You are on page 1of 21

Teranet Income Fund

(TF.UN-TSX)
Stock Rating: Industry Rating: Market Perform Market Perform

June 29, 2007 Research Comment Toronto, Ontario

David W. Wright
(416) 359-5762 David.Wright@bmo.com Assoc: Paul Gurney

Automating Ontarios Land Information; Initiating Coverage at Market Perform


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

Price (28-Jun) Target Price


Price: High,Low,Close

$9.91 $10.50

52-Week High 52-Week Low

$11.05 $7.71

Teranet Income Fund (TF.UN) 12 11 10 9 8 7 20 10 0 150 100 50


2006

12 11 10 9 8 7
Volume (mln)

20 10 0

TF.UN Relative to S&P/TSX Comp

150 100 50
2007

Q3

Q4

Q1

Q2

Last Data Point: June 27, 2007

(FY-Dec.) CDPU P/CDPU CFPU P/CFPU CF Payout % EV ($mm) EBITDA ($mm) EV/EBITDA Quarterly CDPU 2005A 2006A 2007E Dividend Book Value Shares O/S (mm) Float O/S (mm) Wkly Vol (000s) Net Debt ($mm)

2005A na

2006A $0.61

2007E $0.95 10.4x $0.97 10.2x 79% $1,908 $165.0 11.6x Q3 na $0.27 $0.26

2008E $0.91 10.9x $0.97 10.2x 82% $1,909 $165.0 11.6x Q4 na $0.19 $0.21 7.6% 1.0x $1,536 $1,368 $24.5 24-Jul (E)

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

na

$0.84

na na na na Q1 na na $0.23 $0.75 $9.66 155.0 138.0 2,492 $348.0

66% $1,894 $156.0 12.1x Q2 na $0.15 $0.25

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.

Yield Price/Book Mkt. Cap ($mm) Float Cap ($mm) Wkly $ Vol (mm) Next Rep. Date

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

This report was prepared by an Analyst employed by a Canadian affiliate, BMO Nesbitt Burns Inc., and who is not registered as a research analyst under NYSE/NASD rules. For disclosure statements, including the Analyst's Certification, please refer to pages 19 to 21.

BMO Capital Markets

Teranet Income Fund

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 property registrations 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 a non-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 is 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 overallotment 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 net proceeds (net of underwriting fees and offering expenses) totalling roughly $714.2 million.

Page 2 June 29, 2007

BMO Capital Markets

Teranet Income Fund

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 Services


Includes Writs electronic filing and province-wide OWL Writs searches, and other revenues.

Page 3 June 29, 2007

BMO Capital Markets

Teranet Income Fund

Chart 1: Teranet Revenue by Fee Type


Teranet Revenue by Fee Type
350 300 $233.4 250 Revnue ($MM) $190.8 200 150 $106.3 100 50 0 2001 2002 2003 2004 2005 2006 31-Dec06 2007 2008 2009 2010 2011 2012 $137.5 $170.3 $212.7 $238.0 $242.0 $255.0 $268.0 $282.0 $296.0

$239.0

Statutory registrations

Statutory search

Statutory w rits

Teraview fees

Other value added services

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

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 that 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 from revenues and debt financing to a capped amount. Teranet has retained a $100 million credit 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 new condominium developments and residential subdivisions, and that a single condominium unit generally consist of several parcels (dwelling unit, parking space and storage locker).

Page 4 June 29, 2007

BMO Capital Markets

Teranet Income Fund

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 total 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.
2.5 mm

Registrations vs. Nominal Home Prices

$300,000

2.0 mm

$250,000

$200,000 1.5 mm $150,000 1.0 mm $100,000 0.5 mm Registrations Nominal Home Price in Ontario 0.0 mm
19 7 19 3 7 19 4 7 19 5 7 19 6 7 19 7 78 19 7 19 9 80 19 8 19 1 82 19 8 19 3 84 19 8 19 5 86 19 8 19 7 8 19 8 89 19 9 19 0 91 19 9 19 2 93 19 9 19 4 9 19 5 96 19 9 19 7 98 19 9 20 9 0 20 0 0 20 1 0 20 2 0 20 3 0 20 4 0 20 5 06

$50,000

$0

Source: Cansim, Teranet, BMO Capital Markets Recent registration trend has indicated a decline in registration activity.
Registration Growth Rate
20%

15%

10%

5%

0%
Ju l-0 5 S ep -0 5 N ov -0 5 Ja n06 M ar -0 6 M ay -0 6 Ju l-0 6 S ep -0 6 N ov -0 6 Ja n07 M ar -0 5 M ay -0 5 M ar -0 7

-5%

-10%

Source: Teranet

Page 5 June 29, 2007

BMO Capital Markets

Teranet Income Fund

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 latest 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 Writs 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 fees 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.

Page 6 June 29, 2007

BMO Capital Markets

Teranet Income Fund

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 or 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 to international 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 ecommerce 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 units 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).

Page 7 June 29, 2007

BMO Capital Markets

Teranet Income Fund

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 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 will be in the interest of maximizing long-term value for its unitholders. 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 at 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 interest 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 fee increases 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 offset 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 nonexclusive 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.

Page 8 June 29, 2007

BMO Capital Markets

Teranet Income Fund

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 settlement 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 valueadded 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 recent 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.

Page 9 June 29, 2007

BMO Capital Markets

Teranet Income Fund

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 will be in the interest of maximizing long-term value for its unitholders. There remains uncertainty as 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 servers and 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) Revenue growth Direct Expenses Gross Margin Operating Expenses EBITDA
EBITDA Margin

2006E $239.0 6% $27.5 $211.5 $55.1 $156.4


65.4%

Q1/07A $53.2 -2% $6.1 $47.1 $9.8 $37.3


70.2%

Q2/07E $62.4 -2% $6.6 $55.8 $12.3 $43.5


69.8%

Q3/07E $63.9 0% $6.4 $57.5 $13.3 $44.2


69.2%

Q4/07E $58.4 2% $7.0 $51.4 $11.7 $39.7


68.0%

2007E $237.9 0% $26.1 $211.9 $47.1 $164.8


69.3%

Q1/08E $54.0 1% $7.1 $46.9 $10.1 $36.8


68.2%

Q2/08E $63.6 2% $7.1 $56.5 $12.6 $43.9


69.0%

Q3/08E $65.0 2% $6.9 $58.1 $13.6 $44.5


68.5%

Q4/08E $59.6 2% $7.5 $52.0 $12.0 $40.0


67.2%

2008E $242.1 2% $28.6 $213.5 $48.3 $165.3


68.2%

2009E $255.0 5% $31.2 $223.8 $49.5 $174.3


68.3%

2010E $268.3 5% $34.2 $234.0 $50.7 $183.4


68.3%

2011E $282.5 5% $37.6 $244.8 $51.9 $192.9


68.3%

2012E $296.4 5% $41.6 $254.8 $53.1 $201.7


68.1%

D&A $63.0 -$23.0 Interest Expense (Income) Income Taxes (Recovery) ($5.5) Net Income $74.67 EPS, F.d. $0.48 EPS Growth na CFPS $0.92 DCPU $0.61 DPU $0.40 ($356.0) Net Cash (Debt)

$22.2 $3.3 ($2.7) $14.6 $0.09

$22.0 $4.3 ($1.7) $19.0 $0.12

$22.0 $4.3 ($1.8) $19.7 $0.13

$22.0 $4.3 ($1.3) $14.7 $0.10

($368.3)

($369.0)

($363.8)

($371.3)

$88.2 $16.1 ($7.6) $68.01 $0.44 (9%) $0.97 $0.95 $0.75 ($371.3)

$22.0 $4.7 ($1.0) $11.1 $0.07

$22.0 $4.7 ($1.7) $18.9 $0.12

$22.0 $4.7 ($1.8) $19.6 $0.13

$22.0 $4.7 ($1.3) $14.7 $0.09

($381.1)

($373.0)

($366.2)

($374.1)

$88.0 $18.8 ($5.8) $64.26 $0.41 (6%) $0.97 $0.91 $0.75 ($374.1)

$88.0 $18.7 ($6.8) $74.26 $0.48 16% $1.03 $0.97 $0.75 ($364.8)

$88.0 $18.8 ($7.6) $84.13 $0.54 13% $0.84 $1.03 $0.75 ($385.0)

$88.0 $19.6 $26.9 $58.45 $0.38 (31%) $0.88 $0.91 $0.75 ($399.6)

$88.0 $20.3 $29.4 $63.98 $0.41 9% $0.91 $0.95 $0.75 ($408.8)

Source: BMO Capital Markets

Page 10 June 29, 2007

BMO Capital Markets

Teranet Income Fund

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 for Ontario 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 Canadian population 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 Mercer 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 inflation not 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

Page 11 June 29, 2007

BMO Capital Markets

Teranet Income Fund

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 Teranet 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 Price / CF EV/EBITDA Yield (on distributable cash) Average

Target Multiple 10x 14x 10.0%

2007E $9.72 $9.59 $9.47 $9.60

2008E $9.68 $9.16 $9.13 $9.32

2009E $10.33 $10.05 $9.73 $10.04

Source: BMO Capital Markets

2) Our second valuation method considers applying a 7.7% yield on our post-tax-distributable cash per unit (DCPU) forecast and then adding back the present value of the tax shield until 2011.
Table 3: Tax Shield Valuation
$ DCPU Tax Rate on DCPU (Corp. 31.5%): 20.0% $ $ After Tax DCPU 7.7% Yield: $ Yield target (after-tax) $ PV of tax shield Yield target pre-tax 2007 0.95 0.19 0.76 7.7% 9.84 0.65 $ $ $ $ $ 2008 0.91 0.18 0.73 7.7% 9.49 0.52 2009 0.97 0.19 0.78 7.7% $ 10.11 $ 0.38 $ $ $ $ 10.48 2010 2011 2012 1.03 0.21 0.82 $ 0.92 $ 0.95 7.7% 7.7% 7.7% $ 10.71 $ 11.89 $ 12.36 $ 0.21 $ $ $ $ 10.91 $ 11.89 $ 12.36

$ 10.14

$ 10.01

Source: BMO Capital Markets

3) Our third method considers a discounted cash flow analysis. We have assumed that the Ontario 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 is slowed to mid-single digits and then forecast to accelerate growth to high single digits.

Page 12 June 29, 2007

BMO Capital Markets

Teranet Income Fund

Pricing set by the Ontario government: Management does not see a price increase for a number of years. Should inflation become strong, a price increase is possible. Management suggests 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 Analysis
Present Value Revenue y/y growth EBITDA Margin y/ygrowth Taxes (recovery) Adj'd- After Tax Cash Flow y/y growth Changes in W/C sustenance Capital Total Cash Flow Growth Discount Factor 2007E 237,934 0% 164,780 69.3% 5% (7,564) 172,345 6% (14,371) (35,068) 122,906 9% 1.00 2008E 242,141 2% 165,251 68.2% 0% (5,848) 171,099 -1% 461 (35,000) 136,560 11% 0.91 1.00 2009E 254,985 5% 174,273 68.3% 5% (6,759) 181,032 6% 588 (35,000) 146,620 7% 0.83 0.91 1.00 2010E 268,274 5% 183,357 68.3% 5% (7,656) 191,014 6% 622 (35,000) 156,636 7% 0.75 0.83 0.91 1.00 2011E 282,488 5% 192,950 68.3% 5% 26,972 165,977 -13% 610 (23,000) 143,587 -8% 0.68 0.75 0.83 0.91 1.00 2012E 296,418 5% 201,715 68.1% 5% 29,574 172,141 4% 635 (11,000) 161,776 13% 0.62 0.68 0.75 0.83 0.91 1.00 100,450 110,495 121,545 133,699 147,069 764,230 2013E 310,089 5% 209,603 67.6% 4% 32,045 177,558 3% 615 (11,000) 167,174 3% 0.56 0.62 0.68 0.75 0.83 0.91 94,365 103,802 114,182 125,600 138,160 2014E 325,212 5% 218,320 67.1% 4% 34,789 183,532 3% 582 (11,000) 173,114 4% 0.51 0.56 0.62 0.68 0.75 0.83 88,835 97,718 107,490 118,239 130,063 2015E 341,991 5% 227,981 66.7% 4% 37,830 190,151 4% 544 (11,000) 179,695 4% 0.47 0.51 0.56 0.62 0.68 0.75 83,829 92,212 101,433 111,576 122,734 2016E 360,658 5% 238,713 66.2% 5% 41,253 197,460 4% 501 (11,000) 186,961 4% 0.42 0.47 0.51 0.56 0.62 0.68 79,290 87,219 95,940 105,534 116,088 2017E 381,484 6% 250,666 65.7% 5% 45,039 205,627 4% 452 (11,000) 195,078 4% 0.39 0.42 0.47 0.51 0.56 0.62 75,211 82,732 91,005 100,106 110,116

10%

202,881 4% 0.35 0.39 0.42 0.47 0.51 0.56

Discounted Cash Flow

122,906

124,145 136,560

121,174 133,291 146,620

117,683 129,451 142,396 156,636

98,072 107,879 118,667 130,534 143,587 907,818

Summed Discounted Cash Flow Cashflow 2018 Terminal Multiple Implied Terminal Growth Discount Factor Terminal Value (TV % of DCF+TV) Cash Debt Total Net Cash Value Sum (DCF+TV+Cash) Total Units DCF/Unit

1,105,959

1,081,359

1,039,279

981,924

13.0x

202,881 202,881 202,881 202,881 202,881 202,881 13.0x 13.0x 13.0x 13.0x 13.0x 13.0x 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 0.35 0.39 0.42 0.47 0.51 0.56 $924,412 $1,016,853 $1,118,538 $1,230,392 $1,353,431 $1,488,774 46% 48% 52% 56% 60% 66% $99,757 $525,447 ($425,690) $1,604,681 154,984 10.35 $89,507 $523,497 ($433,990) $1,664,221 154,984 $ 10.74 $91,372 $523,497 ($432,125) $100,802 $553,122 ($452,320) $113,763 $529,707 ($415,944) $76,175 $489,707 ($413,532)

$1,725,693 $1,759,997 $1,845,304 $1,839,473 154,984 154,984 154,984 154,984 $ 11.13 $ 11.36 $ 11.91 $ 11.87

Source: BMO Capital Markets

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.

Page 13 June 29, 2007

BMO Capital Markets Table 5: Discounted Cash Flow Analysis with Alternative Method
2018 CF in perpetuity Growth in perpetuity Discount factor Terminal CF Value (TV % of DCF+TV) Value Sum (DCF+TV+Cash) Total Units DCF/Unit 2007E 202,881 4% 0.35 2008E 202,881 4% 0.42 2009E 202,881 4% 0.47

Teranet Income Fund

2010E 202,881 4% 0.51

2011E 202,881 4% 0.56

2012E 202,881 4% 0.62

$1,185,143 $1,434,023 $1,577,426 $1,735,168 $1,908,685 $2,099,554 52% 57% 60% 64% 68% 73% $1,865,412 154,984 $12.04 $2,081,392 154,984 $13.43 $2,184,580 $2,264,773 $2,400,558 $2,450,252 154,984 154,984 154,984 154,984 $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 companys remaining 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 accumulated cash 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 of 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, may increase 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.

Page 14 June 29, 2007

BMO Capital Markets

Teranet Income Fund

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.

Page 15 June 29, 2007

BMO Capital Markets

Teranet Income Fund

Appendix: Financial Statements and Forecasts


Table A1: Income Statement
Year end
(000's)

2006
Year

Q1
Mar-07

Q2
Jun-07

Q3
Sep-07

Q4
Dec-07

2007
Year

2008
Year

2009
Year

2010
Year

2011
Year

2012
Year

Statutory registration Statutory search Statutory Writs Total Statutory Revenues Teraview value-added services Other value-added services Revenues
Revenue Growth

115,769 20,589 28,689 165,047 47,982 25,971 73,953 239,000


6%

24,653 4,908 5,658 35,219 11,165 6,833 17,998 53,217


-2%

30,148 5,008 7,868 43,025 11,934 7,473 19,407 62,432


-2%

31,624 5,254 7,841 44,719 11,931 7,278 19,209 63,928


0%

27,476 4,565 6,521 38,562 11,762 8,034 19,796 58,358


2%

113,901 19,735 27,888 161,524 46,792 29,618 76,410 237,934


0%

113,917 18,925 27,888 160,730 47,350 34,061 81,411 242,141


2%

119,332 19,824 27,888 167,045 48,771 39,170 87,941 254,985


5%

124,435 20,672 27,888 172,995 50,234 45,045 95,279 268,274


5%

129,537 21,520 27,888 178,945 51,741 51,802 103,543 282,488


5%

133,488 22,176 27,888 183,553 53,293 59,572 112,865 296,418


5%

Direct Expenses (Data utility and other operating)

$27,549
11.5%

$6,092
11.4%

$6,582
10.5%

$6,408
10.0%

$6,980
12.0%

$26,062
11.0%

$28,598
11.8%

$31,221
12.2%

$34,226
12.8%

$37,647
13.3%

$41,612
14.0%

Gross Profit $211,451 Expenses: G&A ex- LTIP 25,319 5,049 Long Term Incentive Plan 30,368 Total General & Admin 13,232 Research & Development 11,467 Marketing Contract termination (recovery) provision Royalties -- Province of Ontario 55,067 Operating Costs 50,018 Operating costs -ex LTIP 156,384 EBITDA 0 Depreciation 63,049 Amortization 63,049 Depreciation & Amortization Total Operating Expenses EBIT Interest (Income) Ineterest Expense Net interest Expense (Income) Other Expense(Income) Restructuring charge Income, before taxes Income taxes (recovery) Net Income/(Loss) Net Income growth EPS (Basic) Shares Outstanding (000, Basic) EPS (f.d.) Ave. Shares Outstanding (000, f.d.) Adjusted Earnings EBT other income (expense) Adjusted Income before tax and restruct Income taxes Adjusted Earnings Adj. EPS basic Adj. EPS f.d. 118,116 93,335

$47,125 4,646 0 4,646 2,346 2,799 0 0 9,791 9,791 37,334 0 22,191 22,191 31,982 15,143 (278) 3,559 3,281

$55,850 6,000 0 6,000 3,300 3,000 0 0 12,300 12,300 43,550 0 22,011 22,011 34,311 21,539 (1,022) 5,305 4,282

$57,519 7,000 0 7,000 3,300 3,000 0 0 13,300 13,300 44,219 0 22,011 22,011 35,311 22,208 (1,036) 5,305 4,269

$51,377 5,000 0 5,000 3,500 3,200 0 0 11,700 11,700 39,677 0 22,011 22,011 33,711 17,666 (1,035) 5,305 4,270

$211,871 22,646 22,646 12,446 11,999

$213,542 23,046 23,046 12,846 12,399

$223,764 23,446 23,446 13,246 12,799

$234,048 23,846 23,846 13,646 13,199

$244,841 24,246 24,246 14,046 13,599

$254,806 24,646 24,646 14,446 13,999

47,091 47,091 164,780 0 88,224 88,224 135,315 76,556 (3,371) 19,473 16,102 0 60,455 (7,564) $68,019
-9%

48,291 48,291 165,251 0 88,044 88,044 136,335 77,207 (4,057) 22,788 18,731 0 58,476 (5,848) $64,324
-5%

49,491 49,491 174,273 0 88,044 88,044 137,535 86,229 (4,146) 22,788 18,642 0 67,588 (6,759) $74,346
16%

50,691 50,691 183,357 0 88,044 88,044 138,735 95,313 (4,039) 22,788 18,748 0 76,565 (7,656) $84,221
13%

51,891 51,891 192,950 0 88,044 88,044 139,935 104,906 (3,509) 22,788 19,279 0 85,626 26,972 $58,654
-30%

53,091 53,091 201,715 0 88,044 88,044 141,135 113,671 (3,002) 22,788 19,786 0 93,885 29,574 $64,311
10%

(23,043) (1,125) 69,167 ($5,508) $74,675


-311%

11,862 (2,705) $14,567


585%

17,256 (1,726) $18,982


-47%

17,940 (1,794) $19,734


6%

13,397 (1,340) $14,736


-19%

$0.48 154,974 $0.48 154,974 69,167 (1,125) 70,292 (5,508) $75,800 0.49 0.49

$0.09 154,984 $0.09 154,984 11,862 0 11,862 (2,705) $14,567 0.09 0.09

$0.12 154,984 $0.12 154,984 17,256 0 17,256 (1,726) $18,982 0.12 0.12

$0.13 154,984 $0.13 154,984 17,940 0 17,940 (1,794) $19,734 0.13 0.13

$0.10 154,984 $0.10 154,984 13,397 0 13,397 (1,340) $14,736 0.10 0.10

$0.44 154,984 $0.44 154,984 60,455 0 60,455 (7,564) $68,019 0.44 0.44

$0.42 154,984 $0.42 154,984 58,476 0 58,476 (5,848) $64,324 0.42 0.42

$0.48 154,984 $0.48 154,984 67,588 0 67,588 (6,759) $74,346 0.48 0.48

$0.54 154,984 $0.54 154,984 76,565 0 76,565 (7,656) $84,221 0.54 0.54

$0.38 154,984 $0.38 154,984 85,626 0 85,626 26,972 $58,654 0.38 0.38

$0.41 154,984 $0.41 154,984 93,885 0 93,885 29,574 $64,311 0.41 0.41

Source: BMO Capital Markets

Page 16 June 29, 2007

BMO Capital Markets Table A2: Balance Sheet


2006
Year

Teranet Income Fund

Q1
Mar-07

Q2
Jun-07

Q3
Sep-07

Q4
Dec-07

2007
Year

2008
Year

2009
Year

2010
Year

2011
Year

2012
Year

ASSETS Current Assets Cash ST Inv Accounts Receivables Derivative contract receivable Income taxes recoverable Prepaid Expenses Future income tax asset Total Current Assets

95,610 18,389 3,077 0 176 1,702 1,153 $120,107

79,100 20,657 4,322

78,394 20,657 5,258

84,560 20,657 5,498

78,095 20,657 4,919

2,260 1,072 $107,411

923 1,072 $106,304

998 1,072 $112,784

878 1,072 $105,620

78,095 20,657 4,919 0 0 878 1,072 $105,620

77,334 20,657 5,054 0 0 900 1,072 $105,016

86,800 20,657 5,326 0 0 923 1,072 $114,778

96,684 20,657 5,613 0 0 945 1,072 $124,971

59,218 20,657 5,920 0 0 968 1,072 $87,835

54,424 20,657 6,204 0 0 990 1,072 $83,347

Fixed Assets Deferred ELRS Implemnetation Costs Prepaid Royalties Cash & Equivelant Long-Term Investments Other Assets Intangible Assets Goodwill Future Income Tax Assets TOTAL ASSETS

14,528 13,420 0 98,778 6,113 3,340 1,521,010 772,309 0 $2,549,605

13,357 20,958 0 98,866 6,142 1,628 1,500,686 772,309 $2,521,357

14,687 28,441 0 98,866 6,142 1,628 1,480,362 772,309 $2,508,739

13,517 34,924 0 98,866 6,142 1,628 1,460,038 772,309 $2,500,208

14,847 41,407 0 98,866 6,142 1,628 1,439,714 772,309 $2,480,533

14,847 41,407 0 98,866 6,142 1,628 1,439,714 772,309 0 $2,480,533

15,167 69,339 0 98,866 6,142 1,628 1,358,418 772,309 0 $2,426,885

15,487 97,271 0 98,866 6,142 1,628 1,277,122 772,309 0 $2,383,603

15,807 125,203 0 68,866 6,142 1,628 1,195,826 772,309 0 $2,310,752

16,127 141,135 0 63,866 6,142 1,628 1,114,530 772,309 0 $2,203,572

16,447 145,067 0 63,866 6,142 1,628 1,033,234 772,309 0 $2,122,040

LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities 0 Bank Debt 40,930 Accounts Payable and Accrued Liabilit 0 Long Term Incentive Plans 0 Income Taxes Payable 1,972 Current Portion Deferred Revenue 0 Current Portion of Long Term Debt 55,279 Current Portion of Other Liabilities 9,687 Other Total current liablities Long Term Debt Deferred Revenue Future Income Tax Liability Other Liabilities Long Term Incentive Plans Total Liabilities Non controlling interest Shareholders equity Common Stock Cumulative Foreign Exchange Accumilated distributions Retained Earnings Total Shareholder's Equity TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY 107868 470,000 494 405,732 68,188 1,052,282 0

0 32,544 0 3,059 0 57,401 9,687 $102,691 468,046 538 401,134 66,117 1,038,526 0

0 38,981 0 3,059 0 56,151 $98,191 468,046 2,497 401,134 66,117 1,035,986 0

0 40,967 0 3,059 0 54,901 $98,927 468,046 2,557 401,134 66,117 1,036,781 0

0 37,088 0 3,059 0 53,651 $93,798 468,046 2,334 401,134 66,117 1,031,429 0

0 37,088 0 0 3,059 0 53,651 $93,798 468,046 2,334 401,134 66,117 1,031,429 0

0 37,706 0 0 3,059 0 53,651 $94,416 468,046 2,383 401,134 63,717 1,029,695 0

0 38,589 0 0 3,059 0 53,651 $95,299 468,046 2,508 401,134 61,317 1,028,305 0

0 39,521 0 0 3,059 0 53,651 $96,231 468,046 2,643 401,134 19,417 987,471 0

0 40,460 0 0 3,059 0 53,651 $97,170 428,046 2,788 401,134 8,737 937,875 0

0 41,401 0 0 3,059 0 53,651 $98,111 408,046 2,921 401,134 (1,943) 908,269 0

1,508,155 1 (29,059) 18,226 $1,497,323

1,508,155 1 (58,118) 32,793 $1,482,831

1,508,155 1 (87,178) 51,775 $1,472,753

1,508,155 1 (116,237) 71,508 $1,463,427

1,508,155 1 (145,297) 86,245 $1,449,104

1,508,155 1 (145,297) 86,245 $1,449,104

1,508,155 1 (261,535) 150,569 $1,397,190

1,508,155 1 (377,773) 224,915 $1,355,298

1,508,155 1 (494,011) 309,136 $1,323,281

1,508,155 1 (610,249) 367,790 $1,265,698

1,508,155 1 (726,487) 432,101 $1,213,771

$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

Source: BMO Capital Markets

Page 17 June 29, 2007

BMO Capital Markets Table A3: Statement of Cash Flows


2006
Year

Teranet Income Fund

Q1
Mar-07

Q2
Jun-07

Q3
Sep-07

Q4
Dec-07

2007
Year

2008
Year

2009
Year

2010
Year

2011
Year

2012
Year

OPERATIONS Net profit (loss) Non-cash items Amortization of fixed assets Amortization of deferred ELRS impl Amortization of prepaid royalties Amortization of Intagible assets Amortization of writs costs Amortization of deferred charges Increase (decrease) in deferred reven Amortization of deferred map conve Long-term incentive plans Gain on sale of investment in Filogix Loss on disposal of fixed assets Provision for write-down on investm Future income taxes Other Items Not Effecting Cash Payments under long-term incentive plan Other liabilities Unusual Items Changes in non-cash working capital

$74,675 74,667 5,259 12,454 3,750 40,649 0 937 (518) 0 0 0 417 0 (15,395) 7,774 55,327 0 (287) 0 $129,715 129,707 (21,787) $107,928 107,920

$14,567 1,170 517 0 20,324 0 180 1,131 0 0 0 14 0 (4,517) (278) 18,541 0 51 0 $33,159 (10,013) $23,146

$18,982 1,170 517 0 20,324 0 1,959 0 0 0 0 0 0 0 23,970 0 (1,250) 0 $41,702 (2,848) $38,854

$19,734 1,170 517 0 20,324 0 0 60 0 0 0 0 0 0 0 22,071 0 (1,250) 0 $40,554 1,671 $42,225

$14,736 1,170 517 0 20,324 0 0 (223) 0 0 0 0 0 0 0 21,788 0 (1,250) 0 $35,275 (3,180) $32,094

$68,019 4,680 2,068 0 81,296 0 180 2,927 0 0 0 14 0 (4,517) (278) 86,370 0 (3,699) 0 $150,690 (14,371) $136,319

$64,324 4,680 2,068 0 81,296 0 0 48 0 0 0 0 0 0 0 88,092 0 (2,400) 0 $150,016 461 $150,477

$74,346 4,680 2,068 0 81,296 0 0 126 0 0 0 0 0 0 0 88,170 0 (2,400) 0 $160,116 588 $160,705

$84,221 4,680 2,068 0 81,296 0 0 135 0 0 0 0 0 0 0 88,179 0 (41,900) 0 $130,500 622 $131,122

$58,654 4,680 2,068 0 81,296 0 0 145 0 0 0 0 0 0 0 88,189 0 (10,680) 0 $136,163 610 $136,772

$64,311 4,680 2,068 0 81,296 0 0 133 0 0 0 0 0 0 0 88,177 0 (10,680) 0 $141,809 635 $142,443

INVESTMENT Additions to Fixed Assets ELRS implementation costs, net ELRS migration costs Acquisition Proceeds:sale of invtmt in Filogix Inc. Dividends: invtmt in Filogix Inc. (Note 8 Prepaid royalties Long-term investments Short-term investments Restricted investments (gov't funding) Other

(4,256) (20,069) (125) (355,478) 6,288 0 0 (9,263) (46,380) (98,778) (233) ($528,294) (528,294)

(91) (7,977) 0 0 278 0 0 (29) (2,268) (88) (422) ($10,597)

(2,500) (8,000) 0 0 0 0 0 0 0 0 ($10,500)

0 (7,000) 0 0 0 0 0 0 0 0 ($7,000)

(2,500) (7,000) 0 0 0 0 0 0 0 0 ($9,500)

(5,091) (29,977) 0 0 278 0 0 (29) (2,268) (88) (422) ($37,597)

(5,000) (30,000) 0 0 0 0 0 0 0 0 0 ($35,000)

(5,000) (30,000) 0 0 0 0 0 0 0 0 0 ($35,000)

(5,000) (30,000) 0 0 0 0 0 0 0 30,000 0 ($5,000)

(5,000) (18,000) 0 0 0 0 0 0 0 5,000 0 ($18,000)

(5,000) (6,000) 0 0 0 0 0 0 0 0 0 ($11,000)

FINANCING Issuance of Trust Units, net ELRS Implementation Provincial Fund Expenses related to new credit facilities Use of reserves for bond funds Repurchase of common shares Return of common share capital Dividend payments Bonds Deferred financing charges Notes payable Long-term deposits Obligation under capital leases Notes payable to related parties Cash Distributions

724,162 54,000 (3,573) 0 (58,900) 0 (7,000) (139,079) 0 (54,927) 100 729 (5,525) (52,958) $457,029 457029 36,663 36,655 58,956 $95,618

0 0 0 0 0 0 0 0 0 0 0 0 0 (29,059) ($29,059) (16,510) 95,618 $79,108

0 0 0 0 0 0 0 0 0 0 0 0 0 (29,060) ($29,060) (706) 79,108 $78,403

0 0 0 0 0 0 0 0 0 0 0 0 0 (29,060) ($29,060) 6,165 78,403 $84,568

0 0 0 0 0 0 0 0 0 0 0 0 0 (29,060) ($29,060) (6,465) 84,568 $78,103

0 0 0 0 0 0 0 0 0 0 0 0 0 (116,238) ($116,238) (17,515) 95,618 $78,103

0 0 0 0 0 0 0 0 0 0 0 0 0 (116,238) ($116,238) (761) 78,103 $77,342

0 0 0 0 0 0 0 0 0 0 0 0 0 (116,238) ($116,238) 9,467 77,342 $86,809

0 0 0 0 0 0 0 0 0 0 0 0 0 (116,238) ($116,238) 9,884 86,809 $96,692

0 0 0 0 0 0 0 (40,000) 0 0 0 0 0 (116,238) ($156,238) (37,466) 96,692 $59,227

0 0 0 0 0 0 0 (20,000) 0 0 0 0 0 (116,238) ($136,238) (4,795) 59,227 $54,432

Increase in cash Cash, beginning of year Cash, end of year

Source: BMO Capital Markets

Page 18 June 29, 2007

BMO Capital Markets

Teranet Income Fund

Teranet Income Fund (TF.UN)


Quarterly Price
11.0 10.5 10.0 9.5 9.0 8.5 8.0 11.0

12 11
10.5 10.0 9.5 9.0 8.5

Share Price

12 11 10 9 8 7 6

10 9 8 7

8.0

6 TF.UN Relative to S&P/TSX Comp. TF.UN Relative to Software 100 90 80 70 1980 1985 1990 1995 Revenue / Share Price / Revenue 2000 2005 100 90 90 80 70 80 70 60 2005 2006 TF.UN Relative to S&P/TSX Comp. TF.UN Relative to Software

120 110 100

120 110 100 90 80 70 60 2007

2 1 0

2
0.35

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


0.35 0.34 0.33

1 0 EPS (4 Qtr Trailing) Price / Earnings

0.34 0.33

0.01

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


0.34 0.34 0.32

1985

1990

1995

2000

2005

-0.01

0.32

2005

2006

2007

FYE (Dec.) Current* Average:

EPS $ ND

P/E nm

DPS $ 0.75

Yield % 7.7

Payout % nm

BV $ ND

P/B nm

ROE % nm

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

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

Last Daily Data Point: June 25, 2007

Page 19 June 29, 2007

BMO Capital Markets Company Risk Disclosure

Teranet Income Fund

In addition to the risks involved in investing in common stocks generally, we also highlight the following risks that pertain to this company. Teranet currently has an exclusive license with the government. It is possible that this exclusive license could be terminated under licence agreement and writs licence agreement. Termination of the Writs Licence Agreement would have a material adverse effect on the business, financial condition and results of 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 Writs System. 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 the level of registration and/or search activity, as a result of these or other factors, could have a material adverse effect on the business, financial condition and 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 agreement of 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 disagreements with the Province and, even if such disagreements are resolved, the resolution may be on terms and conditions less favourable to the Fund. A defined process 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 Funds business or ultimately distributed to the Fund. The actual amount distributed in respect of the units is not guaranteed and depends on numerous factors, including 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 specified investment flow-through entities or SIFTs, and the distributions from such entities, would be taxed. No assurance can be given that the Fund will be able to maintain its status as a Grandfathered SIFT until January 1, 2011. Loss of this status may result in material adverse tax consequences for the Fund and its Unitholders. No assurance can be given that the SIFT Proposals will be enacted in their present form. The provisions of any enacted legislation 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 and affecting the Company, the ELRS or the Writs System will not be amended or enforced otherwise than in accordance with current practices or new laws enacted. Such amendments, changes in practices or new laws may have a material and adverse consequence to the Fund in the future. Analysts Certification I, David W. Wright, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I 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 this report. General Disclosure The 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 a trade name used by the BMO Investment Banking Group, which includes the wholesale/institutional arms of Bank of Montreal and BMO NB in Canada, and BMO Capital Markets Corp. in the U.S. BMO Capital Markets Corp. is an affiliate of BMO NB. BMO NB and BMO Capital Markets Corp. are subsidiaries of Bank of Montreal. Bank of Montreal or its affiliates (BMO Financial Group) has lending arrangements with, or provide other remunerated services to, many issuers covered by BMO NB research. A significant lending relationship may exist between BMO Financial Group and certain of the issuers mentioned herein. The reader should assume that BMO NB, BMO Capital Markets Corp., Bank of Montreal or their affiliates 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 issuers discussed 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 to change without notice. BMO NB endeavours to ensure that the contents have been compiled or derived from sources that we believe are reliable and contain information and opinions that are accurate and complete. However, BMO NB makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions contained herein and accepts no liability whatsoever for any loss arising from any use 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. The information in this report is not intended to be used as the primary basis of investment decisions, and because of individual client objectives, should not be construed as advice designed to meet the particular investment needs of any investor. This material is for information purposes only and is not an offer to sell or the solicitation of an offer to buy any security. The research analyst and/or associates who prepared this report are compensated based upon (among other factors) the overall profitability of BMO NB and its affiliates, which includes the overall profitability of investment banking services. BMO NB, or its affiliates expect to receive or will seek compensation for investment banking services within the next 3 months from all issuers 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 a

Page 20 June 29, 2007

BMO Capital Markets

Teranet Income Fund

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

Company Specific Disclosure


Disclosure 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 within the 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: Investment Banking Services & Non-Securities Related Services.

Distribution of Ratings
Rating BMO BMO BMO First Call Category 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 Key
We 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 each company. Prior to September 1, 2003, a fourth rating tierTop Pickwas used to designate those stocks we felt would be the best performers relative to the market. Our six Top 15 lists which guide investors to our best ideas according to six different objectives (large, small, growth, value, income and quantitative) have replaced the Top Pick rating. Dissemination of Research Our research publications are available via our web site http://bmocapitalmarkets.com. Institutional clients may also receive our research via FIRST CALL Research Direct and Reuters. All of our research is made widely available at the same time to all BMO NB, BMO Capital Markets Corp. and BMO Nesbitt Burns Securities Ltd. client groups entitled to our research. Please contact your investment advisor or institutional salesperson for more information.

Additional Matters
TO U.S. RESIDENTS: BMO Capital Markets Corp. and/or BMO Nesbitt Burns Securities Ltd., affiliates of BMO NB, furnish this report to U.S. residents and accept responsibility for the contents herein, except to the extent that it refers to securities of Bank of Montreal. Any U.S. person wishing to 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 of the 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 Securities Ltd. 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.

Page 21 June 29, 2007