Teranet Jun29Y07

8/2/2019 Teranet Jun29Y07

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This report was prepared by an Analyst employed by a Canadian affiliate, BMO Nesbitt Burns Inc., and who is not registered as a research analy

under NYSE/NASD rules. For disclosure statements, including the Analyst's Certification, please refer to pages 19 to 21.

Teranet Income Fund(TF.UN-TSX)

Stock Rating: Market PerformIndustry Rating: Market Perform

June 29, 2007Research CommentToronto, Ontario

David W. Wright(416) [email protected]: Paul Gurney

Price (28-Jun) $9.91 52-Week High $11.0Target Price $10.50 52-Week Low $7.7

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Teranet Income Fund (TF.UN)

Price: High,Low,Close

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Q3 Q4 Q1 Q22006 2007

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150

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150TF.UN Relative to S&P/TSX Comp

Last Data Point: June 27, 2007

(FY-Dec.) 2005A 2006A 2007E 2008E

CDPU na $0.61 $0.95 $0.9P/CDPU 10.4x 10.9

CFPU na $0.84 $0.97 $0.9P/CFPU 10.2x 10.2

CF Payout % na 66% 79% 82%EV($mm) na $1,894 $1,908 $1,90EBITDA($mm) na $156.0 $165.0 $165.EV/EBITDA na 12.1x 11.6x 11.6

Quarterly CDPU Q1 Q2 Q3 Q

2005A na na na n2006A na $0.15 $0.27 $0.12007E $0.23 $0.25 $0.26 $0.2

Dividend $0.75 Yield 7.6%Book Value $9.66 Price/Book 1.0

Shares O/S (mm) 155.0 Mkt. Cap ($mm) $1,53Float O/S (mm) 138.0 Float Cap ($mm) $1,36Wkly Vol (000s) 2,492 Wkly $ Vol (mm) $24.Net Debt ($mm) $348.0 Next Rep. Date 24-Jul (E

Automating Ontarios Land Information;Initiating Coverage at Market Perform

The Fund

Teranet is a leading provider of integrated land-based information products andservices. It operates in Ontario and provides access to the Ontario Electronic

Land Registration System through its proprietary software application,

Teraview. This product enables customers to conduct electronic property

registrations as well as title and Writs searches relating to real property.

Teranets 80,000 customers include lawyers, paralegals, real estate brokers and

agents, search houses, title insurers, financial institutions, corporations,

governments, police services, utilities, investigators and appraisers. As of

December 31, 2006, Teranet had approximately 17,650 licensed Teraview users.

Teranet generates revenues through Land and Writs registrations and searches;

Teraview software licensing fees and valued-added fees; and value-added

services.

Forecasts

We forecast 2007, 2008 and 2009 revenues of $238 million, $242 million and

$255 million; EBITDA of $165 million, $165 million and $174 million; and

distributable cash per unit of $0.95, $0.91 and $0.97, respectively

Valuation

Our $10.50 target price is derived by applying 10x Price/Cash Flow and 14x

EV/EBITDA to our 2009 estimates. This target price represents a 10% yield

(non-taxed) on our 2009 distributable cash estimate.

Recommendation

Considering our forecasts, we are initiating coverage of Teranet with a

Market Perform rating and a 2009 target price of $10.50, predominately

based on a 7.7% after-tax yield on the DCPU with a benefit for the present

value of the tax shelter.

First Call Mean Estimates: TERANET INCOME FUND (C$) 2007$0.35; 2008E: $0.33


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BMO Capital Markets Teranet Income Fund

Page 2 June 29, 2007

Company Description

Teranet is a leading provider of integrated land-based information products and services

Headquartered in Toronto, Ontario, Teranet operates in Ontario and provides access to the

Ontario Electronic Land Registration System (ELRS) through its proprietary software

application, Teraview. This product enables customers to conduct electronic propertyregistrations as well as title and Writs searches relating to real property (searches for claims

against the property). Teranets 80,000 customers include lawyers, paralegals, real estate

brokers and agents, search houses, title insurers, financial institutions, corporations

governments, police services, utilities, investigators and appraisers. As of December 31, 2006

Teranet had approximately 17,650 licensed Teraview users.

Teranet has the exclusive licence (until March 31, 2017) from the Province of Ontario

(Province) to access the data in and operate the ELRS, and to create and market value-added

products and services in connection with the ELRS. If the exclusive licence is not renewed

Teranet will have a perpetual non-exclusive right to access and use the ELRS. Additionally

Teranet has an exclusive licence from the Province of Ontario to access and operate the Writs

System in Ontario, and to create and market value-added products and services in connection

with the Writs System, until and including March 31, 2017. If the exclusive licence is not

renewed, Teranet has a non-exclusive right to provide remote access to the Writs until June 18

2047.

Teranet generates revenues through:

1. Land and Writs registrations and searches;

2. Teraview software licensing fees and valued-added fees; and

3. value-added services.

The transformation of electronic land information from paper and microfilm-based records is anon-revenue activity performed by Teranet under contract to the Ontario Ministry of

Government Services. The transformation is funded by Teranet through revenue earned, debt

financing and some funds from the government (the government has contributed $35 million of

the total of $90 million required to fund the next phase of transformation, the Continuation

Plan, which is set to commence in mid-2008). Although cash outlays by the company are

expected to be incurred until full automation is achieved in 2011, the implementation expense i

amortized until the end of the exclusive licence term in 2017.

Ownership Structure

On June 16, 2006, the fund successfully completed its IPO of 70,000,000 units at $10 per unit

On July 10, 2006, the fund sold an additional 6.2 million units through the exercise of the over

allotment option by its underwriters. (A total of 10.5 million units were available through the

over-allotment). Total gross proceeds including the over-allotment were $762 million, with ne

proceeds (net of underwriting fees and offering expenses) totalling roughly $714.2 million.


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Teranet Income Fund is an unincorporated, open-ended trust established under the laws of the

Province of Ontario. The fund holds a 100% (on a fully diluted basis) interest in Teranet Inc.

Teranet Operations

Teranets operations and revenues can be segmented into six broad segments.

1. Automation and Conversion (non-revenue generating)

The creation of electronic land information records from physical records.

2. Statutory Registrations

Registrations relating to all automated properties whether onsite or remotely.

3. Statutory Search

Electronic searches conducted onsite or remotely.

4. Statutory Writs

Writs searches conducted through Teranet software (excluding province-wide OWL Writs

searches).

5. Teraview Value-Add

Remote access fees received by Teranet in connection with electronic registrations and

searches (onsite or remotely) via Teraview.

6. Other Value-Added ServicesIncludes Writs electronic filing and province-wide OWL Writs searches, and other

revenues.


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Chart 1: Teranet Revenue by Fee Type

Teranet Revenue by Fee Type

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2007 2008 2009 2010 2011 2012

Revnue($MM)

Statutory registrations Statutory search Statutory wr its Teraview fees Other value added services

$106.3

$190.8

$170.3

$137.5

$212.7

Note: 2001-2006 are years ended March 31; 2007-2012 are forecast years ended December 31.

$233.4

$239.0

$268.0$255.0

$242.0$238.0

$282.0$296.0

Source: Teranet

1. Automation and Conversion of Ontarios Parcel Base

Teranet is contracted by the Ontario Ministry of Government Services (MGS) to automate and

convert Ontarios estimated 5.4 million land parcels. Millions of these parcels were converted

by Teranet between 1991 and March 31, 2002. As of December 31, 2006, approximately 4.88

million parcels have been automated, with roughly 520,000 remaining. Teranet estimates tha

the land parcel base will grow to 6.0 million land parcels by 2011.

Automation and conversion enable revenues and are a direct cost to Teranet financed fromrevenues and debt financing to a capped amount. Teranet has retained a $100 million credi

facility (capex facility) to be used primarily for conversion and automation under certain

contracts, while MGS has prepaid $35 million to Teranet for future automation and conversion

activities. Teranat is currently using cash flows from operations to fund the conversions and

has not used the $100 million credit facility.

Beyond 100% automation (which we expect to be achieved in 2010), we forecast parcel base

growth to continue at the historical (since 1973) CAGR of 2.4%, representing roughly 140,000

parcels per year. The CAGR of parcel growth has historically outpaced the CAGR of Ontario

population growth of 1.3%

Teranet suggests that the number of properties has increased due to the increase in newcondominium developments and residential subdivisions, and that a single condominium uni

generally consist of several parcels (dwelling unit, parking space and storage locker).


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2. Statutory Registrations

For the quarter ended December 31, 2006, Statutory Registrations revenues of $27.5 million

decreased from $30.0 million from Q4/05. Statutory Registrations represented 48% of tota

revenues. Registration volumes of 455,698 decreased from 498,874 from Q4/05 as a result of a

decline in Refinancing activity.

The chart below shows that nominal home prices and total registrations appear to be

positively correlated. Intuitively, this makes sense, as higher housing prices induce increased

housing starts, housing permits, housing resales and refinancings, while housing price declines

do not.

Registrations vs. Nominal Home Prices

Source: Cansim, Teranet, BMO Capital Markets

Recent registration trend has indicated a decline in registration activity.

Registration Growth Rate

-10%

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Source: Teranet

0.0 mm

5 mm

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1973

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Registrations

Nominal Home Price in Ontario


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3. Statutory Search

Statutory searches, or searches of parcels in the ELRS, represented 8.6% of revenues for the

year ended December 31, 2006, and grew 7% compared to 2005. Search volumes in the lates

quarter were 587,558, or at 1.44x registration volumes. Teranet estimates that search volumes

have typically tracked at roughly 1.2x registration volumes.

4. Statutory Writs

Statutory Writs are claims, liens or other orders issued by a court or other authority against a

property. Writs filings and searches represented 12% of Teranet revenues for the year

December 31, 2006, and declined by 3% compared to 2005. We believe the Statutory Writ

system to be mature, and therefore to remain reasonably stable.

5. Teraview

Teraview is Teranets software application allowing electronic access to land information and

related systems. Access fees consist of remote access fees received by Teranet in connection

with electronic registrations and searches (onsite or remotely) via Teraview. Teraview fee

represented 20% of revenues for the year ended December 31, 2006, resulting in 8% growth

compared with 2005.

6. Other Value-Added Services

For the year ended December 31, 2006, Other Value Added Services represented 11% of

revenues, and increased by 36% compared with 2005. Leveraging its core business capabilities

creating complementary and related offerings, and offering products to different types of

customers, value-added services represent a potential growth driver for the company.

Strategic Opportunities

1. Parcel Base Growth

We calculate that the number of automated parcels in Ontario has grown between 290,000 and

350,000 parcels per year since 2002. This represents annual increases of 79% in the

automated parcel base available for electronic searches and registrations. Until automation

converges toward 100% (which we estimate will occur at the end of 2010), we forecast annual

increases in Ontarios automated parcel base to be roughly 5%.

Given an increased base of automated land parcels at 5% per annum, under the assumption of

stable registration activity, we would expect electronic search and registration activity to

increase at a similar rate of 5%. As such, we believe that Teranet is somewhat insulated from

negative volatility in the real estate arena to the effect of 5% per annum until 100% automation

is achieved. Beyond 100% automation, we would expect the automated parcel base growth to

increase at historical levels of roughly 2.4% per year, representing roughly 140,000 parcels per

year.


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2. Revenue Diversification

For the trailing 12 months ended December 31, 2006, Statutory Registrations and Statutory

Search represented 48% of Teranets total revenues. Of this revenue base, less than half had a

direct operational exposure to real estate activity (purchase/sale of property) in Ontario. The

remaining portion of this revenue base includes refinancings (changes of lender or terms of

mortgage), mortgage credits (reverse mortgages, second mortgages and lines of credit)maturity discharge (full payment of mortgage), title change transfers (typically after marriage o

death), and other (transfers of easements, liens and application general). Although loosely

correlated with real estate activity, these diverse revenue sources lower Teranets real estate

activity exposure. We would also expect Statutory Writs, Teraview fees and other value-added

services to have a low beta with overall real estate activity.

3. Organic and Acquired Growth

Teranets land information products are best of breed, with Ontario being the only province in

Canada to offer both real-time search and registration. Teranets expertise is recognized

worldwide, having provided consulting, systems integration and knowledge transfer services tointernational clients in Hong Kong, Lebanon, Jamaica, Puerto Rico, Czech Republic and the

Philippines. We would expect Teranet to pursue continued knowledge transfer within Canada

and internationally through acquisitions, joint ventures, consulting and RFP wins.

4. Increased Value-Added Services

Value-added services were $26 million during 2006, representing 11% of consolidated revenues

and representing revenue growth of 36% compared to 2005. Value added services remain a key

area of focus for Teranet over the next few years in order to promote company growth. Given

Teranets diverse customer network, we see opportunity to provide complementary products to

the companys current customer base. For example, Teranet recently developed Unity, an e-

commerce and payment processing infrastructure, which is being used for the online collection

of parking fines, and for online payment processing for hospitals. We would expect Teranet to

leverage its customer base, government relationships and expertise in continued development of

value-added services.

5. Unit Price Support Issuer Bid

Teranet initiated a normal course issuer bid to purchase and cancel up to 5,000,000 million unit

from November 17, 2006, to November 16, 2007. The issuer bid, if employed, would provide

some support should Teranet unit prices decline. As at December 31, 2006, no trust units had

been purchased under the normal course issuer bid. Considering the proposed change in

income tax law for income trusts, we do not expect management to be overly aggressive with a

particular use of funds until the future ownership options are more seriously considered (i.e

should Teranet go private or remain a public company and if so should it acquire other

companies).


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Risks

1. Income Trust Taxation. On October 31, 2006, Canadas Minister of Finance announced a

proposed Tax Fairness Plan that would impose a tax on distributions made by income trust

and limited partnerships. Management has noted that, Teranet will assess the proposed

changes and is monitoring the situation. Teranet will continue to pay its distributions as

planned, and any action it takes will be in the interest of maximizing long-term value for itunitholders. There remains uncertainty as to whether Teranet will continue to operate

under an income trust structure, or convert to an operating business.

2. Aggressive Payout. Teranet has a target payout ratio of 95%. Teranets exclusive licence

agreements provide long-term stability to the companys operations. However, the high

payout ratio exposes stability of cash distributions to shorter-term volatility in operations.

3. Payout Increases Uncertain. Although Teranet has a target payout ratio of 95%, we are

uncertain on the timing of when Teranet will increase its payout to reach the 95% ratio

Teranets current payout ratio currently stands at 82%. Uncertainty as to the strategic

direction of Teranet has likely lowered managements priority on increasing distributions a

this time.

4. Macro Sensitivities. Although Teranet does have a diversified revenue base that lowers its

sensitivity to the real estate market, it does have some exposure to macro variables

including the overall housing market, unemployment rate, economic activity and interes

rates. We believe that Teranets diverse revenue and customer base somewhat insulates its

operations from gradual changes in macro environment variables. However, sudden

changes in the macro environment could adversely affect Teranets operations and resulting

cash flow available for distribution.

5. Limited Ability to Set Fees. Statutory search and registration fees are set by the Province

The prospectus indicates that, the Province has advised that the Province is not

contemplating fee increases. Management has indicated that there have been no feeincreases since 1999. There exists a risk that the government reduces fees, which would

adversely affect Teranets revenues and distributable cash. However, a reduction in fees by

the Province would likely cause Teranet to invoke the Material Adverse Impact clause of

the contract. Therefore, it would seem unlikely that the government would ever move to

reduce fees. In addition,there exists the risk that inflationary cost increases are not offse

by corresponding fee increases. Teraviews fees are set by mutual agreement between

Teranet and the Province. Value-added service fees are set by Teranet.

6. Expiry of Exclusive Terms. Teranet currently retains exclusive licence rights to the ELRS

and Writs until March 31, 2017.Upon expiry of the exclusive period, other parties may be

permitted to offer similar services as Teranet. However, Teranet will retain the non

exclusive rights to the ELRS until 2047, and in perpetuity for the Writs system.

7. Royalty Payments to Begin in 2017. Prior to March 1, 2003, Teranet paid the Ontario

Ministry of Government Services (MGS) a royalty equal to 25% of ELRS registration

revenue, plus generally 5% of other services for which Teranet received fees. Teranet no

longer pays royalties up to and including March 31, 2017.


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After the expiration of the MGS Exclusive Term and the Writs Exclusive Term, each of

which end on March 31, 2017, the company may be required to pay ELRS and Writs

Royalties at rates to be negotiated by Teranet and MGS or Ministry of the Attorney

General, Ontario (MAG).

8. Dissident Shareholder. This shareholder, whose interest amounts to the equivalent of

roughly 6.0 million Teranet Fund units, was made a share purchase offer of $52.5 million

($8.75 per share) based on fair value of the company as a taxable, privately held

corporation. The dissenting shareholder has not accepted the offer. Teranet has retained

cash to pay the fair value of the shares and the costs of any dissent process as determined

by a court. Until the matter is resolved, there remains uncertainly concerning the settlemen

amount.

9. Long-Term Incentive Plans. In the past, Teranet appears to have been generous in

compensating its senior executives with roughly $150 million of compensation to 15

executives under long-term incentive plans over the past five years. The former long-term

incentive plan was cancelled and paid in full prior to the IPO. (A cash payment of $78.5

million was made in Q1/06).

The former incentive plan has been replaced with one based on distributable cash flow per

annum per unit exceeding $0.79 per share.

We would expect incentive compensation to be much less than it has been in the past

Combined with having already been paid a large sum of cash at cancellation of the former

incentive plan, we believe there to be a risk associated with low financial motivation of

Teranet executives. We do note that the prospectus outlines that Mr. Kaplanis has made a

commitment to remain as President and CEO of Teranet for at least one year from April 1,

2006. In the Q4/07 conference call, Mr.Kaplanis indicated that he did not plan to leave any

time soon after the April 1, 2007, date. However, no firm guidance was provided as to how

long he would stay on or if he had any plans in the future to transition out of the role.

Recent Results

On May 10, 2007, Teranet reported Q1/07results. Total revenues were $53.2 million

representing a 2% decline from a year ago. Registration and Writs revenues declined by 7%

and 3%, respectively, while Search revenue increased less than 1%. Teraviews fees and value

added services grew by 5% and 45%, respectively. Registration volumes declined 7%, while

Search volumes displayed the slowest growth in over four years, at 0.8%. These weak growth

rates occurred despite a 1.6% increase in the Provinces parcel base and a 6.8% increase in

Teranets automated parcel base. We attribute the weakness in Search volumes to the recen

decline in Refinancing activity. Refinancing activity represents approximately 25% of Search

and Registration revenues.

EBITDA of $37.3 million increased by 23% year over year. The increase in EBITDA and

margins was due to lower direct expenses, lower incentive expense, as well as lower expense

for R&D and marketing expenses. Distributable cash in the quarter was $35.4 million or $0.23

per unit, exceeding the quarterly distributions declared of $29.059 million or $0.1875 per unit

This resulted in a payout ratio of 83% for the period.


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Page 10 June 29, 2007

Taxation of Distributions

On October 31, 2006, Canadas Minister of Finance announced a proposed Tax Fairness Plan

that would impose a tax on distributions made by income trusts and limited partnerships

Management has noted that, Teranet will assess the proposed changes and is monitoring the

situation. Teranet will continue to pay its distributions as planned, and any action it takes wil

be in the interest of maximizing long-term value for its unitholders. There remains uncertaintyas to whether Teranet will continue to operate under an income trust structure, or convert to an

operating business.

Operating under a trust structure, distributions would be taxed by 31.5% at the trust level

beginning in 2011. Teranet has noted in the past that it has a target payout ratio of 95%, and

that distributions are expected to be 100% taxable. Teranets current payout ratio is 70%. We

are uncertain at this time regarding a timeframe for Teranet to reach its 95% payout ratio.

Capital Expenditures

Maintenance capital expenditures include items such as disk storage devices, network serversand other computer hardware devices. Maintenance capital expenditures have averaged

approximately $5.8 million over the last three fiscal years, which management believes

represents a higher than normal expenditure level due to a recently constructed data centre

Based on Teranets normalized historical annual maintenance capital expenditures

management expects that annual maintenance capital expenditures will be approximately $5

million.

Forecasts

We forecast 2007, 2008 and 2009 revenues of $238 million, $242 million and $255 million

EBITDA of $165 million, $165 million and $174 million; and distributable cash per unit of

$0.95, $0.91 and $0.97, respectively. Our forecasts are summarized below.

Table 1: Forecasts

Forecasts:FYE-Dec. (C$mm) 2006E Q1/07A Q2/07E Q3/07E Q4/07E 2007E Q1/08E Q2/08E Q3/08E Q4/08E 2008E 2009E 2010E 2011E 2012ERevenue $239.0 $53.2 $62.4 $63.9 $58.4 $237.9 $54.0 $63.6 $65.0 $59.6 $242.1 $255.0 $268.3 $282.5 $296.4growth 6% - 2% -2% 0% 2% 0% 1% 2% 2% 2% 2% 5% 5% 5% 5%

Direct Expenses $27.5 $6.1 $6.6 $6.4 $7.0 $26.1 $7.1 $7.1 $6.9 $7.5 $28.6 $31.2 $34.2 $37.6 $41.6Gross Margin $211.5 $47.1 $55.8 $57.5 $51.4 $211.9 $46.9 $56.5 $58.1 $52.0 $213.5 $223.8 $234.0 $244.8 $254.8Operating Expenses $55.1 $9.8 $12.3 $13.3 $11.7 $47.1 $10.1 $12.6 $13.6 $12.0 $48.3 $49.5 $50.7 $51.9 $53.1EBITDA $156.4 $37.3 $43.5 $44.2 $39.7 $164.8 $36.8 $43.9 $44.5 $40.0 $165.3 $174.3 $183.4 $192.9 $201.7EBITDA Margin 65.4% 70.2% 69.8% 69.2% 68.0% 69.3% 68.2% 69.0% 68.5% 67.2% 68.2% 68.3% 68.3% 68.3% 68.1%

D&A $63.0 $22.2 $22.0 $22.0 $22.0 $88.2 $22.0 $22.0 $22.0 $22.0 $88.0 $88.0 $88.0 $88.0 $88.0Interest Expense (Income) -$23.0 $3.3 $4.3 $4.3 $4.3 $16.1 $4.7 $4.7 $4.7 $4.7 $18.8 $18.7 $18.8 $19.6 $20.3Income Taxes (Recovery) ($5.5) ($2.7) ($1.7) ($1.8) ($1.3) ($7.6) ($1.0) ($1.7) ($1.8) ($1.3) ($5.8) ($6.8) ($7.6) $26.9 $29.4Net Income $74.67 $14.6 $19.0 $19.7 $14.7 $68.01 $11.1 $18.9 $19.6 $14.7 $64.26 $74.26 $84.13 $58.45 $63.98EPS, F.d. $0.48 $0.09 $0.12 $0.13 $0.10 $0.44 $0.07 $0.12 $0.13 $0.09 $0.41 $0.48 $0.54 $0.38 $0.41

EPS Growth na (9%) (6%) 16% 13% (31%) CFPS $0.92 $0.97 $0.97 $1.03 $0.84 $0.88 $0.91DCPU $0.61 $0.95 $0.91 $0.97 $1.03 $0.91 $0.95DPU $0.40 $0.75 $0.75 $0.75 $0.75 $0.75 $0.75Net Cash (Debt) ($3 56 .0) ($368.3) ($369.0) ($363.8) ($371.3) ($371.3) ($381 .1) ($373.0) ($366.2) ($374 .1) ($374.1) ($36 4.8) ($385 .0) ($3 99 .6) ($40 8.8)

Source: BMO Capital Markets


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Page 11 June 29, 2007

Valuation

We have considered valuing Teranet in several fashions. Many industry fundamentals have

influenced our sense of the growth rates of the industry and Teranet, namely:

i) Teranet is an extremely well-established and profitable business.

ii) The business growth rate is expected to be slightly better than the long-term growth rate forOntario Real Estate transaction volume.

A) Contributing factors:

a) Teranet is nearing the completion of the digitization of the database. Work

to digitize the records has supplemented the growth rate to date. As this work

is completed, the reported growth rate should approach that of the long-term

growth rate of the real estate industry.

b) Toronto is the largest city in Canada and, as such, tends to attract a greater

proportion of immigrants to Canada to the city, thus fuelling the Ontario Real

Estate transaction growth rate beyond the growth rate of the Canadianpopulation growth rate.

c) Teranet processes transactions for other industries beyond Real Estate. We

have forecast this division to grow faster than the Real Estates division

growth rate, due to its small size and its potential.

d) On a worldwide basis, Toronto is perceived as a relatively inexpensive

place to live. According to a recently published study (June 2007) by Merce

Human Resource Consulting, Toronto was ranked the 82nd most expensive

city in the world to live in, down from 47th last year. (No city in Canada

ranked above Toronto.) Considering the rise in real estate values around the

world, we believe the slip in ranking is due to Torontos real estate inflationnot keeping pace with other cities of the world.

B) Detracting factors:

a) The strength of the Canadian dollar against the U.S. dollar is likely to

dampen the manufacturing sector in Ontario, and thus slow the economy and

demand for real estate.

b) The slump in demand in the auto sector is likely to hurt the growth of the

Ontarian economy, as a number of manufacturing plants for the North

American auto industry are located in Ontario.

c) During the past five years, transaction activity has been above average

While activity could remain strong if interest rates remain low, we expect a

modest rise in interest rates in the near term and, as such, a slowing of the

industry growth rate is likely.

iii) Teranet has an exclusive relationship with the Ontario government to provide access to the

Ontario Electronic Land Registration System (ELRS) through its proprietary software


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Page 12 June 29, 2007

application, Teraview. Unfortunately, Teranet does not have pricing control for the Teraview

product.

iv) Teranet does offer other value-added services beyond access to the ELRS, for which Terane

has pricing control. While margins are expected to be less than the Teraview margins, the

business should contribute nicely to the overall profitability of the company. Ultimately

however, corporate margins should decline as this division increases in importance.

v) Approximately half of the value-added service revenue is directly related to the growth of the

real estate industry in Ontario.

Valuation Methods

1) If we consider Teranet as a transaction processor, a $10.04 valuation is derived by applying

10x Price/Cash Flow and 14x EV/EBITDA to our 2009 estimates. This valuation represents a

10% yield (non-taxed) on our 2009 distributable cash estimate.

Table 2: Valuation Metrics

Valuation Metric Target Multiple 2007E 2008E 2009EPrice / CF 10x $9.72 $9.68 $10.33EV/EBITDA 14x $9.59 $9.16 $10.05Yield (on distributable cash) 10.0% $9.47 $9.13 $9.73Average $9.60 $9.32 $10.04


2) Our second valuation method considers applying a 7.7% yield on our post-tax-distributablecash per unit (DCPU) forecast and then adding back the present value of the tax shield until2011.

Table 3: Tax Shield Valuation

2007 2008 2009 2010 2011 2012

DCPU 0.95$ 0.91$ 0.97$ 1.03$

Tax Rate on DCPU (Corp. 31.5%): 20.0% 0.19$ 0.18$ 0.19$ 0.21$

After Tax DCPU 0.76$ 0.73$ 0.78$ 0.82$ 0.92$ 0.95$

Yield: 7.7% 7.7% 7.7% 7.7% 7.7% 7.7% 7.7%

Yield target (after-tax) 9.84$ 9.49$ 10.11$ 10.71$ 11.89$ 12.36$

PV of tax shield 0.65$ 0.52$ 0.38$ 0.21$

Yield target pre-tax 10.14$ 10.01$ 10.48$ 10.91$ 11.89$ 12.36$


3) Our third method considers a discounted cash flow analysis. We have assumed that theOntario real estate market growth rate will slow slightly this year and next. This will also slow

the rate of growth of other value-added revenues. Following this period, we have forecast the

Statutory revenue (pricing controlled by the Ontario government) growth rate to recover

somewhat with revenue growth of 34%. The growth rate of other value-added services i

slowed to mid-single digits and then forecast to accelerate growth to high single digits.


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Pricing set by the Ontario government: Management does not see a price increase for a numbe

of years. Should inflation become strong, a price increase is possible. Management suggest

that the Ministry has also considered a price decrease as a possible scenario. Considering the

small cost of search to the sale value of a property, the uncertainty regarding the governments

pricing intentions, and the highly profitable nature of the business, we have assumed no price

changes in our forecast horizon.

4) i) Using a discount factor of 10% and a terminal value multiple of 13x our 2018 cash flow

estimate suggests a 2009 DCF valuation per unit of $11.13.

Table 4: Discounted Cash Flow AnalysisPresent Value 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E

Revenue 237,934 242,141 254,985 268,274 282,488 296,418 310,089 325,212 341,991 360,658 381,484

y/y growth 0% 2% 5% 5% 5% 5% 5% 5% 5% 5% 6%

EBITDA 164,780 165,251 174,273 183,357 192,950 201,715 209,603 218,320 227,981 238,713 250,666

Margin 69.3% 68.2% 68.3% 68.3% 68.3% 68.1% 67.6% 67.1% 66.7% 66.2% 65.7%

y/ygrowth 5% 0% 5% 5% 5% 5% 4% 4% 4% 5% 5%

Taxes (recovery) (7,564) (5,848) (6,759) (7,656) 26,972 29,574 32,045 34,789 37,830 41,253 45,039

Adj'd- After Tax Cash Flow 172,345 171,099 181,032 191,014 165,977 172,141 177,558 183,532 190,151 197,460 205,627

y/y growth 6% -1% 6% 6% -13% 4% 3% 3% 4% 4% 4%

Changes in W/C (14,371) 461 588 622 610 635 615 582 544 501 452

sustenance Capital (35,068) (35,000) (35,000) (35,000) (23,000) (11,000) (11,000) (11,000) (11,000) (11,000) (11,000)

Total Cash Flow 122,906 136,560 146,620 156,636 143,587 161,776 167,174 173,114 179,695 186,961 195,078 202,88

Growth 9% 11% 7% 7% -8% 13% 3% 4% 4% 4% 4% 4Discount Factor 10% 1.00 0.91 0.83 0.75 0.68 0.62 0.56 0.51 0.47 0.42 0.39 0.3

1.00 0.91 0.83 0.75 0.68 0.62 0.56 0.51 0.47 0.42 0.3

1.00 0.91 0.83 0.75 0.68 0.62 0.56 0.51 0.47 0.4

1.00 0.91 0.83 0.75 0.68 0.62 0.56 0.51 0.4

1.00 0.91 0.83 0.75 0.68 0.62 0.56 0.5

1.00 0.91 0.83 0.75 0.68 0.62 0.5

Discounted Cash Flow 122,906 124,145 121,174 117,683 98,072 100,450 94,365 88,835 83,829 79,290 75,211

136,560 133,291 129,451 107,879 110,495 103,802 97,718 92,212 87,219 82,732

146,620 142,396 118,667 121,545 114,182 107,490 101,433 95,940 91,005

156,636 130,534 133,699 125,600 118,239 111,576 105,534 100,106

143,587 147,069 138,160 130,063 122,734 116,088 110,116

Summed Discounted Cash Flow 1,105,959 1,081,359 1,039,279 981,924 907,818 764,230

Cashflow 2018 202,881 202,881 202,881 202,881 202,881 202,881

Terminal Multiple 13.0x 13.0x 13.0x 13.0x 13.0x 13.0x 13.0x

Implied Terminal Growth 1.5% 1.5% 1.5% 1.5% 1.5% 1.5%

Discount Factor 0.35 0.39 0.42 0.47 0.51 0.56Terminal Value $924,412 $1,016,853 $1,118,538 $1,230,392 $1,353,431 $1,488,774

(TV % of DCF+TV) 46% 48% 52% 56% 60% 66%

Cash $99,757 $89,507 $91,372 $100,802 $113,763 $76,175

Debt $525,447 $523,497 $523,497 $553,122 $529,707 $489,707

Total Net Cash ($425,690) ($433,990) ($432,125) ($452,320) ($415,944) ($413,532)

Value Sum (DCF+TV+Cash) $1,604,681 $1,664,221 $1,725,693 $1,759,997 $1,845,304 $1,839,473

Total Units 154,984 154,984 154,984 154,984 154,984 154,984

DCF/Unit 10.35$ 10.74$ 11.13$ 11.36$ 11.91$ 11.87$


ii) A second DCF method considers a 4% growth in cash flow perpetuity method, and suggests

a 2009 DCF valuation of $14.10. This method tends to value businesses more lucratively than

the previous DCF method, as it gives more credit for continued growth in the business beyond

2017the period for which we are least informed, after the company loses its monopoly status

and when it is likely to be run by different senior managers.


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Table 5: Discounted Cash Flow Analysis with Alternative Method

2007E 2008E 2009E 2010E 2011E 2012E

2018 CF in perpetuity 202,881 202,881 202,881 202,881 202,881 202,881

Growth in perpetuity 4% 4% 4% 4% 4% 4%

Discount factor 0.35 0.42 0.47 0.51 0.56 0.62

Terminal CF Value $1,185,143 $1,434,023 $1,577,426 $1,735,168 $1,908,685 $2,099,554

(TV % of DCF+TV) 52% 57% 60% 64% 68% 73%

Value Sum (DCF+TV+Cash) $1,865,412 $2,081,392 $2,184,580 $2,264,773 $2,400,558 $2,450,252

Total Units 154,984 154,984 154,984 154,984 154,984 154,984

DCF/Unit $12.04 $13.43 $14.10 $14.61 $15.49 $15.81

Investment Thesis

Teranet operates a stable business, with high barriers to entry through exclusive

government licences. Unfortunately, Teranet does not have significant pricing power

for its core products. While exposed to the real estate industry, Teranet has limited

exposure to any one single aspect of the housing market, thus minimizing its housing

market beta. (Roughly 30% of total revenues are directly related to real estate activity

i.e. transaction volume related to buying and selling of properties. The companyremaining revenues are tied more generally to real estate activity, through refinancings

mortgage credits, maturity discharges, title change transfers, automated valuations

other non-related services including payment processing.)

Our forecasts currently incorporate a slowing housing market over the next two years

with the expectation of a decline of 2% and 0% in 2007 and 2008 for total registration

volumes. However, we continue to expect growth in the Provinces parcel base and the

number of properties automated providing opportunity for longer-term growth.

Teranets current payout ratio was 82% in Q1/07. For 2007, the current payout ratio

represents 79% of our forecast distributable cash, below the stated payout ratio of 95%.

With a payout ratio below 100%, we would normally assume that any accumulatedcash will be used to increase unitholder value, including accretive acquisitions, unit

buybacks or debt reductions. However, we do not expect a significant change in the

payout structure until management formally determines the future corporate direction

of the company (privatization or not) and determines the most favourable use of funds

(to remain in the company for acquisitions, or to be paid out).

On December 13, 2006, 62.7 million units and shares, or roughly 40% of total

outstanding units and shares, came off of lockup. We consider this large sum o

tradable units and shares could be an overhang for the stock in the short term.

With recent changes in the legislation related to income trusts, we are uncertain of the

direction management will take the company. Acquisitions, although accretive, mayincrease the risk profile of Teranets stable business model; while a conversion to a

corporation may prompt immediate taxation of operations (whereas Teranet is currently

tax exempt for the next four years), lowering margins and the companys overall

earnings growth profile.


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Recommendation

Considering our forecasts, we are initiating coverage of Teranet with a Market Perform rating

and a 2009 target price of $10.50, predominately based on a 7.7% after tax yield on the DCPU

with a benefit for the present value of the tax shelter.


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Appendix: Financial Statements and Forecasts

Table A1: Income Statement

Year end 2006 Q1 Q2 Q3 Q4 2007 2008 2009 2010 2011 2012(000's) Year Mar-07 Jun-07 Sep-07 Dec-07 Year Year Year Year Year Year

Statutory registration 115,769 24,653 30,148 31,624 27,476 113,901 113,917 119,332 124,435 129,537 133,488Statutory search 20,589 4,908 5,008 5,254 4,565 19,735 18,925 19,824 20,672 21,520 22,176

Statutory Writs 28,689 5,658 7,868 7,841 6,521 27,888 27,888 27,888 27,888 27,888 27,888

Total Statutory Revenues 165,047 35,219 43,025 44,719 38,562 161,524 160,730 167,045 172,995 178,945 183,553

Teraview value-added services 47,982 11,165 11,934 11,931 11,762 46,792 47,350 48,771 50,234 51,741 53,293

Other value-added services 25,971 6,833 7,473 7,278 8,034 29,618 34,061 39,170 45,045 51,802 59,572

73,953 17,998 19,407 19,209 19,796 76,410 81,411 87,941 95,279 103,543 112,865

Revenues 239,000 53,217 62,432 63,928 58,358 237,934 242,141 254,985 268,274 282,488 296,418

Revenue Growth 6% -2% -2% 0% 2% 0% 2% 5% 5% 5% 5%

Direct Expenses $27,549 $6,092 $6,582 $6,408 $6,980 $26,062 $28,598 $31,221 $34,226 $37,647 $41,612

(Data utility and other operating) 11.5% 11.4% 10.5% 10.0% 12.0% 11.0% 11.8% 12.2% 12.8% 13.3% 14.0%

Gross Profit $211,451 $47,125 $55,850 $57,519 $51,377 $211,871 $213,542 $223,764 $234,048 $244,841 $254,806

Expenses:

G&A ex- LTIP 25,319 4,646 6,000 7,000 5,000 22,646 23,046 23,446 23,846 24,246 24,646

Long Term Incentive Plan 5,049 0 0 0 0

Total General & Admin 30,368 4,646 6,000 7,000 5,000 22,646 23,046 23,446 23,846 24,246 24,646

Research & Development 13,232 2,346 3,300 3,300 3,500 12,446 12,846 13,246 13,646 14,046 14,446

Marketing 11,467 2,799 3,000 3,000 3,200 11,999 12,399 12,799 13,199 13,599 13,999

Contract termination (recovery) provision 0 0 0 0Royalties -- Province of Ontario 0 0 0 0

Operating Costs 55,067 9,791 12,300 13,300 11,700 47,091 48,291 49,491 50,691 51,891 53,091

Operating costs -ex LTIP 50,018 9,791 12,300 13,300 11,700 47,091 48,291 49,491 50,691 51,891 53,091

EBITDA 156,384 37,334 43,550 44,219 39,677 164,780 165,251 174,273 183,357 192,950 201,715

Depreciation 0 0 0 0 0 0 0 0 0 0 0

Amortization 63,049 22,191 22,011 22,011 22,011 88,224 88,044 88,044 88,044 88,044 88,044

Depreciation & Amortization 63,049 22,191 22,011 22,011 22,011 88,224 88,044 88,044 88,044 88,044 88,044

Total Operating Expenses 118,116 31,982 34,311 35,311 33,711 135,315 136,335 137,535 138,735 139,935 141,135

EBIT 93,335 15,143 21,539 22,208 17,666 76,556 77,207 86,229 95,313 104,906 113,671

Interest (Income) (278) (1,022) (1,036) (1,035) (3,371) (4,057) (4,146) (4,039) (3,509) (3,002)

Ineterest Expense 3,559 5,305 5,305 5,305 19,473 22,788 22,788 22,788 22,788 22,788Net interest Expense (Income) (23,043) 3,281 4,282 4,269 4,270 16,102 18,731 18,642 18,748 19,279 19,786

Other Expense(Income) (1,125) 0 0 0 0 0 0

Restructuring charge

Income, before taxes 69,167 11,862 17,256 17,940 13,397 60,455 58,476 67,588 76,565 85,626 93,885

Income taxes (recovery) ($5,508) (2,705) (1,726) (1,794) (1,340) (7,564) (5,848) (6,759) (7,656) 26,972 29,574

Net Income/(Loss) $74,675 $14,567 $18,982 $19,734 $14,736 $68,019 $64,324 $74,346 $84,221 $58,654 $64,311

Net Income growth -311% 585% -47% 6% -19% -9% -5% 16% 13% -30% 10%

EPS (Basic) $0.48 $0.09 $0.12 $0.13 $0.10 $0.44 $0.42 $0.48 $0.54 $0.38 $0.41

Shares Outstanding (000, Basic) 154,974 154,984 154,984 154,984 154,984 154,984 154,984 154,984 154,984 154,984 154,984

EPS (f.d.) $0.48 $0.09 $0.12 $0.13 $0.10 $0.44 $0.42 $0.48 $0.54 $0.38 $0.41

Ave. Shares Outstanding (000, f.d.) 154,974 154,984 154,984 154,984 154,984 154,984 154,984 154,984 154,984 154,984 154,984

Adjusted Earnings

EBT 69,167 11,862 17,256 17,940 13,397 60,455 58,476 67,588 76,565 85,626 93,885other income (expense) (1,125) 0 0 0 0 0 0 0 0 0 0

Adjusted Income before tax and restruct 70,292 11,862 17,256 17,940 13,397 60,455 58,476 67,588 76,565 85,626 93,885

Income taxes (5,508) (2,705) (1,726) (1,794) (1,340) (7,564) (5,848) (6,759) (7,656) 26,972 29,574

Adjusted Earnings $75,800 $14,567 $18,982 $19,734 $14,736 $68,019 $64,324 $74,346 $84,221 $58,654 $64,311

Adj. EPS basic 0.49 0.09 0.12 0.13 0.10 0.44 0.42 0.48 0.54 0.38 0.41

Adj. EPS f.d. 0.49 0.09 0.12 0.13 0.10 0.44 0.42 0.48 0.54 0.38 0.41



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Table A2: Balance Sheet

2006 Q1 Q2 Q3 Q4 2007 2008 2009 2010 2011 2012Year Mar-07 Jun-07 Sep-07 Dec-07 Year Year Year Year Year Year

ASSETS

Current Assets

Cash 95,610 79,100 78,394 84,560 78,095 78,095 77,334 86,800 96,684 59,218 54,424

ST Inv 18,389 20,657 20,657 20,657 20,657 20,657 20,657 20,657 20,657 20,657 20,657

Accounts Receivables 3,077 4,322 5,258 5,498 4,919 4,919 5,054 5,326 5,613 5,920 6,204

Derivative contract receivable 0 0 0 0 0 0 0

Income taxes recoverable 176 0 0 0 0 0 0Prepaid Expenses 1,702 2,260 923 998 878 878 900 923 945 968 990

Future income tax asset 1,153 1,072 1,072 1,072 1,072 1,072 1,072 1,072 1,072 1,072 1,072

Total Current Assets $120,107 $107,411 $106,304 $112,784 $105,620 $105,620 $105,016 $114,778 $124,971 $87,835 $83,347

Fixed Assets 14,528 13,357 14,687 13,517 14,847 14,847 15,167 15,487 15,807 16,127 16,447

Deferred ELRS Implemnetation Costs 13,420 20,958 28,441 34,924 41,407 41,407 69,339 97,271 125,203 141,135 145,067

Prepaid Royalties 0 0 0 0 0 0 0 0 0 0

Cash & Equivelant 98,778 98,866 98,866 98,866 98,866 98,866 98,866 98,866 68,866 63,866 63,866

Long-Term Investments 6,113 6,142 6,142 6,142 6,142 6,142 6,142 6,142 6,142 6,142 6,142

Other Assets 3,340 1,628 1,628 1,628 1,628 1,628 1,628 1,628 1,628 1,628 1,628

Intangible Assets 1 ,521 ,010 1 ,500 ,686 1 ,480 ,362 1 ,460 ,038 1 ,439,714 1 ,439 ,714 1 ,358 ,418 1 ,277 ,122 1 ,195 ,826 1 ,114,530 1,033,234

Goodwill 772,309 772,309 772,309 772,309 772,309 772,309 772,309 772,309 772,309 772,309 772,309

Future Income Tax Assets 0 0 0 0 0 0 0

TOTAL ASSETS $2,549,605 $2,521,357 $2,508,739 $2,500,208 $2,480,533 $2,480,533 $2,426,885 $2,383,603 $2,310,752 $2,203,572 $2,122,040

LIABILITIES AND SHAREHOLDER'S EQUITY

Liabilities

Bank Debt 0 0 0 0 0 0 0 0 0 0Accounts Pa

0

0yable and Accrued Liabilit 40,930 32,544 38,981 40,967 37,088 37,088 37,706 38,589 39,521 40,460 41,401

Long Term Incentive Plans 0 0 0 0 0 0 0

Income Taxes Payable 0 0 0 0 0 0 0 0 0 0

Current Portion Deferred Revenue 1,972 3,059 3,059 3,059 3,059 3,059 3,059 3,059 3,059 3,059 3,059

Current Portion of Long Term Debt 0 0 0 0 0 0 0 0 0 0

Current Portion of Other Liabilities 55,279 57,401 56,151 54,901 53,651 53,651 53,651 53,651 53,651 53,651 53,651

Other 9,687 9,687

Total current liablities 107868 $102,691 $98,191 $98,927 $93,798 $93,798 $94,416 $95,299 $96,231 $97,170 $98,111

Long Term Debt 470,000 468,046 468,046 468,046 468,046 468,046 468,046 468,046 468,046 428,046 408,046

Deferred Revenue 494 538 2,497 2,557 2,334 2,334 2,383 2,508 2,643 2,788 2,921

Future Income Tax Liability 405,732 401,134 401,134 401,134 401,134 401,134 401,134 401,134 401,134 401,134 401,134

Other Liabilities 68,188 66,117 66,117 66,117 66,117 66,117 63,717 61,317 19,417 8,737 (1,943)

Long Term Incentive Plans

Total Liabilities 1,052,282 1,038,526 1,035,986 1,036,781 1,031,429 1,031,429 1,029,695 1,028,305 987,471 937,875 908,269

Non controlling interest 0 0 0 0 0 0 0 0 0 0

Shareholders equity

Common Stock 1 ,508 ,155 1 ,508 ,155 1 ,508 ,155 1 ,508 ,155 1 ,508,155 1 ,508 ,155 1 ,508 ,155 1 ,508 ,155 1 ,508,155 1 ,508 ,155 1,508,155

Cumulative Foreign Exchange 1 1 1 1 1 1 1 1 1 1

Accumilated distributions ( 29,059) (58,118) (87,178) ( 116,237) (145,297) (145,297) (261,535) (377,773) (494,011) (610,249) (726,487)

Retained Earnings 18,226 32,793 51,775 71,508 86,245 86,245 150,569 224,915 309,136 367,790 432,101

Total Shareholder's Equity $1,497,323 $1,482,831 $1,472,753 $1,463,427 $1,449,104 $1,449,104 $1,397,190 $1,355,298 $1,323,281 $1,265,698 $1,213,771

TOTAL LIABILITIES AND

SHAREHOLDER'S EQUITY $2,549,605 $2,521,357 $2,508,739 $2,500,208 $2,480,533 $2,480,533 $2,426,885 $2,383,603 $2,310,752 $2,203,572 $2,122,040

0

0

0

1



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Page 18 June 29, 2007

Table A3: Statement of Cash Flows

2006 Q1 Q2 Q3 Q4 2007 2008 2009 2010 2011 2012Year Mar-07 Jun-07 Sep-07 Dec-07 Year Year Year Year Year Year

OPERATIONS

Net profit (loss) $74,675 $14,567 $18,982 $19,734 $14,736 $68,019 $64,324 $74,346 $84,221 $58,654 $64,31

Non-cash items 74,667

Amortization of fixed assets 5,259 1,170 1,170 1,170 1,170 4,680 4,680 4,680 4,680 4,680 4,68

Amortization of deferred ELRS impl 12,454 517 517 517 517 2,068 2,068 2,068 2,068 2,068 2,06

Amortization of prepaid royalties 3,750 0 0 0 0 0 0 0 0 0 Amortization of Intagible assets 40,649 20,324 20,324 20,324 20,324 81,296 81,296 81,296 81,296 81,296 81,29

Amortization of writs costs 0 0 0 0 0 0 0 0 0 0

Amortization of deferred charges 937 180 0 0 180 0 0 0 0

Increase (decrease) in deferred reven (518) 1,131 1,959 60 (223) 2,927 48 126 135 145 13

Amortization of deferred map conve 0 0 0 0 0 0 0 0 0 0

Long-term incentive plans 0 0 0 0 0 0 0 0 0 0

Gain on sale of investment in Filogix 0 0 0 0 0 0 0 0 0 0

Loss on disposal of fixed assets 417 14 0 0 0 14 0 0 0 0

Provision for write-down on investm 0 0 0 0 0 0 0 0 0 0

Future income taxes (15,395) (4,517) 0 0 0 (4,517) 0 0 0 0

Other 7,774 (278) 0 0 0 (278) 0 0 0 0

Items Not Effecting Cash 55,327 18,541 23,970 22,071 21,788 86,370 88,092 88,170 88,179 88,189 88,17

Payments under long-term incentive pla 0 0 0 0 0 0 0 0 0 0

Other liabilities (287) 51 (1,250) (1,250) (1,250) (3,699) (2,400) (2,400) (41,900) (10,680) (10,68

Unusual Items 0 0 0 0 0 0 0 0 0 0

$129,715 $33,159 $41,702 $40,554 $35,275 $150,690 $150,016 $160,116 $130,500 $136,163 $141,80

Changes in non-cash 129,707

working capital (21,787) (10,013) (2,848) 1,671 (3,180) (14,371) 461 588 622 610 63

$107,928 $23,146 $38,854 $42,225 $32,094 $136,319 $150,477 $160,705 $131,122 $136,772 $142,44107,920

INVESTMENT

Additions to Fixed Assets (4,256) (91) (2,500) 0 (2,500) (5,091) (5,000) (5,000) (5,000) (5,000) (5,00

ELRS implementation costs, net (20,069) (7,977) (8,000) (7,000) (7,000) (29,977) (30,000) (30,000) (30,000) (18,000) (6,00

ELRS migration costs (125) 0 0 0 0 0 0 0 0 0

Acquisition (355,478) 0 0 0 0 0 0 0 0 0

Proceeds:sale of invtmt in Filogix Inc. 6,288 278 0 0 0 278 0 0 0 0

Dividends: invtmt in Filogix Inc. (Note 0 0 0 0 0 0 0 0 0 0

Prepaid royalties 0 0 0 0 0 0 0 0 0 0

Long-term investments (9,263) (29) 0 0 0 (29) 0 0 0 0

Short-term investments (46,380) (2,268) 0 0 0 (2,268) 0 0 0 0

Restricted investments (gov't funding) (98,778) (88) (88) 0 0 30,000 5,000

Other (233) (422) 0 0 0 (422) 0 0 0 0

($528 ,294) ($10,597) ($10 ,500) ($7 ,000) ($9 ,500) ($37,597) ($35,000) ($35,000) ($5,000) ($18,000 ) ($11 ,00

(528,294)

FINANCING

Issuance of Trust Units, net 724,162 0 0 0 0 0 0 0 0 0

ELRS Implementation Provincial Fund 54,000 0 0 0 0 0 0 0 0 0

Expenses related to new credit facilities (3,573) 0 0 0 0 0 0 0 0 0 Use of reserves for bond funds 0 0 0 0 0 0 0 0 0 0

Repurchase of common shares (58,900) 0 0 0 0 0 0 0 0 0

Return of common share capital 0 0 0 0 0 0 0 0 0 0

Dividend payments (7,000) 0 0 0 0 0 0 0 0 0

Bonds (139,079) 0 0 0 0 0 0 0 0 (40,000) (20,00

Deferred financing charges 0 0 0 0 0 0 0 0 0 0

Notes payable (54,927) 0 0 0 0 0 0 0 0 0

Long-term deposits 100 0 0 0 0 0 0 0 0 0

Obligation under capital leases 729 0 0 0 0 0 0 0 0 0

Notes payable to related parties (5,525) 0 0 0 0 0 0 0 0 0

Cash Distributions (52 ,958) (29,059) (29,060) (29,060) (29,060) (116,238) (116 ,238) (116,238) (116,238 ) (116 ,238 ) (116 ,23

$457,029 ($29,059) ($29,060) ($29,060) ($29,060) ($116,238) ($116,238) ($116,238) ($116,238) ($156,238) ($136,23

457029

Increase in cash 36,663 (16,510) (706) 6,165 (6,465) (17,515) (761) 9,467 9,884 (37,466) (4,79

36,655

Cash, beginning of year 58,956 95,618 79,108 78,403 84,568 95,618 78,103 77,342 86,809 96,692 59,22

Cash, end of year $95,618 $79,108 $78,403 $84,568 $78,103 $78,103 $77,342 $86,809 $96,692 $59,227 $54,43



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Page 19 June 29, 2007

Teranet Income Fund (TF.UN)

Last Daily Data Point: June 25, 2007

8.0

8.5

9.0

9.5

10.0

10.5

11.0

8.0

8.5

9.0

9.5

10.0

10.5

11.0

Quarterly Price

1980 1985 1990 1995 2000 2005

70

80

90

100

70

80

90

100

TF.UN Relative to S&P/TSX Comp.

TF.UN Relative to Software

0

1

2

0

1

2

Revenue / Share

Price / Revenue

1985 1990 1995 2000 20050

2

-0.01

0.01

EPS (4 Qtr Trailing)

Price / Earnings

FYE EPS P/E DPS Yield Payout BV P/B ROE(Dec.) $ $ $% % %

Current* ND nm 0.75 7.7 nm ND nm nm

Average:

* Current EPS is the 4 Quarter Trailing to Q1/2007.

6

7

8

9

10

11

12Share Price

6

7

8

9

10

11

12

2005 2006 200760

70

80

90

100

110

120

TF.UN Relative to S&P/TSX Comp.

TF.UN Relative to Software

60

70

80

90

100

110

120

0.33

0.34

0.35

BMO 2007FY EPS ( Jun 07 = NA )

IBES 2007FY Cons.EPS ( Jun 07 = 0.35 )

0.33

0.34

0.35

2005 2006 20070.32

0.34

BMO 2008FY EPS ( Jun 07 = NA )

IBES 2008FY Cons.EPS ( Jun 07 = 0.33 )

TF.UN - Rating as of 12-Feb-07 = NR

0.32

0.34


20/21


Page 20 June 29, 2007

Company Risk DisclosureIn addition to the risks involved in investing in common stocks generally, we also highlight the following risks that pertain to this company. Teranecurrently has an exclusive license with the government. It is possible that this exclusive license could be terminated under licence agreement and writlicence agreement. Termination of the Writs Licence Agreement would have a material adverse effect on the business, financial condition and resultof operations of the Fund.

A substantial portion of the Funds revenues consists of fees received in connection with search and/or registration activity in the ELRS and the WritsSystem. The level of search and/or registration activity depends on a number of factors that are not within the control of the Fund, such as the strength

of the economy in Ontario, consumer confidence, employment rates, and lending rates and the business practices of users. A significant reduction in thelevel of registration and/or search activity, as a result of these or other factors, could have a material adverse effect on the business, financial conditionand results of operations of the Fund.

The Fund has limited ability to set fees. Fees for services within the Basic Service, which are not controlled by statute, are set by the mutual agreemenof the Fund and the Province, and accordingly, the Province must consent to any increases in such fees and the Province is not obliged to do so.Disagreements may arise between the Fund and the Province in a number of areas. The Fund may not be able to resolve any potential disagreementwith the Province and, even if such disagreements are resolved, the resolution may be on terms and conditions less favourable to the Fund. A definedprocess exists within the agreements to deal with potential disagreements with the Province.

Although the Fund intends to pay its monthly distributions, there can be no assurance regarding the amounts of income to be generated by the Fundsbusiness or ultimately distributed to the Fund. The actual amount distributed in respect of the units is not guaranteed and depends on numerous factorsincluding the Funds profitability, the fluctuation in the Funds working capital and capital expenditures.

On March 29, 2007, the Minister of Finance (Canada) tabled legislation (the SIFT Proposals) in the House of Commons to implement proposals

originally announced on October 31, 2006, that, if enacted, would change the manner in which certain flow-through entities, referred to as specifiedinvestment flow-through entities or SIFTs, and the distributions from such entities, would be taxed. No assurance can be given that the Fund will beable to maintain its status as a Grandfathered SIFT until January 1, 2011. Loss of this status may result in material adverse tax consequences for theFund and its Unitholders. No assurance can be given that the SIFT Proposals will be enacted in their present form. The provisions of any enactedlegislation may be materially different than the provisions in the SIFT Proposals and/or the Normal Growth Guidelines.

No assurances can be given that legislation (including regulations, policies, decisions or orders enacted thereunder) which is currently in force andaffecting the Company, the ELRS or the Writs System will not be amended or enforced otherwise than in accordance with current practices or new lawsenacted. Such amendments, changes in practices or new laws may have a material and adverse consequence to the Fund in the future.

Analysts CertificationI, David W. Wright, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in thireport.

General DisclosureThe information and opinions in this report were prepared by BMO Nesbitt Burns Inc. and BMO Nesbitt Burns Lte./Ltd., collectively (BMO NB)BMO NB is not subject to U.S. rules with regard to the preparation of research reports and the independence of analysts. BMO Capital Markets is atrade name used by the BMO Investment Banking Group, which includes the wholesale/institutional arms of Bank of Montreal and BMO NB inCanada, and BMO Capital Markets Corp. in the U.S. BMO Capital Markets Corp. is an affiliate of BMO NB. BMO NB and BMO Capital MarketCorp. are subsidiaries of Bank of Montreal. Bank of Montreal or its affiliates (BMO Financial Group) has lending arrangements with, or provideother remunerated services to, many issuers covered by BMO NB research. A significant lending relationship may exist between BMO FinanciaGroup and certain of the issuers mentioned herein. The reader should assume that BMO NB, BMO Capital Markets Corp., Bank of Montreal or theiaffiliates may have a conflict of interest and should not rely solely on this report in evaluating whether or not to buy or sell securities of issuersdiscussed herein. The opinions, estimates and projections contained in this report are those of BMO NB as of the date of this report and are subject tochange without notice. BMO NB endeavours to ensure that the contents have been compiled or derived from sources that we believe are reliable andcontain information and opinions that are accurate and complete. However, BMO NB makes no representation or warranty, express or implied, inrespect thereof, takes no responsibility for any errors and omissions contained herein and accepts no liability whatsoever for any loss arising from anyuse of, or reliance on, this report or its contents. Information may be available to BMO NB or its affiliates that is not reflected in this report. Theinformation in this report is not intended to be used as the primary basis of investment decisions, and because of individual client objectives, should nobe construed as advice designed to meet the particular investment needs of any investor. This material is for information purposes only and is not anoffer to sell or the solicitation of an offer to buy any security. The research analyst and/or associates who prepared this report are compensated basedupon (among other factors) the overall profitability of BMO NB and its affiliates, which includes the overall profitability of investment bankingservices. BMO NB, or its affiliates expect to receive or will seek compensation for investment banking services within the next 3 months from alissuers covered by BMO NB. BMO NB or its affiliates will buy from or sell to customers the securities of issuers mentioned in this report on


21/21


principal basis. BMO NB or its affiliates, officers, directors or employees may have a long or short position in the securities discussed herein, relatedsecurities or in options, futures or other derivative instruments based thereon.

Company Specific DisclosureDisclosure 2: BMO NB has undertaken an underwriting liability with respect to this issuer within the past 12 months.

Disclosure 3: BMO NB has provided investment banking services with respect to this issuer within the past 12 months.

Disclosure 7: BMO Capital Markets Corp. or an affiliate has received compensation for investment banking services from this issuer within the past 12

months.Disclosure 9: BMO Capital Markets Corp. or an affiliate received compensation for products or services other than investment banking services withinthe past 12 months.

Disclosure 10: This issuer is a client (or was a client) of BMO NB, BMO Capital Markets Corp. or an affiliate within the past 12 months: InvestmenBanking Services & Non-Securities Related Services.

Distribution of RatingsRating BMO BMO BMO First CallCategory Rating Universe I.B. Clients* Universe**Buy Outperform 38% 47% 47%Hold Market Perform 52% 45% 46%Sell Underperform 10% 8% 7%* Reflects rating distribution of all companies where BMO Capital Markets has received compensation for Investment Banking services.** Reflects rating distribution of all North American equity research analysts.

Ratings KeyWe use the following ratings system definitions:OP = Outperform - Forecast to outperform the market;Mkt = Market Perform - Forecast to perform roughly in line with the market;Und = Underperform - Forecast to underperform the market;(S) = speculative investment;NR = No rating at this time;R = Restricted Dissemination of research is currently restricted.

Market performance is measured by a benchmark index such as the S&P/TSX Composite Index, S&P 500, Nasdaq Composite, as appropriate for eachcompany. Prior to September 1, 2003, a fourth rating tierTop Pickwas used to designate those stocks we felt would be the best performers relativeto the market. Our six Top 15 lists which guide investors to our best ideas according to six different objectives (large, small, growth, value, income andquantitative) have replaced the Top Pick rating.

Dissemination of ResearchOur research publications are available via our web site http://bmocapitalmarkets.com. Institutional clients may also receive our research via FIRSTCALL Research Direct and Reuters. All of our research is made widely available at the same time to all BMO NB, BMO Capital Markets Corp. andBMO Nesbitt Burns Securities Ltd. client groups entitled to our research. Please contact your investment advisor or institutional salesperson for moreinformation.

Additional MattersTO U.S. RESIDENTS: BMO Capital Markets Corp. and/or BMO Nesbitt Burns Securities Ltd., affiliates of BMO NB, furnish this report to U.Sresidents and accept responsibility for the contents herein, except to the extent that it refers to securities of Bank of Montreal. Any U.S. person wishingto effect transactions in any security discussed herein should do so through BMO Capital Markets Corp. and/or BMO Nesbitt Burns Securities Ltd.

TO U.K. RESIDENTS: The contents hereof are intended solely for the use of, and may only be issued or passed onto, persons described in part VI othe Financial Services and Markets Act 2000 (Financial Promotion) Order 2001.

BMO Nesbitt Burns Inc. and BMO Nesbitt Burns Lte/Ltd. are Members of CIPF. BMO Capital Markets Corp. and BMO Nesbitt Burns SecuritieLtd. are Members of SIPC.

"BMO Capital Markets" is a trade-mark of Bank of Montreal, used under licence.

"BMO (M-Bar roundel symbol)" is a registered trade-mark of Bank of Montreal, used under licence.

Documents

Teranet Jun29Y07