Wajax Income Fund
TSX : WJX.UN

Wajax Income Fund

November 01, 2005 11:19 ET

Wajax Announces Significantly Improved Third Quarter Results And A 15% Increase In Distributions

MISSISSAUGA, ONTARIO--(CCNMatthews - Nov. 1, 2005) - Wajax Income Fund (TSX:WJX.UN) today announced significantly improved third quarter 2005 results.



(Dollars in millions, Three Months Nine Months
except per unit data) Ended September 30 Ended September 30
------------------ ------------------
2005 2004 2005 2004

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Revenue from continuing
operations $258.0 $215.0 $772.6 $634.7

Net earnings from
continuing operations $12.7 $4.9 $19.8 $11.8

Net (loss) earnings from
discontinued operations $(3.3) $0.3 $(2.5) $0.5

Net earnings $9.4 $5.2 $17.4 $12.3

Basic earnings (loss)
per unit:
- From continuing
operations $0.77 $0.31 $1.23 $0.75
- From discontinued
operations $(0.21) $0.02 $(0.15) $0.03
- Net earnings $0.56 $0.33 $1.08 $0.78


Third Quarter Highlights

- Revenues from continuing operations increased $43.0 million, or 20% (24% after adjusting for the decline in the value of the U.S. dollar) compared to last year. Mobile Equipment revenues increased 25%, Industrial Components 9%, and Power Systems were up 22%, as solid increases were realized in most regions in Canada, with particular strength continuing in the Alberta energy sector.

- Stronger sales led to significantly improved earnings in all three segments. Compared to the previous year, Mobile Equipment earnings were up 36% to $8.4 million, Industrial Components increased 18% to $3.4 million, and Power Systems improved by 31% to $4.4 million.

- Basic Distributable Cash (See Non-GAAP Measures section in MD&A) amounted to $0.85 per unit for the quarter, and $1.08 per unit since the date of conversion, compared to distributions declared of $0.64 per unit.

- On September 30, 2005, the assets of Spencer Industries, a hydraulics business and the Fund's only active U.S. subsidiary, were sold to Applied Industrial Technologies Inc. of Cleveland, Ohio. Cash proceeds on closing amounted to $18.5 million and are subject to certain post closing adjustments. The fund accounted for this business as a discontinued operation and recorded a loss on sale of $3.3 million after writing off $2.6 million of U.S. future income tax balances and taking appropriate reserves for a number of liabilities retained. This will allow the fund to redeploy these proceeds to further grow its Canadian operations.

- Net earnings for the quarter after accounting for discontinued operations were $9.4 million, or $0.56 per unit, compared to $5.2 million, or $0.33 per share, recorded in 2004.

- On October 31, 2005, the Fund purchased all the shares of Midwest Detroit Diesel-Allison Ltd. (Midwest). Midwest is the Detroit Diesel engine and Allison transmission distributor for Manitoba, Saskatchewan, northwestern Ontario and Nunavut. It also distributes Electro-Motive Diesel (EMD) engines across Canada. EMD engines are used in power generation, oil field, industrial and marine applications requiring large, low-speed diesel engines. The price paid on closing for the shares and assumed debt was $8.4 million and is subject to post-closing adjustments. Midwest has annual revenues of approximately $22 million and adjusted EBITDA (See Non-GAAP measure section in MD&A) of approximately $2.0 million. Midwest will be operated by the Fund's Waterous Power Systems operation centered in Edmonton.

- Estimated pro-forma distributable cash (see Non-GAAP Measures section in MD&A) for the twelve-months ended September 30, 2005 was $2.74 per unit, up from an estimated $2.45 per unit for the twelve months ended June 30, 2005.

- The Fund announced a 15% increase in monthly distributions to $0.21 per unit ($2.52 per unit annualized) beginning with the November, 2005 distribution, payable on December 20, 2005, to unitholders of record on November 30, 2005.

Commenting on the third quarter results and the outlook for the rest of the year, Neil Manning, President and CEO, stated "We continue to be very satisfied with the performance of our operating divisions in the third quarter. We are also excited about the prospects for our Power Systems business with the acquisition of Midwest Detroit Diesel. Midwest extends our product territory in Canada and brings some interesting new product opportunities to our organization. With many sectors of the Canadian economy continuing to be strong and particularly the resource sector in western Canada, we look forward to another strong quarter to finish the year."

Wajax is a diversified income fund that has three core distribution businesses engaged in the sale and after-sales parts and service support of mobile equipment, industrial components and power systems, through a network of over 100 branches across Canada. Its customer base spans natural resources, construction, transportation, manufacturing, industrial processing and utilities.

Wajax will Webcast its Third Quarter Financial Results Conference Call. You are invited to listen to the live Webcast on Tuesday, November 1, 2005 at 2:30 p.m. ET. To access the Webcast, enter www.wajax.com and click on the link for the Webcast on the Investor Relations page. The archived Webcast will be available at the above mentioned website within 24 hours after the conference call.

This news release contains forward-looking information. Actual future results may differ from expected results.

MANAGEMENT'S DISCUSSION AND ANALYSIS - THIRD QUARTER 2005

The following management discussion and analysis ("MD&A") provides a review of the consolidated financial condition and results of operations of Wajax Income Fund (the "Fund") for the quarter ended September 30, 2005. The following discussion should be read in conjunction with the information contained in the accompanying financial statements and notes thereto for the quarter ended September 30, 2005. For additional information and details, readers are referred to the Fund's financial statements and MD&A for the first and second quarters of 2005 and the year ended December 31, 2004, as well as the Fund's Annual Information Form, all of which are published separately and are available on SEDAR at www.sedar.com.

Unless otherwise indicated, all financial information within this MD&A is in millions of dollars, except per unit data.

DISTRIBUTIONS

The Fund makes monthly distributions, generally payable to unitholders of record on the last business day of each calendar month and to be paid on or about the 20th day of the following month. Distributions paid during the quarter of $0.458 per unit, or $7.6 million, do not include amounts declared for the last month of the quarter. The following is a summary of distributions declared by the Fund in the quarter.



Period Record Date Payment Date Per Unit
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June 15 to July 31, 2005 July 29, 2005 August 22, 2005 $0.2750
August 2005 August 31, 2005 September 20, 2005 $0.1833
September 2005 September 30, 2005 October 20, 2005 $0.1833
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Total $0.6416
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On October 11, 2005 the Fund declared a cash distribution of $0.1833 per unit for the month of October, payable on November 21, 2005 to unitholders of record on October 31, 2005. Effective November 1, 2005 monthly distributions will be increased to $0.21 per unit to reflect the growth in the Fund's distributable cash.

Management expects that substantially all of the distributions paid by the Fund will be taxable to unitholders.

During the third quarter of 2004, Wajax Limited paid a dividend on common shares of $0.04 per share.



QUARTERLY RESULTS OF OPERATIONS

Consolidated Results

for the three months ended September 30 2005 2004
---------------------------------------------------------------------
Gross revenue $258.0 $215.0
Net earnings from continuing operations $12.7 $4.9
Net (loss) earnings from discontinued operations ($3.3) $0.3
Net earnings $9.4 $5.2

Basic earnings per unit
- Net earnings from continuing operations $0.77 $0.31
- Net (loss) earnings from discontinued operations ($0.21) $0.02
- Net earnings $0.56 $0.33
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for the nine months ended September 30 2005 2004
---------------------------------------------------------------------
Gross revenue $772.6 $634.7
Net earnings from continuing operations before
income fund conversion-related items (a) $26.6 $11.8
Income fund conversion-related items (after tax)(b) ($6.7) -
Net earnings from continuing operations $19.9 $11.8
Net (loss) earnings from discontinued operations ($2.5) 0.5
Net earnings $17.4 $12.3

Basic earnings per unit
- Net earnings from continuing operations before
income fund conversion-related items (a) $1.65 $0.75
- Income fund conversion-related items (after
tax)(b) ($0.42) -
- Net earnings from continuing operations $1.23 $0.75
- Net earnings from discontinued operations ($0.15) $0.03
- Net earnings $1.08 $0.78
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(a) Non-GAAP measure, see the Non-GAAP Measures section.
(b) Income fund conversion-related items include costs related to the
income fund conversion and the early extinguishment of long-term
debt.


Revenues from continuing operations increased $43.0 million, or 20%, in the third quarter of 2005 to $258.0 million from $215.0 million in 2004. The strengthening Canadian dollar relative to the U.S. dollar had the effect of decreasing 2005 consolidated quarterly revenues by approximately $8.0 million as the Fund realized lower sales dollars per unit on U.S.-sourced products.

Net quarterly earnings from continuing operations of $12.7 million, or $0.77 per unit, increased $7.8 million compared to the $4.9 million, or $0.31 per share, recorded the previous year. During the quarter Spencer, the Fund's U.S.-based hydraulics business, was treated as a discontinued operation. It was sold for cash proceeds on closing, subject to adjustments, of $18.5 million. The resulting net loss from discontinued operations of $3.3 million, or $0.21 per unit, includes the write-off of $2.6 million, or $0.16 per unit, of U.S. future income tax balances as the Fund has no remaining U.S.-based operations. For the nine months ended September 30, 2005 revenue from continuing operations increased $137.9 million, or 22%, to $772.6 million and net earnings from continuing operations increased $8.1 million to $19.9 million, or $1.23 per unit, from $11.8 million, or $0.75 per share, the previous year. The strengthening Canadian dollar relative to the U.S. dollar had the effect of decreasing 2005 consolidated revenues from continuing operations for the nine months ended September 30, 2005 by approximately $21.2 million. Included in the nine months ended September 30, 2005 earnings are income fund conversion-related items totaling $10.2 million ($6.7 million after tax or $0.42 per unit) which include conversion-related costs of $2.6 million ($1.7 million after tax or $0.11 per unit) and charges associated with the early extinguishment of long-term debt of $7.6 million ($5.0 million after tax or $0.31 per unit). Excluding these income fund conversion-related items, net earnings from continuing operations for the year increased $14.8 million, or $0.90 per unit, to $26.6 million, or $1.65 per unit, from the previous year.

On October 31, 2005 the Fund purchased all the shares of Midwest Detroit Diesel-Allison Ltd. (Midwest). Midwest is the Detroit Diesel engine and Allison transmission distributor for Manitoba, Saskatchewan, northwestern Ontario and Nunavut. It also distributes Electro-Motive Diesel (EMD) engines across Canada. EMD engines are used in power generation, oil field, industrial and marine applications requiring large, low-speed diesel engines. The price paid on closing for the shares and assumed debt was $8.4 million and is subject to post-closing adjustments. Midwest has annual revenues of approximately $22 million and adjusted EBITDA (Non-GAAP measure, see the Non-GAAP Measures section) of approximately $2.0 million. Midwest will be operated by the Fund's Waterous Power Systems operation centered in Edmonton.

The following factors contributed to the change in year-over-year quarterly results from continuing operations:

- Mobile Equipment's revenues increased 25%, or $28.1 million, and segment earnings increased $2.2 million due to higher equipment, parts and service volumes in all regions of Canada.

- Industrial Components revenues increased 9%, or $5.6 million, and segment earnings increased $0.6 million as a result of higher volumes, particularly in western Canada.

- Power Systems' revenues increased by 22%, or $9.2 million and segment earnings increased $1.0 million as a result of the strong oil and gas sector in western Canada.

- Interest expense of $0.9 million decreased $1.0 million quarter-over-quarter due primarily to the Fund's lower cost of borrowing resulting from its new financing arrangements, effective June 7, 2005, compared to last year.

- The effective income tax rate of 5.1% was lower than the Fund's statutory income tax rate of 34.3% due to a portion of the Fund's income that will be distributed directly to unitholders and not subject to tax in the Fund.

- Funded debt, net of cash, of $40.6 million decreased $14.2 million compared to June 30, 2005 as a result of the disposition of Spencer. As a result, the Fund's quarter-end debt to equity ratio of 0.20:1 was improved from last year's ratio of 0.27:1.



Mobile Equipment

for the three months ended September 30 2005 2004
---------------------------------------------------------------------
Equipment $97.7 $72.5
Parts and service $41.0 $38.1
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Gross revenue $138.7 $110.6
Segment earnings $8.4 $6.2
Segment earnings margin 6.1% 5.6%
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for the nine months ended September 30 2005 2004
---------------------------------------------------------------------
Equipment $286.3 $210.9
Parts and service $124.9 $113.3
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Gross revenue $411.2 $324.2
Segment earnings $22.2 $15.7
Segment earnings margin 5.4% 4.8%
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Revenues increased 25%, or $28.1 million, to $138.7 million in the third quarter of 2005 from $110.6 million in 2004. The strengthening Canadian dollar relative to the U.S. dollar had the effect of decreasing 2005 consolidated quarterly revenues by approximately $5.4 million. Segment earnings increased $2.2 million, to $8.4 million compared to the previous year. For the nine months ended September 30, 2005, revenues increased 27% to $411.2 million and segment earnings increased to $22.2 million from $15.7 million. The following factors contributed to the mobile equipment segment's third quarter results:

- Revenues in western Canada increased, 46%, or $22.1 million quarter-over-quarter due to a 69%, or $21.1 million, increase in equipment sales and a 6%, or $1.0 million, increase in parts and service volumes. The equipment sales increase was driven by a $12.8 million increase in forestry and construction equipment sales including a $10.4 million increase in new Hitachi excavator revenues reflecting the strong demand for equipment in western Canada. Mining equipment sales increased by $6.8 million due to partial deliveries of the North American Construction Group and Elk Valley Coal mining packages. Crane and utility equipment sales increased $1.5 million while material handling equipment sales remained flat compared to last year. Parts and service revenues increased $1.0 million despite the $1.3 million rebuild of a large mining machine in 2004. Earnings increased $1.9 million compared to last year due to the impact of higher volumes.

- Revenues in central Canada (Ontario) increased 5%, or $1.8 million, quarter over quarter due to a 4%, or $0.8 million, increase in equipment sales and a 9%, or $1.0 million, increase in parts and service revenues. A $1.6 million increase in forestry and construction revenues included a $2.4 million increase in Hitachi revenues, a $1.0 million increase in Direct Technologies forestry equipment sales and a $2.6 million reduction in Timberjack volumes compared to last year. Increased crane & utility revenues of $0.8 million more than offset the $0.6 million reduction in material handling revenues. Earnings increased by $0.2 million as the positive impact of higher volumes was offset in part by slightly higher selling and administrative expenses.

- In eastern Canada revenues increased 14%, or $4.2 million, compared to last year due to a $3.4 million increase in equipment revenues and an 8%, or $0.8 million, increase in parts and service volumes. Mining equipment revenue increased $2.4 million, due mainly to a large LeTourneau loader delivery, and material handling equipment revenue increased $1.0 million resulting from higher container handler sales. Parts sales increased $0.6 million during the quarter, as a result of higher mining sector sales, and service volumes increased $0.2 million. Earnings increased by $0.1 million as the positive impact of increased volumes was offset, in part, by lower parts margins and increased selling and administrative expenses compared to last year.

Effective December 31, 2005 Jim Burns, Senior Vice-President of Mobile Equipment will be retiring. The divisional Vice-Presidents of the Mobile Equipment segment, Mark Whitman (western Canada and Ontario) and Jack Doyon (eastern Canada) will report directly to Neil Manning, CEO of the Fund, commencing January 1, 2006.

As previously reported, the Mobile Equipment segment received an order from North American Construction Group for fifteen 320 ton Hitachi mining trucks and two 800 ton Hitachi hydraulic shovels with deliveries over 16 months from the end of December 2004. Due to a tire supply shortage, certain trucks that were scheduled for delivery in 2006 may be delayed until 2007.



Industrial Components - Kinecor

for the three months ended September 30 2005 2004
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Gross revenue $69.1 $63.5
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Segment earnings $3.4 $2.8
Segment earnings margin 4.9% 4.4%
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for the nine months ended September 30 2005 2004
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Gross revenue $212.5 $187.6
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Segment earnings $9.0 $4.8
Segment earnings margin 4.2% 2.6%
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Revenues increased 9% to $69.1 million in the third quarter of 2005 from $63.5 million and earnings improved to $3.4 million compared to $2.8 million the previous year. The strengthening Canadian dollar relative to the U.S. dollar had the effect of decreasing 2005 consolidated quarterly revenues by approximately $1.4 million. For the nine months ended September 30, 2005, revenue increased 13% to $212.5 million and segment earnings have increased by $4.2 million to $9.0 million from $4.8 million in 2004. The following factors contributed to the segment's quarterly results:

- Bearings and power transmission sales increased 5%, or $2.3 million, due to stronger sales in western Canada's oil and gas and mining sectors, and increased activity in the forestry, mining and steel sectors in central Canada. In eastern Canada, bearing and power transmission sales remained flat quarter-over-quarter.

- Fluid Power parts and service revenues increased 15%, or $3.3 million, as a result of the continued strength of the oil and gas and mining sectors in western Canada, increased activity in the mining sector in eastern Canada and strong sales growth in imported hydraulic products. Fluid power sales in central Canada remained relatively flat quarter-over-quarter.

- Earnings increased $0.6 million to $3.2 million as improved volumes more than offset a slight drop in margins, mainly due to a higher parts obsolescence provision, and higher selling and administrative expenses, resulting from higher personnel costs, compared to last year.



Power Systems (formerly Diesel Engines)

for the three months ended September 30 2005 2004
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Equipment $25.9 $19.1
Parts and service $24.8 $22.4
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Gross revenue $50.7 $41.5
Segment earnings $4.4 $3.4
Segment earnings margin 8.7% 8.2%
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for the nine months ended September 30 2005 2004
---------------------------------------------------------------------
Equipment $75.0 $52.2
Parts and service $75.8 $72.3
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Gross revenue $150.8 $124.5
Segment earnings $13.2 $10.6
Segment earnings margin 8.7% 8.5%
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Revenues increased 22%, or $9.2 million, to $50.7 million in the third quarter of 2005 compared to $41.5 million in 2004. The strengthening Canadian dollar relative to the U.S. dollar had the effect of decreasing 2005 consolidated quarterly revenues by approximately $1.2 million. Segment earnings increased $1.0 million to $4.4 million from $3.4 million the previous year. For the nine months ended September 30, 2005, revenues increased 21%, or $26.3 million, to $150.8 million and earnings improved $2.6 million to $13.2 million. The following events affected quarterly revenues and earnings:

- Revenues at the Waterous Power Systems operation in Alberta were 33%, or $8.4 million, ahead of 2004. Equipment sales increased $6.0 million and parts and service revenues increased $2.4 million compared to last year. These increases were due mainly to an increase in oil and gas activity in western Canada.

- Revenues from the Quebec and Maritimes operation, Detroit Diesel-Allison Canada East, increased 5%, or $0.8 million, to $17.1 million compared to last year. Equipment sales increased $0.8 million primarily as a result of higher generator set sales to the construction industry. Parts and service volumes remained relatively flat quarter-over-quarter.

- Earnings increased $1.0 million to $4.4 million as the earnings effect of higher sales volumes more than offset higher selling and administrative expenses resulting primarily from increases in volume related personnel costs compared to last year.

DISCONTINUED OPERATIONS

On September 27, 2005, the Wajax Limited Board of Directors approved a plan to divest the assets of Spencer, the U.S.-based operation of Industrial Components, to Applied Industrial Technologies Inc. on September 30, 2005. As a result, the revenues and the results of Spencer have been reported as discontinued activities in the consolidated statement of operations.



SELECTED QUARTERLY INFORMATION

2005 2004(a) 2003(a)
-------------------- --------------------------- -------
Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
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Revenue (b) $258.0 $275.4 $239.1 $236.7 $215.0 $222.0 $197.5 219.7

Net earnings
from
continuing
operations 12.7 2.6 4.6 5.8 4.9 4.4 2.4 4.4
Net earnings
from
continuing
operations
per unit
- Basic $0.77 $0.16 $0.29 $0.37 $0.31 $0.28 $0.15 $0.28
- Diluted $0.76 $0.16 $0.28 $0.36 $0.31 $0.28 $0.15 $0.27

Net earnings $9.4 $3.0 $5.0 $6.0 $5.2 $4.6 $2.5 $3.4

Earnings per
unit
- Basic $0.56 $0.19 $0.32 $0.38 $0.33 $0.29 $0.16 $0.22
- Diluted $0.56 $0.19 $0.31 $0.37 $0.33 $0.28 $0.16 $0.22
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(a) Restated. See Note 2 in the Q3 2005 and Q4 2004 quarterly
financial statements available on SEDAR at www.sedar.com.
(b) Comparatives have been adjusted to exclude revenues from
discontinued operations.


A discussion of the Fund's previous quarterly results can be found in the Fund's quarterly MD&A reports available on SEDAR at www.sedar.com.

NON-GAAP MEASURES

To supplement the consolidated financial statements, the Fund uses non-GAAP financial measures that do not have standardized meaning prescribed by Canadian GAAP and are therefore unlikely to be comparable to similar measures used by other companies.

"Net Earnings from continuing operations before Income Fund Conversion-related Items" and "Net Earnings from continuing operations per Unit before Income Fund Conversion-related Items" are non-GAAP financial measures that management believes are useful to investors because they exclude the impact of conversion-related items which are non-recurring in nature and therefore provide more meaningful information for investors, and management, to assess the ongoing financial performance of the Fund. A reconciliation between reported Net Earnings from continuing operations and Net Earnings from continuing operations before Income Fund Conversion-related Items, and Net Earnings from continuing operations per Unit and Net Earnings from continuing operations per Unit before Income Fund Conversion-related Items, is detailed in the Results of Operations section above.

"Distributable Cash" and "Estimated Distributable Cash" are not recognized measures under GAAP, and the method of calculation adopted by the Fund may differ from methods used by other entities. Accordingly, Distributable Cash and Estimated Distributable Cash as presented may not be comparable to similar measures presented by other entities. The Fund believes that Distributable Cash and Estimated Distributable Cash are useful financial metrics as they represent the key determination of cash flow available for distribution to unitholders. Distributable Cash and Estimated Distributable Cash should not be construed as an alternative to net earnings as determined by GAAP. See the Distributable Cash and Estimated Distributable Cash sections below for the method of calculating the Fund's Distributable Cash and Estimated Distributable Cash.

References to "EBITDA" are to earnings before interest expense, income taxes, depreciation and amortization. EBITDA is a measure used by many investors to compare issuers on the basis of their ability to generate cash from operations. EBITDA is not a recognized measure under GAAP and is not intended to be representative of cash flow or results of operations determined in accordance with GAAP or cash available for distributions. Management believes that EBITDA is a better measure than net earnings from which to make adjustments to determine distributable cash. Since the Fund intends to distribute substantially all of its available cash on an ongoing basis, management believes that EBITDA is a useful measure in evaluating the performance of the Fund and, hence, cash available for distribution by the Fund. However, EBITDA should not be construed as an alternative to net earnings as determined in accordance with GAAP or to cash flows from operating, investing and financing activities as a measure of liquidity and cash flows, or as an indicator of the Fund's performance. EBITDA as presented may not be comparable to similarly titled amounts reported by other entities.

"Adjusted EBITDA" is EBITDA after removing the effect of non-recurring items and giving effect to adjustments as described under the Distributable Cash section. Non-recurring items are transactions or events which management believes are unusual in the context of a publicly-traded entity or which are not expected to recur within the foreseeable future. Adjusted EBITDA is not a recognized measure under GAAP and the qualifications outlined above with respect to EBITDA apply equally to Adjusted EBITDA.

A reconciliation of net earnings to EBITDA, based on the Fund's financial statements, has been provided in the Distributable Cash section.

LIQUIDITY AND CAPITAL RESOURCES

The Fund generated $20.5 million of cash from continuing operations before financing activities in the third quarter of 2005 compared to $5.6 million in the third quarter of 2004. For the nine months ended September 30, 2005 the Fund used $0.5 million of cash from continuing operations before financing activities compared to $8.1 million the previous year.

Cash generated by continuing operating activities amounted to $4.6 million in the third quarter of 2005, with $16.6 million of cash generated from operating earnings offset, in part, by $12.0 million of cash used in changes in non-cash working capital. Significant components of the increase in non-cash working capital are as follows:

- Accounts receivable increased by $11.9 million as a result of increased volumes.

- Inventory increased $11.6 million due to the higher sales activity, particularly in the mining sector in Mobile Equipment in western Canada.

- Accounts payable and accrued liabilities increased by $13.0 million as a result of the higher inventory levels.

For the nine months ended September 30, 2005 cash used in continuing operating activities amounted to $10.8 million and included $38.6 million of increases in non-cash working capital net of $27.8 million of cash from operating earnings.

Working capital, exclusive of funded debt and cash, increased $6.5 million to $146.3 million at September 30, 2005 from $139.9 million at June 30, 2005. The increase was due to the cash flow factors listed above.

The Fund had net cash inflows of $15.9 million from investing activities for the quarter. Proceeds from the disposal of discontinued operations (Spencer) of $18.5 million were offset by net investments of $2.5 million. The most significant investing activities in continuing operations were $1.7 million of lift truck rental fleet additions in Mobile Equipment and $1.2 million of other capital asset additions.

Debt, net of cash, of $40.6 million, decreased $14.2 million compared to June 30, 2005 principally due the positive cash flows from financing activities net of $7.6 million of distributions paid in the quarter. As a result, the Fund's debt to equity ratio decreased to 0.20:1 at September 30, 2005 compared to 0.27:1 at June 30, 2005. Compared to September 30, 2004, the debt-to-equity ratio decreased from 0.26:1 to 0.20:1.

At September 30, 2005, the Fund had utilized $64.0 million of its $95 million bank credit facility and had cash balances of $23.4 million. The Fund has entered into interest-rate swap contracts with two of its lenders, such that in total the interest rate on the $30 million non-revolving term part of the facility is effectively fixed at the 3.47 % plus applicable margins until expiry of the facility on June 7, 2008. The differential the Fund would receive to hypothetically terminate or exchange the swap agreement in the prevailing market conditions is estimated at $0.1 million.

The bank credit facility and its cash balances along with its currently unutilized $15 million equipment financing demand facility will be sufficient to meet the Fund's short-term working capital and maintenance capital requirements. In the long-term the Fund may be required to access the equity or debt markets in order to fund significant acquisitions and growth related working capital and capital expenditure requirements.

The Fund has committed to acquire land for an amount of $2.5 million. It is anticipated the land will be purchased in early 2006 and subsequently sold to a third party and leased back in a design build transaction.

The Mobile Equipment segment had possession of $52.3 million of consigned inventory from a major manufacturer at September 30, 2005 compared to $46.7 million the previous year. This inventory is not included in the Fund's inventory as the manufacturer has title to the inventory.

The Fund's off balance sheet financing arrangements include operating lease contracts in relation to the Fund's long-term truck rental fleet in the Mobile Equipment segment. At September 30, 2005, the non-discounted operating lease commitment for the rental fleet was $25.5 million.

During the quarter, the Fund entered into short-term foreign currency forward contracts to sell $16 million U.S. dollars to offset its foreign currency exposure on its investment in its U.S. self-sustaining operations. Upon the sale of the Spencer assets, the forward contract used to hedge this U.S. self-sustaining operation was exercised, with the Fund selling $16 million U.S. dollars. The Fund had a gain of $1.4 million on these hedging contracts that was offset by a $1.4 million unrealized foreign currency loss on its investment in its U.S. self-sustaining operations.



DISTRIBUTABLE CASH

Distributable cash July 1, 2005 to June 15, 2005 to
for the period September 30, 2005 September 30, 2005
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Cash flows from continuing
operating activities before
changes in non cash
working capital (1) $16,586 $20,577
Maintenance capital
expenditures (2,531) (2,741)
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Distributable Cash (2) $14,055 $17,836
Distributable Cash per unit (2)
- basic $0.85 $1.08
- diluted $0.84 $1.07
Distributions Declared per
unit (2) $0.64 $0.64
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(1) Based on pro-rata results for the month of June 2005.
(2) See Non-GAAP Measures section above.


The following summary of Estimated Distributable Cash for the twelve months ended September 30, 2005 has been prepared by Wajax on the basis of actual results of continuing operations adjusted for non-recurring items which are transactions or events which management believes are unusual in the context of a publicly-traded entity or which are not expected to recur within the foreseeable future. Adjustments for ongoing maintenance capital expenditures, interest and taxes have been made. Although the Fund does not have firm commitments for all of these additional amounts and, accordingly, the complete financial effects of all of these additional amounts are not objectively determinable, based on past experience, management has estimated such amounts and prepared the following analysis, which management believes represents a reasonable estimate of Distributable Cash had the Fund been in existence for the twelve months ended September 30, 2005. This analysis is not a forecast or a projection of future results. The actual results of operations of the Fund will vary from the amount set forth in the following analysis, and those variations may be material. The actual results of Wajax are subject to a number of risks and uncertainties. See Risk and Uncertainties section and Forward-Looking Statements section.



Estimated Distributable Cash for the twelve months ended September
30, 2005(1)
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EBITDA from continuing operations for the twelve months
ended September 30, 2005 (1) 56,041
Adjustments to EBITDA (1)
Income fund conversion-related costs 2,606
Management long-term incentive costs (3) 1,696
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Adjusted EBITDA from continuing operations(1) 60,343
Management believes that in order to arrive at
distributable Cash, Adjusted EBITDA from continuing
operations should be reduced by the following:
Maintenance capital expenditures (4) (10,000)
Interest expense (5) ( 3,900)
Taxes (6) ( 800)
---------------------------------------------------------------------
Estimated Distributable Cash (1) (2) $45,643
Estimated Distributable Cash trust unit (2)
- basic $2.75
- diluted $2.74
---------------------------------------------------------------------
(1) See Non-GAAP Measures section.
(2) Assumes the Fund was in existence for the period indicated.
(3) Wajax's executive and director compensation plans were modified
as a result of conversion to the Fund. EBITDA has been increased
by $2,959 to take into account those plans that will no longer
exist and reduced by $1,263 to take into account the new
compensation plans of the Fund.
(4) For the five year period from 2000 to 2004, average annual
maintenance capital expenditures, (including rental equipment
but excluding Spencer, U.S. mobile equipment operations sold in
2002 and an ERP computer system abandoned in 2002), was $9.1
million. The annual maintenance capital expenditures varied
between $3.4 million and $12.0 million during this period.
Management's expectation for future annual maintenance capital
expenditures is $10.0 million. The Fund has committed to acquire
land for an amount of $2.5 million. This amount has not been
included in the maintenance capital expenditures as it is
anticipated the land will be purchased in early 2006 and
subsequently sold to a third party and leased back in a design
build transaction.
(5) Represents estimated interest expense and financing charges on
the new bank credit facility, based on an average outstanding
balance of $57,000. The estimated interest expense assumes
$30,000 of fixed rate debt for three years with the remainder
subject to floating rates of interest.
(6) Estimated Canadian federal large corporations and income tax.


The following table reconciles net income to EBITDA based on the historical consolidated financial statements of the Fund for the periods indicated.



Twelve Months Ended
September 30, 2005
---------------------------------------------------------------------
Net earnings from continuing operations 25,629
Add:
Income tax expense 8,040
Depreciation and amortization 9,960
Interest expense, net of deferred financing
cost amortization included above 4,820
Costs related to the early extinguishment of
long-term debt 7,592
---------------------------------------------------------------------
EBITDA from continuing operations(1) 56,041
---------------------------------------------------------------------
(1) See Non-GAAP Measures section.


UNIT CAPITAL

Wajax converted from a share corporation to an income fund trust on June 15, 2005. Under the Arrangement, the former shareholders of Wajax indirectly received trust units of the Fund. The trust units of the Fund issued are included in unitholders' equity on the balance sheet and are summarized as follows.



2005 2004
Trust Units Shares
Issued and fully paid: Number Amount Number Amount
---------------------------------------------------------------------
Balance at the beginning
of quarter 16,582,530 $104.8 15,718,960 $102.3
Stock options exercised - - 2,500 0.0
Balance at end of quarter 16,582,530 $104.8 15,721,460 $102.3
---------------------------------------------------------------------


The Fund has replaced the former stock option plan with two new stock-based compensation plans: the Unit Ownership Plan in which certain members of management participate and the Trustee Deferred Unit Plan. Both plans issue rights to the participants which are settled by issuing Wajax Income Fund units. Compensation expense is determined based upon the fair value of the rights when issued and recognized over the vesting period. The Fund recorded compensation cost of $143 thousand for the quarter and $720 thousand for the year-to-date in respect of these plans.

During the third quarter of 2004 - 2,500 stock options were exercised with a weighted-average exercise price of $3.80. Wajax did not issue any employee stock options during the quarter.

CHANGES IN ACCOUNTING POLICY

Income taxes

The Fund is a "mutual fund trust" as defined under the Income Tax Act (Canada) and accordingly is not taxable on its income to the extent that it is distributed to its unit holders. The Fund's subsidiaries are, however, subject to income taxation and provide for income tax obligations based on statutory corporate tax rates.

Asset Retirement Obligations

Effective January 1,2004, Wajax adopted the CICA Handbook section 3110 "Asset Retirement Obligations". This section requires a company to capitalize the fair market value of the costs to decommission an asset, with an offsetting liability. The asset retirement obligations pertain to operating leases of branch facilities where certain clauses require premises to be returned to their original state at the end of the lease term. The total estimated undiscounted cash flows required to settle these obligations amount to $1,025 thousand. Wajax adopted the section on a retroactive basis beginning on October 1,2004. As a result, figures for the consolidated balance sheets as at September 30, 2004 were restated as follows: a $7 thousand increase in fixed assets, an increase in future income taxes of $283 thousand, an increase in accrued liabilities of $749 thousand and a decrease in retained earnings of $450 thousand.

RISKS AND UNCERTAINTIES

As with most businesses, the Fund is subject to a number of marketplace and industry related risks and uncertainties which could have a material impact on operating results. The Fund attempts to minimize many of these risks through diversification of core businesses and through the geographic diversity of its operations. For more information on risks and uncertainties refer to the MD&A for the quarter ended June 30, 2005 which may be found on SEDAR at www.sedar.com.

OUTLOOK

The Fund's earnings for the first nine months of 2005 were ahead of management's expectations. The Fund has benefited from strong demand for its products in most sectors of the economy with particular strength in the Alberta energy sector. Assuming a continuation of current economic conditions, management expects another strong earnings quarter to end the year.

FORWARD-LOOKING STATEMENTS

This MD&A contains forward-looking statements. These statements relate to future events or future performance and reflect management's current expectations and assumptions. Such forward-looking statements reflect management's current beliefs and are based on information currently available to management of the Fund. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward-looking statements. These factors include and are not restricted to the risks identified in this MD&A. In addition these factors should be considered carefully and readers should not place undue reliance on the forward-looking statements. These forward-looking statements are made as of the date hereof and the Fund does not assume any obligation to update or revise them to reflect new events or circumstances.

Additional information, including the Fund's Annual Report and Annual Information Form, may be found on SEDAR at www.sedar.com.

Mississauga, Canada

November 3, 2005



WAJAX INCOME FUND

Unaudited Consolidated Financial Statements

For the nine months ended September 30, 2005






Notice required under National Instrument 51-102, "Continuous
Disclosure Obligations" Part 4.3(3) (a).

The attached consolidated financial statements have been prepared by
Management of Wajax Income Fund and have not been reviewed by the
auditors of Wajax Income Fund.



WAJAX INCOME FUND
CONSOLIDATED BALANCE SHEETS

---------------------------------------------------------------------
September 30 December 31 September 30
(in thousands of dollars) 2005 2004 2004
unaudited audited unaudited
---------------------------------------------------------------------
(restated
note 2)
Current Assets
Cash and cash
equivalents $ 23,378 $ 49,409 $ 30,548
Accounts receivable 131,544 108,380 109,337
Inventories 185,528 150,586 144,636
Future income taxes 6,353 5,059 5,117
Prepaid expenses and
other recoverable amounts 3,192 3,671 2,212
Current assets related
to discontinued
operations (note 9) 1,453 18,652 20,380
---------------------------------------------------------------------
351,448 335,757 312,230
---------------------------------------------------------------------

Non-Current Assets
Rental equipment 16,987 16,362 16,049
Property, plant and
equipment 28,411 28,804 28,558
Goodwill and other
assets 55,428 54,621 52,190
Future Income taxes 900 2,851 3,070
Long term assets related
to discontinued
operations (note 9) - 1,447 1,619
---------------------------------------------------------------------
101,726 104,085 101,486
---------------------------------------------------------------------
$ 453,174 $ 439,842 $ 413,716
---------------------------------------------------------------------
---------------------------------------------------------------------

Current Liabilities
Accounts payable and
accrued liabilities $ 175,849 $ 151,441 $ 129,983
Distributions payable
to unit holders 3,040 - -
Income taxes payable 846 7,935 5,928
Current portion of
long-term debt - 4,683 4,564
Current liabilities
related to discontinued
operations (note 9) 2,525 4,289 5,721
---------------------------------------------------------------------
182,260 168,348 146,196
---------------------------------------------------------------------

Non-Current Liabilities
Future income taxes 2,586 3,545 2,808
Long-term pension liability 2,280 2,080 -
Long-term debt (note 4) 64,000 70,884 75,299
---------------------------------------------------------------------
68,866 76,509 78,107
---------------------------------------------------------------------

Unitholders' Equity
Trust units (note 1)(note 5) 104,818 102,390 102,305
Contributed surplus 720 373 294
Accumulated earnings 96,510 92,222 86,814
---------------------------------------------------------------------
202,048 194,985 189,413
---------------------------------------------------------------------
$ 453,174 $ 439,842 $ 413,716
---------------------------------------------------------------------
---------------------------------------------------------------------



WAJAX INCOME FUND
CONSOLIDATED STATEMENTS OF EARNINGS
AND ACCUMULATED EARNINGS

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

Three months ended Nine months ended
September 30 September 30
(in thousands of dollars, unaudited unaudited
except per unit data) 2005 2004 2005 2004
---------------------------------------------------------------------
Revenue $ 258,030 $ 215,008 $ 772,586 $ 634,694
Cost of sales 202,237 165,246 603,383 489,499
---------------------------------------------------------------------

Gross profit 55,793 49,762 169,203 145,195
Selling and
administrative
expenses 41,505 39,557 131,340 119,517
Income fund
conversion-related
costs (note 1) - - 2,606 -
---------------------------------------------------------------------

Earnings from continuing
operations before
interest and income
taxes 14,288 10,205 35,257 25,678
Interest expense 908 1,861 3,782 5,792
Early extinguishment
of long-term debt
(note 1) - - 7,592 -
---------------------------------------------------------------------

Earnings from continuing
operations before
income taxes 13,380 8,344 23,883 19,886
Income tax expense
(recovery)
- current (189) 3,066 6,290 8,101
- future 870 339 (2,233) (3)
---------------------------------------------------------------------

Net earnings from
continuing operations $ 12,699 $ 4,939 $ 19,826 $ 11,788
(Loss)/Earnings from
discontinued operations
(note 9) (3,335) 298 (2,474) 512
---------------------------------------------------------------------
Net earnings 9,364 5,237 17,352 12,300

Accumulated earnings,
beginning of period,
as reported 97,785 83,144 92,222 77,331
Impact of new accounting
standard - (938) - (932)
Adjustment to future
income tax in
consequence of the
income fund conversion
(note 3) - - (216) -
Distributions (10,639) - (10,639) -
Dividends on common
shares - (629) (2,209) (1,885)
---------------------------------------------------------------------

Accumulated earnings,
end of period $ 96,510 $ 86,814 $ 96,510 $ 86,814
---------------------------------------------------------------------

Earnings per unit from
continuing operations
(note 6)
- basic $ 0.77 $ 0.31 $ 1.23 $ 0.75
- diluted 0.76 0.31 1.23 0.74

Earnings per unit
(note 6)
- basic 0.56 0.33 1.08 0.78
- diluted 0.56 0.33 1.07 0.77

---------------------------------------------------------------------
---------------------------------------------------------------------
Number of trust units
outstanding 16,582,530 15,721,460 16,582,530 15,721,460

Number of common share
stock options
outstanding - 806,070 - 806,070
Number of Trustee
Deferred Unit Plan
and Management Unit
Plan rights
outstanding 93,135 - 93,135 -
---------------------------------------------------------------------
---------------------------------------------------------------------


WAJAX INCOME FUND
CONSOLIDATED STATEMENTS OF CASH FLOWS

Three months ended September 30
2005 2004
(in thousands of dollars) unaudited unaudited
---------------------------------------------------------------------
(restated note 2)
OPERATING ACTIVITIES
Net earnings from continuing operations $ 12,699 $ 4,939
Items not affecting cash flows:
Amortization
- Rental equipment 1,082 1,104
- Property, plant and equipment 1,387 1,146
- Deferred expenses and intangible assets 188 241
Pension expense - net of payments 158 190
Non-cash rental expense 33 -
Stock-based compensation expense (note 7) 143 107
Future income taxes 896 410
---------------------------------------------------------------------
Cash flows from continuing operations before
changes in non-cash working capital 16,586 8,137
---------------------------------------------------------------------
Changes in non-cash working capital:
Accounts receivable (11,905) (7,104)
Inventories (11,553) (8,430)
Prepaid expenses and other recoverable amounts 417 138
Accounts payable and accrued liabilities 12,993 12,329
Income taxes payable (1,943) 2,051
---------------------------------------------------------------------
(11,991) (1,016)
---------------------------------------------------------------------
Cash flows from operating activities
from continuing operations 4,595 7,121
---------------------------------------------------------------------
INVESTING ACTIVITIES
Rental equipment additions (1,669) (875)
Rental equipment disposals 342 255
Property, plant and equipment additions (1,222) (722)
Proceeds on disposal of capital assets 18 33
Acquisition of business - (250)
Proceeds on disposal of discontinued
operations 18,458 -
---------------------------------------------------------------------
15,927 (1,559)
---------------------------------------------------------------------
Cash flows from continuing operations
before financing activities 20,522 5,562
---------------------------------------------------------------------
FINANCING ACTIVITIES
Issuance of common shares on exercise of
stock options (note 7) - 10
Repayment of long term debt (note 4) - (858)
Increase in bank debt (note 4) 6,000 -
Deferred financing costs (note 4) (43) -
Hedging activities (note 8) 1,418 -
Distributions paid (7,599) -
Dividends paid - (629)
---------------------------------------------------------------------
(224) (1,477)
---------------------------------------------------------------------
Cash flows from continuing operations
before effect of foreign exchange 20,298 4,085
Effect of foreign exchange on
translation adjustment - (2,035)
---------------------------------------------------------------------
Net change in cash and cash equivalents
from continuing operations $ 20,298 $ 2,050
Cash and cash equivalents (used in/from)
discontinued operations (note 9) (98) 2,444
Cash and cash equivalents - beginning of
period $ 3,178 $ 26,054
---------------------------------------------------------------------
Cash and cash equivalents - end of period $ 23,378 $ 30,548
---------------------------------------------------------------------
---------------------------------------------------------------------

Cash flows provided by operating
activities include the following:
---------------------------------------------------------------------
Interest paid $ 673 $ 623
Income taxes paid $ 1,821 $ 997
---------------------------------------------------------------------
Significant non-cash transactions:
Rental equipment transferred to
inventory $ 330 $ 185


WAJAX INCOME FUND
CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine months ended September 30
2005 2004
(in thousands of dollars) unaudited unaudited
---------------------------------------------------------------------
(restated note 2)
OPERATING ACTIVITIES
Net earnings $ 19,826 $ 11,788
Items not affecting cash flows:
Amortization
- Rental equipment 3,027 3,248
- Property, plant and equipment 3,778 3,585
- Deferred expenses and intangible assets 576 880
Write off of deferred charges 867 -
Pension expense - net of payments 485 537
Non-cash rental expense 259 -
Stock-based compensation expense (note 7) 1,139 231
Future income taxes (2,191) 29
---------------------------------------------------------------------
Cash flows from continuing operations
before changes in non-cash working
capital 27,766 20,298
---------------------------------------------------------------------
Changes in non-cash working capital:
Accounts receivable (23,070) (8,802)
Inventories (34,448) (13,047)
Prepaid expenses and other recoverable amounts 541 (330)
Accounts payable and accrued liabilities 25,490 (4,648)
Income taxes payable (7,084) 4,581
---------------------------------------------------------------------
(38,571) (22,246)
---------------------------------------------------------------------
Cash flows used in operating activities
from continuing operations (10,805) (1,948)
---------------------------------------------------------------------
INVESTING ACTIVITIES
Rental equipment additions (6,324) (4,885)
Rental equipment disposals 1,611 1,066
Property, plant and equipment additions (3,444) (2,193)
Proceeds on disposal of capital assets 39 115
Acquisition of business - (250)
Proceeds on disposal of discontinued
operations 18,458 -
---------------------------------------------------------------------
10,340 (6,147)
---------------------------------------------------------------------
Cash flows from continuing operations
before financing activities (465) (8,095)
---------------------------------------------------------------------
FINANCING ACTIVITIES
Issuance of common shares on exercise of
stock options (note 7) 5,314 94
Repayment of long term debt (note 4) (78,477) (2,942)
Income fund conversion costs charged to
trust units (note 1) (3,677) -
Increase in bank debt (note 4) 64,000 -
Deferred financing costs (note 4) (1,805) -
Hedging activities (note 8) (909) (2,025)
Distributions paid (7,599) -
Dividends paid (2,210) (1,885)
---------------------------------------------------------------------
(25,363) (6,758)
---------------------------------------------------------------------
Cash flows used in continuing operations
before effect of foreign exchange (25,828) (14,853)
Effect of foreign exchange on translation
adjustment 2,227 (648)
---------------------------------------------------------------------
Net change in cash and cash equivalents
from continuing operations $ (23,601) $ (15,501)
Cash and cash equivalents (used in)/from
discontinued operations (note 9) (2,430) 654
Cash and cash equivalents - beginning of
period $ 49,409 $ 45,395
---------------------------------------------------------------------
Cash and cash equivalents - end of period $ 23,378 $ 30,548
---------------------------------------------------------------------
---------------------------------------------------------------------

Cash flows provided by operating
activities include the following:
---------------------------------------------------------------------
Interest paid $ 4,549 $ 4,650
---------------------------------------------------------------------
Income taxes paid $ 13,430 $ 3,537
---------------------------------------------------------------------
Significant non-cash transactions:
Rental equipment transferred to inventory $ 1,061 $ 726
Note receivable transferred from inventory $ 377 $ -


WAJAX INCOME FUND

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabulated in thousands of dollars)

(unaudited)

Note 1 Structure of the trust and basis of presentation

Wajax Income Fund (the "Fund") is an unincorporated, open-ended, limited purpose investment trust governed by the laws of Ontario pursuant to the declaration of trust dated April 27, 2005. The Fund was created to indirectly acquire all the outstanding shares of Wajax Limited ("Wajax") and exchange those on an equal basis for Wajax Trust Units ("Units") in the Fund pursuant to a Plan of Arrangement (the "Arrangement") effective June 15, 2005. The Fund is authorized to issue an unlimited number of units and each Unitholder participates pro rata in any distribution from the Fund.

The Fund is considered to be a continuation of Wajax Limited following the continuity of interest method of accounting, which recognizes the Fund as the successor entity to Wajax Limited. Accordingly, these interim consolidated financial statements reflect the financial position, results of operations and cash flows as if the Fund had always carried on the business formerly carried on by Wajax Limited with all assets and liabilities recorded at the carrying values of Wajax Limited.

In the second quarter, income fund conversion costs including audit fees, legal fees, investment advisory fees and other costs of $3,678 thousand were charged to trust units. Conversion-related costs of $2,606 thousand including the acceleration of certain executive and director long-term incentives, including Wajax Limited stock based compensation plans were charged to earnings. Costs for the early extinguishment of long-term debt of $7,592 thousand were charged to interest expense. The tax effect of the reorganization was to decrease future income taxes and retained earnings by $216 thousand.

The accounting policies used in the preparation of these unaudited interim consolidated financial statements conform with those used in the audited annual consolidated financial statements of Wajax Limited.

These unaudited interim consolidated financial statements do not include all of the disclosures included in the audited annual consolidated financial statements. Accordingly, these unaudited interim financial statements should be read in conjunction with the annual consolidated financial statements of Wajax Limited for the year ended December 31, 2004.

Note 2 Change in accounting policies

Asset Retirement Obligations

Effective January 1,2004, Wajax adopted the CICA Handbook section 3110 "Asset Retirement Obligations". This section requires a company to capitalize the fair market value of the costs to decommission an asset, with an offsetting liability. The asset retirement obligations pertain to operating leases of branch facilities where certain clauses require premises to be returned to their original state at the end of the lease term. The total estimated undiscounted cash flows required to settle these obligations amount to $1,025 thousand. Wajax adopted the section on a retroactive basis beginning on October 1,2004. As a result, figures for the consolidated balance sheets as at September 30, 2004 were restated as follows: a $7 thousand increase in fixed assets, an increase in future income taxes of $283 thousand, an increase in accrued liabilities of $749 thousand and a decrease in retained earnings of $450 thousand.

Note 3 Income Taxes

The Fund is a "mutual fund trust" as defined under the Income Tax Act (Canada) and accordingly is not taxable on its income to the extent that it is distributed to its unit holders. The Fund's subsidiaries are, however, subject to income taxation and provide for income tax obligations based on statutory corporate tax rates.

Income taxes reported differ from the amount computed by applying Canadian statutory rates to income from operations before income taxes as a result of following:



---------------------------------------------------------------------
September 30, September 30,
2005 2004
---------------------------------------------------------------------
Statutory tax rates 34.3% 34.5%

Earnings before income tax $ 13,380 $ 8,344

Income taxes at the statutory rates $ 4,589 $ $2,880
Income of the Fund taxed directly to
unitholders (4,217) -
Other 308 527
---------------------------------------------------------------------
Income tax expense $ 681 $ 3,405
---------------------------------------------------------------------

As a result of the Arrangement, previously recorded future income
taxes of $216 thousand were charged to retained earnings in the
second quarter of 2005.

Note 4 Long-Term Debt


September 30, September 30,
2005 2004
---------------------------------------------------------------------
---------------------------------------------------------------------

Revolving term bank credit facility,
repayable June 7, 2008 34,000 -
Non-revolving term bank credit facility,
repayable June 7, 2008 30,000 -
U.S. $50.0 million senior notes, 7.62%,
maturing December 18, 2007 $ - $ 62,649
Debentures
10.69%, Series I, maturing August 24, 2009 - 11,556
8.66%, Series II, maturing June 13, 2006 - 5,658
---------------------------------------------------------------------
64,000 79,863
Less current portion - 4,564
---------------------------------------------------------------------
$ 64,000 $ 75,299
---------------------------------------------------------------------


In order to facilitate the Arrangement, on June 8, 2005 the Company entered into new bank credit facilities and repaid the U.S. senior notes and Series I and Series II debentures. The early extinguishment of the debt resulted in a $6.8 million pre-payment penalty and a $0.8 million write-off of unamortized deferred financing costs. The cost of entering into the new bank credit facilities of $1.7 million has been capitalized and will be amortized over the term of the facility. The Fund's fully secured $95 million bank credit facility, which expires June 7, 2008, is made up of a $30 million non-revolving term facility and a $65 million revolving term facility. Borrowing capacity under the new bank credit facility is dependent upon the level of the Fund's inventories on hand and the outstanding trade accounts receivable. In addition, the bank credit facility contains customary restrictive covenants including restrictions on the payment of cash distributions and the maintenance of certain financial ratios all of which were met as at September 30, 2005. Borrowings under the facility bear floating rates of interest at margins over Canadian dollar bankers' acceptance yields, U.S dollar LIBOR rates or prime. The Fund entered into interest-rate swap hedge contracts with two of its lenders, such that in total the interest rate on $30 million of its non-revolving term facility is effectively fixed at 3.47% plus applicable margins until expiry of the facility on June 7, 2008.

Note 5 Trust Units

Wajax converted from a share corporation to an income fund trust on June 15, 2005. Under the Arrangement, the former shareholders of Wajax indirectly received trust units of the Fund. The trust units of the Fund issued are included in unitholders' equity on the balance sheet and are summarized as follows.



2005 2004
Issued and fully paid: Number Amount Number Amount
---------------------------------------------------------------------
Balance of trust units of
the Fund at beginning of
quarter 16,582,530 $104,818 15,718,960 $102,296
Stock options exercised - - 2,500 9

---------------------------------------------------------------------
Balance of trust units of
the Fund at end of
quarter 16,582,530 $104,818 15,721,460 $102,305
---------------------------------------------------------------------

Note 6 Earnings per unit

The following table sets forth the computation of basic and diluted
earnings per unit (in thousands, except per unit information):


Three months ended September 30 2005 2004
---------------------------------------------------------------------
---------------------------------------------------------------------
(restated note 2)
Numerator for basic and diluted earnings
per unit:
- net earnings from continuing
operations $ 12,699 $ 4,939
- net earnings 9,364 5,237
---------------------------------------------------------------------
Denominator for basic earnings per unit :
- weighted average units 16,582,530 15,720,196
---------------------------------------------------------------------
Denominator for diluted earnings per unit:
- weighted average units 16,582,530 15,720,196
- effect of dilutive unit rights 90,451 333,921
---------------------------------------------------------------------
Denominator for diluted earnings per unit 16,672,981 16,054,117
---------------------------------------------------------------------
Basic earnings per unit from continuing
operations $ 0.77 $ 0.31
---------------------------------------------------------------------
Diluted earnings per unit from
continuing operations $ 0.76 $ 0.31
---------------------------------------------------------------------
---------------------------------------------------------------------
Basic earnings per unit $ 0.56 $ 0.33
---------------------------------------------------------------------
Diluted earnings per unit $ 0.56 $ 0.33
---------------------------------------------------------------------
---------------------------------------------------------------------


Nine months ended September 30 2005 2004
---------------------------------------------------------------------
---------------------------------------------------------------------
(restated note 2)
Numerator for basic and diluted earnings
per unit:
- net earnings from continuing
operations $ 19,826 $ 11,788
- net earnings 17,352 12,300
---------------------------------------------------------------------
Denominator for basic earnings per unit :
- weighted average units 16,107,834 15,706,916
---------------------------------------------------------------------
Denominator for diluted earnings per unit:
- weighted average units 16,107,834 15,706,916
- effect of dilutive unit rights 33,052 319,018
---------------------------------------------------------------------
Denominator for diluted earnings per unit 16,140,886 16,025,934
---------------------------------------------------------------------
Basic earnings per unit from continuing
operations $ 1.23 $ 0.75
---------------------------------------------------------------------
Diluted earnings per unit from continuing
operations $ 1.23 $ 0.74
---------------------------------------------------------------------
---------------------------------------------------------------------
Basic earnings per unit $ 1.08 $ 0.78
---------------------------------------------------------------------
Diluted earnings per unit $ 1.07 $ 0.77
---------------------------------------------------------------------
---------------------------------------------------------------------


No stock options were outstanding at the end of the period (2004 - 806,070). In 2004, 65,000 options with a price range of $10.22-$11.50 were excluded from the above calculations as they were anti-dilutive.

Note 7 Stock-based compensation plans

During the quarter no stock options were exercised. In 2004, 2,500 stock options were exercised with a weighted-average exercise price of $3.80. Wajax did not issue any employee stock options during the quarter.

Year to date, 843,070 (2004 - 24,500) stock options were exercised with a weighted-average exercise price of $6.30 (2004 - $3.80). Wajax did not issue any employee stock options during the year (2004 - 86,570 with an exercise price of $9.03 and a weighted average life of 8.6 years).

As part of the Arrangement to convert Wajax into an Income Fund, Wajax permitted exercise of any unvested options. Any outstanding options at the time of conversion were to be cancelled. There were no outstanding options at the time of conversion. The Fund recorded no compensation cost for the quarter (2004 - $107 thousand) and $419 thousand for the year to date (2004 - $231 thousand) in respect of employee stock options granted after December 31, 2002. Wajax had accounted for employee stock options using the intrinsic value method prior to 2003 and accordingly has not recorded compensation cost for grants prior to this year. There would have been a nominal reduction in both net earnings and earnings per share if Wajax had accounted for employee stock options issued in 2002 under the fair value method.

The Fund has replaced the former stock option plan with two new stock-based compensation plans: the Unit Ownership Plan in which certain members of management participate and the Trustee Deferred Unit Plan. Both plans issue rights to the participants which are settled by issuing Wajax Income Fund units. Compensation expense is determined based upon the fair value of the rights when issued and recognized over the vesting period. The Fund recorded compensation cost of $143 thousand for the quarter and $720 thousand for the year to date in respect of these plans.

Note 8 Financial Instruments

The Fund has entered into interest-rate swap contracts with two of its lenders, such that in total the interest rate on $30 million of its non-revolving term facility is effectively fixed at the 3.47 % plus applicable margins until expiry of the facility on June 7, 2008. The differential the Fund would receive to hypothetically terminate or exchange the swap agreement in the prevailing market conditions is estimated at $0.1 million.

During the quarter, the Fund entered into short-term foreign currency forward contracts to sell $16 million U.S. dollars to offset its foreign currency exposure on its investment in its U.S. self-sustaining operations. Upon the sale of the Spencer assets, the forward contract used to hedge the U.S. self-sustaining operations was exercised, with the Fund selling $16 million U.S. dollars. The Fund had a gain of $1.4 million on these hedging contracts that was offset by a $1.4 million unrealized foreign currency loss on its investment in its U.S. self-sustaining operations

Note 9 Discontinued Operations

On September 27, 2005, the Board of Directors approved a plan to divest operations of Spencer Industries, the US based operation of industrial components. On September 30, 2005, the Income Fund closed the sale of the assets of Spencer Industries to Applied Industrial Technologies Inc. As a result of the decision, the revenues and the results of Spencer Industries have been reported as discontinued activities in the consolidated statement of operations.



Three months ended September 30, 2005 2005 2004
---------------------------------------------------------------------
---------------------------------------------------------------------
Sales $ 16,787 $ 14,953
(Loss)/Earnings before income taxes (1,063) 458
Income tax (expense)recovery - future 372 (160)
Future Income taxes written off (2,644) -
---------------------------------------------------------------------
(Loss)/Earnings from discontinued operations (3,335) 298
---------------------------------------------------------------------

Nine months ended September 30, 2005 2005 2004
---------------------------------------------------------------------
---------------------------------------------------------------------
Sales $ 48,194 $ 44,286
(Loss) Earnings before income taxes 261 787
Income tax (expense)recovery - future (91) (275)
Future income taxes written off (2,644) -
---------------------------------------------------------------------
(Loss)/Earnings from discontinued operations (2,474) 512
---------------------------------------------------------------------

The assets and liabilities of the discontinued operations are as
follows:


September December September
2005 2004 2004
---------------------------------------------------------------------
---------------------------------------------------------------------
Current assets $ 1,453 $ 18,652 $ 20,380
Property, plant and equipment - 1,447 1,619
---------------------------------------------------------------------
1,453 20,099 21,999
---------------------------------------------------------------------
Current Liabilities 2,525 4,289 5,721
---------------------------------------------------------------------

Cash flows from discontinued operations consist of cash provided from
(used in):


For the three For the nine
months ended months ended
---------------------------------------------------------------------
---------------------------------------------------------------------
September September September September
2005 2004 2005 2004
Operating activities $ (572) $ 1,294 $ (2,304) $ 467
Investing activities 9 (99) (90) (170)
Financing activities - - - -
Effect of foreign exchange on
translation adjustment 465 1,249 (36) 357
---------------------------------------------------------------------
Increase in cash and cash
equivalents from discontinued
operations 98 2,444 (2,430) 654
---------------------------------------------------------------------

Note 10 Employees' pension plans

Net pension plan expenses are as follows:

For the three months ended September 30 2005 2004
---------------------------------------------------------------------
---------------------------------------------------------------------
Net pension plan expense - defined benefit
plans $ 215 $ 235
Net pension plan expense - defined contribution
plans 898 920
---------------------------------------------------------------------
$ 1,113 $ 1,155
---------------------------------------------------------------------
---------------------------------------------------------------------

For the nine months ended September 30 2005 2004
---------------------------------------------------------------------
---------------------------------------------------------------------
Net pension plan expense - defined benefit
plans $ 644 $ 672
Net pension plan expense - defined
contribution plans 2,804 2,878
---------------------------------------------------------------------
$ 3,448 $ 3,550
---------------------------------------------------------------------
---------------------------------------------------------------------

Note 11 Segmented information


For the three months ended September 30 2005 2004
---------------------------------------------------------------------
---------------------------------------------------------------------
Revenue (restated note 2)
---------------------------------------------------------------------
---------------------------------------------------------------------
Mobile Equipment $ 138,716 $ 110,613
Industrial Components 69,101 63,483
Power Systems 50,744 41,489
Segment eliminations (531) (577)
---------------------------------------------------------------------
Revenue from continuing operations 258,030 215,008
Revenue from discontinued operations 16,787 14,953
---------------------------------------------------------------------
Total consolidated $ 274,817 $ 229,961
---------------------------------------------------------------------
---------------------------------------------------------------------

Segment Earnings
---------------------------------------------------------------------
---------------------------------------------------------------------
Mobile Equipment $ 8,393 $ 6,154
Industrial Components 3,361 2,846
Power Systems 4,406 3,375
Corporate costs and eliminations (1,872) (2,170)
---------------------------------------------------------------------
Earnings from continuing operations 14,288 10,205
Earnings from discontinued operations (1,063) 458
---------------------------------------------------------------------
Total consolidated $ 13,225 $ 10,663
---------------------------------------------------------------------
---------------------------------------------------------------------
Interest expense, income taxes and corporate costs are not allocated
to business segments.


For the nine months ended September 30 2005 2004
---------------------------------------------------------------------
---------------------------------------------------------------------
Revenue (restated note 2)
---------------------------------------------------------------------
---------------------------------------------------------------------
Mobile Equipment $ 411,176 $ 324,155
Industrial Components 212,459 187,648
Power Systems 150,835 124,495
Segment eliminations (1,884) (1,604)
---------------------------------------------------------------------
Revenue from continuing operations 772,586 634,694
Revenue from discontinued operations 48,194 44,286
---------------------------------------------------------------------
Total consolidated $ 820,780 $ 678,980
---------------------------------------------------------------------
---------------------------------------------------------------------

Segment Earnings
---------------------------------------------------------------------
---------------------------------------------------------------------
Mobile Equipment $ 22,156 $ 15,671
Industrial Components 9,000 4,848
Power Systems 13,178 10,567
Corporate costs and eliminations (6,471) (5,408)
Income fund conversion-related costs (note 1) (2,606) -
---------------------------------------------------------------------
Earnings from continuing operations 35,257 25,678
Earnings from discontinued operations 261 787
---------------------------------------------------------------------
Total consolidated $ 35,518 $ 26,465
---------------------------------------------------------------------
---------------------------------------------------------------------
Interest expense, income taxes and corporate costs are not allocated
to business segments.


Note 12 Contingencies

In August 2004, a statement of claim had been served naming the Fund's subsidiary, Wajax Limited, and a subsidiary, since amalgamated into Wajax Limited, as defendants in proceedings under the Class Proceedings Act of British Columbia. The action arises out of the conversion on January 1, 2001 of the Employee Pension Plan from defined benefit to defined contribution, the taking of contribution holidays and the payment of pension administration expenses from the pension fund. Management has assessed the facts and arguments pleaded and continue to believe the claims would be unlikely to succeed.

Note 13 Comparative information

Certain comparative numbers have been reclassified to conform with current presentation.

Note 14 Subsequent events

On October 31, 2005, the Fund purchased all the shares and assumed debt of Midwest Detroit - Allison Limited, the Detroit Diesel engine and Allison transmission distributor for Manitoba, Saskatchewan and Nunavut for a purchase price of $8.4 million.


Contact Information

  • Wajax Income Fund
    Neil Manning
    President and Chief Executive Officer
    (905) 212-3300
    nmanning@wajax.com
    or
    Wajax Income Fund
    John Hamilton
    Chief Financial Officer
    (905) 212-3300
    jhamilton@wajax.com