Contrans Income Fund Announces Fourth Quarter Results



     (TSX:CSS.UN)

    WOODSTOCK, ON, Feb. 27 /CNW/ -

    
    -------------------------------------------------------------------------
    (unaudited)
    Period ended December 31
    (in millions except                      Three Months      Twelve Months
     per unit amounts)                       2007     2006     2007     2006
    ------------------------------------------------------- -----------------
    Revenue - transportation services     $ 103.3  $ 103.6  $ 429.2  $ 399.9
    Revenue - fuel surcharges                15.2     12.0     56.7     55.3
    ------------------------------------------------------- -----------------
    Revenue - total                       $ 118.5  $ 115.6  $ 485.9  $ 455.2
    ------------------------------------------------------- -----------------
    Earnings before gain on sale of land
     and income taxes                     $   7.1  $   7.3  $  34.2  $  34.2
    Gain on sale of land                        -        -        -      2.9
    -------------------------------------------------------------------------
                                              7.1      7.3     34.2     37.1
    Income taxes                             (0.4)    (0.5)     8.0      1.3
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Net earnings                              7.5      7.8     26.2     35.8
    ------------------------------------------------------- -----------------
    Distributable cash earned per unit
     from:
    Continuing operations before proceeds
     from sale of land                    $  0.41  $  0.34  $  1.72  $  1.55
    Proceeds from sale of land                  -        -        -     0.13
    -------------------------------------------------------------------------
    Total distributable cash earned
     per unit                                0.41     0.34     1.72     1.68
    Distributions declared per unit          0.31     0.31     1.25     1.25
    ------------------------------------------------------- -----------------
    Surplus of distributable cash earned
     per unit over distributions declared
     per unit                             $  0.10  $  0.03  $  0.47  $  0.43
    ------------------------------------------------------- -----------------
    ------------------------------------------------------- -----------------
    Payout ratio (1)
    Excluding sale of land                    76%      91%      73%      81%
    Including sale of land                    76%      91%      73%      74%
    -------------------------------------------------------------------------

    (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 generally accepted
        accounting principles (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.

    "The past year was marked by an increasingly challenging environment in
our industry," stated Stan Dunford, Chief Executive Officer and Chairman of
the Board of Contrans Income Fund. "These challenges included the
strengthening Canadian dollar, rising fuel costs and a slowing economy. These
factors resulted in an overcapacity of equipment for the volume of freight to
be transported."
    "In addressing these changing business conditions, we focused on and
succeeded in maintaining the profitability of our operations. We are proud of
the fact that we were able to maintain our EBITDA margins of profit while at
the same time increasing our revenue. We view our performance as a significant
achievement, particularly given the number of companies that have recorded
steep declines in their operating results."
    "Our positive performance reflects our management team's longstanding
commitment to maintaining and improving our profit margins. While many
companies can maintain or grow their profits in good times, the mark of a
truly focused company is its ability to maintain those results in a
challenging business climate."
    "The fact is that Contrans has demonstrated an ability to create more
sustainable unitholder value in difficult times than in good ones. We expect
to maintain shareholder value, based on our disciplined operating principles,
skilled managers and proven ability to take the proactive measures needed to
maintain and to grow the profitability of our operations."
    "Given our track record, our time-tested approach and our dedicated
workforce, we face the future with confidence. We believe that the current
challenging conditions will create opportunities for us to continue to
strengthen our operations and to significantly increase unitholder value."

    MANAGEMENT'S DISCUSSION AND ANALYSIS

    The consolidated financial statements contained in this annual report,
which have been prepared in accordance with Canadian GAAP and reported in
Canadian funds, detail the performance and financial position of Contrans
Income Fund (the "Fund") for the years ended December 31, 2007 and 2006. 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)           2007              2006             2005
    -------------------------------------------------------------------------
    Revenue
     - transportation
        services           $ 429.2  100.0%   $ 399.9  100.0%  $ 342.1  100.0%
     - fuel surcharges        56.7              55.3             43.4
    -------------------------------------------------------------------------
    Revenue - total          485.9             455.2            385.5
    -------------------------------------------------------------------------
    Operating expenses
     - net of fuel
        surcharges           330.0   76.9      309.5   77.4     266.0   77.8
    Selling, general and
     administration
     expenses                 43.2   10.1       38.2    9.6      35.0   10.2
    -------------------------------------------------------------------------
    Earnings before
     amortization, interest,
     gain on sale of land,
     income taxes and
     discontinued operations
     (EBITDA)                 56.0   13.0       52.2   13.0      41.1   12.0
    Amortization of property
     and equipment            12.9    3.0       13.4    3.4      10.3    3.0
    Amortization of
     intangible assets         3.9    0.8        2.2    0.5       1.3    0.4
    Net interest expense       5.0    1.2        2.4    0.6       1.1    0.3
    -------------------------------------------------------------------------
    Earnings before gain on
     sale of land, income
     taxes and discontinued
     operations               34.2    8.0       34.2    8.5      28.4    8.3
    Gain on sale of land         -      -        2.9    0.7         -      -
    -------------------------------------------------------------------------
    Earnings before income
     taxes and discontinued
     operations (EBT)         34.2    8.0       37.1    9.2      28.4    8.3
    Income tax provision
     - Current                 1.1    0.3        0.6    0.1       0.3    0.1
     - Future(1)               6.9    1.6        0.7    0.2       0.6    0.2
    -------------------------------------------------------------------------
    Net earnings from
     continuing operations    26.2    6.1%      35.8    8.9%     27.5    8.0%
    Earnings from
     discontinued operations     -                 -              1.0
    -------------------------------------------------------------------------
    Net earnings           $  26.2           $  35.8          $  28.5
    -------------------------------------------------------------------------
    Earnings per unit basic
     - Continuing
        operations         $  0.91           $  1.26          $  0.98
     - Discontinued
        operations               -                 -             0.04
    -------------------------------------------------------------------------
                           $  0.91           $  1.26          $  1.02
    -------------------------------------------------------------------------
    Earnings per unit
     diluted
     - Continuing
        operations         $  0.91           $  1.25          $  0.97
     - Discontinued
        operations               -                 -             0.04
    -------------------------------------------------------------------------
                           $  0.91           $  1.25          $  1.01
    -------------------------------------------------------------------------
    Total assets           $ 270.6           $ 260.9          $ 220.5
    Long-term debt            90.4              75.3             40.6
    Cash                      18.3               2.8             46.3
    Distributions
     declared per unit
      Regular              $  1.25           $  1.25          $  1.25
      Special                    -                 -             0.23
    -------------------------------------------------------------------------

    (1) Reflects a $7.6 million non-cash charge resulting from the enactment
        of new taxes on income trusts commencing in 2011. This $7.6 million
        future income tax provision has reduced the Fund's earnings per unit
        for 2007 (basic and diluted) from $1.17 to $0.91.

    Fourth Quarter Results

    (unaudited)
    Quarters ended December 31
    (in millions except per unit amounts)           2007            2006
    -------------------------------------------------------------------------
    Revenue - transportation services        $ 103.3   100%   $ 103.6  100.0%
            - fuel surcharges                   15.2             12.0
    -------------------------------------------------------------------------
    Revenue - total                            118.5            115.6
    -------------------------------------------------------------------------
    Operating expenses net of fuel surcharges   80.3  77.7       80.6   77.8

    Selling, general and administration
     expenses                                   10.6  10.3       10.6   10.2
    -------------------------------------------------------------------------
    EBITDA                                      12.4  12.0       12.4   12.0
    Amortization of property and equipment       3.1   3.0        3.5    3.4
    Amortization of intangible assets            1.0   1.0        0.6    0.6
    Net interest expense                         1.2   1.2        1.0    1.0
    -------------------------------------------------------------------------
    EBT                                          7.1   6.8        7.3    7.0
    Income tax provision - Current              (0.1) (0.1)         -
                         - Future               (0.3) (0.3)      (0.5)  (0.5)
    -------------------------------------------------------------------------
    Net earnings                             $   7.5   7.2%   $   7.8    7.5%
    -------------------------------------------------------------------------
    Earnings per unit - basic and diluted    $  0.26          $  0.27
    -------------------------------------------------------------------------

    RESULTS FROM CONTINUING OPERATIONS

    Acquisitions generated additional revenues from transportation services
("revenue") of $53.7 million ($3.2 million in the fourth quarter of 2007) and
additional earnings before tax and discontinued operations ("EBT") of $6.2
million ($0.6 million in the fourth quarter of 2007) compared to the same
periods in 2006. In addition, management of the Fund spent considerable time
negotiating with and securing new customers. The Fund was also awarded new
work from existing customers during the year. These positive impacts have been
offset by several significant events and circumstances. In August 2007, UPM, a
major customer of the Fund, closed down its plant in Eastern Canada. Revenues
in 2007 from this customer were approximately $11.2 million (2006 revenues -
$10.0 million) and amounted to $3.6 million in the fourth quarter of 2006.
Management has been soliciting new business to replace this lost revenue. The
Fund has closed several underperforming operations dating back to late 2006.
The closures included terminals located in Regina SK, Hamilton ON, Milton ON,
Woodstock NB and Winnipeg MB. The effect of these closures was to reduce
revenues in 2007 by $15.2 million compared to 2006 ($4.3 million in the fourth
quarter of 2007).
    The Fund has also been adversely affected by a reduction in volumes of
export shipments to the U.S. caused by the weakening of both the American
economy and the U.S. dollar. Approximately 25% of the Fund's revenues are
billed in U.S. dollars. The stronger Canadian dollar has resulted in a
reduction in the value of the U.S. dollar denominated revenues by
approximately $6.3 million in 2007. The Fund has some natural hedges in the
form of U.S. dollar expenses, however, the majority of the Fund's expenses are
incurred in Canadian funds. Management mitigates this risk by entering into
foreign exchange forward contracts and through customer negotiations. The Fund
has converted some customers to Canadian dollar-based billing from U.S. dollar-
    based billing and has adjustment clauses with many customers that
automatically revise freight rates as exchange rates fluctuate.
    The Fund's operating expense percentage has remained relatively constant
in 2007 compared to 2006. Reduced empty miles, most notably in the Fund's van
operations, and the impact of the Fund's less than truckload (LTL) operation
acquired in the fourth quarter of 2006 have offset the effects of pricing
pressure. This LTL operation has lower operating costs but higher selling,
general and administration expenses ("SG&A") as a percentage of revenue
compared to the Fund's other operations.
    Acquisitions added $4.7 million (2006 - $4.3 million) to SG&A expenses
during the year ($0.2 million in the fourth quarter of 2007). In 2007, the
Fund recognized a foreign exchange loss of $0.4 million (2006 - gain of $0.1
million) which included an unrealized gain on forward contracts of $0.6
million. Foreign exchange losses in the fourth quarter of 2007 amounted to
$0.2 million (2006 - exchange gain of $0.4 million).
    Net interest expense increased due to the higher average debt levels in
2007. This increase was largely caused by the acquisitions made in the second
half of 2006 and also due to purchases of property and equipment.
    Amortization of intangibles increased in 2007 primarily due to having a
full year's amortization from the acquisitions made in the second half of
2006.
    On June 22, 2007, federal legislation (the "SIFT Rules") received royal
assent. This has caused publicly-traded income trusts and partnerships to be
subject to income taxes in the same manner as corporations commencing on
January 1, 2011. Accordingly, the Fund was required to recognize a non-cash,
future income tax provision of $7.6 million ($0.26 per unit) in 2007.

    Summary of Quarterly Results

    (unaudited)                          ------------------------------------
    (in millions except for                  First Quarter     Second Quarter
     per unit amounts)                       2007     2006     2007     2006
    -------------------------------------------------------------------------
    Revenue - transportation services     $ 106.4  $  94.6  $ 111.2  $ 102.2
            - fuel surcharges                13.0     12.9     14.6     15.4
    -------------------------------------------------------------------------
    Revenue - total                       $ 119.4  $ 107.5  $ 125.8  $ 117.6
    -------------------------------------------------------------------------
    Net earnings                          $   8.1  $   9.7  $   1.5  $  10.3
    -------------------------------------------------------------------------
    Earnings per unit - basic and diluted $  0.28  $  0.34  $  0.05  $  0.36
    -------------------------------------------------------------------------

    (unaudited)                          ------------------------------------
    (in millions except for                  Third Quarter    Fourth Quarter
     per unit amounts)                       2007     2006     2007     2006
    -------------------------------------------------------------------------
    Revenue - transportation services     $ 108.2  $  99.5  $ 103.3  $ 103.6
            - fuel surcharges                13.9     14.9     15.2     12.0
    -------------------------------------------------------------------------
    Revenue - total                       $ 122.1  $ 114.4  $ 118.5  $ 115.6
    -------------------------------------------------------------------------
    Net earnings                          $   9.1  $   7.9  $   7.5  $   7.8
    -------------------------------------------------------------------------
    Earnings per unit - basic and diluted $  0.32  $  0.28  $  0.26  $  0.27
    -------------------------------------------------------------------------

    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 $49.0 million in 2007 compared to
$49.6 million in 2006. This decline was primarily due to the decrease in net
income.
    Non-cash working capital items have increased in 2007 due principally to
a decrease in accounts payable and accrued liabilities. Accounts payable and
accrued liabilities decreased as a result of settlement of liabilities related
to acquisitions made in the latter part of 2006. Fourth quarter business
activity levels in 2007 were lower than in 2006. This reduced amounts owing to
owner-operators and partner carriers by approximately $1.0 million. Accounts
receivable have decreased due to the settlement of a non-trade receivable
related to acquisitions, of approximately $2.0 million.
    Capital expenditures made by the Fund decreased in 2007 compared to 2006.
Capital expenditures in 2006 were higher as the Fund purchased equipment to
service the Alberta market and acquired equipment in advance of changes to new
trailing equipment regulations. The slowdown in the economy also reduced the
necessity to replace some equipment in the short-term. The Fund has continued
to invest in equipment for its Alberta operations, purchasing $1.5 million of
rolling stock in 2007. The Fund has also expended $1.7 million to meet
specialized requirements for customers in the Fund's bulk operations. The new
multi-axle equipment purchased in 2006 prior to the implementation of changes
in regulations governing weights and dimensions have been deployed in the tank
operations. Proceeds from the sale of property and equipment in 2007 were
higher than normal. During 2007, proceeds of $1.3 million were generated from
the sale of real estate resulting from terminal closures. In addition, $1.0
million resulted from the sale of a small bulk operation.
    The Fund drew down the remaining $16 million of term debt prior to the
expiry of its availability in November 2007. These funds are being held in an
interest bearing account until a suitable acquisition or growth opportunity
arises.
    The Fund's dividend reinvestment plan ("DRIP") was suspended effective in
October 2007. This reduced the funds received from the issuance of units in
2007 to $4.9 million (2006 - $6.4 million). The DRIP was reinstated in January
2008. The Fund also exercised part of its normal course issuer bid and
repurchased units during 2007 at a cost of $ 3.9 million (2006 - $1.3
million).

    Cash Distributions
                                     ----------------------------------------
    (unaudited)                          Three
    Periods ended December 31           months           Twelve months
    (in thousands)                        2007      2007      2006      2005
    -------------------------------------------------------------------------
    Cash flow from operating
     activities(1)                    $ 11,800  $ 46,597  $ 42,392  $ 39,813
    Net earnings                         7,507    26,225    35,789    28,512
    Cash distributions declared to
     unitholders(2)                      8,986    36,033    35,670    41,512
    -------------------------------------------------------------------------

    Excess (shortfall) of cash flows
     from operating activities over
     distributions declared           $  2,814  $ 10,564  $  6,722  $ (1,699)
    Excess (shortfall) of net earnings
     over distributions declared      $ (1,479) $ (9,808) $    119  $(13,000)
    -------------------------------------------------------------------------

    (1) Includes changes in non-cash working capital balances.
    (2) Includes a special distribution of $6.5 million declared in 2005, to
        offset the unitholders' potential income tax consequences arising
        from the disposal of the Fund's school bus business.

    The shortfall of net earnings over distributions declared does not
reflect an economic return of capital. The shortfall in 2007 is comprised
principally of two no-cash expenses: a future tax charge of $7.6 million and
amortization of intangibles of $3.9 million.

    UNITHOLDER DISTRIBUTIONS

    Distributable Cash
    (unaudited)
    Periods ended
     December 31           --------------------------------------------------
    (in thousands except        Three months        Twelve months
     per unit amounts)          2007      2006      2007      2006      2005
    -------------------------------------------------------------------------
    Cash flow from operating
     activities             $ 11,800  $ 11,808  $ 46,597  $ 42,392  $ 39,813
    Net change in non-cash
     working capital             527       (79)    2,354     7,174      (242)
    Proceeds from sale of
     property and equipment
     excluding land            2,324     2,485     7,363     4,888     4,503
    Asset retirement
     obligations - settlements    (3)     (150)      (55)     (250)     (140)
    Maintenance capital
     expenditures             (2,893)   (4,224)   (6,707)  (10,056)   (6,661)
    -------------------------------------------------------------------------
    Distributable cash from
     continuing operations
     before land proceeds     11,755     9,840    49,552    44,148    37,273
    Distributable cash earned
     from discontinued
     operations                    -         -         -         -     3,834
    -------------------------------------------------------------------------
    Total distributable
     cash earned before
     land proceeds            11,755     9,840    49,552    44,148    41,107
    Proceeds from sale of
     land                          -         -         -     3,717         -
    -------------------------------------------------------------------------
    Distributable cash
     earned                   11,755     9,840    49,552    47,865    41,107
    -------------------------------------------------------------------------
    Distributions declared
    Regular                    8,986     8,955    36,033    35,670    35,011
    Special                        -         -         -         -     6,501
    -------------------------------------------------------------------------
                               8,986     8,955    36,033    35,670    41,512
    -------------------------------------------------------------------------
    Surplus of distributable
     cash earned vs.
     regular distributions
     declared               $  2,769  $    885  $ 13,519  $ 12,195  $  6,096
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Distributable cash
     earned per unit from:
    Continuing operations   $   0.41  $   0.34  $   1.72  $   1.55  $   1.33
    Proceeds from sale of
     land                          -         -         -      0.13         -
    Discontinued operations        -         -         -         -      0.14
    -------------------------------------------------------------------------
                                0.41      0.34      1.72      1.68      1.47
    Distribution declared
     per unit - regular         0.31      0.31      1.25      1.25      1.25
    -------------------------------------------------------------------------
    Surplus of distributable
     cash earned vs.
     regular distributions
     declared               $   0.10  $   0.03  $   0.47  $   0.43  $   0.22
    -------------------------------------------------------------------------
    Weighted average number
     of units outstanding     28,749    28,644    28,826    28,513    27,980
    -------------------------------------------------------------------------
    Capital expenditures
     - continuing operations
    Maintenance capital
     expenditures           $  2,893  $  4,224  $  6,707  $ 10,056  $  6,661
    Growth capital
     expenditures              1,620     2,296     5,711    15,707     9,769
    -------------------------------------------------------------------------
    Total capital
     expenditures           $  4,513  $  6,520  $ 12,418  $ 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, 2007,
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".

    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 amounts 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 the
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.

    PRODUCTIVE CAPACITY
    Definition

    The Fund's productive capacity is a function of the following service
modes:

    -  Tractors and trailers owned or leased by the Fund
    -  Tractors and trailers of owner-operators under contract with the Fund
    -  Partner carriers under contract with the Fund

    The Fund's capital requirements are affected by each of the foregoing
service modes. In addition, capital requirements vary by the type of trailer
used within each of Contrans' operating divisions. For example, a dry van
trailer can cost between $25,000 and $40,000 whereas a pneumatic tank trailer
can cost more than $150,000.

    Management Strategy

    The Fund generally prefers to utilize owner-operators' tractors over
company tractors. Owner-operators own their own tractors providing the Fund
with equipment that it would otherwise have to lease or purchase. Some owner-
operators also own their own trailers. Accordingly, these individuals are
effectively a source of capital as well as providers of freight-hauling
capacity. In addition, owner-operators' goals are generally well-aligned with
those of the Fund. As a result, the Fund is very focused on recruiting and
retaining qualified owner-operators.
    The Fund is also focused on maintaining good working relationships with
partner carriers that are safe, provide reliable service and have adequate
insurance coverage. The Fund is often an important source of revenue for these
carriers who, in turn, provide service to the Fund's customers when the Fund
cannot provide its own equipment or when it is more efficient to make use of
partner carrier capacity.

    Financing Strategy

    The Fund prefers to lease rather than purchase tractors and certain types
of trailers due to the risk associated with fluctuations in the market for
used equipment. Terms of tractor leases usually coincide with engine warranty
periods to protect the Fund from costly repairs.

    LIQUIDITY AND CAPITAL RE

SOURCES (unaudited) As at December 31, 2007 (in millions) ------------------------------------------------------------------------- Cash and cash equivalents $ 18.3 Operating line cash available $ 30.0 Current ratio 1.9:1 Total debt (including future tax obligations) to equity ratio 1.1:1 ------------------------------------------------------------------------- The Fund requires working capital to meet day-to-day operating activities, to fund maintenance capital expenditures and to pay distributions. In 2008, 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. Senior secured notes amounting to $37.5 million were otherwise repayable on December 15, 2008. However, on February 27, 2008 the Fund entered into an agreement, under substantially the same terms and conditions, to renew $30.0 million of this amount for a further term of seven years. PROPERTY AND EQUIPMENT (unaudited) Owned Leased Owner-operated Total ------------------------------------------------------------------------- Tractors 214 451 792 1,457 Trailers 1,644 611 129 2,384 Major office and terminal locations 15 5 - 20 ------------------------------------------------------------------------- TAX ATTRIBUTES OF DISTRIBUTIONS The tax attributes of the distributions made to holders of the Fund's subordinate voting trust units can be found on the Fund's website at www.contrans.ca under Investor Relations. CONTRACTUAL OBLIGATIONS (unaudited) (in $ millions) 2008 2009 2010 2011 2012 Thereafter Total ------------------------------------------------------------------------- Long-term debt 7.8 0.4 0.1 - - 82.1 90.4 Lease obligations 14.7 11.2 7.1 2.0 0.4 - 35.4 ------------------------------------------------------------------------- Total 22.5 11.6 7.2 2.0 0.4 82.1 125.8 ------------------------------------------------------------------------- OUTSTANDING UNITS (unaudited) As at January 31, 2008 (in thousands) ------------------------------- Subordinate Voting Trust units 22,471 Class A LP units 4,810 Class B LP units 1,468 ------------------------------- Total 28,749 ------------------------------- NORMAL COURSE ISSUER BID The Fund repurchased 0.4 million of its outstanding Subordinate Voting Trust Units at a cost of $3.9 million during 2007. The units repurchased pursuant to the bid were 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 for doubtful accounts performed and a general provision is established based on past performance. ------------------------------------------------------------------------- Goodwill and long-lived assets Based on expected future cash - impairment testing flows. 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 intangible Based on past performance. assets - useful lives ------------------------------------------------------------------------- Accrued liabilities - Accruals for settlement matters involving litigation established 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 The Fund has adopted the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 1530, Comprehensive Income; CICA Handbook Section 3251, Equity; CICA Handbook Section 3855, Financial Instruments - Recognition and Measurement; CICA Handbook Section 3861, Financial Instruments - Disclosure and Presentation; and CICA Handbook Section 3865, Hedges. These new Handbook Sections, which apply to fiscal years beginning on or after October 1, 2006, provide comprehensive requirements for the recognition and measurement of financial instruments, as well as standards on when and how hedge accounting may be applied. The adoption of CICA Handbook Section 3855, has reduced each of other current assets and long-term loans by $0.5 million at December 31, 2007 and has resulted in $0.1 million being reclassified from selling, general and administration expenses to interest expense for the year ended December 31, 2007. Financing fees and related transaction costs are offset against long- term debt and charged against income using the effective interest method over the life of the long-term debt. FINANCIAL INSTRUMENTS The Fund from time to time enters into foreign exchange contracts to manage its net exposure to currency fluctuations against the U.S. dollar. As at December 31, 2007, the Fund had contracts with an aggregate value of U.S. $10.4 million to sell U.S. funds throughout the first five months of 2008. The contracts expire on a monthly basis over the period and require the Fund to sell U.S. dollars at rates between $1.077 and $0.9325. At December 31, 2007, the net fair value of these contracts comprised an asset of CAD $0.6 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 U.S. 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 protect 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 U.S. dollar cash flow. Management manages this risk through foreign exchange contracts, denominating equipment leases in U.S. dollars and through customer negotiations. Changes in the relative value of the Canadian dollar against the U.S. 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 arising 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 are diminished. Rapid fluctuations in fuel prices, moreover, 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, 2007, approximately 97% 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 system of internal controls has been documented at all material operating divisions of the Fund. 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, 2007 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 year ended December 31, 2007, 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 2007, the Fund paid $6.1 million to Peterbilt of Ontario Inc., a company controlled by the Chairman of the Fund, for tractor repairs, vehicle maintenance and lease costs. In addition, the Fund also leased certain premises to Peterbilt of Ontario Inc. in 2007 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 facilitates a 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, 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", "estimate", "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. ADDITIONAL INFORMATION Additional information, including the Fund's Annual Information Form, is available at www.sedar.com. February 27, 2008 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands except for per unit amounts) -------------------------- Years ended December 31 2007 2006 ------------------------------------------------------------------------- Revenue $ 485,865 $ 455,246 Operating expenses 386,686 364,875 Selling, general and administration expenses 43,172 38,156 Amortization of property and equipment 12,854 13,388 Amortization of intangible assets 3,881 2,238 ------------------------------------------------------------------------- 39,272 36,589 Net interest expense (income) - long-term 5,113 3,002 - short-term (92) (635) ------------------------------------------------------------------------- Earnings before Gain on Sale of Land and Income Taxes 34,251 34,222 Gain on sale of land (Note 17) - 2,867 ------------------------------------------------------------------------- Earnings before Income Taxes 34,251 37,089 Income tax provision (Note 8): Current 1,129 545 Future 6,897 755 ------------------------------------------------------------------------- 8,026 1,300 ------------------------------------------------------------------------- Net Earnings and Comprehensive Income $ 26,225 $ 35,789 ------------------------------------------------------------------------- Earnings per unit - basic $ 0.91 $ 1.26 - diluted $ 0.91 $ 1.25 Weighted average number of units outstanding (Note 15) - basic 28,826 28,513 - diluted 28,826 28,643 ------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (in thousands) -------------------------- Years ended December 31 2007 2006 ------------------------------------------------------------------------- Retained Earnings - Beginning of Year $ 18,975 $ 19,629 Net earnings 26,225 35,789 Premium paid on units repurchased (1,787) (773) Distributions declared (36,033) (35,670) ------------------------------------------------------------------------- Retained Earnings - End of Year $ 7,380 $ 18,975 ------------------------------------------------------------------------- The accompanying notes are an integral part of these statements. CONSOLIDATED BALANCE SHEETS (in thousands) -------------------------- As at December 31 2007 2006 ------------------------------------------------------------------------- Assets Current Assets Cash and cash equivalents (Note 7) $ 18,301 $ 2,844 Accounts receivable 54,599 55,615 Other current assets 6,021 6,389 ------------------------------------------------------------------------- 78,921 64,848 Property and Equipment (Note 5) 107,295 112,747 Intangible Assets (Note 6) 22,905 26,314 Goodwill 61,478 56,987 ------------------------------------------------------------------------- $ 270,599 $ 260,896 ------------------------------------------------------------------------- Liabilities and Unitholders' Equity Current Liabilities Accounts payable and accrued liabilities $ 31,191 $ 35,138 Distributions payable 2,996 3,102 Income taxes payable 417 87 Current portion of long-term debt (Note 7) 7,806 420 ------------------------------------------------------------------------- 42,410 38,747 Long-Term Debt (Note 7) 82,553 74,914 Asset Retirement Obligations 1,192 1,029 Future Income Taxes (Note 8) 15,660 8,763 ------------------------------------------------------------------------- 141,815 123,453 ------------------------------------------------------------------------- Unitholders' Equity (Note 9) Contributed surplus 744 663 Trust units 120,660 117,805 Retained earnings 7,380 18,975 ------------------------------------------------------------------------- 128,784 137,443 ------------------------------------------------------------------------- $ 270,599 $ 260,896 ------------------------------------------------------------------------- Commitments and contingencies (Notes 10 and 11) 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) -------------------------- Years ended December 31 2007 2006 ------------------------------------------------------------------------- Cash Provided by (Used in) Operating Activities Net earnings $ 26,225 $ 35,789 Items not affecting cash: Unit-based compensation expense (Note 9) 94 288 Unrealized foreign exchange (gain) loss (Note 12) (553) 64 Long-term debt - accretion 136 - Asset retirement obligations - accretion 54 48 Amortization of property and equipment 12,854 13,388 Amortization of intangible assets 3,881 2,238 Future income taxes 6,897 755 Gain on sale of land (Note 17) - (2,867) Gain on sale of equipment (637) (137) ------------------------------------------------------------------------- 48,951 49,566 Change in non-cash working capital (Note 14) (2,354) (7,174) ------------------------------------------------------------------------- 46,597 42,392 ------------------------------------------------------------------------- Investing Activities Expended on acquisitions (Note 4) (6,423) (64,772) Asset retirement obligations - settlements (55) (250) Proceeds on sale of land (Note 17) - 3,717 Proceeds on sale of equipment (Note 16) 7,363 4,888 Purchase of property and equipment (12,418) (25,763) ------------------------------------------------------------------------- (11,533) (82,180) ------------------------------------------------------------------------- Financing Activities Distributions paid - regular (36,139) (35,514) - special - (6,501) Proceeds from long-term debt 16,099 34,041 Repayment of long-term debt (622) (789) Repurchase of trust units (Note 9) (3,850) (1,277) Issuance of trust units (Note 9) 4,905 6,413 ------------------------------------------------------------------------- (19,607) (3,627) ------------------------------------------------------------------------- Increase (decrease) in Cash and Cash Equivalents 15,457 (43,415) Cash and Cash Equivalents - Beginning of Year 2,844 46,259 ------------------------------------------------------------------------- Cash and Cash Equivalents - End of Year $ 18,301 $ 2,844 ------------------------------------------------------------------------- The accompanying notes are an integral part of these statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2007 and 2006 (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 is based in Canada and operates in a single industry segment, freight transportation. 2. CHANGES IN ACCOUNTING POLICIES The Fund has adopted the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 1530, Comprehensive Income; CICA Handbook Section 3251, Equity; CICA Handbook Section 3855, Financial Instruments - Recognition and Measurement; CICA Handbook Section 3861, Financial Instruments - Disclosure and Presentation; and CICA Handbook Section 3865, Hedges. These new Handbook Sections, which apply to fiscal years beginning on or after October 1, 2006, provide comprehensive requirements for the recognition and measurement of financial instruments, as well as standards on when and how hedge accounting may be applied. Under these new standards, all financial instruments are classified into one of the following five categories: held for trading, held-to-maturity investments, loans and receivables, available-for-sale financial assets or other financial liabilities. All financial instruments, including derivatives, are included on the consolidated balance sheet and are measured either at fair market value, with the exception of loans and receivables, held-to-maturity investments and other financial liabilities which are measured at amortized cost. Subsequent measurement and recognition of changes in fair value of financial instruments depend on their initial classification. Held for trading financial investments are measured at fair value and all gains and losses are included in net income in the period in which they arise. Available-for-sale financial instruments are measured at fair value with revaluation gains and losses included in other comprehensive income until the assets are removed from the balance sheet. The standards also require derivative instruments to be recorded as either assets or liabilities measured at their fair value unless exempted from derivative treatment as a normal purchase and sale. Certain derivatives embedded in other contracts must also be measured at fair value. All changes in the fair value of derivatives are recognized in earnings unless specific hedge criteria are met, which requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. Upon adoption of these new standards, the Fund has designated its financial instruments as follows: cash and cash equivalents as held for trading, accounts receivable as loans and receivables, and accounts payable and accrued liabilities, distributions payable and long-term debt as other financial liabilities. The Fund classifies derivative financial instruments which have not been designated in a hedging relationship as held for trading and values them at fair value each period with changes in fair value recorded in earnings. The adoption of these standards by the Fund has reduced both prepaid expenses and long term loans by $0.5 million at December 31, 2007 and has resulted in a nominal amount being reclassified from selling, general and administration expenses to interest expense for the year ended December 31, 2007. Financing fees and related transaction costs are offset against long-term debt and charged against income using the effective interest method over the life of the long-term debt. 3. 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 the residual amount that results when the purchase price of an acquired business exceeds the sum of the amounts allocated to the assets acquired, less liabilities assumed, based on their fair values. 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, with finite lives, 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 approach and accordingly the change in the obligation due to the passage of time is recognised 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 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. Under the SIFT rules, (see note 8) the Fund is also required to recognize future income tax assets and liabilities with respect to the temporary differences between the carrying amount and the tax bases of its assets and liabilities and those of its flow-through entities that are expected to reverse in or after 2011. 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 earnings. HEDGING RELATIONSHIPS The Fund enters into foreign exchange contracts periodically to hedge against its U.S. dollar-denominated revenues. These contracts are marked to market with the related gains or losses included in earnings for each reported period. 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 9. Upon the exercise of options consideration received is recorded as trust units. In addition, the value of the options, at the grant date, is recorded as trust units and offset by a reduction of contributed surplus. EARNINGS PER UNIT Basic earnings per unit is computed by dividing net earnings by the weighted average trust units outstanding during the year. Diluted earnings per unit is similarly computed except that the weighted average units outstanding are increased to include additional trust 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 trust 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 earnings 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, future income taxes and asset retirement obligations. 4. ACQUISITIONS 2007 Marco ECL Cornerstone Firm Other Total ------------------------------------------------------------------------- Accounts receivable $ 706 $ - $ - $ - $ - $ 706 Other current assets 8 - - - - 8 Property and equipment 1,147 - - - 199 1,346 Intangible assets Customer relationships 200 - - - 80 280 Non-competition agreements 282 - - - 40 322 Goodwill - 1,694 2,200 667 - 4,561 ------------------------------------------------------------------------- Fair value of assets acquired 2,343 1,694 2,200 667 319 7,223 ------------------------------------------------------------------------- Accounts payable & accrued liabilities 781 - - - 19 800 ------------------------------------------------------------------------- Fair value of liabilities assumed 781 - - - 19 800 ------------------------------------------------------------------------- $ 1,562 $ 1,694 $ 2,200 $ 667 $ 300 $ 6,423 ------------------------------------------------------------------------- Consideration Cash $ 1,562 $ 1,694 $ 2,200 $ 667 $ 300 $ 6,423 ------------------------------------------------------------------------- ------------------------------------------------------------------------- % Shares Service Entity acquired Date Acquired Base Area ------------------------------------------------------------------------- Marco Transport Inc. ("Marco") 1-Mar-07 100% Quebec Bulk ------------------------------------------------------------------------- Narum Transport Ltd. Assets ("Other") 24-Sep-07 acquired Alberta Tank ------------------------------------------------------------------------- Acquisitions have been accounted for using the purchase method. The results of operations from the acquisition date have been included in these consolidated financial statements. The purchase price and fair value allocation are subject to final adjustments. Due to the achievement of certain performance objectives, additional consideration was paid to the former owners of Elgin Cartage Limited ("ECL"), a company acquired by the Fund in 2004. Similarly additional consideration was paid to the former owners of Cornerstone Logistics Inc. ("Cornerstone"), a company acquired by the Fund in 2006 and to the former owners of Firm Transportation and Distributions Services Inc. ("Firm"), a company acquired by the Fund in 2004. 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 Firm Other 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 21,776 667 550 38,669 ----------------------------------------------------------------- Fair value of assets acquired 38,159 667 1,460 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 $ 667 $ 1,265 $64,772 ----------------------------------------------------------------- Consideration Cash $33,087 $ 667 $ 1,265 $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") 4-Apr-06 100% Alberta Bulk ------------------------------------------------------------------------- Vanadium Machines Ltd. ("Other") 26-Apr-06 100% Ontario Bulk ------------------------------------------------------------------------- Future Transfer Co. Assets Inc. ("Future") 1-May-06 acquired Ontario Tank ------------------------------------------------------------------------- B.I.Z. Mechanical Inc. Assets ("Other") 2-Jun-06 acquired Ontario Bulk ------------------------------------------------------------------------- Cornerstone Logistics Ontario & Inc. ("Cornerstone") 5-Sep-06 100% New York Logistics ------------------------------------------------------------------------- Garcha Transport Inc. Assets ("Garcha") 3-Nov-06 acquired Ontario Waste ------------------------------------------------------------------------- Tripar Transportation Ontario & Inc. ("Tripar") 6-Nov-06 100% New Jersey Van ------------------------------------------------------------------------- An additional $3 million of consideration is payable contingent upon Tripar achieving certain performance objectives over the next year. Additional contingent consideration is also payable to the former owners of Cornerstone based upon this operation's financial performance. Any additional consideration that is paid will be allocated to goodwill. 5. PROPERTY AND EQUIPMENT Accumulated 2007 Cost amortization Net ------------------------------------------------------------------------- Land $ 8,243 $ - $ 8,243 Buildings 24,525 7,790 16,735 Rolling stock and other 131,885 49,568 82,317 ------------------------------------------------------------------------- $ 164,653 $ 57,358 $ 107,295 ------------------------------------------------------------------------- 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 ------------------------------------------------------------------------- 6. INTANGIBLE ASSETS Accumulated 2007 Cost amortization Net ------------------------------------------------------------------------- Customer relationships $ 22,775 $ 5,970 $ 16,805 Non-competition agreements 8,994 2,894 6,100 ------------------------------------------------------------------------- $ 31,769 $ 8,864 $ 22,905 ------------------------------------------------------------------------- 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 ------------------------------------------------------------------------- 7. LONG-TERM DEBT 2007 2006 ------------------------------------------------------------------------- Senior secured notes payable with fixed interest rates between 6.5% and 6.6% $ 87,048 $ 71,500 Equipment finance contracts with interest rates between 8.0% and 9.2% 879 1,254 Other unsecured loans with varying interest rates and due dates 2,432 2,580 ------------------------------------------------------------------------- 90,359 75,334 Less: current portion 7,806 420 ------------------------------------------------------------------------- $ 82,553 $ 74,914 ------------------------------------------------------------------------- The senior secured notes payable are stated net of financing transaction costs of $0.5 million and provide for monthly payments of interest only. On February 27, 2008 the Fund entered into an agreement, under substantially the same terms and conditions, to renew $30.0 million of its existing $37.5 million credit facility for another term of seven years at a rate, to be fixed in the future, based on Government of Canada bond rates. Other terms and covenants of the existing facility will remain unchanged. The principal repayments are due on December 15, 2008 ($7.5 million), October 15, 2016 ($50 million) and December 15, 2017 ($30.0 million). Liens on rolling stock with a net book value of approximately $75 million have been provided as security for the senior secured notes. As at December 31, 2007 and 2006, 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: 2008 $ 7,806 2009 388 2010 93 2011 - 2012 - Thereafter 82,072 ------------------------------------------------------------------------- $ 90,359 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS $16 million of the cash and cash equivalents on hand at December 31, 2007 is restricted and may only be used to fund future acquisition of businesses, operating assets or repayment of specified senior secured notes as they mature. 8. INCOME TAXES The following table reconciles the provision for income taxes recorded in the statement of earnings with a statutory income tax rate of 35.0% (2006 - 35.6%): 2007 2006 ------------------------------------------------------------------------- Earnings before income taxes $ 34,251 $ 37,089 ------------------------------------------------------------------------- Computed income tax expense at Canadian statutory rate 11,988 13,204 Reduction of taxes due to taxable income allocated to unitholders (11,691) (10,983) U.S. state taxes 664 329 Change to future Canadian statutory tax rate (265) (250) Change in SIFT rules 7,600 - Reduction of taxes on reorganization - (620) Other (270) (380) ------------------------------------------------------------------------- Income tax provision $ 8,026 $ 1,300 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The tax effects of temporary differences that give rise to future tax assets and liabilities are presented below: 2007 2006 ------------------------------------------------------------------------- Future tax assets Deductible reserves $ (794) $ (765) Issue costs and financing fees (72) (191) Non-capital loss carry forwards - (310) Other (581) (537) Future tax liabilities Property, equipment and intangible assets 13,854 5,491 Impact of off-calendar year end of corporate subsidiary 3,253 5,075 ------------------------------------------------------------------------- Net future income tax liability $ 15,660 $ 8,763 ------------------------------------------------------------------------- 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 currently deducted for income tax purposes. However, on June 22, 2007, legislation (the "SIFT Rules") relating to the federal income taxation of publicly-listed or traded trusts (such as income trusts and real estate investment trusts) and partnerships received royal assent. The SIFT Rules apply to a publicly-traded trust that is a specified investment flow-through entity (a "SIFT") which existed before November 1, 2006 ("Existing Trust") commencing with taxation years ending in 2011. From January 1, 2011, certain distributions attributable to a SIFT will not be deductible in computing the SIFT's taxable income, and the SIFT will be subject to tax on such distributions at a rate that is substantially equivalent to the general tax rate applicable to Canadian corporations. Distributions paid by a SIFT as returns of capital will not be subject to this tax. There may be circumstances where an Existing Trust could lose its transitional relief where its equity capital grows beyond certain dollar limits measured by reference to the Existing Trust's market capitalization at the close of trading on October 31, 2006. The Fund is a SIFT as defined in the Legislation. Accordingly the Fund will be subject to taxes on distributions of certain income earned from investments in its trading partnerships made after 2010. The Fund is also required to recognize future income tax assets and liabilities with respect to the temporary differences between the carrying amount and the tax bases of its assets and liabilities and those of its flow-through entities that are expected to reverse in or after 2011. The impact of this legislation in 2007 was a future income tax expense of $7.6 million. Certain of the Fund's subsidiaries are currently 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. 9. UNITHOLDERS' EQUITY 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, 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 Distribution reinvestment plan 471 4,905 - - Units repurchased (410) (2,050) - - ------------------------------------------------------------------------- Balance at December 31, 2007 22,471 $ 112,772 4,810 $ 6,590 ------------------------------------------------------------------------- Class B LP Units Total ------------------------------------------------------------------------- Units Value Units Value ------------------------------------------------------------------------- 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 Distribution reinvestment plan - - 471 4,905 Units repurchased - - (410) (2,050) ------------------------------------------------------------------------- Balance at December 31, 2007 1,468 $ 1,298 28,749 $ 120,660 ------------------------------------------------------------------------- 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. 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. 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 in the Black-Scholes option pricing model to calculate the fair value of the options on the grant dates and to determine the unit based compensation expense: ------------------------------------------------------------------------- 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 ------------------------------------------------------------------------- Period ended December 31 12 months Years ended December 31 2007 2006 ------------------------------------------------------------------------- Weighted Weighted Average Average Exercise Exercise Units Price Units Price ------------------------------------------------------------------------- Unit options outstanding, beginning of year 2,179 $ 12.21 1,331 $ 11.56 Granted - - 975 13.01 Cancelled (150) 12.00 (46) 11.50 Exercised - - (81) 11.50 ------------------------------------------------------------------------- Unit options outstanding, end of year 2,029 $ 12.23 2,179 $ 12.21 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Unit options exercisable, end of year 1,201 $ 12.01 818 $ 11.90 Amount charged to compensation expense $ 94 $ 288 ------------------------------------------------------------------------- UNITHOLDERS EQUITY Contributed Trust Retained Surplus Units Earnings Total ------------------------------------------------------------------------- Balance at December 31, 2005 $ 413 $ 111,858 $ 19,629 $ 131,900 Net earnings - - 35,789 35,789 Distributions declared - - (35,670) (35,670) Distribution reinvestment plan - 5,482 - 5,482 Options exercised (38) 969 - 931 Unit-based compensation 288 - - 288 Units repurchased - (504) (773) (1,277) ------------------------------------------------------------------------- Balance at December 31, 2006 $ 663 $ 117,805 $ 18,975 $ 137,443 Net earnings - - 26,225 26,225 Distributions declared - - (36,033) (36,033) Distribution reinvestment plan - 4,905 - 4,905 Unit-based compensation 94 - - 94 Units repurchased (13) (2,050) (1,787) (3,850) ------------------------------------------------------------------------- Balance at December 31, 2007 $ 744 $ 120,660 $ 7,380 $ 128,784 ------------------------------------------------------------------------- 10. LEASE COMMITMENTS Future minimum payments under operating leases for rolling stock and property are as follows: 2008 $ 14,747 2009 11,246 2010 7,128 2011 2,008 2012 350 Thereafter 20 ------------------------------------------------------------------------- 11. CONTINGENCIES 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. In the ordinary course of business, the Fund had issued letters of credit amounting to $0.9 million at December 31, 2007. 12. 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 U.S. dollar. As at December 31, 2007, the Fund had contracts with an aggregate value of US $10.4 million to sell US funds throughout the first five months of 2008. The contracts expire on a monthly basis over the period and require the Fund to sell US dollars for CAD Dollars at rates of between $1.077 and $0.9325. As at December 31, 2007, the fair value of these contracts comprised an asset of $0.6 million (2006 - liability of $0.1 million), which is included in accounts receivable in the consolidated balance sheets. a) Credit risk: Credit risk is the risk that a counterparty to a financial instrument will fail to meet their contractual obligations as they fall due. The diversity of the customer base helps limit concentration of credit risk. No single customer accounts for more than 10% of the Fund's revenue. b) Foreign exchange risk: Foreign exchange risk is the risk that the fair value or future cash flow of a financial instrument will fluctuate because of changes in foreign exchange rates. 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. c) Interest rate risk: Interest rate risk is the risk that the value of a financial instrument will change adversely if market interest rates change. Changes in interest rates affect both interest paid on floating rate debt and interest received on surplus cash. As at December 31, 2007, approximately 97% of the Fund's long-term debt had fixed interest rates. d) Liquidity risk: Liquidity risk is the risk that the Fund will not be able to meet its obligations as they fall due. The Fund requires working capital to meet day-to-day operating activities, to fund maintenance capital expenditures and to pay distributions. In 2008, 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. 13. 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: 2007 2006 ------------------------------------------------------------------------- Transactions during the year: Repairs, maintenance and leases $ 6,136 $ 4,247 Rental income 192 186 Equipment and parts purchases - 943 Balances at end of year: Accounts payable 231 277 Accounts receivable 11 10 ------------------------------------------------------------------------- These transactions were carried out in the normal course of business and recorded at exchange amounts, which approximates an arm's length arrangement. 14. CASH FLOW Change in non-cash working capital: 2007 2006 ------------------------------------------------------------------------- Decrease (increase) in accounts receivable $ 2,275 $ (2,256) Decrease (increase) in other current assets (212) 588 Decrease in accounts payable and accrued liabilities (4,747) (5,153) Increase (decrease) in income taxes payable 330 (353) ------------------------------------------------------------------------- Net change in non-cash working capital $ (2,354) $ (7,174) ------------------------------------------------------------------------- Cash paid in respect of: Interest $ 4,847 $ 2,259 Income taxes 790 858 ------------------------------------------------------------------------- 15. EARNINGS PER UNIT The computations for earnings per unit are based on the following: 2007 2006 ------------------------------------------------------------------------- Weighted average number of units outstanding: Basic 28,826 28,513 Effect of unit options - 130 ------------------------------------------------------------------------- Diluted 28,826 28,643 ------------------------------------------------------------------------- 16. SALE OF EQUIPMENT Sale of equipment includes proceeds of $950,000 relating to the sale of a small bulk operation in Calgary, Alberta. The disposal consisted of rolling stock and trailers with a value of $750,000, goodwill with a value of $70,000 and intangibles with a value of $130,000. There was no gain or loss on the disposal. 17. SALE OF LAND During the first quarter of 2006, the Fund sold a vacant parcel of surplus land that was in excess of operating requirements 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. 18. COMPARATIVE FIGURES Certain comparative figures 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

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Contrans Group Inc.

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