Newport Partners Income Fund
TSX : NPF.UN

November 08, 2006 18:30 ET

Newport Partners Income Fund Announces Third Quarter 2006 Results

TORONTO, ONTARIO--(CCNMatthews - Nov. 8, 2006) -

NOT FOR DISTRIBUTION TO U.S. NEWS WIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES

Newport Partners Income Fund ("Newport" or "the Fund")(TSX:NPF.UN) today announced its results for the period July 1, 2006 to September 30, 2006.



Summary Financial Table - Newport ($000s, except per trust unit amounts)

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Three months ended Nine months ended
September 30, 2006 September 30, 2006
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Revenue 153,506 409,092
EBITDA 19,014 47,095
Distributable Cash Flow 16,046 38,173
Distributable Cash Flow per unit $0.23 $0.58
Total weighted average number
of units(1) 70,533 65,766
Distributions Paid(1) 17,555 48,764
Distribution per unit $0.25 $0.74
Total Assets 872,296 872,296
Total Bank Debt 114,804 114,804
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(1) The class C units of NPY owned by Newport principals are subject to
subordination and distributions have not been paid. For the purpose of
calculations of distributable cash flow per unit, the C units have been
excluded.


Third Quarter Highlights for 2006

- The Fund's diversified portfolio of companies produced revenue of $153.5 million and EBITDA of $19.0 million;

- Generated distributable cash flow of $16.0 million or $0.23 per Unit;

- Distributed $17.6 million or $0.25 per Unit;

- Investments in NP LP, Capital C, IC Group, Morrison Williams, Murray and Gemma notably outperformed while the RGC, S&E and EZEE investments underperformed;

- EBITDA was positively impacted primarily by a significant project fee earned by the corporate wealth management practice of NP LP that contributed $2.3 million of EBITDA and by continued strong, on-strategy growth from the marketing segment. ESR, an independent underwriter of commercial liability insurance, also earned significant profit commissions that were unexpected for the quarter, more than offsetting a decline in volume commission revenue;

- EBITDA was negatively impacted primarily by underperformance of Newport's investments in RGC, a consumer electronics distributor and EZEE, an operator of non-financial automatic teller machines. While RGC was successful in rebuilding its gross profit margins to 10%, an improvement of three percentage points over Q2, revenues declined 9% over the same period. RGC contributed $746,000 of EBITDA. Based on management's current outlook, we expect RGC will be an insignificant contributor in fiscal 2006. As reported in Q2, RGC faces operational challenges that management expects will require 12-20 months to return to normal levels. While EZEE's operational performance continued to improve, EBITDA contribution remains below IPO levels and below our expectations. However, during the quarter management successfully identified opportunities to generate increased profitability from its existing portfolio that it believes will result in significant growth in EBITDA in 2007;

- Corporate operating expenses and interest costs are now reported in a separate corporate segment. For Q3, corporate overhead costs were $1.2 million - or annualized at 1% of total invested capital;

- Newport further diversified the portfolio with the addition of two new investments, IC Group and Titan, for $43.5 million of invested capital. Year-to-date, Newport has invested $170.9 million in new capital surpassing 2006 objective of investing between $100 - $150 million;

- Total assets were $872 million at the end of September 30, 2006, compared to $715 million at December 31, 2005;

- Newport expanded its credit facility by adding two more banks into the syndicate and increasing the facility to $170 million from $120 million. Total consolidated bank debt was $115 million at the end of September 30, 2006. Consolidated bank debt to last twelve months (LTM) EBITDA was1.3x and fixed charges coverage is approximately 5x.

- Since inception(1), the companies in the portfolio as at September 30, 2006 have generated an unlevered annual internal rate of return of 17.3%.

(1) Since inception of NPY on February 27, 2004.



Summary Financial Table - Newport ($000s)
Three months ended September 30, 2006

Financial Industrial
Services Marketing Services Distribution Corporate(3) Total
---------------------------------------------------------------
Revenue 18,279 18,603 62,048 54,576 - 153,506
Gross margin 10,374 9,074 13,237 5,431 - 38,116
Net income
before
non-con-
trolling
interest 5,517 1,657 2,301 (789) (3,362) 5,324

EBITDA 9,657 3,560 6,248 746 (1,197) 19,014
Interest
(income)
expense (50) 125 728 239 1,752 2,794
Income
taxes 10 1 66 - - 77
Maintenance
capital
expendi-
tures 84 - 118 24 - 226
Capital
lease
payments 4 33 810 10 - 857
Compensation
expense
funded by
operating
partner(1) 560 - - - - 560
Priority
income per
partnership
agreement(2) - 308 - 118 - 426

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Distributable
cash 10,169 3,709 4,526 591 (2,949) 16,046
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(1) Newport's agreement with ESR contemplates that certain employee
bonuses are paid for by the 20% limited partners. GAAP requires that
the bonuses be expensed and therefore reduces EBITDA. Since there is no
cash outlay by Newport the expense is added back in arriving at
distributable cash.
(2) To the extent that in any reporting period, calculated on a cumulative
basis, Newport's proportionate share of distributable cash is more or
less than its priority amount an adjustment to distributable cash is
made to reflect the actual cash distributions payable to Newport by
the operating partner.
(3) The results of the Corporate segment include corporate expenses and
corporate interest expense both at Newport and NPY.



Summary Financial Table - Newport ($000s)
Nine months ended September 30, 2006

Financial Industrial
Services Marketing Services Distribution Corporate(3) Total
---------------------------------------------------------------
Revenue 50,428 47,181 157,010 154,473 - 409,092
Gross margin 28,013 21,586 32,355 13,456 - 95,410
Net income
before
non-con-
trolling
interest 14,108 3,623 8,232 (6,399) (9,090) 10,474

EBITDA 26,266 8,913 17,112 (1,824) (3,372) 47,095
Interest
(income)
expense (152) 169 1,545 679 4,686 6,927
Income
taxes
(recovery) 85 (24) - 1 - 62
Maintenance
capital
expenditures 282 64 519 51 - 916
Capital
lease
payments 4 111 2,167 72 - 2,354
Compensation
expense
funded by
operating
partner(1) 1,680 - - - - 1,680
Priority
income per
partnership
agreement(2) (720) 740 - (363) - (343)

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Distributable
cash 27,007 9,333 12,881 (2,990) (8,058) 38,173
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(1) Newport's agreement with ESR contemplates that certain employee bonuses
are paid for by the 20% limited partners. GAAP requires that the
bonuses be expensed and therefore reduces EBITDA. Since there is no
cash outlay by Newport the expense is added back in arriving at
distributable cash.
(2) To the extent that in any reporting period, calculated on a cumulative
basis, Newport's proportionate share of distributable cash is more or
less than its priority amount an adjustment to distributable cash is
made to reflect the actual cash distributions payable to Newport by
the operating partner.
(3) The results of the Corporate segment include corporate expenses and
corporate interest expense both at Newport and NPY.



Distributions/Unit ($000's except per Unit amounts)
Three months and nine months ended September 30, 2006

Period ended
September 30, 2006

Three months Nine months
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NPY (representing non-controlling interest) 32,859 33,629
Newport 37,674 32,137
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Total weighted average units outstanding(4) 70,533 65,766
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Total distributions 17,555 48,764
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Distributions per unit $ 0.25 $ 0.74
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Cash provided by operating activities 8,508 37,757
Add: changes in non-cash working capital 8,240 3,881

Add (Deduct): priority income per
partnership agreement 426 (343)

Deduct: maintenance capital expenditures
and reserves (271) (768)
Deduct: capital lease payments (857) (2,354)
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Distributable cash 16,046 38,173
Distributable cash per unit $ 0.23 $ 0.58
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(4) Represents weighted average number of units outstanding during the
period adjusted for C LP units which are currently subordinated.



Balance Sheet ($000s)

As at September 30, 2006 As at December 31, 2005

Total assets $ 872,296 Total assets $ 715,104
Bank operating Bank operating
indebtedness $ 50,783 indebtedness $ 19,436
Investment financing Investment financing
facility $ 62,000 facility $ -
Long-term debt $ 2,021 Long-term debt $ 2,035
Convertible debt $ 83,938 Convertible debt $ 84,339
Unitholder's equity Unitholder's equity
- Newport & NPY $ 543,802 - Newport & NPY $ 497,830



Portfolio Changes - Newport
New Investments (dollar amounts in $000s)

This table provides a summary of new investments made by the Fund during
the three months ended September 30, 2006.

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Historical
Capital Financial
Segment Date Investment Invested Performance
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Marketing 26-Jul-06 80% interest in IC Group, 8,000(i) Revenues of 8,200
a Winnipeg based provider and normalized
of interactive EBITDA of 2,000
promotional solutions. for fiscal 2005.
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Industrial 1-Sep-06 88% interest in Titan, 35,500(ii) Revenues of 52,800
Services an Edmonton-based and normalized
distributor and EBITDA of 6,000
manufacturer of rigging for fiscal 2005.
and ground engaging For the last
tool products to the twelve months
industrial sector in ended June 30,
western Canada. 2006, revenues
were 56,000 and
EBITDA was 6,700.
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Total 43,500
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(i) In addition to the cash payment of $8,000, Newport will pay IC Group an
additional earn-out amount equal to 3.2 times the amount by which
average annual distributable cash flow over the three year period
following closing exceeds $2,000.
(ii)Includes $10,000 advanced to allow Titan to retire long-term debt and
certain obligations.


Outlook Highlights

- Q4 outlook is positive based on seasonal patterns and we expect will account for between 30-35% of our total annual distributable cash flow per unit results for fiscal 2006. If our largest investment, RGC, was tracking to our expectations, we would have exceeded this range;

- Newport is in the process of working with its operating partnerships to develop budgets for the 2007 fiscal year. The baseline for these budgets is reflected in Newport's pro-forma share of the normalized historical EBITDA for the past twelve months from the 15 investments that we held in the portfolio as at September 30, 2006. Had we owned all 15 of the investments for the full twelve-month period, they would have generated more than $86.4 million of EBITDA for Newport. If we include Armstrong and Gusgo, investments made subsequent to quarter-end, our pro-forma EBITDA estimate is $93.7 million. For our internal planning purposes, we use this as a starting point and then factor in expected variances from past performance in each underlying investment to account for organic growth as well as negative variances like the challenges facing RGC;

- Newport believes the distributable cash from its current portfolio is sufficient to sustain regular annual distributions to unit holders at the level of $1.00 per unit.

Commentary on proposed tax changes and expected impact on business plan and distributions

- First and foremost, the proposed tax changes do not come into effect on existing trusts until 2011. This means our distributions will continue to flow through to unit holders free of "corporate" tax for the next four years;

- Second, when the proposed tax changes do come into force in 2011, they are not expected to change the fundamental economics of our business, which is based on investing in a diversified and growing portfolio of seasoned private businesses and distributing their profits to unitholders;

- While the impact of the proposed changes is having an adverse affect on the short term pricing of all income trust units in the market, including Newport's, we have no short term plans to raise additional equity;

- Based on the number of investment opportunities and with the benefit of a relatively un-leveraged balance sheet, we believe we are well-positioned to find and fund accretive investments to add to the portfolio;

- In the short-term, it is possible that reduced valuations in the public income trust market may have a corresponding effect on valuations in the private market - a positive for buyers such as Newport. Longer-term we anticipate growing demand for Newport's value proposition that offers liquidity, diversification and capital to fund growth for Canada's leading entrepreneurs;

- Going forward we expect that income trusts will and should be valued as 'dividend-producing equities' that for the next four years, will enjoy tax-advantaged growth;

- For illustrative purposes, based on the limited information we have with respect to the proposed tax changes, we compared Newport's valuation against dividend producing equities after giving effect to the government's proposed tax changes. Using a unit price of $6.20(2), if we take $1.00 per unit of distributable cash flow as our starting point and apply the full 31.5% tax rate that is proposed, Newport produces $0.68 per unit of "after tax earnings". On this basis Newport is trading at nine times its "after tax earnings". This multiple compares with a median earnings multiple of 18 times for the S&P TSX MidCap Index. If the market applied the same 18 times multiple to Newport's current after tax distributions, the comparable valuation is $12.25 per unit. In addition, Newport's effective "dividend" of $0.68 represents an 11% yield, which compares favourably to diversified dividend funds. We believe once the investor audience recognizes this it should be reflected in our unit price.

- Finally, by executing on our growth strategy, by 2011, the Fund expects to have increased its distributable cash flow to a level that will be more than adequate to offset the introduction of the proposed taxation. This is an advantage that Newport enjoys over other income trusts that are not structured for growth.

(2) Closing price November 3, 2006

ABOUT NEWPORT

Newport is an unincorporated, open-ended trust created to hold through the Company's investment in Newport Partners Commercial Trust, interests in Newport Private Yield LP, ("NPY") a limited partnership established under the laws of the Province of Ontario. Newport began trading on the TSX on August 8, 2005 under the symbol NPF.UN.

Newport is a leading Canadian asset manager. Newport invests in the private business asset class -- a major growth engine of the Canadian economy. Our objective is to make long-term equity investments in leading private businesses that have a track record of strong earnings and potential for future growth. We minimize risk by diversifying our portfolio, investing at attractive prices, with capable operating management who are known to us, and by using debt conservatively. Newport's portfolio currently consists of 17 high-quality businesses representing a diverse cross-section of the Canadian economy. Newport unitholders participate in the cash flows, growth and diversification of the portfolio through monthly distributions. Newport's management has decades of investment experience and a significant ownership position.
Investor Conference Call

Management will hold a conference call at 10:00 am (Eastern Standard Time) on Thursday November 9, 2006 to discuss the quarterly results. The call may be accessed by dialing 416-695-6120 within the Toronto area or 877-888-7019 (toll free). This conference call will be recorded and available for replay until November 23, 2006. To listen to the replay, please dial 416-695-5275 or 888-509-0081 and enter pass code: 632878.

The terms "EBITDA", "LTM EBITDA", "Distributable Cash Flow" and "Distributable Cash Flow per Unit", "Invested Capital" and "Internal Rate of return" (collectively the "Non-GAAP Measures") are financial measures used in this Management's Discussion & Analysis that are not standard measures under Canadian GAAP. Newport's method of calculating Non-GAAP Measures may differ from the methods used by other issuers. Therefore, Newport's Non-GAAP Measures, as presented in this MD&A, may not be comparable to similar measures presented by other issuers.

EBITDA refers to net earnings of Newport and NPY determined in accordance with generally accepted accounting principles, before depreciation and amortization, net of gain or loss on disposal of capital assets, interest expense and income tax expense. LTM EBITDA refers to EBITDA for the last twelve months. Management believes that EBITDA is a useful supplemental measure of performance and is the primary basis on which management assesses financial performance and cash available for debt service, working capital, capital expenditures, income taxes and distributions.

Distributable Cash Flow is not a standard measure under GAAP and is generally used by Canadian income funds as an indicator of financial performance. The method of calculating Newport's Distributable Cash Flow may differ from similar computations as reported by other similar entities and, accordingly, may not be comparable to distributable cash flow as reported by such entities. Newport's method of calculating Distributable Cash Flow is disclosed in the Summary Financial Table. Management believes that Distributable Cash Flow and Distributable Cash Flow Per Unit are useful supplemental measures that provide investors with information on cash available for distribution.

Invested capital includes the cost to acquire the equity interest in an investment and any monies advanced to repay existing long-term debt. It excludes transaction costs and any working capital provided to the invested business. Internal rate of return is calculated by dividing time-weighted cash distributions received by invested capital. Management believes that Invested Capital and Internal Rate of Return are useful supplemental measures that provide investors with information on the performance of Newport's investments.

Investors are cautioned that the Non-GAAP Measures are not alternatives to measures under GAAP and should not, on their own, be construed as an indicator of Newport's or NPY's performance or cash flows, a measure of liquidity or as a measure of actual return on the Units. These Non-GAAP Measures should only be used in conjunction with the financial statements of Newport and NPY as at September 30, 2006.

Certain statements in this news release may include "forward-looking" information that relate to future events or future performance and reflects management's expectations and assumptions regarding the growth, results of operations, performance and business prospects and opportunities of Newport and the operating partnerships in which it holds an ownership interest (the "Operating Partnerships"). Such forward-looking information reflects management's current beliefs and is based on information currently available to management of Newport and the Operating Partnerships. In some cases, forward-looking information can be identified by terminology such as "may", "will", "should", "expect", "plan", "anticipate", "believe", "estimate", "predict", "potential", "continue" or the negative of these terms or other similar expressions concerning matters that are not historical facts. In particular, information regarding the future operating results and economic performance of Newport and the Operating Partnerships is forward-looking information. A number of factors could cause actual events or results to differ materially from the events and results discussed in the forward-looking information. In evaluating this information, prospective purchasers should specifically consider various factors, including the risks outlined under "Risk Factors" in Management's Discussion and Analysis, which may cause actual events or results to differ materially from any forward-looking information. Although the forward-looking information is based on what management of Newport and the Operating Partnerships consider to be reasonable assumptions based on information currently available to it, there can be no assurance that actual events or results will be consistent with this forward-looking information, and management's assumptions may prove to be incorrect. This forward-looking information is made as of the date of this news release, and Newport does not assume any obligation to update or revise them to reflect new events or circumstances.



NEWPORT PARTNERS INCOME FUND
Consolidated Balance Sheets
(In thousands of dollars)

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September 30, December 31,
2006 2005
(Unaudited)
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Assets

Current assets:
Cash and cash equivalents $ 18,529 $ 25,278
Accounts receivable 126,145 117,867
Inventory 67,467 31,164
Prepaid expenses 2,854 2,359
Other current assets 11,657 6,507
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226,652 183,175

Property, plant and equipment 24,561 16,445

Long-term investments 48,074 42,234

Goodwill 290,123 258,102

Intangible assets 277,570 210,177

Other assets 5,316 4,971

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$ 872,296 $ 715,104
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Liabilities and Partners' Equity

Current liabilities:
Bank indebtedness (note 5) $ 50,783 $ 19,436
Investment financing facility (note 5) 62,000 -
Accounts payable and accrued liabilities 109,645 98,252
Deferred revenue 9,471 5,357
Current portion of capital lease obligation 4,165 2,729
Current portion of long-term debt 2,021 2,018
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238,085 127,792

Capital lease obligation 3,950 3,082

Long-term debt - 17

Future tax liability 2,521 2,044

Non-controlling interest 214,544 259,090

Convertible debenture 83,938 84,339

Unitholders' equity 329,258 238,740

Subsequent events (note 7)

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$ 872,296 $ 715,104
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NEWPORT PARTNERS INCOME FUND
Consolidated Statement of Income
(In thousands of dollars, except per unit amounts)
(Unaudited)

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For the period
Three months August 8, Nine months
ended 2005 to ended
September September 30, September 30,
30, 2006 2005 2006
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Revenues $153,506 $ 61,043 $ 409,092
Cost of revenues 115,390 48,543 313,682
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38,116 12,500 95,410

Expenses
Selling, general and
administrative 20,859 6,048 53,066
Amortization of deferred
financing charges 414 - 1,032
Amortization of intangible
assets 8,495 2,895 22,440
Depreciation 1,427 516 4,609
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31,195 9,459 81,147
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Income before the undernoted 6,921 3,041 14,263
Income from equity investments 891 730 2,470
Other income 383 218 730
Interest expense (2,794) (215) (6,927)
Income tax expense (77) - (62)
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Income before non-controlling
interest 5,324 3,774 10,474
Non-controlling interest (3,022) (2,390) (6,873)

Income $ 2,302 $ 1,384 $ 3,601
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Income per unit
Basic and diluted (note 3) 0.07 0.06 0.11



NEWPORT PARTNERS INCOME FUND
Consolidated Statements of Cash Flows
(In thousands of dollars, except unit amounts)
(Unaudited)

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For the period
Three months August 8, Nine months
ended 2005 to ended
September September 30, September 30,
30, 2006 2005 2006
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Cash provided by (used in):

Operating activities:
Net income $ 2,302 $ 1,384 $ 3,601
Items not affecting cash:
Amortization of deferred
financing charges 414 - 1,032
Amortization of intangible
assets 8,495 2,895 22,440
Depreciation 1,427 516 4,609
Income from equity investment,
net of cash received 527 (469) 1,403
Non-cash compensation expense 560 - 1,680
Non-controlling interest 3,023 2,390 6,873
Change in non-cash
working capital (8,240) (20,363) (3,881)
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8,508 (13,647) 37,757

Financing activities:
Issuance of units - 235,420 71,275
Distributions to unitholders (9,385) (1,511) (22,846)
Distribution to non-controlling
interest by Newport Private
Yield LP (8,247) (2,329) (25,606)
Decrease in long-term debt (4) (560) (14)
Increase in bank indebtedness (4,453) 8,196 5
Increase in investment
financing facilities 26,000 26,500 62,000
Repayment of capital lease
obligations (901) (29) (2,355)
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3,010 265,687 82,459

Investing activities:
Acquisition of interest in
Newport - (218,331) -
Acquisition of businesses,
net of cash acquired (33,465) (13,221) (116,066)
Increase in other assets (1,169) - (1,377)
Purchase of long term
investments - - (6,914)
Purchase of intangible assets - (6,404) -
Purchase of property,
plant and equipment (445) (254) (2,608)
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(35,079) (238,210) (126,965)

Increase (decrease) in cash
and cash equivalents (23,561) 13,830 (6,749)

Cash and cash equivalents,
beginning of period 42,090 - 25,278
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Cash and cash equivalents,
end of period 18,529 13,830 18,529
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Supplemental cash flow information:
Interest paid $925 215 5,058
Cash acquired upon acquisition 552 17,404 8,284

Supplemental disclosure of
non-cash financing and financing
and investing activities:
Acquisition of property,
plan and equipment
through capital leases 952 3,204
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Newport's 2006 Third Quarter Financial Statements and Management's Discussion and Analysis are available on the investor relations section of www.newportpartners.ca and on SEDAR at www.sedar.com.

Contact Information