tfi_2004-10-25

A leem Israel , Phone (416) 943-6435 [email protected]

S P E C I A L T Y I N C O M E T R U S T S

October 26, 2004 Transforce Income Fund

Aggressive Growth Model And High Returns On Capital

Since 1998, Transforce has completed over 30 acquisitions, adding more than $1billion in annual revenue. As a result of this rapid growth, Transforce has become thelargest for-hire trucking carrier in Canada’s $20 billion market. Transforce is at animportant milestone in its history as we estimate that its pre-tax return on assets(ROA) will exceed the Canadian trucking industry for the first time since its financialrestructuring in 1995. Furthermore, its ROA through our forecast period is expected toexceed its peers by a wide margin. Since converting to an income trust in late-2002,Transforce has increased its distributions twice in 2004, and we are forecasting furtherincreases in 2005 and 2006. We expect Transforce’s recent Highland acquisition todrive 2005 cash flow and allow the Company to once again increase distributions,while maintaining a payout ratio of 76%. Our discounted free cash flow analysisimplies a $16.75 valuation, while our $15.75 target price is derived by a 7.6xprice/cash flow multiple of our 2005 operating cash flow estimate, equating to a targetyield of 8%. Our target and distribution estimate imply a 12-month total return of30.3%. We recommend Transforce as a Buy with a $15.75 target.

Fiscal YE December 31 2003A 2004E 2005E 2006E CFPU $1.20 $1.81 $2.07 $2.13 P/CFPU -- -- 6.3x 6.1x

Recommendation: Buy Target Price: $15.75

Company Statistics: Stock Symbol: TIF.UN - TSX Price: $13.05 Units Outstanding:

Basic/FD: 67.0 MM Insiders: 22.2 MM

Market Cap: $874.4 MM Market Float: $584.6 MM Net Debt: $177.8 MM Average Daily Trading Volume: 76,099 High – Low (52-Week): $13.30 - $8.48

Company Description: Transforce is Canada’s largest for-hiretrucking carrier serving over 50,000customers in North America. Its operatingsegments include less-than-truckload,truckload, specialized truckload, and logisticsand warehousing.

DCPU $1.02 $1.48 $1.65 $1.70 DPU $1.14 $1.20 $1.26 $1.29 Yield -- -- 8.7% 9.3% Disclosure statements located at

the back and inside back cover CFPU=Diluted Cash Flow from Ops; DCPU=Distributable Cash/Unit; DPU=Indicated Distribution/Unit

OCTOBER 26, 2004 ALEEM ISRAEL 416·943·6435

SPROTT SECURITIES INC. 2

Figure 1 Price Chart

Source: BigCharts (October 25/04)



Transforce Continues To Grow Aggressively Transforce Has Grown Aggressively Through Acquisition. Since 1998, Transforce has completed more than 30 acquisitions adding more than $1 billion in cumulative revenue (refer to Figure 2). While the stronger USD/CAD rate has eroded some of the revenue base that the Company has acquired, and one acquisition did not work out, Transforce’s overall success rate has been very impressive. Mainly as a result of these acquisitions, we expect that Transforce will generate more than $1.2 billion revenue in 2005 compared to just over $116 million in 1997, making it the largest Canadian trucking company.

Figure 2 Transforce’s Acquisition and Divestiture History Date Name Segment Revenue01-Mar-98 Entreprises de Transport J.C.G. Inc. TL 17.001-Mar-98 Transport Lebon Inc. TL 2.501-Oct-98 Papineau International Transport Inc. TL 50.007-Jun-99 Transport Nordique Inc. STL 6.507-Jun-99 Les Services ManutEx Inc. -- --30-Jun-99 Transport R. Mondor Ltee. TL 13.012-Jul-99 Les Enterprises Yves Labonte Inc. TL 10.004-Oct-99 Transport McGill & McGill Air STL 15.002-Jan-00 Transless (1991) TL 7.006-Mar-00 TST Solutions LTL, TL, STL 170.010-Mar-00 DCA Express & Distribution de Colis LTL 10.007-Jul-00 Enterprises R.R. Mondor Inc. STL 13.020-Jul-01 Ceased operations of DCA Express Inc. LTL 8.302-Nov-01 Daily Motor Freight Inc. LTL 31.030-Jan-02 Tri-Line Logistics SS 25.025-Mar-02 Japiro Transport Ltee LTL, TL 10.030-Apr-02 Transport Jacques Auger -- --23-May-02 DPM Transport Inc. -- --31-Jul-02 Canpar LTL 142.512-Jul-02 Transport St-Lambert & Groupe U.S. SS 10.019-Jul-02 Retex Transport Ltd. STL 5.020-Aug-02 Mirald Transport TL 24.015-Oct-02 Besner Group TL 42.031-Jan-03 Transport Forestville Inc. STL 12.016-May-03 T.D.L. Transport TL --06-Jun-03 Transport Leblanc (1979) Inc. LTL --28-Jan-04 Canadian Freightways LTL, TL, SS 235.030-Jan-04 Transport George Lacaille TL 10.025-Feb-04 Transport S.A.S. TL 11.002-Jun-04 Transpel (1994) & PW Intermodal STL 33.030-Sep-04 Ganeca, A&M Transport, Interforce, Montkar TL --06-Oct-04 Highland Transport TL 125.0TL=Truckload, LTL=Less-Than-Truckload & Parcel, STL=Specialized Truckload, SS=Specialized Services Source: Company Reports, Bloomberg, Sprott Securities Inc.

Historical EBITDA CAGR Of 10% Since 1998

Transforce’s strategy of growing through acquisition has been highly accretive. Over the 1998-2003 timeframe (refer to Figure 3), Transforce has generated a compound annual growth rate (CAGR) in EBITDA per unit of 10%. This compares to the companies in the S&P Trucking Index that had a 5-year historical EPS growth rate of negative 2%.



Forecasted EBITDA CAGR Of 19% Into 2005

With an impressive 2004 that has been mainly driven by its Canadian Freightways acquisition, and the recent Highland acquisition that should boost 2005 results, we estimate that Transforce will generate an EBITDA CAGR of 19% over the 2003-2005 timeframe. Thus, Transforce is showing no signs of slowing down after rapid historical growth.

Figure 3 Revenue and EBITDA Per Unit Growth Has Been Impressive

$-

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

1998 1999 2000 2001 2002 2003 2004E 2005E 2006E$-

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00Revenue

EBITDA/Unit

Source: Company Reports, Baseline, Sprott Securities Inc.

Transforce Has Been The Consolidator Of The Canadian Trucking Industry

The trucking industry is highly fragmented with low barriers to entry. However, Transforce’s aggressive acquisition strategy has consolidated the industry, giving it more leverage and intelligence from across its various divisions to develop more effective pricing and marketing plans. In addition, it continues to gain economies of scale in the operation and maintenance of its fleet.

Market Share Has Been Improving

In 1997, we estimate that Transforce’s share of the Canadian for-hire trucking market was no more than 1%. Today, we estimate Transforce controls approximately 5% of the $20 billion Canadian for-hire trucking industry. Referring to Figures 4 and 5, this growth has mainly focused on the less-than-truckload (LTL) and truckload (TL) businesses, which are expected to show CAGR of revenue between 1998 and 2005 of 24% and 33%, respectively.

Figure 4 Transforce’s Divisional Revenue Over The Years ($MM)

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200

400

600

800

1,000

1,200

1,400

1998 1999 2000 2001 2002 2003 2004E 2005E 2006E

SS

STL

TL

LTL

TL=Truckload, LTL=Less-Than-Truckload & Parcel, STL=Specialized Truckload, SS=Specialized Services Source: Company Reports, Sprott Securities Inc.



Figure 5 LTL Will Be The Largest Portion Of Transforce’s Growth During 1998-2005

LTL42%STL

17%

TL29%

SS12%

TL=Truckload, LTL=Less-Than-Truckload & Parcel, STL=Specialized Truckload, SS=Specialized Services Source: Company Reports, Sprott Securities Inc.

Management Has Been The Key Factor

Alain Bédard, Chairman, President and CEO, has been the driving force behind Transforce’s impressive growth. Mr. Bédard came on board in May 1996 (the beginning of its fiscal 1997), which was a year after Transforce’s predecessor (Cabano Kingsway) completed its financial reorganization. Mr. Bédard put in place new operating structures based on a network of independent business centres, which aimed to bring it closer to its customers. In addition, the new management team identified three key objectives: (1) increase revenues from profitable business segments and customers, (2) strengthen Transforce’s position in the North American transportation market, and (3) achieve a more balanced revenue mix. Clearly, Transforce is a much stronger company today, and we believe Mr. Bédard’s commitment to Transforce will continue to persist given that he has continued to add to his position of 3.7 million units (5.5% of Transforce).

Plenty Of Growth Opportunities Remain

Fragmentation of the $20 billion for-hire Canadian trucking industry continues to remain a fact of life. According to Statistics Canada, there were 3,260 for-hire trucking companies in Canada with annual revenues of over $1 million in Q1/04. This represents a 10% increase over the previous year and compares to 2,375 carriers in 1998 (Figure 6). Of those with revenues under $1 million, we estimate that there are an additional 7,000 carriers. Thus, despite Transforce’s rapid growth to a 5% market share, the Company has plenty of additional acquisition opportunities. Furthermore, the inclusion of private trucking (companies that own and operate trucks for the sole purpose of transporting their own goods) and couriers would bring the total trucking market in Canada close to $50 billion annually.

Figure 6 Fragmentation Of Canada’s Trucking Industry Remains

0

2,000

4,000

6,000

8,000

10,000

12,000

1996 1997 1998 1999 2000 2001 2002

<$1MM

>$1MM

Source: Company Reports, Sprott Securities Inc.



Transforce Is Generating High Returns Transforce is the top performing transportation and logistics trust, and it outperforms the median return from North American trucking companies, as measured by pre-tax return on assets (ROA). We use pre-tax ROA to equalize earnings between corporations that are largely subject to full taxation, versus the trusts that typically only pay capital taxes. Referring to Figures 7 and 9, the North American trucking companies have produced a median ROA of 10.3% over the last twelve months, while the transportation and logistics trusts have generated a median ROA of 6.4%. This compares to Transforce’s ROA of 12.8%, which we expect to improve to 17.3% and 18.7% in 2004 and 2005, respectively (Figure 8). Transforce’s success at buying companies at extremely attractive multiples and improving operations is expected to continue to contribute to growing ROA.

Figure 7 Transforce Has Outperformed Trucking And Trusts (TTM)

0%

5%

10%

15%

20%

25%

30%

ROC ROA ROE

TIF.UN

Trusts

Trucking

Source: Baseline, Sprott Securities Inc.



At The Crossover Point Transforce is currently in the process of surpassing the Canadian trucking industry.

According to Statistics Canada (Figure 8), Canadian for-hire trucking companies have historically generated a pre-tax ROA of approximately 12.5%. While Transforce has been below this margin, we note that Transforce has seen a rapid improvement in ROA since Alain Bédard joined the company in 1996. More importantly, we expect that 2004 will mark an important year as we expect that Transforce will surpass the Canadian trucking industry’s ROA for the first time since its financial restructuring in 1995.

Figure 8 At The Crossover Point – Transforce’s ROA Is Improving Rapidly

-5%

0%

5%

10%

15%

20%

25%

TIF.UN -3.1% 2.5% 6.2% 7.3% 8.1% 9.6% 11.9% 17.3% 18.7% 21.1%

Cdn Trucking 14.3% 14.3% 12.1% 12.6% 12.5% 13.2% 13.2% 14.0% 14.3% 14.5%

1997A 1998A 1999A 2000A 2001A 2002A 2003A 2004E 2005E 2006E

Source: Statistics Canada, Company Reports, Sprott Securities Inc.



Figure 9 North American Trucking Comparables and Transportation and Logistics Trusts Ranked By ROA

Shares/Units Market LT Net TTM

Unit Curr. Cash Out Cap Debt P/CF Debt Pretax % Change Company Ticker Price Dist. Yield MM $MM $MM TTM 2004E 2005E /EBITDA ROA 1 Mth 1 Year

CORPORATIONS (US$) SIRVA SIR $23.90 70.4 $1,683.5 $460.4 14.2x 16.1x 10.0x 1.7x 37.6% 5.1% - Landstar Systems LSTR $66.25 30.3 $2,006.4 $77.4 28.3x - - - 21.4% 20.7% 90.6% Heartland Express HTLD $20.07 75.0 $1,505.3 - 17.5x 17.3x 15.4x - 21.4% 11.4% 20.9% Knight Transportation KNGT $11.12 56.4 $1,315.9 - 18.1x 97.3x 77.8x - 20.3% 10.5% 39.8% JB Hunt Transport JBHT $39.64 80.8 $3,201.3 - 10.5x 7.6x 7.5x - 19.8% 13.9% 58.9% Arkansas Best ABFS $38.13 24.9 $950.3 $1.6 8.1x 6.4x 6.9x 2.1x 12.9% 7.2% 16.3% Old Dominion Freight ODFL $28.02 24.8 $695.9 $85.2 9.3x 8.8x 7.6x 2.4x 11.9% 0.9% 37.0% Werner Enterprises WERN $21.00 79.3 $1,664.3 - 7.7x 7.4x 6.5x - 11.7% 13.5% 18.4% Vitran Corporation VVN $16.29 9.6 $155.7 $13.6 9.6x 10.8x 8.9x 2.5x 11.0% 10.8% 24.9% Marten Transport MRTN $18.96 14.1 $268.2 $21.4 5.9x - - - 9.7% 5.3% 17.5% Swift Transportation SWFT $18.67 79.9 $1,492.6 $223.3 6.0x 4.5x 4.5x 5.7x 7.8% 15.9% -18.0% Covenant Transport CVTI $16.78 14.6 $244.3 $10.0 4.2x 4.1x 3.8x 2.0x 8.0% -13.5% -8.9% PAM Transport Services PTSI $18.95 11.3 $214.1 $23.5 5.8x - - 2.0x 6.6% 1.4% -6.3% SCS Transportation SCST $18.10 15.0 $270.8 $121.5 4.2x - - 5.5x 6.3% -0.3% 21.3% Yellow Roadway YELL $46.11 48.1 $2,218.3 $734.6 8.8x 6.5x 5.6x 8.2x 5.8% 3.9% 45.2% Overnite OVNT $33.19 27.9 $926.4 $109.3 8.1x 6.9x 6.9x 3.2x 4.8% 5.2% - USF USFC $35.49 27.8 $985.9 $250.1 6.5x 5.5x 6.5x 3.1x 4.6% 1.2% 3.8% U.S. Xpress XPRSA $20.55 14.1 $289.1 $160.3 5.8x 5.1x - 4.9x 4.0% 12.0% 62.7% Median/Total 8.1x 7.1x 6.9x 2.8x 10.3%

TRUSTS Transforce Income Fund TIF.U $13.05 $1.20 9.2% 66.7 $870.3 $177.8 7.9x 7.2x 6.3x 1.4x 12.8% 11.1% 53.0% Oceanex Income Fund OAX.U $15.00 $1.12 7.5% 8.7 $130.9 - 8.2x - - 1.3x 11.4% 2.0% 29.4% Contrans Income Fund * CSS.U $14.30 $1.25 8.7% 27.8 $397.4 $17.4 10.3x 9.3x 8.8x 0.5x 11.1% 6.4% 61.8% Chemtrade Logistics CHE.U $18.00 $1.80 10.0% 16.2 $291.0 $98.6 7.6x 8.9x 8.7x 2.7x 6.4% -6.3% 8.0% Versacold Income Fund ICE.U $8.70 $0.93 10.7% 22.1 $192.6 $74.2 9.3x 8.2x - 6.1x 4.7% -10.9% 0.0% PBB Global Logistics PBB.U $19.40 $1.75 9.0% 6.1 $119.2 $12.7 10.1x - - 9.7x 2.1% 0.3% 52.2% Livingston International LIV.U $20.93 $1.33 6.4% 15.1 $316.1 - 11.4x - - 7.1x 1.7% 7.3% 44.3% Westshore Terminals WTE.U $9.65 $0.56 5.8% 70.4 $679.2 - 18.4x 13.8x 11.2x 0.0x - 12.2% 44.0% Median/Total 8.9% 9.7x 8.9x 8.8x 2.1x 6.4% *During the past 24 months, Sprott Securities Inc., either on its own or as a syndicate member, participated in the underwriting of securities of this company and/or acted as financial advisor Source: Thomson Baseline, StarData, Sprott Securities Inc.



Distributions Are Heading Higher Since its conversion to an income trust in late 2002, Transforce has increased its distributions twice: in May and October 2004. While Transforce’s Highland acquisition is expected to be accretive to cash flow, will Transforce be able to increase distributions again? To answer this question, we need to determine the adequate payout ratio for a trucking income trust. We looked at EBITDA per unit of the major US trucking companies (refer to Figure 10 footnote) going back to 1994. We then derived a market capitalization weighted EBITDA per unit that adequately reflects the impact of size on the overall volatility. We found that cash flow for the group declined a median of 23% in a cyclical downturn, thereby implying that an efficient payout ratio for trucking income trusts should be in the 75-80% range.

Figure 10 US Trucking Companies’ EBITDA Per Unit Declines A Median Of 23%

-28%

-23%

-19%

-30%

-25%

-20%

-15%

-10%

-5%

0%1995 1998 2001

Represents the market capitalization weighted EBITDA Per Unit Of HTLD, KNGT, LSTR, JBHT, ABFS, ODFL, WERN, VVN, MRTN, SWFT, CVTI, PTSI, YELL, USFC, XPRSA Source: Baseline, Sprott Securities Inc.

Determining Distributable Cash

With business trusts that operate in different industries, significant capital disposals are typically a warning sign that the Company is reducing its capacity or is having trouble satisfying distributions with its operating cash flow. However, in the trucking business asset disposals are a fact of life, as rolling stock continuously must be turned over. It becomes even more difficult determining distributable cash given that Transforce’s rapid pace of acquisitions typically results in optimizing the acquired fleet to a size that fits its business model. For example, some of Transforce’s Canadian Freightways assets have been sold and/or replaced since the acquisition to “right-size” the fleet. Another example of a trucking company selling assets following an acquisition would be Contrans Income Fund’s (CSS.UN-T) sale-and-leaseback of its Calgary Tri-Line facility in July 2003 after the purchase in early 2002.

Unfortunately, Transforce does not segregate its capital spending or disposals related to “ongoing” operations (maintenance capital). We do not believe that this is an intentional attempt to hide the maintenance capital of the Company, but rather the disclosure of maintenance capital and distributable cash are not required under Canadian GAAP. Furthermore, according to management, the segregation of maintenance related capital spending, and spending related to growth and acquisitions, has not been demanded by the investment community. However, management is now looking at more detailed reporting of its capital spending, which should help derive greater visibility into operations.



While our distributable cash calculation (Figure 11) includes all capital spending in the absence of more detail, the important number to focus on is the net capital spending required to maintain operations. For sustenance of the ongoing operations, management believes that it will require $17 million and $20 million in capital spending in 2004 and 2005 to maintain operations, while disposals should total $4 million and $5-6 million, respectively. This would imply net maintenance capital spending of approximately $13 million in 2004 and $14-15 million in 2005.

As a percentage of amortization, this represents approximately 33% of Transforce’s 2005 amortization compared to roughly 41% for Contrans. However, it is very important to note that Transforce’s business is very different than Contrans’, which is only TL and school buses. Furthermore, the revenue production of Transforce is over three times that of Contrans; therefore, tremendous economies of scale and networks can be derived from buying and selling large quantities of capital equipment.

Figure 11 Transforce’s Statement Of Distributable Cash ($000s) 2003A 2004E 2005E 2006EOperating Cash Flow 76,400 120,395 138,023 142,502Less: Debt/Capital Lease Repayment 7,924 12,915 14,000 14,140Less: Capital Spending 15,134 24,131 24,866 20,092Add: Asset Disposals 11,555 15,008 10,448 5,276Distributable Cash $64,897 $98,357 $109,605 $113,546 Distributions To Trust Units 54,773 59,133 62,655 65,329 Dividends To Tracking Shares 10,877 12,138 12,593 13,131Total Distributions & Dividends $65,650 $71,270 $75,248 $78,460Total Payout Ratio 101% 81% 76% 76%Diluted Distributable Cash Per Unit $1.02 $1.48 $1.65 $1.70Indicated Trust Unit Distribution $1.14 $1.20 $1.26 $1.29Indicated Tracking Share Dividend $0.68 $0.77 $0.80 $0.83Source: Company Reports, Sprott Securities Inc.

Higher 2005 Distributions From Highland

We estimate that Transforce’s payout ratio would decline to 73% in 2005 if it did not increase distributions. We are forecasting that Transforce increases distributions to $1.26 (from $1.20) in 2005, bringing its payout ratio to 76%. We believe that this level is adequate to prevent distribution pressure in a downturn. In 2006, we are forecasting another distribution increase to $1.29.



Transforce Is Cheap Transforce is on the cusp of surpassing the industry in terms of economic returns, and we believe that the market has not fully recognized the investment opportunity. We believe Transforce is undervalued and based on our analysis, we have derived a 12-month target price for Transforce of $15.75, which equates to 7.6x our 2005 operating cash flow and a yield of 8%.

Trailing P/CF Multiples Have Improved For Canada’s Trucking Trusts

Transforce has traded at an average trailing P/CF multiple of 4.8x since 1998, while Contrans Income Fund (CSS.UN-T) has traded at 5.7x (Figure 12). This compares to the S&P Trucking Index that has traded at an average of 8.0x during this same period. We note, however, that Contrans and Transforce both saw their multiples move significantly higher during 2002 when they both converted to income trusts and received more investor attention. We believe that these companies are now trading at more reasonable long-term valuation multiples of 7-9x trailing cash flow that are in line with aggregate and historical trucking multiples.

Figure 12 Transforce’s Trailing P/CF Multiple Has Improved

0x

2x

4x

6x

8x

10x

12x

14x

Jan-

98

May

-98

Sep

-98

Jan-

99

May

-99

Sep

-99

Jan-

00

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-00

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01

May

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ContransTransforceS&P Trucking Index

Source: Baseline, Bloomberg, Company Reports, Sprott Securities Inc.

Yield Has Also Improved For Canada’s Trucking Trusts

While yield is a useful valuation measure for investors seeking only yield, we typically do not set our targets based on yield, because yield is relative to the free cash flow that the company is generating and the payout ratio that the Company chooses to maintain. Since Contrans and Transforce converted to income trusts, they have traded at median yields of 13.3% and 13.2%, respectively (Figure 13). We believe that these yields were inflated for most of 2003 as the Canadian trucking industry was having its difficulties in dealing with the rising Canadian dollar, SARS and mad cow disease, leading to tight cash flow and stressed payout ratios. In 2004, the industry recovered very rapidly as the US economy continued to recover and the US introduced new driver hours of service legislation that limited driver work hours and put further pressure on the supply of truck drivers. These factors have resulted in very strong pricing power for the industry. The higher cash flow resulting from the industry recovery along with Transforce’s acquisitions has brought its payout ratio and yield down.



Figure 13 Transforce’s Cash Yield Has Moved Lower Through The Industry Recovery

8%9%

10%11%12%13%14%15%16%17%

Jul-0

2

Nov

-02

Mar

-03

Jul-0

3

Nov

-03

Mar

-04

Jul-0

4

ContransTransforce

Source: Baseline, Bloomberg, Company Reports, Sprott Securities Inc.

Peer Analysis Referring back to Figure 9, we note that the US trucking companies currently trade at 7.1x and 6.9x the consensus 2004 and 2005 cash flow estimates, respectively. The transportation and logistics income trusts in Canada trade at roughly 8.8x 2005 estimates, for a cash yield of 8.9%. Finally, Transforce’s closest trust comparable Contrans trades at 9.3x and 8.8x our 2004 and 2005 operating cash flow estimates, and a cash yield of 8.7%.

Given these comparable metrics, we believe that Transforce is undervalued at 7.2x and 6.3x our 2004 and 2005 operating cash flow estimates. Transforce’s 2005 multiple is 8.7% below its US trucking peers despite 24% better ROA. Compared to the transportation and logistics trusts, Transforce’s ROA is double, yet its multiple is 28% lower. In addition, we believe that Transforce’s ROA will continue to improve at a rapid pace in 2005 as the Highland acquisition has an impact.

DCF Analysis Referring to Figure 14, our DCF analysis uses a 10% discount rate and it assumes a 0% long-term growth rate. While we estimate that Transforce’s theoretical weighted average cost of capital (WACC) is roughly 7.06%, the 10% WACC is a more realistic picture of how Transforce’s WACC will look over the long-term. With our DCF analysis, we come out with a $16.75 valuation.



Figure 14 Discounted Free Cash Flow Analysis Assumptions Beta 0.45Risk Free Rate 5.10%Equity Risk Premium 6.90%Cost of Equity 8.21%Cost of Debt 5.49%Weight Average Cost of Capital (Theoretical) 7.04%Weight Average Cost of Capital (Used) 10.00%Growth Rate (2006) 2.19%LT Growth Rate (2007+) 0.00%Debt-Adjusted Discounted Cash Flow $16.75Source: Bloomberg, Sprott Securities Inc.

Transforce Is Undervalued Our DCF10% analysis indicates that Transforce’s intrinsic value is $16.75, while our Sprott Trust Valuation Cube implies a P/CF multiple of 7.6x (see Figure 15 that follows). We believe that the 7.6x multiple is justified given we value Contrans at 8.0x, noting that Transforce’s lower multiple arises from the higher debt level of 0.9x 2005 EBITDA compared to Contrans at 0.1x. Furthermore, the valuations of Transforce’s US trucking peers with similar ROA and balance sheets also support a 7.6x multiple. Using this multiple, we generate at 12-month target price of $15.75, which also equates to a target yield of 8%.

Initiating Coverage With A Buy

Clearly our target price has ample room to move higher with Transforce’s aggressive acquisition strategy. Given that the Company has completed over 30 acquisitions since 1998 and under Alain Bédard’s watch, we do not expect that its current book of business will remain stagnant.

We are initiating coverage of Transforce Income Fund with a 12-month target price of $15.75. Given a total potential return of 30.3% and a favourable risk/reward proposition, we recommend Transforce as a Buy.



Sprott Trust Valuation Cube Analysis Figure 15 Sprott Trust Valuation Cube – Transforce Income Fund Measure Commentary Value Weight Adj.

STABILITY The trucking business is highly cyclical. Relative to TL, LTL has higher barriers to entry as the capital requirements for terminals raises the barriers.

-2 20.0% -40.0%

FINANCIAL Capital Structure/ Balance Sheet Quality

Transforce is expected to end 2005 with a debt/EBITDA ratio of 0.9x.

-2 5.0% -10.0%

Payout Ratio If distributions remained flat, its payout ratios would be 73% in 2005 and 71% in 2006.

2 15.0% 30.0%

ROIC/Growth Ability 2005 ROIC expected to be 26.1%. 2 15.0% 30.0%Foreign Exchange Exposure Roughly 33% of Transforce's revenue and 25% of its

cash flow is derived from US$. -2 5.0% -10.0%

US Taxation Transforce only has one small US-based operation that is not material to its overall operations.

1 5.0% 5.0%

STRUCTURAL Regulatory/Environmental Transforce is subject to various environmental laws and

regulations, in addition to stringent transport laws. We note also that the majority of Transforce’s workforce is unionized.

0 5.0% 0.0%

Supplier Power Suppliers have relatively low pricing power. 2 5.0% 10.0%Barriers to Entry The barriers to entry are very low. -2 5.0% -10.0%Customer Power Given the fragmented trucking markets, customer have a

high degree of power. -2 5.0% -10.0%

Degree of Rivalry Rivalry is very high. -2 5.0% -10.0%

OTHER Management Ownership Mgmt & Directors own roughly 7% of units. -2 2.5% -5.0%Public Market History Transforce has been public for more than a decade. 2 2.5% 5.0%Liquidity Transforce trades approximately $1.1 MM per day. 1 2.5% 2.5%Corporate Governance Transforce has 5 (of 9) trustees that are not related to

Transforce, Jolina Capital or Saputo Inc. Transforce does not have an option compensation plan and uses an incentive plan that awards units that are purchased on the open market.

-2 2.5% -5.0%

100.0% -17.5%

Average Specialty Trust P/CF Multiple 9.2x Premium/(Discount) To Average -17.5% Transforce P/CF Multiple 7.6x Source: Company Reports, Bloomberg, Sprott Securities Inc.

Stability The trucking industry is cyclical and driven primarily by economic activity. In addition, fuel costs can impact margins during very volatile periods. We calculated that the median cash flow decline is roughly 23% for US trucking companies when the cycle turns negative.

Financial Capital Structure and Balance Sheet Quality: Transforce has 66.9 million units outstanding, bringing its market capitalization to over $850 million. As of September 30, 2004, its current debt outstanding of $177.8 million puts Transforce at a debt to 2004 EBITDA ratio of 1.3x. This leaves Transforce with remaining debt capacity of $19.9 million. Refer to Figure 16 for more detail on its debt as of June 30, 2004 (the detailed debt segmentation for September 30, 2004 was not yet available).



Figure 16 Transforce’s Capital Structure Type – Debt Interest Rate1 Used CapacityOperating Facility2 P+0.5% $52.6 MM $80.0 MMGE Capital Loan, Jan/07 P+1.1% $50.0 MM $50.0 MMConditional Contracts/Leases 7.1% $38.0 MM $38.0 MMCapital Leases 4.44-8.51% $29.7 MM $29.7 MMTotal $170.3 MM $197.7 MMType – Equity Notes Units PercentageJolina Capital Tracking Shares 15.8 MM 23.5%Jolina Capital Trust Units 2.5 MM 3.7%Alain Bédard Trust Units 3.7 MM 5.5%Other Mgmt & Directors Trust Units 0.3 MM 0.5%Fidelity Trust Units 9.6 MM 14.3%CDP Capital Trust Units 4.6 MM 6.9%Remaining Float Trust Units 30.5 MM 45.6%Options Nil NilTotal 66.9 MM 100%1 P=Prime 2 $11.5 MM in letters of credit written on the operating facility Source: Company Reports (as at June 30, 2004)

Payout Ratio: Transforce’s payout ratio on its current indicated distribution for 2004 is forecasted to be 81.1%, down substantially from 101% in 2003. In 2005, we are forecasting a payout ratio of 73% assuming that it held distributions at the current level of $1.20 per unit. Based on our historical analysis of cash flow among the US trucking companies, we believe that a payout ratio of 75-80% for a trucking income trust is adequate to prevent distribution cuts when the cycle turns negative.

ROIC: We estimate that Transforce will have an average return on invested capital (ROIC) during 2002-2006 of 20%, which is much higher than its theoretical cost of capital of just over 7%.

Foreign Exchange Exposure & US Taxation: Approximately one-third of Transforce’s revenue is generated by US trans-border activity; however, only 25% of cash flow is US$. To manage this risk, Transforce is currently hedged at an average rate of 1.3577 at declining levels of coverage from 65% today to 25% of US$ cash flow through March 2006. Transforce has one small US-based operation that is subject to US taxation; however, it is not material to its overall business.

Figure 17 Financial Analysis Summary 2003A 2004E 2005E 2006E

Revenue 753,674 1,067,942 1,231,888 1,244,207 Growth rate 41.7% 15.4% 1.0%EBITDA 90,212 138,170 158,708 160,295 Growth rate 53.2% 14.9% 1.0%Debt/Capital Lease Repymt. 7,924 12,915 14,000 14,140Net Maintenance Capex 3,579 9,123 14,418 14,816Distributable cash per unit $1.02 $1.48 $1.65 $1.70 Growth rate - 45.1% 11.5% 3.0%Distribution $1.14 $1.20 $1.26 $1.29 Growth rate - 5.3% 5.0% 2.4%Payout Ratio 101.2% 81.1% 76.4% 75.9%Net Debt/EBITDA 1.4x 1.3x 0.9x 0.6xSource: Company Reports, Sprott Securities Inc.

Structural Regulatory/Environmental: Transforce is subject to various environmental laws and regulations, in addition to stringent transport laws related to hours of service. We note alsothat the majority of Transforce’s workforce is unionized.

Supplier Power: Suppliers have relatively low pricing power.



Barriers to Entry: In general, the barriers to entry into trucking are very low. Relative to TL, LTL has higher barriers to entry, as the capital required for terminals can be onerous.

Customer Power: While customers currently have little power, the continued fragmentation of the trucking industry generally gives customers a high degree of power.

Degree of Rivalry: Rivalry is very high in the trucking industry.

Other Management Ownership: Management and directors own roughly 7% of the outstanding units, while Jolina Capital (holds two Board positions) owns 27%.

Public Market History: Transforce has been public for more than a decade.

Liquidity: Transforce trades approximately $1.1 million per day.

Corporate Governance: Transforce has nine trustees, five of which are unrelated parties. Two of the remaining four are employed by Transforce, and the remaining two are employed by Jolina Capital, which have been large owners of the Fund and its predecessor corporation since its financial restructuring.

Transforce does not utilize an options compensation program, which we view as very positive. The Company uses a long-term incentive plan (LTIP) that does not result in dilution. The LTIP awards executive officers with trust units that Transforce buys on the open market, based on distributable cash exceeding a distribution target. These units vest at the rate of one-third of the total grant beginning on the first anniversary of the date of grant, subject to the participant being employed by Transforce on the vesting dates.

In 2003, the target of $1.14 was not exceeded and no bonuses were awarded. For 2004, we estimate that distributable cash will be 31 cents higher than the cumulative (not indicated) distributions of $1.17 per unit. Referring to Figure 18, this would result in the LTIP receiving 20% of the 31 cents that Transforce has exceeded its 2004 target.

Figure 18 LTIP Summary For 2004 Distributable Cash Above

Distribution Target Of $1.17 Amount Allocated

(% of distribution above target amount) Up to 5 cents 10% 5 to 10 cents 15%

More than 10 cents 20% Source: Company Reports



Appendix 1: Corporate Profile The Company was formed in 1957 (refer to Figure 19) and went public in December 1986. After industry deregulation in 1987, which increased competition and drove down freight rates, coupled with the recession of the early 1990s, the Company ran into financial difficulties and restructured in May 1995 changing its name to Cabano-Kingsway Inc. One year later, Alain Bédard was brought in to improve the Company’s operations and financial performance. In April 1999, the Company changed its name to Transforce, and in September 2002 it converted to an income trust. For more details on the Company’s acquisition history, refer to Figure 2.

Figure 19 Corporate History 1957 Transport Cabano started its activities with two trucks based in Cabano, Quebec. 1959 Acquired license to service the Montreal, Quebec area. 1962 Transport Cabano incorporated under Cabano Transport Ltée. Dec-86 Completed its IPO of 900,000 common shares on the Montreal Stock Exchange. Aug-87 Through the acquisition of Expeditex Inc., the Company gained the necessary permits to

serve greater areas of Quebec, as well as Ontario and the United States. Jul-92 Acquired Kingsway Transports Limited, strengthening the Company’s LTL presence in

Ontario and the United States. May-95 Completed its financial restructuring after experiencing financial difficulties. May-96 Alain Bédard was appointed as new CEO. Mid-97 Jolina Capital converted its debt to equity at $0.90 per share plus a warrant. Dec-97 At a price of $1.30, the Company issued 8.85 MM shares to the public and 2.3 MM

shares to Jolina Capital Inc. Apr-99 Cabano Kingsway changes its name to Transforce Inc. Feb-02 At a price of $3.05, the Company issued 6.75 MM shares to the public and 4.05 MM

shares to Jolina Capital Inc. Sep-02 Transforce completed its conversion to an income fund and concurrently issued 12 MM

units of the Fund at $8.50. Mar-04 Issued 3.0 MM units of the Fund at $11.00.

Source: Company Reports, Sprott Securities Inc. Figure 20 Transforce Operating Summary

Fiscal YE December 31 % % % % (MMs) 2003A Rev. 2004E Rev. 2005E Rev. 2006E Rev. Revenue LTL & Parcel 397,153 53% 543,815 51% 562,854 46% 568,483 46%Truckload 165,186 22% 252,855 24% 346,906 28% 350,375 28%Specialized TL 120,408 16% 142,367 13% 187,586 15% 189,462 15%Specialized Serv. 70,927 9% 128,905 12% 134,541 11% 135,887 11%Consolidated Rev. 753,674 100% 1,067,942 100% 1,231,888 100% 1,244,207 100%Operating Exp. 524,960 70% 717,305 67% 827,730 67% 836,007 67%Gross Margin 228,714 30% 350,638 47% 404,158 54% 408,200 54%Fixed, G&A 138,502 18% 212,468 20% 245,450 20% 247,904 20%EBITDA 90,212 12% 138,170 13% 158,708 13% 160,295 13%Source: Company Reports, Sprott Securities Inc.



Diversified Operations And Customer Base

Transforce is based in St-Laurent, Quebec (the Montreal area) with approximately 7,723employees. Roughly one-third of its revenue is derived from trans-border activity between Canada and the United States; however, its fixed assets are primarily located inCanada. Transforce’s facilities include 229 terminals, with 77 in Ontario, 60 in WesternCanada, 73 in Quebec, 14 in the Atlantic Provinces and 5 in the US. Its trucking fleet is the largest in Canada and consists of 3,360 power units, 7,450 trailers and 1,553 owner-operators; these figures include its recent Highland Transport acquisition.

Referring to Figure 20, the Company operates four segments: less-than-truckload and parcel delivery (LTL), truckload (TL), specialized truckload (STL), and specializedservices (SS) or logistics and warehousing. These segments have divisions (Appendix 5)that operate autonomously, but with the Transforce operating and financial standards instilled upon them. For a list of Transforce’s top competitors, refer to Appendix 6.

Transforce has a broad and diverse customer base with no one customer accounting formore than 10% of revenue. Referring to Figure 21, Transforce serves over 50,000 customers including General Motors, Ford, Dupont, Molson, Domtar, Kruger, Purolator,Wal-Mart, Alcan, Smurfit Stone and Orica.

Figure 21 Transforce’s Customers By Sector Of Activity (2003) Air Freight 1%

Automotive 22%

Pulp & Paper 17%

Retail 12%Construction Materials 10%

Overseas Containers 8%

Chemicals 8%

Other 6%

Metals & Mining 6%

Books 4%

Explosives 4%Food & Beverage 3%

Source: Company Reports, Sprott Securities Inc.



Appendix 2: LTL & Parcel Segment We estimate that Transforce’s LTL and Parcel segment will account for roughly 46% of its overall revenue in 2005. In LTL, Transforce operates as TST Overland Express, Canadian Freightways, Kingsway, Epic Express, Daily, Sélect and ClickExpress (Appendix 5).

Less-Than-Truckload Transforce is Canada’s largest LTL carrier. In 2005, we estimate that Transforce’s LTL group (excluding Parcel) will account for approximately 33.5% of the Company’s overall revenue, delivering an average of close to 11,000 shipments per day. Essentially, the LTL business provides partial-load general-freight shipment to customers across North America. The process is as follows: 1. LTL carriers pick up less than a truckload of goods from a variety of customers, 2. The goods are taken to a local terminal where it is consolidated with the shipments

from other drivers, 3. The goods are sorted according to the desired destination, 4. From the terminal, the goods are taken to either the final destination or a terminal in

another city for further final destination sorting.

The more business an LTL carrier can conduct on its route, or the greater the route density, the higher the return on assets. Relative to the TL business, LTL is more capital and labour intensive, as drivers make much more frequent pick-ups, and fixed terminals are required for the sorting of shipments. For this reason, the LTL business is typically higher margin with higher barriers to entry (more capital required) than the TL business.

With the addition of Canadian Freightways in early 2004, Transforce’s LTL segment now essentially operates across Canada. In the Maritimes and the United States where it does not have a significant base of terminals, Transforce has established exclusive partnerships and alliances.

Parcel Delivery Transforce entered the parcel business in July 2002 through the acquisition of Canpar, based in Mississauga, Ontario. Canpar began operations in 1976 and was originally a part of Canadian Pacific. Transforce paid 1.9x EBITDA for the acquisition, which generated $142.5 million of revenue for the year ended June 30, 2002; management expects Canpar to generate in excess of $150 million revenue in 2004.

The parcel process is similar to that of LTL. Canpar is referred to as a “hub and spoke” ground service, parcel delivery operation that focuses on non-expedited business-to-business parcels. It operates seven major hubs, 65 facilities, and about 1,000 trucks across Canada. For packages destined to the United States, Canpar out-sources this work to Fedex. With Canpar delivering over 23 million packages in 2003, its on-time delivery rate was 99.6%. Approximately 80% of Canpar’s 1,623 employees are unionized, and it recently renewed its union agreement through November 2009. Canpar’s key competitors include Purolator (owned by Canada Post), UPS, Fedex, DHL and Loomis.

TransForce continues to invest in efficiency to create value. In addition to the $5 million already invested in new technology for Canpar, Transforce is spending $25-million to relocate and modernize the Canpar sorting facility in Toronto. The installation of state-of-the-art sorting equipment in Canpar’s largest hub is on track to be completed by the first quarter of 2006, and should provide a rapid return for the Company.



Appendix 3: Truckload Segments With the recent acquisition of Highland, Transforce is now the largest Canadian TL carrier. We estimate that the TL segment will account for 28% of Transforce’s 2005 revenue, while Specialized TL will account for an additional 15%.

The TL business involves the provision of full-load transport of goods using both company-owned vehicles and dedicated owner-operators. As these goods are typically shipped directly from the customer’s dock to the final destination, the provision of terminals for consolidating and sorting is not necessary. While domestic trips occur in TL, it is particularly strong at cross-border activity.

Transforce’s strategy in TL is to constantly improve customer service and the efficiency of operations. Transforce’s trucks are typically equipped with Global Positioning Systems (GPS), which allows Transforce to monitor the location of loads, enabling it to issue new dispatch orders based on real-time information. Another key to achieving higher returns on its assets is reducing the waiting times for drivers and owner-operators at the customer docks, as billing is done on a revenue per mile basis. Furthermore, as Transforce continues to grow its TL business and become more dominant, it can better source backloads, thereby driving down its empty miles.

Truckload In the “non-specialized” TL business, general goods are typically transported in closed van trailers. Transforce operates in the TL business through twelve operating divisions (Appendix 5): Besner, JC Germain, Papineau International, SAS International, Lacaille International, TST Truckload Express, UTL Transportation Services, InterForce International, and the more recent acquisitions of A&M International, Ganeca, Montkar and Highland. Combined, we estimate that these divisions will transport over 4,000 full loads per week and travel over 170 million miles in 2005.

Specialized Truckload In the Specialized TL business, Transforce’s services include container, bulk material shipments (cement, lime, fly ash), petroleum products, propane, butane, expedited deliveries, transport by open trailer, and transport of explosives (for the mining and construction industries). These shipments are carried out by its Specialized TL operatingdivisions that include, TST Expedited Services & Air, Transpel, Mirald, Nordique, Kingsway Bulk, Highland, Mondor, McGill Air and April. In general, the margins in Specialized TL are higher than those of the non-specialized TL services.

Shortage Of Owner Operators

Owner-operators are essentially contractors to trucking carriers, and they are frequently used in the TL business as it provides the carrier with more flexibility to adjust its costs should business slow. These independent contractors pay the costs related to acquisition, maintenance and operation of their equipment.

There continues to be a shortage of owner-operators in the TL business. The reasons for the shortage include an aging workforce, and general lack of incentive to become a trucker. The supply of truck drivers has often been likened to the manufacturing workforce. Until driver pay began rising earlier this year, there has been little incentive to leave the manufacturing assembly line and start driving a truck. For example, the lifestyle of a long-haul truck driver is not as attractive as it is difficult for these drivers to be home with their family every evening. Another factor that exacerbated the driver shortage was the new US Hours Of Service legislation (became effective on January 1, 2004) that increased the time that truck drivers must set aside to rest in each 24-hour period to 10



hours from eight hours, and the total time a driver can be on duty declined to 14 hours from 15 hours.

Pay and Freight Prices Are Rising. While the driver shortage did not pose a tremendous problem when freight volumes were relatively light at the beginning of the new millennium, the shortage promised to drive up the cost of trucking when freight demand improved. In July 2003, The National Transportation Institute’s National Survey of Driver Wages claimed that, “as tonnage increases, we expect demand for new drivers to create a driver shortfall. The result of this will be a very sharp increase in driver pay.” This began to materialize in late-2003 and in early 2004 as we began to see pay rates for drivers increase as the trucking industry in North America began boosting rates and taking advantage of the tight environment. According to Logistics Management, the pricing increases for TL carriers were the largest since 1996. This pricing power continues as the freight market continues to remain tight.



Appendix 4: Specialized Services Segment Transforce’s Specialized Services Segment (formerly Logistics and Warehousing Services) is expected to account for about 11% of revenues in 2005. Its operating divisions include (Appendix 5): Universal Contract Logistics, TST Automotive Services, M&C International Trade, Trans4 Logistics, Stream, St-Lambert, CK Logistics, Transpar, TST Load Brokerage Services, and Transterm. This segment provides ancillary transportation services, grouping a number of areas of expertise including third-party logistics and fleet management, customs brokerage and bonded warehousing, and international freight forwarding. Its large public market comparables in this business include Livingston International (LIV.UN-T) and PBB Logistics (PBB.UN-T).

Logistics The logistics business is a non-asset-base process that allows Transforce to leverage its existing customer relationships and gain greater asset utilization. For example, it can allow a manufacturer to focus on its core competency of making a product, while allowing Transforce to manage the process of getting the product to the customer. In managing this process, the Specialized Services Segment may call on the services of Transforce’s LTL division.

Warehousing In the warehousing business, these same manufacturers can move their inventory out of their plants quickly and lower their costs. Another example of warehousing services may be an international company looking to penetrate the Canadian market, but is unwilling to invest in manufacturing and/or warehousing facilities.



Appendix 5: Transforce’s Operating Divisions Figure 22 Transforce’s Operating Divisions

Source: Transforce Income Fund



Appendix 6: Top Canadian Carriers Figure 23 Top Canadian Trucking Companies

Operating Segments Trucks & $MM Company Location TL LTL Logistics Total Tractors Trailers O/OS Employees Revenue Transforce Income Fund St-Laurent, PQ 20,086 3,360 7,450 1,553 7,723 1,232 Trimac Transportation Services Calgary, AB 14,200 3,126 5,700 1,446 3,928 656 Vitran Corporation Toronto, ON 8,830 1,120 4,700 540 2,470 427 Day & Ross Transportation Group Hartland, NB 7,631 1,587 1,797 2,201 2,046 -- TransX Winnipeg, MB 6,264 876 3,330 278 1,780 -- Mullen Transportation Aldersyde, AB 6,098 1,116 2,585 453 1,944 422 Groupe Robert Boucherville, PQ 5,930 1,010 3,000 170 1,750 -- SLH Transport Kingston, ON 5,555 870 3,425 285 975 -- Paul's Hauling Group Winnipeg, MB 5,431 941 2,815 100 1,575 -- Clarke Inc. Toronto, ON 5,050 1,550 1,600 900 1,000 407 Contrans Income Fund Woodstock, ON 4,468 1,115 1,946 766 641 326 Challenger Motor Freight Inc. Cambridge, ON 4,359 922 2,136 262 1,039 -- Armour Transportation Moncton, NB 4,136 754 1,862 85 1,435 -- Kindersley Transport Group Saskatoon, SK 3,834 717 1,650 267 1,200 -- * Allied Systems Canada Burlington, ON 3,538 975 1,025 138 1,400 -- * Reimer Express Lines Winnipeg, MB 3,476 489 1,307 179 1,501 -- * Schneider National Carriers Aberfoyle, ON 2,929 550 1,650 66 663 -- BLM Group Kitchener, ON 2,920 443 1,345 232 900 -- Bison Transport Winnipeg, MB 2,668 558 1,100 160 850 -- XTL Transport Etobicoke, ON 2,400 490 1,250 290 370 -- Wilson Logistics Etobicoke, ON 2,250 400 1,300 300 250 -- * Parent Company Based In The United States Source: Today’s Trucking, Company Reports, Sprott Securities Inc.



Appendix 7: Key Management Biographies Alain Bédard (President, CEO, Chairman and Trustee): Alain Bédard has been the President and CEO of the Company since June 1996 and a director of the Company since 1992. Prior to June 1996, Mr. Bédard served for more than ten years as VP, Finance & Administration of Saputo Inc., a dairy and grocery products company. From 1978 to 1985, Mr. Bédard was the controller of Normick Perron Inc., a forestry company. Prior to 1978, Mr. Bédard worked as an auditor with KPMG LLP for three years. Mr. Bédard holds a BAA degree from the Université de Sherbrooke and obtained his CMA designation in 1976 and his CA designation in 1977. Mr. Bédard is a director of Uniforêt Inc., a public integrated forest products company.

Gary N. King (President, TST Overland Express): Gary King joined TransForce in March 2000 upon the acquisition by the Company of TST Solutions. Mr. King has more than 36 years of experience in the transportation industry. Over the past 26 years, Mr. King has held various positions with TST Overland Express, including Transportation Center Manager, VP of Operations, Senior VP and VP and GM. Mr. King is also Chairman of the Freight Carriers Association and Vice-Chairman of the North American Transportation Council.

John G. Cyopeck (President, Canpar): John Cyopeck joined TransForce in July 2002 following the acquisition of Canpar. Mr. Cyopeck joined Canpar in March 1989 as VP and Assistant GM, responsible for all operations. In 1990, Mr. Cyopeck was appointed COO, and in 1993, President and CEO of Canpar. He has more than 40 years of experience in the transportation industry.

Brian Kohut (VP, Kingsway): Brian Kohut joined the Transforce group in mid 2001 as VP and General Manager for TST Expedited, a position he occupied until February 2004 when he became EVP for Kingsway. Prior to joining Transforce, Brian was VP sales for Sameday Rightoway. In that capacity he oversaw all sales & marketing functions for the $100 million per year courier, express & cargo operations of Sameday Rightoway.

Jean-Claude Germain (Trustee, Transforce & President, JC Germain): Jean-Claude Germain joined TransForce in March 1998 upon the acquisition by the Company of Entreprises de Transport J.C.G. Inc., of which Mr. Germain was founder and President. Mr. Germain, who also founded Transport Lebon Inc., has more than 25 years of experience in the transportation industry. Mr. Germain has been a director of the Company since 1998.

Robert Papineau (President, Papineau International): Robert Papineau joined TransForce in October 1998 upon the acquisition by the Company of Le Groupe Papineau Inc. Mr. Papineau, who has more than 35 years of experience in the transportation industry, has held several positions with Le Groupe Papineau Inc. since 1967, including that of Vice-President and President. In 1974, Mr. Papineau founded Location Mirabel Inc., following which, in 1982, he founded Transport Papineau International Inc.



Appendix 8: Financials Figure 24 Transforce Income Fund – Canadian GAAP Income & Distributable Cash Statement Fiscal YE December 31 2004E ($000s) 2003A Q1A Q2A Q3A Q4E 2004E 2005E 2006ERevenue $753,674 $225,715 $276,878 $278,405 $286,944 $1,067,942 $1,231,888 $1,244,207Operating Expenses 524,960 154,727 184,984 185,341 192,253 717,305 827,730 836,007Gross Profit 228,714 70,988 91,894 93,064 94,692 350,638 404,158 408,200Fixed, General & Admin. 138,502 47,282 56,916 52,986 55,284 212,468 245,450 247,904EBITDA $90,212 $23,706 $34,978 $40,078 $39,408 $138,170 $158,708 $160,295Interest 7,517 2,636 2,477 2,566 2,621 10,300 11,900 8,659Loss (Gain) on Sale of Assets (1,384) (25) 276 191 - 442 - -Amortization 33,554 9,589 10,560 11,206 11,462 42,817 43,875 39,108Pre-tax Earnings 50,525 11,506 21,665 26,115 25,325 84,611 102,933 112,528Current Taxes 6,295 1,490 2,012 1,826 2,147 7,475 8,786 9,135Future Taxes (1,844) (620) 17 1,102 (128) 371 371 371Net Income $46,074 $10,636 $19,636 $23,187 $23,306 $76,765 $93,777 $103,022Shares Outstanding Basic 63,929 65,459 66,959 66,739 66,690 66,441 66,690 66,690 Diluted 63,929 65,459 66,959 66,739 66,690 66,441 66,690 66,690Earnings Per Unit Basic $0.72 $0.16 $0.29 $0.35 $0.35 $1.15 $1.41 $1.54 Diluted $0.72 $0.16 $0.29 $0.35 $0.35 $1.15 $1.41 $1.54STATEMENT OF DISTRIBUTABLE CASH Operating Cash Flow 76,400 19,580 30,489 35,686 34,640 120,395 138,023 142,502Less: Debt/Cap. Lease Repay. 7,924 2,102 3,303 4,010 3,500 12,915 14,000 14,140Less: Capital Spending 15,134 3,755 5,249 7,127 8,000 24,131 24,866 20,092Add: Asset Disposals 11,555 3,960 4,089 3,594 3,365 15,008 10,448 5,276Distributable Cash $64,897 $17,683 $26,026 $28,143 $26,505 $98,357 $109,605 $113,546 Distributions To Trust Units 54,773 14,023 14,850 14,978 15,282 59,133 62,655 65,329 Div. To Tracking Shares 10,877 3,003 3,072 2,991 3,072 12,138 12,593 13,131Total Distrib. & Dividends $65,650 $17,026 $17,922 $17,969 $18,353 $71,270 $75,248 $78,460Total Payout Ratio 101% 105% 75% 70% 75% 81% 76% 76%Diluted Distrib. Cash Per Unit $1.02 $0.27 $0.39 $0.42 $0.40 $1.48 $1.65 $1.70Indicated Trust Unit Distrib. $1.14 $0.28 $0.29 $0.29 $0.30 $1.20 $1.26 $1.29Indicated Track. Share Div. $0.68 $0.19 $0.19 $0.19 $0.20 $0.77 $0.80 $0.83MARGIN & RATIO ANALYSIS Revenue Growth Rate 69.5% 23.7% 44.0% 49.4% 49.0% 41.7% 15.4% 1.0%Dist. Cash Growth Rate Per Unit - - - - - 45.1% 11.5% 3.0%Gross Margin 30.3% 31.5% 33.2% 33.4% 33.0% 32.8% 32.8% 32.8%EBITDA Margin 12.0% 10.5% 12.6% 14.4% 13.7% 12.9% 12.9% 12.9%Income Tax Rate 8.8% 7.6% 9.4% 11.2% 8.0% 9.3% 8.9% 8.4%Net Debt/EBITDA 1.4x 1.6x 1.6x 1.4x 1.3x 1.3x 0.9x 0.6xPretax Return on Assets 11.9% - - - - 17.3% 18.7% 21.1%Return on Equity 21.4% - - - - 34.4% 37.7% 38.1%Return on Invested Capital 15.4% - - - - 20.2% 26.1% 29.4%Source: Company Reports, Sprott Securities Inc.



Figure 25 Transforce Income Fund – Balance Sheet Fiscal YE December 31 ($000s) 2003A 2004E 2005E 2006E

ASSETS Accounts Receivable 110,430 164,555 183,441 185,275Prepaid Expenses and Other 6,338 14,505 14,505 14,505

116,768 179,060 197,946 199,780Fixed Assets 200,455 261,558 232,102 207,809Goodwill 100,696 112,748 112,748 112,748Other Assets 4,059 933 933 933TOTAL ASSETS $421,978 $554,300 $543,728 $521,270

LIABILITIES & UNITHOLDERS' EQUITY Liabilities Operating loan 31,981 27,414 4,156 3,425Accounts Payable & Accrued 82,325 120,134 133,922 135,261Distributions Payable 6,645 6,747 6,747 6,747Income Taxes Payable 1,206 80 80 80Current Portion of LT Debt 16,974 27,930 27,930 27,930

139,131 182,306 172,834 173,443Long-term Debt 73,430 126,525 106,525 58,525Future Income Taxes 3,162 5,669 6,040 6,411

$215,723 $314,500 $285,399 $238,379Unitholders' Equity Unitholders' Capital $166,147 $194,197 $194,197 $194,197Retained Earnings/(Deficit) 40,108 45,603 64,132 88,694

206,255 239,800 258,329 282,891Total Liabilities & Unitholders' Equity $421,978 $554,300 $543,728 $521,270

Book Value $3.23 $3.61 $3.87 $4.24 Source: Company Reports, Sprott Securities Inc.



Figure 26 Transforce Income Fund – Cash Flow Statement Fiscal YE December 31 ($000s) 2003A 2004E 2005E 2006E

Cash Provided by Operations Net Earnings $46,074 $76,765 $93,777 $103,022Add (Deduct) Non-cash Items Amort. Of Fixed Assets 33,554 42,817 43,875 39,108 Loss (Gain) On Disp. Of Fixed Assets (1,384) 442 - - Future Income Taxes (1,844) 371 371 371

76,400 120,395 138,023 142,502Changes in Non-cash Working Capital (4,989) 2,510 (5,098) (495)

$71,411 $122,905 $132,925 $142,006

Financing Activiities Net Increase / (Decrease) in LT Debt $1,006 17,902 $(20,000) $(48,000)Change in Revolving Loan 3,610 (4,567) (23,258) (731)Issuance of Equity & Convertible Debt 500 28,050 - -Distributions (65,804) (71,168) (75,248) (78,460)

$(60,688) $(29,783) $(118,507) $(127,191)

Investing Activitiies Additions to Capital Assets $(15,134) (24,131) (24,866) (20,092)Acquisitions (5,384) (86,281) - -Proceeds on Disposal of Assets 11,555 15,008 10,448 5,276Other (1,760) 2,282 - - $(10,723) $(93,122) $(14,418) $(14,816)

Change in Cash - - - -Cash, Beginning of Period - - - -Cash, End of Period $ - $ - $ - $ -

Op. Cash Flow Before Working Cap. $1.20 $1.81 $2.07 $2.13Op. Cash Flow After Working Capital $1.11 $1.84 $1.98 $2.13Source: Company Reports, Sprott Securities Inc.



Figure 27 Transforce Income Fund - Historic Return On Invested Capital Fiscal YE December 31 YE Apr 30 ($000s) 2002A 2003A 2004E 2005E 2006ENet Operating Profit Less Adjusted Tax (NOPLAT) Calculations Sales $445,478 $753,674 $1,067,942 $1,231,888 $1,244,207Operating Expenses 294,609 524,960 717,305 827,730 836,007Fixed, General & Admin. 83,581 138,502 212,468 245,450 247,904Other 770 (1,384) 442 - -Depreciation Expense 23,994 33,554 42,817 43,875 39,108EBIT 42,524 58,042 94,911 114,833 121,187Operating Taxes 19,454 6,957 8,430 9,844 9,867NOPLAT 23,070 51,085 86,481 104,989 111,320Invested Capital Calculations Operating Current Assets 89,309 116,768 179,060 197,946 199,780Non-Int. Bearing Current Liabilities 65,156 90,176 126,961 140,749 142,088Net Working Capital 24,153 26,592 52,099 57,197 57,692Other Assets 1,414 4,059 933 933 933Net Property, Plant & Equipment 154,459 200,455 261,558 232,102 207,809Operating Invested Capital 180,026 231,106 314,590 290,232 266,434Unamortized Goodwill 74,137 100,696 112,748 112,748 112,748Total Investor Funds 254,163 331,802 427,338 402,980 379,182Return on Invested Capital (ROIC) Calculations NOPLAT 23,070 51,085 86,481 104,989 111,320Average Operating Invested Capital 180,026 231,106 314,590 290,232 266,434ROIC - Operating Invested Capital 12.8% 22.1% 27.5% 36.2% 41.8%NOPLAT 23,070 51,085 86,481 104,989 111,320Average Total Investor Funds 254,163 331,802 427,338 402,980 379,182ROIC - Total Investor Funds 9.1% 15.4% 20.2% 26.1% 29.4%Source: Company Reports, Sprott Securities Inc.



Appendix 9: Key Risks and Concerns Acquisitions: One of Transforce’s strategies is to grow through acquisition. While Transforce has had a very high success rate of effectively integrating its acquisitions, there is no guarantee that future acquisitions will be as successful.

Competition: The North American trucking industry is highly competitive with over 11,000 participants in the for-hire business. While Transforce has an advantage because it is the largest in the industry and it has the greatest access to capital, the barriers to entry are very low. In addition, the trucking industry competes with other modes of transportation such as rail, air freight and marine transportation.

Economy: The transportation industry is subject to fluctuations in economic activity. A downturn in US or Canadian economic activity could have an adverse impact on Transforce’s cash flow.

Environmental: The operations and properties of Transforce are subject to environmental laws and requirements in both Canada and the US relating to, among other things, air emissions (Kyoto) and the management of contaminants. A risk of environmental liabilities is inherent in transportation operations, historic activities associated with such operations and the ownership, management or control of real estate.

Fuel: Fuel represents roughly 8% of Transforce’s cost of sales. The practice of applying fuel surcharges is widely used in the transportation industry and the Company has successfully been able to offset the impact of fuel price increases over the last decade. However, in volatile fuel pricing environments, there is the potential for short-term (Transforce’s billing cycle is typically every week) margin differentials in either direction.

Interest Rates: The market for income trusts is partly driven by interest rates. For example, if interest rates rise on safer government debt, yields on corporate bonds and income trusts will likely increase also in order to compensate for the risk premium. However, we have proven in the past that the high-growth, low payout ratio income trusts have less long-term correlation to interest rates than slow-growth, high payout ratio trusts.

Labour: The majority of Transforce’s workforce is unionized. Transforce has had success in 2004 at renewing two major contracts for an additional five years: Kingsway (Ontario) and Canpar. The next major union agreement coming up for renewal is Kingsway (Quebec) in June 2005.

Regulation: TransForce is subject to transportation laws and regulations of federal (Canadian and US), provincial and state governments. TransForce is required to hold operating licences, permits and registrations issued by the appropriate regulatory authorities of the jurisdictions in which it operates. In Canada, provincial authorities are delegated the right to issue licences according to the Canada Transportation Act. In the US, the Department of Transportation exercises similar authority. It is also required to comply with the laws relating to the safety of vehicles and equipment.

Taxation of Income Trusts: The Canadian Department of Finance continues to evaluate income trusts and their impact on the Department’s tax revenue. Any change to tax laws could adversely affect Transforce’s cash flows and/or valuation. However, recent studies have demonstrated that income trusts have a minimal impact on Canada’s tax revenues.



Notes



Figure 28 Transforce Income Fund – Disclosure Chart

$15.75 (B)

Disclosure Statements

Yes No

Yes No

Yes No

Yes No

If YES 1) Is it a long and/or short position?2) What type of security is it?

Yes No

Buy or Top PickMarket PerformReduce Buy or Top Pick ReduceNot Rated Market Perform

Changes to our recommendation and/or target price and the date when they occurred are summarized below:26-Oct-04

Updated October 2004

During the last 24 months, has Sprott Securities Inc. received compensation forproviding investment banking services to this company?

26% 4% 3%

67%

During the last 24 months, has the analyst of this company received compensationfrom a pool that included investment banking revenue from this issuer earned bySprott Securities Inc. or entities affiliated with it?

Does the analyst or a member of the analyst's household have a financial interest inthe securities of this company?

Does Sprott Securities Inc. and / or one or more entities affiliated with SprottSecurities Inc. beneficially own common shares (or any other class of commonequity securities) of this company which constitutes more than 1% of the presentlyissued and outstanding shares of this company?

Sprott Securities Inc. and its affiliates actively solicit investment banking business, includingunderwriting and advisory services, from its research coverage list. As a result, although uncertain,revenue from these activities may be received at any time.

12%

TP = Top Pick B = Buy B (S) = Speculative Buy BonW = Buy on Weakness MP = Market Perform R = Reduce

Sprott Securities Inc. has thispercentage of its universe assigned asthe following:

Over the past 24 months, the following percentage ofissuers whose securities received a “Top Pick” or “Buy”, a"Market Perform", or a "Reduce" rating from SprottSecurities Inc., have engaged Sprott Securities Inc. toprovide investment-banking services during this period:

52% 0%

During the last 24 months, has Sprott Securities Inc. provided financial advice toand/or, either on its own or as a syndicate member, participated in a public offeringof securities of this company?

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00

$18.00

Oct

-01

Jan-

02

Mar

-02

May

-02

Jul-0

2

Sep

-02

Dec

-02

Feb-

03

Apr

-03

Jun-

03

Aug

-03

Nov

-03

Jan-

04

Mar

-04

May

-04

Jul-0

4

Oct

-04

Px Last TP B B (S) BonW MP R

Initiated Coverage

Source: Sprott Securities Inc.



Analyst Certification I, Aleem Israel, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject company(ies) and its (their) securities. I also certify that I have not been, and will not be receiving direct or indirect compensation in exchange for expressing the specific recommendation(s) in this report.

Recommendation Terminology

Sprott’s recommendation terminology is as follows:

Top Pick our best investment ideas, the greatest potential value appreciationBuy expected to outperform its peer groupMarket Perform expected to perform with its peer groupReduce expected to underperform its peer group

Our ratings may be followed by "(S)" which denotes that the investment is speculativeand has a higher degree of risk associated with it.

Additionally, our target prices are based on a 12-month investment horizon.

HEAD OFFICE R o y a l B a n k P l a z a S o u t h

S u i t e 2 7 5 0 T o r o n t o O N

M 5 J 2 J 2 T e l : ( 4 1 6 ) 3 6 2 - 7 4 8 5 F a x : ( 4 1 6 ) 9 4 3 - 6 4 9 9

T o l l F r e e : ( 8 0 0 ) 4 6 1 - 2 2 7 5

CALGARY OFFICE 3 0 0 - 5 t h A v e n u e S W

S u i t e 2 9 5 0 C a l g a r y A B

T 2 P 3 C 4 T e l : ( 4 0 3 ) 2 6 6 - 4 2 4 0 F a x : ( 4 0 3 ) 2 6 6 - 4 2 5 0

T o l l F r e e : ( 8 0 0 ) 4 6 1 - 9 4 9 1

MONTREAL OFFICE 1 8 0 0 M c G i l l C o l l e g e A v e

S u i t e 2 1 0 4 M o n t r e a l P Q

H 3 A 3 J 6 T e l : ( 5 1 4 ) 8 7 8 - 0 0 0 9 F a x : ( 5 1 4 ) 8 7 8 - 1 5 1 4

T o l l F r e e : ( 8 0 0 ) 6 9 9 - 5 9 4 6 For Canadian Resident: This report has been approved by Sprott Securities Inc. (“SSI”), member IDA and CIPF, which takes responsibility for this report and its dissemination in Canada. Canadian clients wishing to effect transactions in any security discussed should do so through a qualified salesperson of SSI. For US Residents: Sprott Securities (USA) Limited, (“SUSA”), member NASD and SIPC, accepts responsibility for this report and its dissemination in the United States. This report is intended for distribution in the United States only to certain institutional investors. US clients wishing to effect transactions in any security discussed should do so through a qualified salesperson of SUSA. Every province in Canada, state in the U.S., and most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as the process for doing so. As a result, some of the securities discussed in this report may not be available to every interested investor. Accordingly, this report is provided for informational purposes only, and does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction where such would be prohibited. The information and any statistical data contained herein have been obtained from sources believed to be reliable as of the date of publication, but the accuracy or completeness of the information is not guaranteed, nor in providing it does Sprott Securities Inc. assume any responsibility or liability. All opinions expressed and data provided herein are subject to change without notice. The inventories of Sprott Securities Inc., its affiliated companies and the holdings of their respective directors, officers and companies with which they are associated may have a long or short position or deal as principal in the securities discussed herein. A Sprott Securities Inc. company may have acted as underwriter or initial purchaser or placement agent for a private placement of any of the securities of any company mentioned in this report, may from time to time solicit from or perform financial advisory, or other services for such company. The securities mentioned in this report may not be suitable for all types of investors; their prices, value and/or the income they produce may fluctuate and/or be adversely affected by exchange rates. No part of any report may be reproduced in any manner without prior written permission of Sprott Securities Inc.

tfi_2004-10-25

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