PRT Forest Regeneration Income Fund
TSX : PRT.UN

PRT Forest Regeneration Income Fund

March 01, 2007 20:23 ET

PRT Announces 2006 Fourth Quarter Results and Special Distribution

VICTORIA, BRITISH COLUMBIA--(CCNMatthews - March 1, 2007) - PRT Forest Regeneration Income Fund (TSX:PRT.UN) today announced results for its fourth quarter and year ended December 31, 2006. The Fund's interim financial report is enclosed as part of this release.

For the year ended December 31, 2006, the Fund reported net earnings of $7,365,000 ($0.77 per unit) and distributable cash flow of $9,099,000 ($0.95 per unit), as compared to prior year earnings of $6,008,000 ($0.79 per unit) and distributable cash of $7,456,000 ($0.98 per unit). Net earnings and distributable cash increased year-over-year due to the full-year impact of acquisitions made in 2005, and higher order volumes. Partially offsetting the year-over-year improvement was a one-time gain on the sale of property in 2005. Per unit amounts declined due to the greater number of units outstanding this year.

For the three months ended December 31, 2006, the Fund reported net earnings of $2,076,000 ($0.22 per unit) and distributable cash flow of $2,187,000 ($0.23 per unit). These results were lower than the same period in 2005 due to the impact of crop mix shifts, which redistributed revenues to the first half of the year, and the timing of the Unit offering in 2005 to finance the Pelton acquisition.

Annual revenues increased by 22%, to $51,574,000, a record level for the Fund. This growth was driven by the acquisitions of the Pelton and Coldstream nurseries during 2005, as well as marginally higher order volumes in other nursery sites.

Margins for the year decreased slightly as a result of a full year impact of the Pelton nursery, which has a higher cost structure. Other factors included higher energy costs and isolated crop yield problems. Selling, general and administrative expenses were higher, largely on the annualized impact of the Pelton acquisition, but declined as a proportion of revenues.

President and CEO, John Kitchen, commented, "We are pleased to report another year of stable operating results, which confirms the direction we have been taking the company in recent years. We have demonstrated our ability to deliver reasonable returns to unitholders through tough industry cycles, while remaining committed to the execution of our longer-term strategic priorities.

"For 2007, markets appear to be temporarily weaker, and our challenge will be to execute to our full potential on our operating plan. Reliability and efficiency will remain as top priorities. By staying focused on these goals, we will continue to deliver the returns our unitholders have come to expect from PRT."

Special Distribution

The Fund also announced today a special cash distribution of $0.03 per unit. The distribution will be payable on March 30, 2007 to unitholders of record at the close of business on March 15, 2007. The "top up" distribution consists of taxable dividend income from additional distributable cash flow available from PRT's 2006 operating results. This will bring total distributions paid on account of the 2006 operating year to $0.93 per unit.

About PRT

PRT is the largest producer of container grown forest seedlings in North America, operating 15 nurseries located in Canada and the United States. Units of the Fund are listed for trading on the Toronto Stock Exchange under the trading symbol PRT.UN.

Conference Call and Taped Replay

The Fund will host an open conference call to further discuss these results, on Friday, March 2, 2007 at 2:00 p.m. (EST). The toll-free dial in phone number is 1-866-585-6398. To access a recording of this call at a later date, please dial 1-866-245-6755, Playback Conference ID # 435073. The recording will be made available until March 9, 2007.

PRT will also web cast the conference call on the Internet, available from our web site at www.prtgroup.com. The web cast will also be archived and available for listening at a later date.

Management's Discussion and Analysis

We are pleased to present the 2006 fourth quarter report for the PRT Forest Regeneration Income Fund. This section presents management's view of the operating results, cash flows, financial position and business of the Fund, and its wholly owned operating subsidiary, Pacific Regeneration Technologies Inc. ("PRT").

This discussion contains forward-looking statements that involve risks and uncertainties. These forward-looking statements relate to, among other things, expectations for future order volumes, pricing, operating costs and other expenditures; the future impact of acquisitions; the outlook for future energy prices; plans and opportunities for capital spending; and other statements contained in this discussion that are not historical fact. Words such as "anticipate", "expect", "potential", "intends", "opportunity", "believes", "may", "will" and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are based on management's current expectations and beliefs and actual events or results may differ materially. Risks and uncertainties include, but are not limited to, agricultural risks and crop yields, future commodity prices, exchange rate risks, the outlook for the forest industry, the risk that acquisitions may not be integrated as planned, the impact of proposed changes to income trust taxation, and other risks identified from time to time in the Fund's annual report, annual information return, prospectus, and other filing documents. These documents are available in electronic form at www.sedar.com, or by contacting the Fund directly. Forward-looking statements are based on current expectations and the company assumes no obligation to update such information to reflect later events or developments, except as required by law. Readers are cautioned not to place undue reliance on forward-looking statements.

This management's discussion and analysis has been prepared based on information available as at February 27, 2007.

Between 2000 and 2004, PRT experienced a challenging operating period of higher energy prices, market disruptions caused by the softwood lumber dispute, and other factors. By 2005 however, market conditions began to improve somewhat as silviculture spending returned to more normal levels, due in part to the continuing high rate of cut by forest industry customers to meet lumber demand, and by increased timber cutting in BC to salvage damaged timber. In 2006, a settlement was reached in the softwood lumber trade dispute, which removed some uncertainty from forestry markets. PRT was able to increase seedling order volumes in this environment, and supplemented this added business with two nursery acquisitions during 2005, which contributed to improved financial performance in 2005 and 2006.

Operating Results

For the Year Ended December 31, 2006

Revenues for the year increased by $9.5 million from 2005, as a result of a full year's operating revenue contribution from PRT Pelton and PRT Coldstream, both of which were acquired part way through 2005.

PRT measures production volumes in seedling blocks, which is a uniform measure of growing space represented by a standard Styroblock™ growing container. This measure is considered more meaningful than the number of trees since tree sizes vary widely between markets and customers, and tree prices vary accordingly. Revenues generated per seedling block tend to be more uniform, as the number of seedlings produced per block and price per tree will vary proportionately with the size of the seedling.

Excluding the impact of acquisitions, contracted seedling block volumes at pre-acquisition nursery sites were slightly higher on a year-over-year basis in 2006, reflecting improved market conditions and reforestation activities related to damage caused by the mountain pine beetle in BC. Partially offsetting the increased block volumes were lower tree planting revenues relative to 2005, due to a change in the planting program of a key Ontario based customer.

PRT's average realized seedling pricing in 2006 was lower than 2005, due to the impact of product mix changes. This included an increase in the proportion of lower priced outdoor compound production related to the acquisitions of Pelton and Coldstream late in 2005. PRT has a strategy to increase the ratio of outdoor compound production as a way to lower energy consumption.

Costs of production rose as a percentage of revenue, to 60% from 57% in the prior year. This was attributable to the impact of a full year of operations with the Pelton nursery, which has a higher cost structure than other PRT sites, higher costs at the Hybrid nursery related to lower yields on certain crops, and higher greenhouse heating costs.

Greenhouse heating costs increased in 2006, due to higher energy prices and modestly higher consumption. As a percentage of revenue, heating costs rose to approximately 5.7% from 5.2% in 2005. In 2006, PRT contracted forward approximately one half of its estimated annual gas needs to reduce exposure to commodity price fluctuations, and this was done at prices roughly equivalent to those paid in 2005. However, there was an increase in early season crops in the 2006 seedling contract mix, which leads to earlier sowing and germination dates, resulting in increased consumption. For 2007, PRT has put forward buying contracts in place for over 50% of its anticipated needs, at prices slightly below those paid in 2006. With this forward buying program in place, management estimates that the Fund's sensitivity to natural gas price changes is approximately $0.01 in per unit distributable cash flow for every $1.00 per gigajoule change in the average annual cost of natural gas, and that a 10% change in consumption would impact distributable cash by approximately $0.025 per unit.

Combined Selling, General and Administration costs were $1.1 million higher overall, due to the impact of the Pelton acquisition in the fourth quarter of 2005. As a percentage of revenues, SG&A costs declined to 18.4% from 19.8% last year, reflecting the impact of operating leverage with prior year acquisitions. Included in Selling, General and Administration costs is the management fee to PRT Management Inc ("PMI") for corporate management and administration. PMI is owned by current and former employees, officers and directors of PRT, and as such is a related party. Fees payable to PMI are determined based on reimbursement of PMI's actual costs without allowance for profit, and the terms of the agreement are disclosed in the notes to the Fund's financial statements.

In recent years the Fund expanded its business into the US, and had established nurseries in Oregon and Nevada to service customers in both markets. US sourced growing contracts currently exceed US growing capacity, resulting in a net foreign exchange exposure. To help further reduce this exposure, the company has created a natural currency hedge by financing US dollar assets with US dollar denominated debt. PRT may also use forward exchange contracts for this purpose. Accordingly, on net exposure the Company recorded a $25,000 exchange gain, mainly on the translation of US dollar debt.

Foreign currency exchange gains and losses may be realized or unrealized. The Fund records realized foreign exchange gains and losses on the translation of cash balances and settlements of monetary items, and records unrealized gains and losses on the translation of non-cash monetary balances. Only realized foreign exchange gains and losses are included in the determination of distributable cash flow. Management estimates for 2007 that the Fund's sensitivity to the Canadian/US dollar exchange rate is less than $0.005 in per unit distributable cash flow for every CA$0.01 change in relative value of the Canadian dollar.

Interest expense for the year decreased by $0.2 million, primarily as a result of the retirement in December 2005 of borrowings made to finance nursery site acquisitions over the previous two years. These loans were repaid from the proceeds of a unit offering. In addition, the fund retired a further $2.5 million of term debt during 2005 from the proceeds of a property sale.

Depreciation and amortization charges increased year-over-year due to the inclusion of results from the Pelton and Coldstream nursery sites for a full year.

PRT has a 40% equity investment in a company involved in developing software for silviculture management by Forestry companies, and is using this software to electronically provide seedling contract information to its customers. The equity in loss of the investee is primarily created by amortization of intangible assets booked on the initial purchase, and therefore does not impact PRT's operating cash flow.

Earnings in the prior period were boosted by a $0.5 million gain on the sale of the former Aldergrove nursery site. The proceeds of this sale were applied to reduce term debt during 2005. Gains of a similar extent were not incurred in the current period.

Pre-tax earnings in 2006 were $0.7 million higher, or $1.2 million higher excluding the impact of gains on sales of property, plant and equipment in each year. This improvement was mainly as a result of the contribution from acquisitions completed in 2005.

The Fund recorded a $0.9 million tax recovery for 2006, which was higher than the recovery in 2005 due to higher distributions to the Fund, the impact of reductions in future income tax rates, and recognition of tax assets not previously recorded.

Net earnings for the year increased by nearly $1.4 million, but declined by $0.02 per Unit, to $0.77 per Unit on the greater number of units outstanding. Excluding the $0.04 per unit impact of the Aldergrove site disposal gain in 2005, per share earnings would have increased by $0.02 per unit. Operating contribution from the Pelton acquisition accounted for most of this improvement.

The Fund determines distributable cash flow as cash flow from operating activities before changes in non-cash working capital items adjusted for seedling container depreciation, sustaining capital expenditures, long-term debt repayment, gains or losses on asset sales, and such other reserves as the board of PRT and the Trustees of the Fund may consider appropriate. Certain expense items which are incurred as part of earnings enhancing capital projects may be excluded from the determination of distributable cash flow if the overall project return meets internal investment hurdle rates to be eligible for funding from external sources, such as term debt or equity financing. The Fund considers distributable cash flow as defined to be a useful measure of the free cash flow from operations available for making unitholder distributions, as it is determined after providing for the maintenance and replacement of PRT's underlying asset base, as well as providing for the financing of expansionary project spending.

The Fund calculates distributable cash as follows:



In $000's except Three months ended Year ended
per unit amounts December 31 December 31
2006 2005 2006 2005
-------------------------------------
Cash flow from
operating activities $ (2,689) $ (452) $ 13,063 $ 6,029
Less: changes in non-cash
working capital items (5,533) (3,562) 1,254 (3,583)
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2,844 3,110 11,809 9,612

Cash flow adjustments:
Seedling container depreciation (436) (406) (1,547) (1,159)
Repayment of long term debt (196) (204) (735) (485)
Sustaining capital expenditures (25) (33) (478) (462)
Sustaining capital reserve - (50) 50 (50)
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Distributable cash 2,187 2,417 9,099 7,456
Seasonal excess of cash flow
to distributions declared,
applied to working capital (27) (612) (215) (670)
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Distributions declared $ 2,160 $ 1,805 $ 8,884 $ 6,786
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Distributable cash per unit $ 0.23 $ 0.31 $ 0.95 $ 0.98

Distributions declared per unit $ 0.22 $ 0.22 $ 0.93 $ 0.88
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Distributable cash flow for the year was over $1.6 million higher than in 2005 as a consequence of improved cash flow from operations, which benefited from the combined impact of acquisitions and realized foreign exchange gains. In determining distributable cash in 2005, the Fund had allowed for an additional $50,000 in a sustaining capital reserve as a contingency against potential near term needs at the acquired Pelton nursery site. This reserve was utilized to partially fund current period sustaining capital spending. On a per unit basis, growth in distributable cash flow per unit was tempered by the higher number of units outstanding in 2006. Since the unit offering to refinance acquisitions was not done until the end of 2005, the Pelton acquisition had a disproportionately high per unit contribution last year.

Three Months Ended December 31, 2006 compared to Three Months Ended December 31, 2005

The fourth quarter of 2005 included the operating results of PRT Pelton and PRT Coldstream, and accordingly is comparable in scale to the Company's operations in the fourth quarter of 2006.

Revenues in the three month period decreased by $1.0 million relative to the same period last year. This was mainly caused by an increase in the relative mix of early season crops this year, which has the effect of shifting revenue recognition to earlier quarters.

Costs of production were lower with the shift to earlier season crops, but increased as a percentage of revenues due to poor fall crop yields at two sites, and the timing of repairs and maintenance expenditures.

Overhead costs were $0.2 million lower in the quarter, due to lower employee incentive compensation costs and the impact of capitalizing certain project development costs.

Financing costs decreased by $0.3 million on a quarter-over-quarter basis as PRT carried higher debt balances for most of the fourth quarter of 2005 related to borrowings to finance the Pelton and Coldstream nursery acquisitions. This debt was retired at the end of 2005 from the net proceeds of a $20,300,000 unit offering.

Depreciation and amortization expenses were lower as a result of revisions to the preliminary estimated useful lives of assets acquired in the Pelton acquisition.

The Fund recorded a larger future income tax recovery in the quarter due to higher year-over-year tax deductible distribution payments made to Fund unitholders, the impact of reductions in future income tax rates and recognition of tax assets not previously recorded.

Net earnings for the quarter increased by $0.5 million, due to the higher future income tax recovery provision, and but only increased by $0.02 per unit with the greater number of units outstanding.

Distributable cash flow in the quarter decreased by $0.2 million on the shift in operating earnings to earlier quarters caused by the crop mix in 2006. On a per unit basis, distributable cash flow was $0.23 as compared to $0.31 in the fourth quarter of 2005, reflecting this shift as well as the greater number of units outstanding this year.

Liquidity and Cash Flow

For the Year Ended December 31, 2006

Cash flows from operating activities increased by $7.0 million in the year, which was the result of decreased non-cash working capital investments in 2006, and operating contribution from the Pelton acquisition.

Non-cash working capital changes contributed $1.3 million to cash flow, representing a $4.8 million year-over-year improvement. This was primarily due to invoicing and collection of 2005 year-end unbilled revenue balances, which were unusually high, and improved accounts receivable collections in the current year, partially offset by reductions in short-term accounts payable. Most of this additional cash was applied to reduce the operating line and make increased Unitholder distributions.

Cash distributions to Unitholders were $2.2 million higher than in 2005, due to the increase in the average number of units outstanding over the year, as well as a $0.05 increase in per unit distributions during 2006. Distributions declared during 2006 totalled $0.93 per unit, including a $0.03 "top-up" distribution from 2005 cash flow, as compared to $0.88 in 2005, which did not include a "top-up" distribution. Of this amount, $0.87 was designated as a return on capital and $0.06 as a return of capital for Canadian income tax purposes. As distributions declared from current year cash flow were less than the $0.95 per unit generated by operations in 2006, on February 27, 2007 the Fund declared an additional "top up" distribution of $0.03 per unit, funded from 2006 distributable cash flow.

With improved cash flow from operating activities, the Company was able to reduce its operating line balance by $0.8 million. PRT has up to $13,000,000 available under this facility, subject to certain margin requirements. At year-end, the full amount was available and $9.4 million had been drawn.

During the year, PRT purchased property, plant and equipment totalling $2.6 million, a decrease of $0.5 million from the prior year (excluding acquisitions). The Company categorizes its capital purchases as follows:




-----------------------------------------------------------
Capital Spending 2006 2005
-----------------------------------------------------------

Earnings-enhancing capital projects $ 539,274 $ 1,639,006
-----------------------------------------------------------
Sustaining capital projects 478,067 461,818
-----------------------------------------------------------
Seedling containers 1,549,522 1,014,824
-----------------------------------------------------------
Total $ 2,566,863 $ 3,115,648
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The Fund determines its purchase breakdown between "sustaining" and "earnings enhancing" capital expenditures on a transaction by transaction basis. The consideration is whether the asset purchased replaces productive capacity which previously existed in PRT ("sustaining"), or whether the asset expenditure is being made to enhance future earnings, either through increased revenue potential or by lowering operating costs ("earnings enhancing"). Certain rate-of-return benchmarks are applied to the evaluation of earnings enhancing capital projects, and if these are not expected to be achieved then the Fund considers the expenditure to be sustaining. Sustaining capital expenditures are typically less than depreciation charges due to the long life nature of greenhouse assets, and the Company's strategy to improve returns on capital by moving production into lower capital cost growing facilities.

Significant earnings enhancing capital projects during the year included expansion of specialized growing facilities for clonal seedling production, expansion of outdoor growing compounds, and investments in energy-efficient heating systems. In the prior year, earnings-enhancing capital expenditures were mainly attributable to expansion of outdoor growing compounds, and various investments in cost-saving production automation equipment.

Sustaining capital spending is financed from operating cash flow, while the replacement of seedling containers is financed from cash reserves created specifically for this purpose from distributable cash. Earnings-enhancing capital is generally financed from draws against the Company's bank term debt facilities. Only earnings-enhancing investments are financed from the Company's term debt facilities. PRT has up to $22.3 million available under these facilities, subject to meeting certain covenants, of which $15.1 million remained available at year-end to finance expansionary capital spending.



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Payments Due by Period - $
--------------------------------------------------------------------------
Contractual Obligations Total Less than 1 - 3 4 - 5 After
1 Year years years 5 years
--------------------------------------------------------------------------
Long Term Debt 7,177,770 904,589 2,530,269 3,425,969 316,943
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Operating Leases 6,224,763 902,544 1,512,905 1,276,968 2,532,346
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Other 648,737 648,737 - - -
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Total Contractual
Obligations 14,051,270 2,455,870 4,043,174 4,702,937 2,849,289

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During the year the fund reduced $1.1 million of term debt through scheduled amortization payments. PRT's facilities are generally set up to amortize over a 10 year period, as forest seedling production facilities are typically long-life assets. In 2005, in addition to scheduled amortization, the company applied $2.5 million of the proceeds from the sale of its former Aldergrove, BC nursery site to reduce bank debt that year. In December 2005, the Fund issued 2,000,000 new Trust Units at an issue price of $10.15 per unit. The net proceeds of the offering were $18.9 million, and these were applied to partially retire term debt taken out to finance acquisitions and other capital expenditures.

Over the past three years the Fund has completed the following acquisitions:

- In July 2004, PRT completed an acquisition of H.N. Hybrid Nurseries Ltd., a forest seedling nursery in the Lower Mainland region of British Columbia. This facility had a gross purchase price of $6.8 million inclusive of working capital, and was financed through a combination of equity placed with the vendor, term debt, and vendor financing. The vendor financing was refinanced with term debt in 2005.

- In June 2005, PRT purchased Coldstream Nursery Ltd., an open compound forest seedling nursery in the Okanagan region of British Columbia. The acquisition was completed for a gross purchase price of $1.6 million inclusive of working capital, and was financed through a combination of term debt and vendor holdbacks.

- In October 2005, PRT purchased Pelton Reforestation Ltd., a large forest seedling nursery located in the Lower Mainland region of British Columbia. This nursery has approximately 40% of its production in open compounds, with the balance in greenhouse production. The acquisition was completed for a gross purchase price of $19.3 million inclusive of working capital and related costs, and was financed with term debt and operating debt.

All of the above transactions were consistent with the Fund's strategies to consolidate production in the forest seedling industry, and to invest in growing facilities in warmer climate areas to reduce heating costs.

Three Months Ended December 31, 2006 compared to Three Months Ended December 31, 2005

Cash flow from operating activities was a $2.7 million deficit versus a deficit of $0.5 million in the prior year quarter, a decrease of $2.2 million. This was due to the higher short term trade payable balances in the previous year which supported cash flow in that period.

Distributions per trust unit during the fourth quarter were higher, at $0.225 versus $0.219 in 2005. This change resulted from an increase in the base monthly distribution announced early in 2006. Total distributions were $0.5 million higher, related to the higher number of units outstanding this year.

PRT incurred $0.2 million in capital spending in the quarter, as compared to $0.3 million in 2005. This was primarily related to completion of earnings enhancing capital projects. Part of this capital spending has been temporarily financed from the Fund's operating line, which will be refinanced with term debt in 2007.

The Pelton acquisition was completed in the fourth quarter of 2005 and consumed $17.8 million of cash resources, exclusive of cash included in the company at the closing date.

There were no term debt drawings during the quarter, but drawings in the prior year quarter totalled $18.4 million, primarily to finance the Pelton acquisition. This debt was retired with the proceeds of the 2,000,000 Unit offering in December, 2005.

Financial Position

At December 31, 2006, working capital was $3.4 million compared to $3.6 million at the end of 2005, a decrease of $0.2 million. This change was largely attributable to using short term sources to temporarily fund earnings-enhancing capital expenditures during the year, partially offset by the excess of current year distributable cash flow over distributions declared. The Fund's working capital position remains adequate relative to its operating needs.

Property, plant and equipment totaled $48.2 million at December 31, 2006, a decrease from the prior year due to depreciation charges exceeding capital spending.

In conjunction with prior period acquisitions, the Fund has recorded intangibles related to the value of customer lists, leases and non-competition agreements. In addition, goodwill of $4.2 million was recognized related to the Pelton, Coldstream and Hybrid acquisitions, and $28.2 million of goodwill is recorded by the Fund related to its initial acquisition of PRT. The customer list intangibles are being amortized against income over 5 years, whereas leases are being amortized over 15 years, and non-competition agreements over periods from 5 to 10 years. Goodwill is subject to periodic impairment testing and will be written down if impairment is indicated.

Unitholders' Equity at December 31, 2006 was $75.9 million, a decrease of $1.4 million since the end of 2005. This decline in equity was due to distributions declared exceeding net earnings for the period, partially offset by the 13,802 units issued under the provisions of PRT's Employee Share Purchase Plan. Distributable cash flow from the Fund is typically higher than reported earnings, since depreciation charges generally exceed the expenditures required for asset replacement, while asset maintenance expenditures are already included as a component of net income. Most greenhouse assets can be maintained in use indefinitely with a regular repair and maintenance program.

Outstanding Unit Data

The Fund has one class of voting equity securities, of which 9,601,216 units are outstanding. Up to 560,572 units have been reserved for issuance under its Unit Option Plan, however to date no options have been granted. There are no other securities currently outstanding which may be converted into units of the Fund.

Financial Instruments

PRT uses interest rate swap contracts to fix interest rates on its variable rate long-term debt. Payments and receipts under interest rate swaps are recognized as adjustments to interest expense in a manner that matches them to interest payments under floating rate financial liabilities.

Swap terms are matched to the maturity of the underlying loan obligation. However, the Company could incur a gain or loss on the contract in the event the swap was cancelled before the scheduled maturity date. PRT periodically obtains mark-to-market valuations on its swap contracts. At December 31, 2006 the fair value of the Company's outstanding interest rate swaps approximated their carrying amount based on reference to current market interest rates.

PRT may use foreign currency forward sales contracts to manage currency exposure on net US dollar cash flows (see discussion of Foreign Exchange Risks below). The terms of such contracts are designed to match the receipt of US dollars under seedling sales contracts. Outstanding foreign currency forward sales contracts are revalued on a mark-to-market basis at the end of each reporting period, and any resulting gains or losses are recorded in income during the period. At December 31, 2006 there were no foreign currency forward sales contracts outstanding.

Accounting Policy Changes

Variable Interest Entities

Effective January 1, 2005, the Fund adopted the CICA's Accounting Guideline AcG-15, Consolidation of Variable Interest Entities. Application of this guideline has required consolidation of PRT Management Inc. with the Fund's financial statements in 2005. Adoption of this policy had no significant impact on reported results for either period.

Financial Instruments

The CICA has issued three new Handbook Sections which will apply to the Fund as of January 1, 2007: Section 3855 "Financial Instruments", Section 3865 "Hedges" and Section 1530 "Comprehensive Income". Section 3855 prescribes when a financial instrument should be recognized on the balance sheet and at what amount. It also specifies how to present financial instrument gains and losses. Section 3865, which is optional, provides alternative treatments to Section 3855 for qualifying transactions that are designated as hedges for accounting purposes. Section 1530 introduces new requirements for situations when certain gains and losses must be temporarily presented outside of net income in a new Statement of Comprehensive Income, which will be presented with equal prominence to the regular Income Statement. PRT has elected not to utilize hedge accounting on its existing derivative financial instruments (which are discussed below, under Interest Rate Risk and Foreign Exchange Risk). As a result, these instruments, which were previously not recognized on the balance sheet, will be recorded on the balance sheet at fair value, and gains and losses which were previously not recognized until the contracts were exercised will be recorded during each period. The Fund will adopt these new accounting standards commencing with its first quarter report in 2007, and the effect, if any, will be determined at that time.

Critical Accounting Estimates

Revenue Recognition

PRT accounts for revenue under seedling contracts based on percentage completion contract accounting. Percentage completion is determined as the ratio of direct growing expenses incurred to total expected direct growing costs over the crop cycle. While most crops are completed by the end of the Fund's fiscal year, during interim periods management must make estimates of total expected direct growing costs for the fiscal year. In addition, total annual revenue under growing contracts is estimated based on expected annual crop yields. To increase the accuracy of these estimates, PRT has internal policies and procedures which require periodic revisions to cost forecasts and crop yield forecasts whenever a material variance is known or expected. The potential for errors in estimation is typically limited to interim periods, as in most instances final crop yields and costs are known by the end of the fiscal year.

Future Income Taxes

In accordance with CICA recommendations, the Fund recognizes future income tax assets when it is more likely than not that the future income tax assets will be realized. This assumption is based on management's best estimate of future circumstances and events. If these estimates and assumptions are changed in the future, the value of the future income tax assets could be reduced or increased, resulting in an income tax expense or recovery. The Fund re-evaluates its future income tax assets on a regular basis.

Impairment of Goodwill

Goodwill, which is the excess of the purchase price paid for an acquisition over the fair value of the net identifiable assets acquired, is not amortized but is assessed annually for impairment or more frequently if events or circumstances indicate that it may be impaired.



Selected Annual Information
Figures are presented in $000's except number of Units and per Trust Unit
amounts
1998 1999 2000 2001 2002

Operating
Statistics
Revenues(1) 22,097 26,714 33,270 35,165 34,277
Revenue Growth
Rate (Year over
Year) 8.6% 20.9% 24.5% 5.7% -2.5%

Gross Margin
percentage 49.8% 47.9% 43.2% 44.3% 42.4%

Operating
Income(2) 6,207 7,090 8,060 8,905 7,628
% of revenue 28.1% 26.5% 24.2% 25.3% 22.3%

Net Earnings(1) 4,040 4,508 4,122 4,372 4,939
Basic and Fully
Diluted Earnings
per Unit $ 0.72 $ 0.80 $ 0.74 $ 0.78 $ 0.73

Distributable
Cash Flow(2) 5,725 5,895 5,383 5,685 6,800
Distributable
Cash Flow per
Unit(2) $ 1.02 $ 1.05 $ 0.96 $ 1.01 $ 1.01

Distributions
Declared per
Unit(1) $ 1.02 $ 0.88 $ 1.05 $ 0.96 $ 1.01

Return on
Average Equity 7.9% 9.0% 8.4% 9.2% 9.3%

Distributable
Cash Flow Yield
(on closing unit
price) 11.3% 12.0% 11.0% 9.1% 10.1%

Capex Spending:
Sustaining
Capital
(excludes
reserves) 228 276 540 419 462
% of revenue 1.0% 1.0% 1.6% 1.2% 1.3%
Earnings
enhancing 4,950 5,627 3,913 1,036 661
Subtotal 5,178 5,903 4,453 1,455 1,123
Seedling
Containers 749 993 954 1,090 660
Total 5,927 6,896 5,407 2,545 1,783

Acquisitions - 2,594 471 - -

Maintenance
expenditures 1,636 1,865 2,082 2,489 2,475
Maintenance &
Sustaining
Capital
expenditures as
a percentage of
revenue 8.4% 8.0% 7.9% 8.3% 8.6%

Financial
Position
Working Capital 2,211 1,135 1,343 1,523 4,737

Interest Bearing
Debt Position
Operating 2,882 4,231 7,096 6,993 4,615
Term (including
current portion) 4,968 8,070 11,838 11,502 -
Total 7,850 12,301 18,934 18,495 4,615

Term Debt to
Equity 0.098 0.161 0.247 0.246 0.000

Total Assets 61,062 66,402 70,999 69,934 68,709

Market
Capitalization
(based on
closing unit
price) 50,901 49,487 49,487 62,778 72,630

Units
Outstanding at
End of Period 5,655,714 5,655,714 5,655,714 5,655,714 7,255,714

Unit Price Range
High $ 10.25 $ 9.90 $ 10.20 $ 11.45 $ 11.26
Low(3) $ 8.00 $ 8.25 $ 7.00 $ 8.50 $ 9.51
Close -
December 31 $ 9.00 $ 8.75 $ 8.75 $ 11.10 $ 10.01
Volume 834,339 874,126 877,194 1,276,590 2,086,315


2003 2004 2005 2006

Operating
Statistics
Revenues(1) 34,955 34,770 42,097 51,574
Revenue Growth
Rate (Year over
Year) 2.0% -0.5% 21.1% 22.5%

Gross Margin
percentage 41.8% 41.3% 43.0% 40.1%

Operating
Income(2) 6,802 7,488 9,699 11,229
% of revenue 19.5% 21.5% 23.0% 21.8%

Net Earnings(1) 4,836 4,921 6,008 7,365
Basic and Fully
Diluted Earnings
per Unit $ 0.67 $ 0.67 $ 0.79 $ 0.77

Distributable
Cash Flow(2) 6,176 6,085 7,456 9,099
Distributable
Cash Flow per
Unit(2) $ 0.85 $ 0.82 $ 0.98 $ 0.95

Distributions
Declared per
Unit(1) $ 0.99 $ 0.88 $ 0.88 $ 0.93

Return on
Average Equity 8.2% 8.4% 8.8% 9.6%

Distributable
Cash Flow Yield
(on closing unit
price) 9.4% 8.7% 9.7% 11.5%

Capex Spending:
Sustaining
Capital
(excludes
reserves) 263 201 462 478
% of revenue 0.8% 0.6% 1.1% 0.9%
Earnings
enhancing 2,019 4,189 1,639 539
Subtotal 2,282 4,390 2,101 1,017
Seedling
Containers 708 752 1,015 1,550
Total 2,990 5,142 3,116 2,567

Acquisitions - 3,010 19,233 -

Maintenance
expenditures 2,506 2,089 2,523 3,609
Maintenance &
Sustaining
Capital
expenditures as
a percentage of
revenue 7.9% 6.6% 7.1% 7.9%

Financial
Position
Working Capital 3,561 3,756 3,586 3,419

Interest Bearing
Debt Position
Operating 6,687 6,788 10,203 9,445
Term (including
current portion) 1,763 8,601 7,826 7,178
Total 8,450 15,389 18,029 16,623

Term Debt to
Equity 0.031 0.146 0.101 0.095

Total Assets 68,054 77,801 104,663 99,472

Market
Capitalization
(based on
closing unit
price) 65,301 71,460 96,833 79,114

Units
Outstanding at
End of Period 7,255,714 7,577,901 9,587,414 9,601,216

Unit Price Range
High $ 10.30 $ 9.90 $ 11.57 $ 11.94
Low(3) $ 8.60 $ 8.73 $ 9.07 $ 7.76
Close - December 31 $ 9.00 $ 9.43 $ 10.10 $ 8.24
Volume 1,017,827 2,683,489 2,919,041 4,040,401

Note 1. This summarized financial data is presented in Canadian dollars,
and has been prepared in accordance with Canadian generally accepted
accounting principles. In 2002 the Fund adopted CICA Handbook section
3062 with regard to goodwill and intangibles. This change in policy was
applied on a prospective basis.
Note 2. Distributable Cash Flow and Operating Income are terms which do not
have standardized meaning under Canadian generally accepted accounting
principles, and may not be comparable to similar measures provided by
other reporting entities.
Note 3. The lowest closing price in 2006 prior to the Federal Government's
October 31 announcement proposing a tax on income trusts was $9.49 per
unit.


Discussion of Historical Annual Results:

Between 2002 and 2004, PRT's operations were adversely affected by difficult conditions in the forest industry, which impacted seedling pricing and volumes. In addition, since 2000, energy prices have risen substantially, resulting in increased costs of production over this period. In 2003, the Fund incurred foreign exchange losses on its US dollar seedling contracts, which impacted earnings for the period by $456,000. In 2002, the Fund retired its term debt from the proceeds of a $15 million equity offering, and in the process incurred a loss on cancellation of interest rate swaps of $472,000. In 2004 the Fund incurred site consolidation costs of $453,000 to close and relocate nursery sites, and in 2005 the Fund recorded a gain on sale of a closed nursery site of $548,000. Over the Fund's operating history there have been no adjustments to earnings for discontinued operations or extraordinary items.

Summary of Quarterly Results

Figures below are presented in $000's, except for per trust unit figures.



---------------------------------------------------------------------------
2005
---------------------------------------------------
January
to
December
1st Q 2nd Q 3rd Q 4th Q 31
---------------------------------------------------------------------------
Operating Results
Revenues $ 8,838 $13,738 $ 6,361 $13,160 $42,097

Net earnings $ 1,345 $ 2,741 $ 356 $ 1,566 $ 6,008
Per Unit(1) $ 0.18 $ 0.36 $ 0.05 $ 0.20 $ 0.79
Distributable cash $ 1,216 $ 3,718 $ 105 $ 2,417 $ 7,456
Per Unit $ 0.16 $ 0.49 $ 0.01 $ 0.32 $ 0.98

Distributions declared $ 1,660 $ 1,660 $ 1,661 $ 1,805 $ 6,786
Per Unit $ 0.22 $ 0.22 $ 0.22 $ 0.22 $ 0.88
---------------------------------------------------------------------------

---------------------------------------------------------------------------
2006
---------------------------------------------------
January
to
December
1st Q 2nd Q 3rd Q 4th Q 31
---------------------------------------------------------------------------
Operating Results
Revenues $12,808 $17,767 $ 8,804 $12,195 $51,574

Net earnings $ 1,697 $ 3,298 $ 294 $ 2,076 $ 7,365
Per Unit(1) $ 0.18 $ 0.34 $ 0.03 $ 0.22 $ 0.77
Distributable cash $ 2,203 $ 4,619 $ 90 $ 2,187 $ 9,099
Per Unit $ 0.23 $ 0.48 $ 0.01 $ 0.23 $ 0.95

Distributions declared $ 2,407 $ 2,158 $ 2,159 $ 2,160 $ 8,884
Per Unit $ 0.25 $ 0.23 $ 0.23 $ 0.22 $ 0.93
---------------------------------------------------------------------------

Note 1: Basic and Fully Diluted

The above summarized financial data is presented in Canadian dollars, and
has been prepared in accordance with Canadian generally accepted
accounting principles, with the exception of distributable cash amounts.
Distributable Cash Flow is a term which does not have standardized meaning
under Canadian generally accepted accounting principles, and may not be
comparable to similar measures provided by other reporting entities.


Discussion of Quarterly Results:

The Fund's operating results are seasonal, driven by the varying levels of activity required throughout the seedling growing cycle, as well as the seasonal nature of silviculture services. Revenues and cash flow are affected by PRT's seedling crop cycles, crop mix, and by the seasonality of PRT's customers' planting season. PRT recognizes revenue under contracts on a percentage completion basis with costs incurred as a base. Revenue from non-contracted goods and services is recognized when the goods are delivered or the service has been substantially rendered. As such, fluctuations between quarters occur depending upon the activities in the quarter. Comparatively high cost activities, such as harvesting, typically occur in the second and fourth quarters, and accordingly these quarters normally reflect a higher proportion of annual revenues. Operating results in the fourth quarter of 2006 were lower than the same period of 2005 due to revenue timing shifts to the first and second quarters caused by crop mix changes. Operating results in the fourth quarter of 2005 were also impacted by the acquisition of Pelton Reforestation Ltd., and the capital structure in place during that quarter. Distributions declared in the first quarter period may include a "top-up" distribution declared from available distributable cash flow of the prior year. No such distribution was made in 2005, while $0.03 per unit was declared in the first quarter of 2006.

Risks and Risk Management

Agricultural

The Company's business involves the cultivation and growing of forest seedlings, an agricultural crop. As such, the business of PRT is subject to risks inherent in an agricultural business. To manage these risks, PRT grows its crop at multiple sites with diverse locations, with the majority of the crop grown in climate-controlled greenhouses. Trained growing personnel monitor the growing conditions with the aid of computerized environmental control, alarm and other management systems. These systems are an integral part of the Company's formalized crop risk management plans, and the Company also maintains insurance over indoor crops against certain types of physical damage.

Commodity Costs

Some of PRT's costs are subject to variations caused by movements in commodity prices. For example, energy prices have been volatile in recent years which has adversely impacted PRT's operating margins and may continue to do so. The Company typically prices its products under annual sales contracts, and is generally not able to revise its sales prices in the short term to offset commodity price volatility. To reduce this risk, PRT purchases energy from a variety of regulated and non-regulated sources, which diversifies the timing and effect of short-term changes in commodity prices. The Company also enters into forward purchase contracts for future energy requirements where management considers it advantageous to do so.

Foreign Exchange

The Fund enters into seedling growing contracts in both Canadian and US dollars. Exchange rates have been, and may continue to be, volatile and, as stated above, the Company typically prices its products under annual sales contracts, and is generally not able to revise its sales prices in the short term to offset exchange rate volatility. To reduce this risk, PRT has established a US based production facility, and is financing the purchase of that facility with US dollar denominated debt, in order to provide some offsetting exchange rate exposure against the US dollar revenue stream. PRT may also enter into forward currency exchange contracts to further hedge exposure on net US dollar cash flows.

Industry Risk

The business of PRT is highly dependent on the forest industry in Canada. While the Company is not materially dependent on any one customer, regional markets may be impacted by changes in global markets and government regulations and by more consolidated buying decisions by larger customers. PRT has taken steps to diversify its operations across a wider variety of customers and Provincial/State jurisdictions, in order to reduce such short term impacts.

Interest Rates

The Company intends to use term debt financing to fund earnings-enhancing capital expenditures in the current low interest rate environment. Interest rate risk is managed by fixing term debt rates for varying terms using interest rate swaps. Working capital loans are short term in nature and represent a relatively small portion of the cost of total borrowings. Accordingly, PRT does not hedge interest rate risk on this debt.

Environmental

The production of forest seedlings has limited impact on the environment. Seedlings are grown in controlled greenhouses or in defined open compounds. To manage any potential environmental risks, PRT has established an Environmental Management System (EMS). The EMS consists of an environmental policy, codes of conduct, periodic site audits, employee training and awareness, environmental monitoring, emergency prevention and response procedures, and periodic reporting.

Income Trust Taxation

On October 31, 2006 the Canadian Federal Government announced proposed plans to apply a tax on publicly traded income trusts, such as the Fund. For existing income trusts, the government is proposing a four-year transition period, until the 2011 taxation year, before the tax would be applicable. The proposals also outline certain provisions to limit the "undue expansion" of income trusts during the transition period, If the Fund were to exceed these limits the consequence would be a loss of the grandfathered tax status during the transition period.

At the time that the tax is applied, the Fund will be subject to entity level taxation which will reduce the amount of cash available for distribution and may result in lower distributions being made to unitholders. The proposed rate of taxation is 31.5% on certain receipts by the trust. Distributions by the trust that are made from such taxed receipts would be treated as eligible Canadian dividend income by unitholders who are Canadian individual taxpayers, Assuming such unitholders are subject to the highest marginal rate of federal and provincial income tax, they would receive an after-tax return from their now reduced distribution of income approximately equal to the after-tax return if pre-tax income of the income trust had been distributed directly to the investor and taxed in the hand of the investor. However, reduced distributions will be an absolute cost to other types of investors including pension funds, Registered Retirement Savings Plans and non-residents who would not benefit from characterization of the distribution as dividends.

No assurance can be given that the Fund will be able to maintain its current grandfathered status until January 1, 2011, or that the proposals will be enacted substantially as outlined.

Disclosure Controls and Internal Controls over Financial Reporting

The Fund has established disclosure controls and procedures to ensure that any material information is properly recorded, processed, summarized and reported to the Board of Trustees and the Audit Committee. PRT's chief executive officer (CEO) and chief financial officer (CFO) have evaluated and are satisfied with the effectiveness, at the reasonable assurance level, of these disclosure controls and procedures for the period ending December 31, 2006.

The Fund has established internal control over financial reporting (ICFR), and the CEO and CFO confirm that there were no changes in these controls that occurred during the interim period ended December 31, 2006 which materially affected, or are reasonably likely to materially affect, the Company's ICFR.

Outlook

The market outlook for 2007 is somewhat weaker as a result of a temporary slowdown in the demand for seedlings. This is due to three main factors:

1. A temporary and unexpected decline in BC market seedling demand. Recent legislative changes to forest tenure policies have resulted in changes in tenure for up to 20% of the provincial crown forest lands, and management believes this may have caused a delay in reforestation activity on some of the affected wood lots.

2. In addition, some customers may be electing to defer silviculture spending as a response to the slowdown in lumber exports due to a commensurate slowdown in the US housing market.

3. A reduction of order volumes due to price increases for 2007 contracts, that were implemented to partially offset increased energy and other production costs.

New seedling volumes are expected to total approximately 205 million trees, representing approximately 2.2 million seedling blocks of production. This is 13% below the block volume in 2006. However, we expect somewhat higher average block revenues, due to the effect of seedling price increases and changes in product mix. This is expected to partially offset the impact of reduced volumes.

Silviculture spending deferrals from the factors mentioned are likely to be temporary, and management expects demand to return to historical levels in subsequent years. This view is supported by the growing reforestation backlog created by mountain pine beetle devastation in BC.

Production margins are expected to remain stable, with the impact of lower volumes largely offset by the anticipated benefits of lower energy costs, higher selling prices, and planned efficiency improvements. Selling general and administrative expenses are expected to be slightly higher, due to increased regulatory compliance, systems development, and R&D costs. Interest costs in 2007 should be similar to 2006, as the current year capital program is expected to be modest, excluding any potential impact from new acquisitions.

In February 2007, we announced our intention to close our Nevada nursery, to improve crop reliability and economies of scale. Since establishing this nursery, we have developed the expertise to grow similar crops outdoors at other PRT locations, with less risk. This closure is not expected to have a significant impact on 2007 earnings.

With lower volumes, operating earnings will come under some pressure, but distributable cash is expected to remain above PRT's base distribution level, and therefore distributions are expected to remain stable.

In the mid-term, the underlying fundamentals for the forest seedling industry remain sound, but will vary regionally. In BC, forest damage from the mountain pine beetle and past forest fires, as well as silviculture spending deferrals, have creating a growing backlog in reforestation which will support future demand. On the other hand, the Ontario forest industry continues to restructure in the face of significant economic challenges. On a national level, the long-term demand for seedlings has remained remarkably stable. To take advantage of this, PRT has positioned itself as a market leader in a number of key markets to help reduce the impact of regional market fluctuations, and our past marketing results have benefited from this diversity. We expect this will continue to be the case in the future.

Our current group of 15 nursery locations gives us the scope and capabilities to service a forest industry that is characterized by ever more consolidation. We continue to execute on our strategy to gradually become less energy dependent, and to adopt new growing technologies that can lead to more cost-effective seedling production.

We remain optimistic about our long-term prospects, including our opportunity to achieve further cash flow improvements from past acquisitions, and to further consolidate our fragmented seedling industry. We also continue to see opportunities to take our expertise to new market areas, where we can create value for our customers and unitholders alike.

On behalf of the Trustees and Management



Colin A.C. Dobell John Kitchen
Chairman & Trustee President & CEO
PRT Forest Regeneration Pacific Regeneration
Income Fund Technologies Inc.


REVIEW OF INTERIM FINANCIAL STATEMENTS

Under National Instrument 51-102, Part 4, subsection 4.3(3)(a), if an auditor has not performed a review of the interim financial statements, they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor.

The accompanying unaudited interim financial statements of the Company have been prepared by and are the responsibility of the Company's management.

The Company's independent auditor has not performed a review of these financial statements in accordance with standards established by the Canadian Institute of Chartered Accountants for a review of interim financial statements by an entity's auditor.



Consolidated Balance Sheets (unaudited)
($000's)
As at As at
December 31 December 31
2006 2005
--------------------------------
Assets

Current assets
Cash $ 720 $ 697
Accounts receivable 10,352 10,261
Income taxes recoverable - 115
Inventories 2,247 2,097
Prepaid expenses and term deposit 639 733
Unbilled revenue 3,366 5,824
--------------------------------------------------------------------------
17,324 19,727

Property, plant and equipment 48,208 50,601
Investment 401 529
Intangibles 1,164 1,431
Goodwill 32,375 32,375
--------------------------------------------------------------------------

$ 99,472 $ 104,663
--------------------------------------------------------------------------
--------------------------------------------------------------------------

LIABILITIES

Current liabilities
Operating line $ 9,445 $ 10,203
Accounts payable and accrued liabilities 2,835 4,250
Distribution payable to Unitholders 720 697
Vendor financing - 135
Current portion of long-term debt 905 857
--------------------------------------------------------------------------
13,905 16,14

Long-term debt 6,273 6,969

Future income taxes 3,364 4,246
--------------------------------------------------------------------------
23,542 27,357
--------------------------------------------------------------------------

UNITHOLDERS' EQUITY

Capital contributions (note 3) 90,233 90,090
Cumulative net earnings 46,529 39,164
Cumulative distributions declared (60,832) (51,948)
--------------------------------------------------------------------------
75,930 77,306
--------------------------------------------------------------------------
$ 99,472 $ 104,663
--------------------------------------------------------------------------
--------------------------------------------------------------------------



Consolidated Statements of Earnings and Cumulative Earnings (unaudited)
($000's)
Three months ended Year ended
December 31 December 31
2006 2005 2006 2005
---------------------------------------
Revenue $ 12,195 $ 13,160 $ 51,574 $ 42,097
--------------------------------------------------------------------------

Expenses
Costs of production 7,016 7,298 30,881 23,984
Selling, general and administration 2,497 2,725 9,489 8,344
Foreign exchange loss (gain) 37 16 (25) 69
--------------------------------------------------------------------------

Operating earnings before
the following 2,645 3,121 11,229 9,700

Interest expense 213 510 1,054 1,207
Depreciation 882 1,036 3,409 3,062
Amortization of intangibles 66 59 266 120
Equity in loss (income) of investee 14 (2) 129 126
Gain on sale of property, plant
and equipment (1) (18) (91) (573)
--------------------------------------------------------------------------

Earnings before income taxes 1,471 1,536 6,462 5,758

Recovery of income taxes 605 30 903 250
--------------------------------------------------------------------------

Net earnings $ 2,076 $ 1,566 $ 7,365 $ 6,008

Cumulative earnings - beginning
of the period 44,453 37,598 39,164 33,156
--------------------------------------------------------------------------

Cumulative earnings - end
of period $ 46,529 $ 39,164 $ 46,529 $ 39,164
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Basic and diluted earnings
per Trust Unit $ 0.22 $ 0.20 $ 0.77 $ 0.79
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Weighted average number of
Trust Units outstanding 9,599,516 7,803,748 9,594,184 7,637,534
--------------------------------------------------------------------------
--------------------------------------------------------------------------



Consolidated Statements of Cash Flows (unaudited)
($000's)
Three months ended Year ended
December 31 December 31
2006 2005 2006 2005
---------------------------------------

Cash flows from operating
activities

Net earnings $ 2,076 $ 1,566 $ 7,365 $ 6,008
Items not affecting cash
Depreciation (excluding seedling
containers) 882 1,036 3,409 3,062
Seedling container depreciation
included in costs of production 436 406 1,547 1,159
Amortization of Intangibles 66 60 266 120
Recovery of future income taxes (663) (4) (934) (247)
Unrealized loss (gain) on foreign
exchange 34 66 118 (43)
Equity in loss (income) of
investee 14 (2) 129 126
Gain on sale of property, plant
and equipment (1) (18) (91) (573)
--------------------------------------------------------------------------
2,844 3,110 11,809 9,612

Net change in non-cash working
capital balances (5,533) (3,562) 1,254 (3,583)
--------------------------------------------------------------------------

(2,689) (452) 13,063 6,029
--------------------------------------------------------------------------

Cash flows from financing
activities
Distributions paid to Unitholders (2,160) (1,661) (8,862) (6,685)
Issuance of Trust Units 36 18,960 143 19,032
Proceeds of long-term debt - 18,414 174 23,586
Repayment of long-term debt (197) (18,916) (1,131) (24,177)
Repayment of vendor holdback - (26) (135) (638)
Increase (decrease) in operating
line 5,099 1,912 (758) 2,700
--------------------------------------------------------------------------

2,778 18,683 (10,569) 13,818
--------------------------------------------------------------------------

Cash flows from investing
activities
Acquisition - (17,836) - (19,233)
Purchase of property, plant and
equipment (199) (324) (2,567) (3,116)
Proceeds on sale of property,
plant and equipment 6 17 96 2,599
--------------------------------------------------------------------------
(193) (18,143) (2,471) (19,750)
--------------------------------------------------------------------------

Increase (decrease) in cash $ (104) $ 88 $ 23 $ 97

Cash - beginning of period 824 609 697 600

--------------------------------------------------------------------------

Cash - end of period $ 720 $ 697 $ 720 $ 697
--------------------------------------------------------------------------
--------------------------------------------------------------------------


Notes to Financial Statements

1. Significant Accounting policies

These unaudited interim consolidated financial statements of the PRT Forest Regeneration Income Fund (The Fund) have been prepared in accordance with Canadian generally accepted accounting principles. The interim financial statements follow the same accounting policies and method of application as the most recent annual consolidated financial statements. As such, these statements should be read in conjunction with the Fund's most recent annual report.

The preparation of these unaudited interim consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates and the operating results for the interim period presented are not necessarily indicative of the results expected for the full year.

The Company uses the temporal method of foreign currency translation to translate foreign currency denominated accounts and the accounts of its foreign subsidiary. Monetary items are translated at the rate of exchange in effect at the balance sheet date. Non-monetary items and revenue and expense items are converted at the historical exchange rate in effect at the time the transaction occurred. The Fund records realized and unrealized foreign exchange (gains) losses in the Statement of Earnings and Unitholders' Equity as "Foreign exchange loss (gain)", and identifies unrealized (gains) losses on the translation of non-cash monetary items as "Unrealized loss (gain) on foreign exchange" in the Statement of Cash Flows.

In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all adjustments necessary to present fairly the Fund's financial position as at December 31, 2006 and December 31, 2005, as well as its results of operations and cash flow for the three months ended December 31, 2006 and 2005 and the twelve months ended December 31, 2006 and 2005.

2. Seasonality of operating results

Revenues and cash flow are affected by the Fund's subsidiary, Pacific Regeneration Technologies Inc.'s ("PRT's") seedling crop cycles and by the seasonality of PRT's customers' planting season. PRT recognizes revenue under contracts on a percentage completion basis with costs incurred as a base. Revenue from non-contracted goods and services is recognized when the goods are delivered or the service has been substantially rendered. As such, fluctuations between quarters occur depending upon the activities and expenditures in the quarter.

3. Capital Contributions



Capital contributions and units outstanding are:


Capital Contributions Three months ended Twelve months ended
($000's) December 31 December 31
2006 2005 2006 2005
------------------------------------------
Capital Contributions -
Beginning of period $ 90,197 $ 71,130 $ 90,090 $ 71,058
Units issued under ESOP program 36 25 143 97
Units issued for cash - 18,935 - 18,935
--------------------------------------------------------------------------
Capital Contributions -
End of period $ 90,233 $ 90,090 $ 90,233 $ 90,090
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Three months ended Twelve months ended
December 31 December 31
2006 2005 2006 2005
------------------------------------------
Units outstanding -
Beginning of period 9,597,433 7,585,112 9,587,414 7,577,901
Units issued under ESOP program 3,783 2,302 13,802 9,513
Units issued for cash - 2,000,000 - 2,000,000
--------------------------------------------------------------------------
Units outstanding -
End of period 9,601,216 9,587,414 9,601,216 9,587,414
--------------------------------------------------------------------------
--------------------------------------------------------------------------


4. Distribution to Unitholders

During the year ended December 31, 2006, the Fund declared distributions to the Unitholders of $8,884,529 or $0.926 per Unit (2005 - $6,786,107 or 0.876 per Unit) based on the number of Units outstanding on the record date. Regular monthly distributions are declared on the last business day of each month and paid the following month, while a special "top-up" distribution on account of prior period cash flow may be declared on or about March 15th. The distribution amounts declared by month for the year were:




Record Payment Taxable Taxable
Date Date Interest Non-Taxable Dividend Total
--------------------------------------------------------------------------
01/31/2006 02/15/2006 $0.06856 $0.00444 $ - $0.07300
02/28/2006 03/15/2006 0.06734 0.00566 - 0.07300
03/15/2006 03/31/2006 - - 0.03000 0.03000
03/31/2006 04/13/2006 0.06856 0.00444 0.00200 0.07500
04/28/2006 05/15/2006 0.06856 0.00444 0.00200 0.07500
05/31/2006 06/15/2006 0.06856 0.00444 0.00200 0.07500
06/30/2006 07/14/2006 0.06856 0.00444 0.00200 0.07500
07/31/2006 08/15/2006 0.06856 0.00444 0.00200 0.07500
08/31/2006 09/15/2006 0.06856 0.00444 0.00200 0.07500
09/29/2006 10/13/2006 0.06856 0.00444 0.00200 0.07500
10/31/2006 11/15/2006 0.06856 0.00444 0.00200 0.07500
11/30/2006 12/15/2006 0.06856 0.00444 0.00200 0.07500
12/29/2006 01/15/2007 0.06449 0.01051 - 0.07500
---------------------------------------------
Total $0.81743 $0.06057 $0.04800 $0.92600
---------------------------------------------
---------------------------------------------


5. Segmented Information - Geographic Areas

The Company recorded revenues from customers located in the United States in the amount of $5,037,000 and $967,000 in the twelve months and three months ending December 31, 2006 respectively ($5,567,000 and $1,076,000 in the twelve months and three months ending December 31, 2005 respectively). In addition, as at December 31, 2006 the Fund's total capital assets located in the USA amounted to $4,876,000 (December 31, 2005 - $5,081,000).

6. Management Agreement and Management Fees

PRT has a Management Agreement with PMI whereby PMI provides management and administration services and strategic advice to PRT, as well as certain individuals to serve in executive positions. The fees under this agreement are reviewed and set annually, at a level necessary to achieve reimbursement, without profit, of PMI's internal costs and out of pocket expenses incurred in providing these services. Management fees are billed monthly in accordance with PMI's budgeted costs for the period. Management fees included in selling, general and administrative expenses totaled $1,365,000 and $457,000 for the twelve months and three months ending December 31, 2006 respectively ($1,337,000 and $434,000 for the twelve months and three months ending December 31, 2005 respectively). Effective January 1, 2005 PMI's operating results are consolidated into the Fund as a Variable Interest Entity.

7. Supplementary cash flow and non-cash investing and financing activities information



Three months ended Twelve months
December 31 December 31
2006 2005 2006 2005
-------------------------------------------
000's
Non-cash financing activities
Vendor financing $ - $ - $ - $ 135

Non-cash investing activities
Purchase of property, plant
and equipment $ - $ - $ - $ (135)


Contact Information

  • PRT Forest Regeneration Income Fund
    Robert Miller
    VP Finance/CFO
    (866) 553-8733 ext. 227
    Website: www.prtgroup.com