exchange during the year. Foreign exchange gains and losses are included in income. UNIT-BASED COMPENSATION The Fund applies the fair value-based method to account for awards made under its long-term incentive plan described in note 8. Consideration received on exercise of unit options is recorded as trust units. In addition, the value of the options is also recorded as trust units and a reduction of contributed surplus. HEDGING RELATIONSHIPS The Fund enters into foreign exchange contracts periodically to hedge against its US dollar-denominated revenues. These contracts are marked to market with the related gains or losses included in earnings for each reported period. EARNINGS PER UNIT Basic earnings per unit is computed by dividing net income by the weighted average units outstanding during the year. Diluted earnings per unit is similarly computed except that the weighted average shares outstanding are increased to include additional units from an assumed exercise of unit options, if dilutive. The number of additional units is calculated by assuming that outstanding unit options were exercised and that the proceeds from such exercises were used to acquire units at average market prices. MEASUREMENT UNCERTAINTY The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts at the date of, and for the period of, the financial statements. Actual results could differ from those estimates. Estimates are reviewed on a regular basis and, as adjustments become necessary, they are reported in income in the periods in which they become known. The assets and liabilities which require management to make significant estimates and assumptions in determining carrying values include accounts receivable, property and equipment, goodwill, intangible assets, accounts payable and accrued liabilities and future income taxes. 3. ACQUISITIONS 2006 General Spectrum Future Cornerstone Garcha ------------------------------------------------------------------------- Accounts receivable $ 949 $ 1,101 $ - $ 3,262 $ - Other current assets 533 267 - 63 - Property and equipment 4,059 3,653 1,793 121 1,374 Intangible assets Customer relationships - - - 2,400 50 Non-competition agreements 120 790 350 450 50 Goodwill 1,081 5,906 1,384 6,829 476 ------------------------------------------------------------------------- Fair value of assets acquired 6,742 11,717 3,527 13,125 1,950 ------------------------------------------------------------------------- Accounts payable & accrued liabilities 1,607 757 205 3,084 - Long-term debt - - 1,322 - - Future income taxes 85 248 - - - ------------------------------------------------------------------------- Fair value of liabilities assumed 1,692 1,005 1,527 3,084 - ------------------------------------------------------------------------- $ 5,050 $ 10,712 $ 2,000 $ 10,041 $ 1,950 ------------------------------------------------------------------------- Consideration Cash $ 5,050 $ 10,712 $ 2,000 $ 10,041 $ 1,950 ------------------------------------------------------------------------- 2006 Tripar Other Firm Total --------------------------------------------------------------- Accounts receivable $ 2,923 $ - $ - $ 8,235 Other current assets 718 - - 1,581 Property and equipment 3,032 660 - 14,692 Intangible assets Customer relationships 6,060 210 - 8,720 Non-competition agreements 3,650 40 - 5,450 Goodwill 21,776 550 667 38,669 --------------------------------------------------------------- Fair value of assets acquired 38,159 1,460 667 77,347 --------------------------------------------------------------- Accounts payable & accrued liabilities 5,072 50 - 10,775 Long-term debt - 145 - 1,467 Future income taxes - - - 333 --------------------------------------------------------------- Fair value of liabilities assumed 5,072 195 - 12,575 --------------------------------------------------------------- $ 33,087 $ 1,265 $ 667 $ 64,772 --------------------------------------------------------------- Consideration Cash $ 33,087 $ 1,265 $ 667 $ 64,772 --------------------------------------------------------------- ------------------------------------------------------------------------- % Shares Service Entity acquired Date Acquired Base Area ------------------------------------------------------------------------- General Freight Carriers Inc. ("General") 17-Jan-06 100% New Brunswick Flatbed ------------------------------------------------------------------------- Spectrum Transport Ltd. Tank & ("Spectrum") 04-Apr-06 100% Alberta Dump ------------------------------------------------------------------------- Vanadium Machines Ltd. ("Other") 26-Apr-06 100% Ontario Dump ------------------------------------------------------------------------- Future Transfer Co. Assets Inc. ("Future") 01-May-06 acquired Ontario Tank ------------------------------------------------------------------------- B.I.Z. Mechanical Inc. Assets ("Other") 02-Jun-06 acquired Ontario Dump ------------------------------------------------------------------------- Cornerstone Logistics Ontario Inc. ("Cornerstone") 05-Sept-06 100% New York Logistics ------------------------------------------------------------------------- Garcha Transport Inc. Assets ("Garcha") 03-Nov-06 acquired Ontario Waste ------------------------------------------------------------------------- Tripar Transportation Ontario Inc. ("Tripar") 06-Nov-06 100% New Jersey Van ------------------------------------------------------------------------- An additional $2 million of consideration is payable contingent upon Cornerstone achieving certain performance objectives over the next year. Further consideration shall also be paid in the initial year and second year after purchase if certain additional performance objectives are met. Any additional consideration that is paid will be allocated to goodwill. An additional $3 million of consideration is payable contingent upon Tripar achieving certain performance objectives over the next two years. Any additional consideration that is paid will be allocated to goodwill. The preliminary purchase accounting for the acquisitions of General and Spectrum was amended during the fourth quarter of 2006 and $3.0 million was reallocated from intangible assets to goodwill. The impact on the results was not significant. Contingent consideration of $667,000 was paid to the vendor of Firm. This amount has been included in goodwill. Further consideration of $667,000 is payable contingent upon Firm achieving certain performance objectives during 2007 and will be recorded as goodwill if paid. Approximately $1.5 million of additional consideration is payable in 2007, contingent upon Elgin achieving certain performance objectives over the three year period since its acquisition. Any additional consideration that is paid will be allocated to goodwill. Approximately $10.2 million of the amount allocated to goodwill is tax deductible. L.A. 2005 Wood Overland Veritrans Dalton ------------------------------------------------------------------------- Accounts receivable $ - $ - $ 49 $ 1,629 Other current assets - - - 74 Property and equipment 670 600 112 5,404 Intangible assets Customer relationships 130 250 - 2,080 Non-competition agreements 100 50 - 1,050 Goodwill 160 360 289 3,222 ------------------------------------------------------------------------- Fair value of assets acquired 1,060 1,260 450 13,459 ------------------------------------------------------------------------- Accounts payable & accrued liabilities 40 10 33 634 Income taxes payable (recoverable) - - - (16) Future income taxes - - - 295 ------------------------------------------------------------------------- Fair value of liabilities assumed 40 10 33 913 ------------------------------------------------------------------------- $ 1,020 $ 1,250 $ 417 $ 12,546 ------------------------------------------------------------------------- Consideration Cash $ 1,020 $ 1,250 $ 417 $ 12,546 ------------------------------------------------------------------------- 2005 Hopefield Firm Total --------------------------------------------------------------- Accounts receivable $ 786 $ - $ 2,464 Other current assets 43 - 117 Property and equipment 6,515 - 13,301 Intangible assets Customer relationships 1,500 - 3,960 Non-competition agreements 90 - 1,290 Goodwill 1,460 666 6,157 --------------------------------------------------------------- Fair value of assets acquired 10,394 666 27,289 --------------------------------------------------------------- Accounts payable & accrued liabilities 677 - 1,394 Income taxes payable (recoverable) 158 - 142 Future income taxes 510 - 805 --------------------------------------------------------------- Fair value of liabilities assumed 1,345 - 2,341 --------------------------------------------------------------- $ 9,049 $ 666 $ 24,948 --------------------------------------------------------------- Consideration Cash $ 9,049 $ 666 $ 24,948 --------------------------------------------------------------- ------------------------------------------------------------------------- % Shares Service Entity acquired Date Acquired Base Area ------------------------------------------------------------------------- Howard L. Wood Transport Assets Ltd. ("Wood") 1-Jun-05 acquired Ontario Dump ------------------------------------------------------------------------- Overland Carriers Ltd. Assets ("Overland") 1-Aug-05 acquired Alberta Tank ------------------------------------------------------------------------- Veritrans LP Compliance/ ("Veritrans") 31-Aug-05 100% Ontario Reporting ------------------------------------------------------------------------- L.A. Dalton Systems Inc. ("L.A. Dalton") 3-Oct-05 100% Ontario Flatbed ------------------------------------------------------------------------- Hopefield Trucking Limited ("Hopefield") 14-Oct-05 100% Ontario Flatbed ------------------------------------------------------------------------- The acquisitions have been accounted for using the purchase method. The results of operations from the acquisition dates have been included in these consolidated financial statements. The purchase prices are subject to final adjustments. 4. PROPERTY AND EQUIPMENT Accumulated 2006 Cost amortization Net ------------------------------------------------------------------------- Land $ 8,458 $ - $ 8,458 Buildings 24,022 7,255 16,767 Rolling stock and other 130,880 43,358 87,522 ------------------------------------------------------------------------- $ 163,360 $ 50,613 $ 112,747 ------------------------------------------------------------------------- Accumulated 2005 Cost amortization Net ------------------------------------------------------------------------- Land $ 9,129 $ - $ 9,129 Buildings 20,229 6,493 13,736 Rolling stock and other 108,892 40,768 68,124 ------------------------------------------------------------------------- $ 138,250 $ 47,261 $ 90,989 ------------------------------------------------------------------------- 5. INTANGIBLE ASSETS Accumulated 2006 Cost amortization Net ------------------------------------------------------------------------- Customer relationships $ 22,495 3,669 $ 18,826 Non-competition agreements 8,849 1,361 7,488 ------------------------------------------------------------------------- $ 31,344 $ 5,030 $ 26,314 ------------------------------------------------------------------------- Accumulated 2005 Cost amortization Net ------------------------------------------------------------------------- Customer relationships $ 13,775 $ 2,236 $ 11,539 Non-competition agreements 3,399 556 2,843 ------------------------------------------------------------------------- $ 17,174 $ 2,792 $ 14,382 ------------------------------------------------------------------------- 6. LONG-TERM DEBT 2006 2005 ------------------------------------------------------------------------- Senior secured notes payable with fixed interest rates ranging from 6.5% to 6.6% $ 71,500 $ 37,500 Equipment finance contracts with implicit interest rates between 8.0% and 9.3% 1,254 - Notes payable (2005 - fixed interest rates between 2.7% and 6.9%) - 577 Other unsecured loans with varying interest rates and due dates 2,580 2,538 ------------------------------------------------------------------------- 75,334 40,615 Less: current portion 420 577 ------------------------------------------------------------------------- $ 74,914 $ 40,038 ------------------------------------------------------------------------- The senior secured notes payable provide for monthly payments of interest only. The principal repayments are due on December 15, 2008 ($37.5 million) and October 31, 2016 ($34 million). Liens on rolling stock with a net book value of approximately $83 million have been provided as security for the senior secured notes. As at December 31, 2006 and 2005, there were no restrictions preventing the Fund from making distributions to unitholders. Aggregate minimum payments required on long-term debt in each of the next five years are as follows: 2007 $ 420 2008 37,800 2009 399 2010 127 2011 9 Thereafter 36,579 ------------------------------------------------------------------------- $ 75,334 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 7. INCOME TAXES The following table reconciles the provision for income taxes recorded in the statement of earnings with a statutory income tax rate of 35.6%: 2006 2005 ------------------------------------------------------------------------- Income before income taxes and discontinued operations $ 37,089 $ 28,415 ------------------------------------------------------------------------- Computed income tax expense at Canadian statutory rate 13,204 10,121 Reduction of taxes due to taxable income allocated to unitholders (10,983) (9,320) U.S. state taxes 329 396 Change to future Canadian statutory tax rate (250) - Reduction of taxes on reorganization (620) - Large corporation tax 8 120 Other (388) (371) ------------------------------------------------------------------------- $ 1,300 $ 946 ------------------------------------------------------------------------- The tax effects of temporary differences that give rise to future tax assets and liabilities are presented below: 2006 2005 ------------------------------------------------------------------------- Future tax assets Non-capital loss carry forwards $ (310) $ (2,664) Issue costs and financing fees (191) (411) Deductible reserves (765) (468) Other (537) (391) Future tax liabilities Property, equipment and intangible assets 5,491 6,909 Impact of off-calendar year end of corporate subsidiary 5,075 4,700 ------------------------------------------------------------------------- Net future income tax liability $ 8,763 $ 7,675 ------------------------------------------------------------------------- The table above consists solely of the proportional ownership of tax assets and liabilities that relate to the fund's corporate subsidiary, an entity that is subject to income taxation. The fund owns the remaining assets and liabilities, the income from which is taxed directly in the hands of subordinate voting trust unitholders as well as limited partnership unitholders. As at December 31, 2006, the accounting net book value of these additional net assets exceeded their tax basis by approximately $24 million. Non-capital losses carried forward amounting to $875,000 expire as follows 2010 - $298,000 and 2015 - $577,000. 8. TRUST UNITS AUTHORIZED Unlimited numbers of Subordinate Voting Trust units ("trust units") and Class A Limited Partnership ("LP") units and 1,467,724 Class B LP units are authorized. ISSUED AND FULLY PAID ------------------------------------------------------------------------- Trust Units Class A LP Units Units Value Units Value ----- ----- ------------------------------------------------------------------------- Balance at December 31, 2004 21,404 $ 98,067 4,951 $ 6,783 Distribution reinvestment plan 244 3,322 - - Exchanges 141 193 (141) (193) Options exercised 199 2,388 - - ------------------------------------------------------------------------- Balance at December 31, 2005 21,988 $ 103,970 4,810 $ 6,590 Distribution reinvestment plan 446 5,482 - - Options exercised 81 969 - - Units repurchased (105) (504) ------------------------------------------------------------------------- Balance at December 31, 2006 22,410 $ 109,917 4,810 $ 6,590 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Class B LP Units Total Units Value Units Value ----- ----- ------------------------------------------------------------------------- Balance at December 31, 2004 1,468 $ 1,298 27,823 $ 106,148 Distribution reinvestment plan - - 244 3,322 Exchanges - - - - Options exercised - - 199 2,388 ------------------------------------------------------------------------- Balance at December 31, 2005 1,468 $ 1,298 28,266 $ 111,858 Distribution reinvestment plan - - 446 5,482 Options exercised - - 81 969 Units repurchased (105) (504) ------------------------------------------------------------------------- Balance at December 31, 2006 1,468 $ 1,298 28,688 $ 117,805 ------------------------------------------------------------------------- VOTING, DISTRIBUTION AND EXCHANGE RIGHTS The trust units and the Class A LP units are entitled to one vote each. The Class B LP units are entitled to ten votes each. Distributions are made equally on a pro rata basis. Each Class A LP unit and Class B LP unit is exchangeable for a trust unit effectively giving the Class A and Class B LP units the same rights and entitlements as the Trust units. REDEMPTION RIGHTS Trust units are redeemable by the Fund at any time at a price equal to the lesser of 90% of their market price during the five trading day period commencing immediately after the date of surrender and 100% of the closing market price on the redemption date. UNIT-BASED COMPENSATION PLAN The Fund maintains a unit option plan to encourage ownership of the Fund by directors, officers and key employees. Under the terms of the plan, a total of 2,762,165 trust units have been reserved for issuance. The maximum number of options that can be issued to an individual is 5% of the trust units outstanding at the time of the grant. Upon issuance, 20% of the options vest immediately and the remainder vest at a rate of 20% annually over the next four anniversary dates. The exercise prices are established based on the closing trading price of the Fund on the day prior to the date of the grant. Any option granted which is cancelled or terminated for any reason prior to exercise will be returned to the pool and will be available for future unit option grants. Below are facts and assumptions used to determine the fair value of the options on the grant dates: ------------------------------------------------------------------------- Options grant dates March 25, 2004 March 1, 2005 March 9, 2006 Expiration dates March 25, 2014 March 1, 2015 March 9, 2016 Risk-free interest rates 4.62% 4.60% 4.21% Expected life 9 years 9 years 7 years Expected volatility 20% 20% 20% Expected dividend yield 10.87% 8.33% 9.61% Estimated grant-date fair value per unit $0.47 $0.89 $0.43 Exercise price $11.50 $14.90 $13.01 ------------------------------------------------------------------------- Year ended December 31 2006 2005 ------------------------------------------------------------------------- Weighted Weighted Average Average Exercise Exercise Units Price Units Price ------------------------------------------------------------------------- Unit options outstanding, beginning of year 1,331 $ 11.56 1,540 $ 11.50 Granted 975 13.01 25 14.90 Cancelled (46) 11.50 (35) 11.50 Exercised (81) 11.50 (199) 11.50 ------------------------------------------------------------------------- Unit options outstanding, end of year 2,179 $ 12.21 1,331 $ 11.56 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Unit options exercisable, end of year 818 $ 11.90 420 $ 11.54 Amount charged to compensation expense $ 288 $ 175 9. LEASE COMMITMENTS Future minimum payments under operating leases for rolling stock and property are as follows: 2007 $ 14,447 2008 12,760 2009 9,257 2010 5,200 2011 1,477 Thereafter 62 ------------------------------------------------------------------------- 10. CONTINGENCIES OUTSTANDING LITIGATION In September 1994, two actions were filed by separate groups of former employees against Laidlaw Carriers Inc. ("Laidlaw") and an Ontario loan and trust company. These actions involved the valuation of the employees' benefit plans in 1988. In 2001, after application for leave to appeal an earlier court decision was denied, these actions became a single class proceeding. Management is unable to determine the outcome of this lawsuit at this time. Laidlaw had been a wholly-owned subsidiary of Contrans Corp. and, upon amalgamations that took place on July 23, 2002, the potential liability surrounding these actions was combined with Contrans Corp., a corporation controlled by the Fund. 11. FINANCIAL INSTRUMENTS The carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities and distributions payable approximate their fair value due to the short-term nature of these instruments. The fair value of long-term debt, which approximates its carrying value, is determined at the net present value of contractual future payments of principal discounted at current market rates of interest for similar debt instruments with terms stretching over the remaining lives of the outstanding loans. Floating rate debt is assumed to be carried at fair value. The Fund from time to time enters into foreign exchange contracts to manage its net exposure to currency fluctuations against the US dollar. As at December 31, 2006, the Fund had contracts with an aggregate value of CAD $4.0 million to sell CAD funds throughout the first four months of 2007. The contracts expire on a monthly basis over the period and require the Fund to sell CAD dollars for US Dollars at rates of between $1.1293 and $1.1632. As at December 31, 2006, the fair value of these contracts was a liability of $0.1 million. 12. RELATED PARTY TRANSACTIONS The Fund had business transactions with and had balances owing to and from a company controlled by the Chairman of the Fund as follows: 2006 2005 ------------------------------------------------------------------------- Transactions during the year Equipment and purchases $ 943 $ 252 Repairs, maintenance and leases 4,247 2,926 Rental income 186 179 Balances at end of year Accounts payable 277 171 Accounts receivable 10 11 ------------------------------------------------------------------------- These transactions were, carried out in the normal course of business and recorded at exchange amounts, which approximates an arm's length arrangement. 13. CASH FLOW Change in non-cash working capital: 2006 2005 ------------------------------------------------------------------------- Increase in accounts receivable $ (2,256) $ (1,186) Decrease (increase) in other current assets 588 (11) Increase (decrease) in accounts payable and accrued liabilities (5,153) 1,831 Decrease in income taxes payable (353) (392) ------------------------------------------------------------------------- Net change in non-cash working capital $ (7,174) $ 242 ------------------------------------------------------------------------- Cash paid in respect of: Interest $ 2,259 $ 1,064 Income taxes 858 736 ------------------------------------------------------------------------- 14. SALE OF LAND During the first quarter of 2006, the Fund sold a vacant parcel of surplus land that was in excess of operating requirement for proceeds of $3.7 million. This transaction resulted in a gain of $2.9 million before an income tax charge of $0.4 million. 15. EARNINGS PER UNIT The computations for earnings per unit are based on the following: 2006 2005 ------------------------------------------------------------------------- Weighted average number of units outstanding: Basic 28,513 27,980 Effect of unit options 130 297 ------------------------------------------------------------------------- Diluted 28,643 28,277 ------------------------------------------------------------------------- 16. DISCONTINUED OPERATIONS On August 4, 2005, the Fund sold its school bus segment for net cash proceeds of $55.2 million. The effective closing date of this transaction was July 31, 2005. Results from operations of this segment are included in the Fund's consolidated financial statements up to and including this date and have been disclosed as discontinued operations. Year ended December 31 2006 2005 ------------------------------------------------------------------------- Revenue $ - $ 18,351 Income (loss) from operating activities - 1,209 Gain on disposal before income tax provision - 1,862 Future income tax provision - (2,028) ------------------------------------------------------------------------- Income (loss) from discontinued operations $ - $ 1,043 Cash provided by (used in) discontinued operations were as follows: Year ended December 31 2006 2005 ------------------------------------------------------------------------- Operating activities $ - $ 3,503 Investing activities - (4,560) Financing activities - - ------------------------------------------------------------------------- $ - $ (1,057) ------------------------------------------------------------------------- 17. DISTRIBUTIONS The Fund's trust indenture requires distribution of the Fund's cash flow to unitholders after giving consideration to such items as expected capital requirements, unit redemptions or any amounts which the Fund's trustees may reasonably consider necessary to provide for as administrators of the Fund. 18. COMPARATIVE FIGURES Certain comparative figures and disclosures have been restated to conform to the current year's basis of presentation.

For further information:

For further information: Stan G. Dunford, Chairman and Chief Executive
Officer, or Gregory W. Rumble, President and Chief Operating Officer, Phone:
(519) 421-4600, E-mail: info@contrans.ca; Web site: www.contrans.ca

Organization Profile

Contrans Group Inc.

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