Canada Cartage Diversified Income Fund reports annual and fourth quarter 2006 results



    TORONTO, March 12 /CNW/ - Canada Cartage Diversified Income Fund (the
"Fund") (TSX: TRK.UN), a leading national provider of dedicated trucking
services, today reported financial and annual and fourth quarter operating
results for the period ended December 31, 2006.

    
    2006 Highlights (1)

    -   Revenue totaled $325.4 million representing an increase of 18.2% or
        $50.1 million compared to $275.3 million in 2005.
    -   EBITDA(2) before equipment lease expense (referred to as "EBITDAR")
        increased 12.2% to $45.7 million, or 14.0% of revenue, compared to
        $40.7 million, or 14.8% of revenue in fiscal 2005.
    -   Net earnings for the 293-day period ended December 31, 2006
        (reflecting the period from the IPO on March 14, 2006 to December 31,
        2006) were $1.5 million, or $0.08 per unit. Due to the change in
        capital structure concurrent with the IPO, the comparison of net
        earnings to the pre-IPO period is not meaningful.
    -   Distributable cash(2) for the 293-day period ended December 31,
        2006 totaled $17.5 million or $0.94 per unit, $0.80 per unit was paid
        to unitholders resulting in a payout ratio of 84.9%, which is in line
        with the level set at the Fund's IPO.

    Fourth Quarter Highlights

    -   Revenue totaled $82.0 million representing an increase of 1.5%
        compared to $80.8 million in the same period in 2005.
    -   EBITDAR(2) totaled $11.2 million, or 13.7% of revenue, compared to
        $12.4 million or 15.3% of revenue in the same period in 2005.
    -   Net loss was $0.3 million, or $0.01 per unit. Due to the change in
        capital structure concurrent with the IPO, the comparison of net
        earnings to pre-IPO periods is not meaningful.
    -   Distributable cash(2) totaled $4.9 million or $0.26 per unit, $0.25
        per unit was paid to unitholders resulting in a payout ratio of
        96.2%.
    

    Management Commentary

    "We're very pleased with the results achieved in 2006, our first year as
a public company after more than 90 years in operation," said Jeff Lindsay,
President & Chief Executive Officer. "These results allowed us to fulfill our
commitment to deliver stable cash distributions consistent with levels set out
at the time of our IPO. This was a transformational year as we brought
together Canada Cartage and Direct to create the largest national provider of
dedicated trucking services. Looking at the results from a strategic
perspective, we made good progress in executing on our growth strategy".
    The Fund achieved strong organic growth from a healthy balance between
growth from existing and new customers. This growth was partially offset by
lower margins. Like many companies with a significant presence in western
Canada, expenses were affected by Alberta's strong economic growth and related
hyper-inflation in labour and other input costs. In order to properly staff
existing business and facilitate future growth opportunities, management was
required to increase driver wages and rates paid to owner-operators.
Management is focused on recovering these higher costs through price
adjustments consistent with the Fund's 'cost-plus' approach, with the benefits
expected to be visible in the first half of 2007.
    "Our outlook for 2007 remains positive," continued Mr. Lindsay. "Organic
growth from existing customers should continue as the West continues to
benefit from strong economic conditions and more modest growth continues in
the East. Our sales pipeline is healthy, with numerous opportunities to gain
additional share of the $27 billion private fleet segment. Finally, we
continue to explore opportunities to selectively acquire complementary
businesses."
    For a more detailed discussion of 2006 and fourth quarter results and
management's outlook for 2007, please see Management's Discussion and Analysis
and the consolidated financial statements for the 293-day period ended
December 31, 2006 at the end of this press release.

    Acquisition of Certain Operating Assets of MacCosham Inc.

    Subsequent to year-end, the Fund completed the acquisition of certain
operating assets of MacCosham Inc. (referred to as the "Acquired Business").
The Acquired Business, based in Edmonton, Alberta, provides warehouse,
distribution and related high value transportation services to customers
operating in various industries. The Acquired Business generated annual
revenue of approximately $4.0 million in 2006. MacCosham Inc. will continue to
operate its other transportation divisions independently.
    "This acquisition is our second in the past six months," said Mr.
Lindsay. "It is consistent with our strategy as it complements and further
strengthens our market position in the growing Alberta market for both
warehouse & distribution and high value transportation services."

    Additional Information

    Additional information relating to the Fund, including the Fund's final
prospectus dated March 3, 2006 is available on SEDAR at www.sedar.com. The
Fund's Annual Information Form for the year ended December 31, 2006 will be
filed on SEDAR at www.sedar.com prior to April 2, 2007.
    Canada Cartage Diversified Income Fund will provide its Management's
Discussion and Analysis, full audited financial statements and accompanying
notes for the 293-day period ending December 31, 2006 in its annual report,
which will be filed with SEDAR by April 2, 2007 and subsequently mailed to
unitholders. The Fund's annual general meeting is scheduled for May 15, 2007
at 10 a.m. ET in the Gallery of the TSX Broadcast and Conference Centre, 130
King Street East, Toronto.

    Management Conference Call and Audio Webcast

    Jeffrey Lindsay, President & CEO, and James Rudyk, Chief Financial
Officer, will host a conference call and live audio webcast to discuss the
Fund's fourth quarter and year end results on March 12, 2007 at 10:00 am EST.
Interested participants may access the conference call by dialing 416-644-3417
(1-800-732-0232) or the audio webcast by visiting
www.canadacartageincomefund.com.
    A replay of the conference call will be available until midnight
April 11, 2007 by dialing 416-640-1917 (1-877-289-8525) and entering the
passcode 21222068 followed by the number sign. The audio webcast will be
available for 90 days at www.canadacartageincomefund.com.

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

    About Canada Cartage Diversified Income Fund

    Canada Cartage Diversified Income Fund, through its indirect interest in
CCD Limited Partnership ("CCD"), is a leading national provider of
transportation services, specializing in fully outsourced, customer-located,
dedicated trucking services. With origins dating to 1914, CCD offers a number
of transportation services including dedicated trucking, warehousing and
distribution, general cartage, logistics and moving services. CCD has a
presence in 12 cities across Canada and operates a fleet of over 1,500 trucks,
1,900 trailers and more than one million square feet in distribution and
warehousing space.
    The Fund was established to provide unitholders with monthly cash
distributions generated from the operations of CCD. Management and other
insiders effectively own a 32.7% interest in the Fund ensuring interests are
aligned with those of unitholders. The Fund's units are listed on the Toronto
Stock Exchange under the symbol TRK.UN.
    Additional information relating to the Fund can be found at
www.canadacartageincomefund.com and www.sedar.com.

    Caution Concerning Forward Looking Statements

    Certain statements in this news release may contain forward-looking
statements. Such statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements
to differ materially from those expressed in the forward-looking statements.
Canada Cartage Diversified Income Fund does not assume responsibility for the
accuracy and completeness of the forward-looking statements and does not
undertake any obligation to publicly revise these forward-looking statements
to reflect subsequent events or circumstances. See "Forward Looking
Statements" in the attached MD&A.

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

    (1) The Fund commenced operations on March 14, 2006. To provide
        comparable results, this press release provides the unaudited
        financial results of the predecessor companies to the Fund and
        normalizes results for certain items. The financial results have not
        been combined in accordance with GAAP and are for illustrative
        purposes only. Investors are cautioned that the figures may not be
        indicative of the results that would have been achieved had Canada
        Cartage and Direct been under common ownership during these periods.
        See "Basis of Management's Discussion & Analysis" in the attached
        MD&A.

    (2) EBITDA, Normalized EBITDA and Distributable Cash are non-GAAP
        measures. See "Non-GAAP Measures" in the attached MD&A for a
        definition of EBITDA, Normalized EBITDA and Distributable Cash.
    


    CANADA CARTAGE DIVERSIFIED INCOME FUND

    MANAGEMENT'S DISCUSSION & ANALYSIS

    March 12th, 2007

    The following management's discussion and analysis ("MD&A"), dated
March 12, 2007, is intended to assist in the understanding and assessment of
the trends and significant changes in the financial condition and results of
operations of Canada Cartage Diversified Income Fund (the "Fund") and its
subsidiaries. It should be read in conjunction with the audited consolidated
financial statements and accompanying notes of the Fund for the 293-day period
ended December 31, 2006, the Fund's final prospectus dated March 3, 2006
available from SEDAR at www.sedar.com.  The financial statements of the Fund
are prepared in accordance with Canadian generally accepted accounting
principles ("GAAP"). The fiscal year of the Fund ends on December 31.
    This MD&A contains forward-looking statements about the objectives,
financial condition, results of operations and businesses of Canada Cartage.
These statements are "forward-looking" as they are based on current
expectations about our business and the markets we operate in, and on various
estimates and assumptions. Our actual results could be materially different
from our expectations if known or unknown risks affect our business, or if our
estimates or assumptions turn out to be inaccurate. Please see "Forward
Looking Statements".

    Canada Cartage Diversified Income Fund

    Canada Cartage Diversified Income Fund, through its indirect interest in
CCD Limited Partnership ("CCD"), is a leading national provider of
transportation services, specializing in fully outsourced, customer-located,
dedicated trucking services. With origins dating to 1914, CCD offers a number
of transportation services including dedicated trucking, warehousing and
distribution, general cartage, logistics and moving services. CCD has a
presence in 12 cities across Canada and operates a fleet of over 1,500 trucks,
1,900 trailers and more than one million square feet in distribution and
warehousing space.
    The Fund was established to provide unitholders with monthly cash
distributions generated from the operations of CCD. Management and other
insiders effectively own a 32.7% interest in the Fund ensuring interests are
aligned with those of unitholders. The Fund's units are listed on the Toronto
Stock Exchange trading under the symbol TRK.UN.
    Additional information relating to the Fund can be found at
www.canadacartageincomefund.com and www.sedar.com.

    The Fund's Initial Public Offering

    On March 14, 2006, the Fund completed an initial public offering ("IPO")
of 11,827,597 units for $10.00 per unit, resulting in gross proceeds of
$118.3 million.  In conjunction with the IPO, the Fund, through CCD, used the
net proceeds from the IPO, funds drawn under its secured credit facilities and
the issuance of Class B LP Units of CCD to (i) acquire the trucking and
transportation logistics assets of each of Canada Cartage System Limited
("Canada Cartage") and Direct Integrated Transportation Inc. ("Direct"); (ii)
repay assumed long-term debt; (iii) retire certain capital lease obligations;
and (iv) pay transaction and related costs. The acquisition was accounted for
using the purchase method with the results of CCD's operations included in the
Fund's financial results from the date of acquisition. On March 30, 2006, the
underwriters of the IPO exercised their over-allotment option and purchased an
additional 591,380 units for $10.00 per unit, resulting in gross proceeds of
$5.9 million. The net proceeds from the exercise of the over-allotment were
used to repurchase an equal number of Class B LP units issued as consideration
for the assets of Canada Cartage and Direct.

    Basis of Management's Discussion and Analysis

    The audited consolidated financial statements of the Fund cover the
293-day period ended December 31, 2006. In order to provide meaningful
disclosure to the reader, the following MD&A includes the combined unaudited
normalized financial results of Canada Cartage and Direct for the 72-day
period ended March 14, 2006 and the three and twelve month periods ended
December 31, 2005 (collectively referred to as the "Pre-IPO Results").  The
Pre-IPO Results for the 72-day period ended March 14, 2006 are combined with
the Fund's results for the 293-day period ended December 31, 2006 to present a
complete twelve month period ended December 31, 2006 (referred to as "Fiscal
2006" or "Combined Results"). The Pre-IPO Results for the twelve months ended
December 31, 2005 provide comparative information for 2005 (referred to as
"Fiscal 2005").
    Readers are cautioned that the Combined Results and Pre-IPO Results
presented are not the results of the Fund and have been presented only to
provide the reader with additional information to enhance comparability of
operating results for the assets acquired and indirectly owned by the Fund.
The financial results have not been combined in accordance with GAAP and are
for illustrative purposes only. Investors are cautioned that the figures may
not be indicative of the results that would have been achieved had Canada
Cartage and Direct been under common ownership for the periods presented. See
also "Risk Factors - Integration Risk".
    The Fund is entirely dependent upon the operations and assets of CCD and
references in this MD&A to the Fund's business and operations and secured
credit facilities and similar matters are to those matters as carried on by
CCD and its subsidiaries.

    Non-GAAP Measures

    EBITDA, Normalized EBITDA and distributable cash are not earnings
measures recognized by GAAP and do not have standardized meanings prescribed
by GAAP. Therefore, EBITDA, Normalized EBITDA and distributable cash is
unlikely to be comparable to similarly titled measures presented by other
issuers. Investors are cautioned that these measures should not be construed
as an alternative to net earnings (loss) determined in accordance with GAAP as
indicators of CCD's or the Fund's performance or to cash flow from operating,
investing and financing activities as measures of liquidity and cash flows.
The Fund provides non-GAAP measures as supplementary information. Management
believes EBITDA, Normalized EBITDA (for Pre-IPO Results) and distributable
cash are useful measures in evaluating the performance of the Fund.

    Definition of EBITDA

    EBITDA is defined as net earnings (loss) adjusted to exclude income
taxes, share of earnings in significantly influenced companies, interest, loss
(gain) on disposal of capital assets and amortization. See "EBITDA &
Normalized EBITDA" for a reconciliation of net earnings to EBITDA.

    Definition of Normalized EBITDA (for Pre-IPO Results)

    To facilitate the comparability of the Fund's results to the Pre-IPO
Results, EBITDA of Canada Cartage and Direct are combined and normalized.
Normalized EBITDA is defined as EBITDA adjusted to (i) exclude excess
shareholder and management compensation for Canada Cartage and Direct which
terminated concurrent with the IPO and will not be incurred by the Fund; (ii)
exclude professional fees, with respect to business acquisitions and the IPO
and related transactions, and other costs that will not be incurred by the
Fund; (iii) include incremental rent expense that will be incurred by the Fund
in respect of the long term leases that CCD entered into concurrent with the
IPO; and (iv) include an estimate for additional general & administrative
expenses that will be incurred by the Fund related to public company costs and
additional employee compensation. See "EBITDA & Normalized EBITDA" for a
reconciliation of net earnings to Normalized EBITDA.

    Definition of Distributable Cash

    Distributable Cash is defined as cash flow from operating activities (per
the Consolidated Statement of Cash Flows) excluding the net change in non-cash
working capital (not considered to be a source of distributable cash), less
maintenance and other capital expenditures (comprised of non-trucking and
equipment capital expenditures, capital lease payments, cash proceeds on
disposal of capital assets and an equipment reserve). See "Distributable Cash
& Distributions" for a reconciliation of Distributable Cash to cash flow from
operating activities.

    Key Factors Affecting the Fund

    The results of operation and financial condition of the Fund are subject
to a number of risks and uncertainties, and are affected by a number of
factors outside management's control. See "Risks & Uncertainties" for a
discussion of such factors.

    Key Factors Impacting Comparability of Financial Results

    The following factors should be taken into consideration when comparing
the financial results for Fiscal 2006 to the corresponding period in 2005.

    Lease Financing Strategy
    Historically, Canada Cartage and Direct financed equipment purchases
(trucks and trailers) using a combination of operating and maintenance leases,
capital leases and capital expenditures. As outlined in the Fund's final
prospectus dated March 3, 2006 for the IPO ("final prospectus"), management
intends to finance substantially all equipment purchases required to replace
existing equipment and to support new contracts using equipment leases. As a
result, capital expenditures, capital lease payments and related amortization
of capital assets are expected to be lower and equipment lease expense is
expected to be higher than amounts historically reflected in the Pre-IPO
Results. This financing strategy was taken into consideration in determining
distributable cash of the Fund as outlined in the final prospectus.

    Fuel Costs and Surcharges
    Substantially all of CCD's contracts with customers provide for an
adjustment in rates based upon changes in the cost of fuel thereby limiting
its exposure to price fluctuations. Fuel surcharges are included in revenue
and fuel costs are included in operating expenses. As a result, an increase in
the price of fuel may not significantly impact EBITDA and net earnings on an
absolute basis; however EBITDA and net earnings expressed as a percentage of
revenue may be lower.

    Additional General & Administrative Expenses
    As outlined in the final prospectus, the Fund is expected to incur (i)
incremental rent expense in respect of the long term leases that CCD entered
into concurrent with the IPO, estimated to be approximately $2.0 million
annually; and (ii) additional expenses related to public company costs and
additional employee compensation, estimated to be approximately $1.9 million
annually. In order to facilitate the comparison of the Fund's results to
Pre-IPO Results, these expenses have been included in the calculation of
Normalized EBITDA as outlined in the reconciliation of net earnings to
Normalized EBITDA.

    Change in Capital Structure
    With the completion of the IPO, the acquisition of each of Canada Cartage
and Direct, the refinancing of the secured credit facilities and the repayment
of assumed long term debt and certain capital lease obligations, the capital
structure of the Fund has changed significantly compared to the capital
structure of Canada Cartage and Direct prior to the IPO. As a result,
comparison of certain financial information including amortization, interest
expense, income taxes, and net earnings to periods prior to the IPO are not
considered meaningful.

    Segmented Results

    The Fund reports its financial information as one business unit, namely,
transportation and related services. Transportation services represent
approximately 90% of revenue for the twelve month period ended December 31,
2006. Related services including warehousing & distribution, logistics and
moving services represented the balance. All operations are conducted from
Canada. Geographically, the Fund segments its operations between Eastern
Canada or "East" (operations in Ontario and Quebec) and Western Canada or
"West" (operations in Manitoba, Saskatchewan, Alberta and British Columbia).
Segmented revenue between East and West is provided under Results of
Operations - Revenue. Management intends to expand the disclosure to include
segmented operating expenses in future reporting periods.

    Economic Dependence

    For the twelve months ended December 31, 2006, the Fund's top ten
customers represented 57.8% of total revenue and the top customer represented
11.2% of total revenue. Revenue is derived primarily in Canada with the East
representing 62.8% of total revenue and the West representing 37.2% of total
revenue for Fiscal 2006.

    Proposed Tax Changes

    On October 31, 2006 the Canadian Department of Finance announced the "Tax
Fairness Plan" whereby the income tax rules applicable to publicly traded
trusts and partnerships will be significantly modified. This proposal also
stated that certain income of (and distributions made by) these entities will
be taxed in a manner similar to income earned by (and dividends made by) a
corporation. Because the Fund completed its IPO prior to November 1, 2006,
these changes, if passed, would be effective for the 2011 taxation year,
although the announcement suggested that this grandfathering could be lost in
certain circumstances.
    Under Canadian GAAP, income taxes are required to be accounted for using
legislation which is enacted or at least "substantively enacted". As at
December 31, 2006, the Finance Minister of Canada's proposed Plan does not
meet the definition of "substantively enacted" legislation. As such, the
income tax impact of the proposed Plan has not been recognized in the Fund's
financial statements.
    Under the proposed Plan, the Fund's taxable status would change once the
proposed tax changes are enacted. This would result in the Fund having to
record future income tax assets and liabilities at the "substantively enacted"
tax rates in respect of temporary differences that are expected to reverse
after the date those tax changes take effect on the whole of its operations.
The impact of the change would be recognized on a prospective basis in the
fiscal quarter in which "substantively enacted" legislation occurs.
    The Tax Fairness Plan has reduced the value of the Units and we expect
has increased the cost to the Fund of raising capital in the public capital
markets. In addition, the Tax Fairness Plan is expected to substantially
eliminate the competitive advantage that the Fund and other Canadian
transportation trusts enjoy relative to their corporate competitors in raising
capital in a tax-efficient manner. The Tax Fairness Plan is also expected to
make the Units less attractive as an acquisition currency. As a result, it may
become more difficult for the Fund to compete effectively for acquisition
opportunities. There can be no assurance that the Fund will be able to
reorganize its legal and tax structure to substantially mitigate the expected
impact of the Tax Fairness Plan.

    Purchase Price Allocation

    During the fourth quarter of 2006, the purchase price allocation to
reflect the Fund's acquisition of the transportation and logistics assets of
Canada Cartage and Direct was finalized (See Note 3 of the consolidated
financials statements). In conjunction with the final purchase price
allocation a physical verification and assessment of the capital assets of the
Fund was completed by independent valuators. This assessment together with the
correction in the computation of the amortization expense for the period
resulted in an update to the capital assets and intangible assets.
Amortizations of capital assets and intangibles in the fourth quarter are
consistent with the final allocation. The final allocation results in an
aggregate increase in amortization of capital assets and intangible assets of
$1.1 million for the 201-day period from the IPO on March 14, 2006 to
September 30, 2006. Interim financial statements and accompanying MD&A for the
three months ended June 30, 2006 and the three months ended September 30, 2006
have been restated and made available at www.sedar.com.

    FISCAL 2006 - RESULTS OF OPERATIONS

    
    Selected Unaudited Financial & Operating Information

                                              Fiscal Year Ended December 31,
    ($ thousands except      293-days ended  --------------------------------
     per Unit figures)     December 31, 2006      2006(1)         2005(2)
    -------------------------------------------------------------------------
                                 (Fund)         (Combined)       (Pre-IPO)

    Operating revenue       251,457      -   306,360      -   262,271      -
    Fuel surcharge revenue   15,633      -    19,012      -    12,986      -
    -------------------------------------------------------------------------
    Revenue                 267,090  100.0%  325,372  100.0%  275,257  100.0%
    Direct costs            198,837   74.4%  243,114   74.7%  202,401   73.5%
    Equipment lease
     expense                 14,555    5.4%   18,257    5.6%   12,607    4.6%
    -------------------------------------------------------------------------
    Operating expenses      213,392   79.9%  261,371   80.3%  215,008   78.1%
    Selling, general &
     administrative
     expenses(3)             30,205   11.3%   36,579   11.2%   32,153   11.7%
    -------------------------------------------------------------------------
    EBITDA(4) &
     Normalized EBITDA(4)    23,493    8.8%   27,422    8.4%   28,095   10.2%
    Amortization of
     capital assets          11,143    4.2%      n/a              n/a
    Amortization of
     intangible assets        8,928    3.3%      n/a              n/a
    Amortization of
     deferred financing
     charges                    203    0.1%      n/a              n/a
    Loss (gain) on sale
     of capital assets           (4)  (0.0%)     n/a              n/a
    Share of loss
     (earnings) in
     significantly
     influenced companies      (219)  (0.1%)     n/a              n/a
    -------------------------------------------------------------------------
    EBIT                      3,442    1.3%      n/a              n/a
    Interest expense          1,900    0.7%      n/a              n/a
    -------------------------------------------------------------------------
    Net Earnings              1,542    0.6%      n/a              n/a
    Net Earnings per Unit
     (fully diluted)          $0.08      -       n/a              n/a
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Other Selected Data:
    -----------------------
    Normalized EBITDA(4)
     before equipment lease
     expense (EBITDAR)       38,048   14.2%   45,679   14.0%   40,702   14.8%

    Revenue growth                -             18.2%               -
    Operating revenue
     growth                       -             16.8%               -
    EBITDAR growth                -             12.2%               -

    Distributable Cash
     per Unit                 $0.94                -                -
    Cash distributions
     (declared)               $0.80                -                -
    Payout Ratio               84.9%               -                -

    Total Assets            238,320          238,320                -
    Total Debt
     (including capital
     lease obligations)      45,498           45,498                -
    -----------------------
    (1) Fiscal year ended December 31, 2006 is comprised of the audited
        consolidated results of the Fund for the period March 14, 2006 to
        December 31, 2006 and the combined unaudited interim results of
        Canada Cartage and Direct for the 72-day period from January 1, 2006
        to March 13, 2006. See "Basis of Management's Discussion & Analysis".

    (2) Pre-IPO Results for the twelve months ended December 31, 2005
        represent the combined unaudited interim results of Canada Cartage
        and Direct for the same period. See "Basis of Management's Discussion
        & Analysis".

    (3) SG&A expenses in the Combined and Pre-IPO periods are normalized to
        include incremental rent expense in respect of the long term property
        leases the Fund entered into concurrent with the IPO, additional
        general & administrative expenses in respect of public company costs
        and exclude non-recurring professional fees and shareholder &
        management compensation.

    (4) See "Non-GAAP Measures" for a definition of EBITDA, Normalized EBITDA
        and Distributable Cash. See "Results of Operations - EBITDA and
        Normalized EBITDA" for a reconciliation of net earnings to EBITDA and
        Normalized EBITDA.
    

    Net earnings for the Combined Results and Pre-IPO Results have not been
presented in the above table as they are not comparable due to changes to the
capital structure of the Fund in connection with the IPO (See "Factors
Impacting Comparability of Financial Results - Change in Capital Structure").

    Revenue

    Revenue is generated primarily from the provision of transportation and
related services. Fees paid by customers are determined based on the time to
perform the service, the distance traveled, the type of equipment used, and
the provision of related value added services such as warehousing,
distribution, or logistics services. Revenue is also generated from fuel
surcharges through which changes in fuel prices are recovered from customers.
    Revenue increased 18.2% or $50.1 million to $325.4 million in Fiscal 2006
compared to $275.3 million in Fiscal 2005. Operating revenue (revenue
excluding fuel surcharge revenue) increased 16.8% or $44.1 million to
$306.4 million in Fiscal 2006 compared to Fiscal 2005.
    The majority of the increase in revenue was a result of organic growth.
This reflected increased business activity with existing customers as well as
the contribution of new customers or contracts as the Fund continues to
capitalize and benefit from the trend of companies outsourcing their
transportation requirements. New business represents revenue from both new
customers and, in certain cases, existing customers where the Fund was
successful in gaining further share of their transportation requirements (e.g.
expansion into a new geographic region or distribution center).
    The acquisition of Mel Hall (March 11, 2005) and the operating assets of
All-Ontario Transport Limited (October 27, 2006) contributed approximately
$2.1 million to the increase in revenue in 2006.

    
    The following table provides an overview of the Fund's revenue segmented
between East and West:
                                       Fiscal Year Ended
                                          December 31,       Change   Change
                                     --------------------  ------------------
    ($ thousands)                        2006      2005        $         %
    -----------------------------------------------------  ------------------
                                     (Combined) (Pre-IPO)

    East                               204,330   166,471    37,859      22.7%
    West                               121,042   108,786    12,256      11.3%
    -------------------------------------------------------------------------
    Revenue                            325,372   275,257    50,115      18.2%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Revenue in the East increased 22.7% or $37.9 million in Fiscal 2006.
Several contracts earned in the latter part of 2005 contributed to the higher
revenue. Revenue in the West increased 11.3% or $12.3 million in Fiscal 2006.
The West benefited from increased business activity due to strong economic
conditions particularly in Alberta. This growth, however, was tempered by the
difficulty in attracting drivers to accommodate the growth.

    Operating Expenses

    Operating expenses represent fixed and variable costs incurred to operate
and maintain the Fund's equipment and facilities and are comprised of (i)
direct costs which include labour, fuel, repair & maintenance, owner
operators, equipment rentals, insurance and other general operating expenses;
and (ii) equipment lease expense consisting of operating and maintenance
leases for equipment.

    
                                       Fiscal Year Ended
                                          December 31,       Change   Change
                                     --------------------  ------------------
    ($ thousands)                        2006      2005        $         %
    -----------------------------------------------------  ------------------
                                     (Combined) (Pre-IPO)

    Direct costs                       243,114   202,401    40,713      20.1%
    Equipment lease expense             18,257    12,607     5,650      44.8%
    -------------------------------------------------------------------------
    Operating expenses                 261,371   215,008    46,363      21.6%
    Percentage of Revenue                 80.3%     78.1%        -         -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Operating expenses totaled $261.4 million (80.3% of revenue) in Fiscal
2006 compared to $215.0 million (78.1% of revenue) in the prior year period.
The increase in operating expenses on an absolute basis and expressed as a
percentage of revenue are explained by the variances in direct costs and
equipment lease expense.

    
                                       Fiscal Year Ended
                                          December 31,       Change   Change
                                     --------------------  ------------------
    ($ thousands)                        2006      2005        $         %
    -----------------------------------------------------  ------------------
                                     (Combined) (Pre-IPO)

    Direct costs                       243,114   202,401    40,713      20.1%
    Percentage of Revenue                 74.7%     73.5%      ---       ---
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Direct costs amounted to $243.1 million in Fiscal 2006 compared with
$202.4 million in Fiscal 2005. On an absolute basis, this increase reflects
the higher direct costs required to support the higher level of revenue in the
period. Expressed as a percentage of revenue, direct costs were 74.7% in
Fiscal 2006 compared to 73.5% in the same period in 2005.
    The increase in direct costs expressed as a percentage of revenue can be
attributed primarily to increased labour and owner-operator costs in the West.
In response to competitive labour market conditions in the West, particularly
Alberta, driver wage rates were increased to reduce turnover and maintain
staffing levels to service existing and new business. Similarly,
owner-operator rates increased, reflecting the competitive market for their
services. Direct costs in the East remained stable as a percentage of revenue
in Fiscal 2006 compared to Fiscal 2005.

    
                                       Fiscal Year Ended
                                          December 31,       Change   Change
                                     --------------------  ------------------
    ($ thousands)                        2006      2005        $         %
    -----------------------------------------------------  ------------------
                                     (Combined) (Pre-IPO)
    Equipment lease expense             18,257    12,607     5,650      44.8%
    Percentage of Revenue                  5.6%      4.6%        -         -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Equipment lease expense in Fiscal 2006 totaled $18.3 million (5.6% of
revenue) compared to $12.6 million (4.6% of revenue) in the 2005 comparative
period. Consistent with management's strategy of utilizing leases to finance
substantially all equipment purchases, the increase in lease expense reflects
additional equipment leases to replace existing owned equipment and to support
new business.
    In general, the useful life of equipment tends to be longer then the term
of the lease (typically five years) reflecting the short haul, local nature of
the dedicated trucking services provided. For those leases which the Fund
chooses to buyout at the end of the term, the equipment is fully financed
prior to the end of its useful life. Based on the mix of owned and leased
equipment and the timing of replacement of owned equipment over the next year,
Management expects equipment lease expense to increase in 2007.

    Selling, General & Administrative Expenses ("SG&A")

    Selling, General & Administrative Expenses are comprised of costs related
to management and administrative salaries, selling expenses and commissions,
occupancy costs, information technology and other general expenses required to
support the operations. In order to facilitate the comparison of the Fund's
results to the Pre-IPO Results, additional expenses incurred by the Fund that
are not reflected in comparative results in 2005 including general &
administrative expenses and incremental rent expense have been included in the
Pre-IPO Results (See "Additional General and Administrative Expenses" under
the section "Factors Impacting Comparability").

    
                                       Fiscal Year Ended
                                          December 31,       Change   Change
                                     --------------------  ------------------
    ($ thousands)                        2006      2005        $         %
    -----------------------------------------------------  ------------------
                                     (Combined) (Pre-IPO)
    Selling, general &
     administrative expenes(1)          36,579    32,153     4,426      13.8%
    Percentage of Revenue                 11.2%     11.7%      n/a       n/a
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (1) SG&A expenses in the Combined and Pre-IPO periods are normalized to
        include incremental rent expense in respect of the long term property
        leases the Fund entered into concurrent with the IPO, additional
        general & administrative expenses in respect of public company costs
        and exclude non-recurring professional fees and shareholder &
        management compensation.
    

    SG&A expenses during Fiscal 2006 totaled $36.6 million compared to
$32.2 million in the prior year period. Higher SG&A expenses in Fiscal 2006
can be attributed to increases in management & administrative salaries, public
company costs; information technology related expenses and other general
operating expenses required to accommodate the higher level of business.
Selling expense increased approximately $0.7 million reflecting the strategic
decision to invest in the sales function by adding a Vice President of Sales,
additional sales professionals and an increase in sales commissions paid on
higher revenue. Occupancy costs were $0.9 million higher compared to Fiscal
2005 primarily reflecting the rent and related expenses of a new warehouse
facility in Calgary. Expressed as a percentage of revenue, SG&A expenses
declined to 11.2% in Fiscal 2006 compared to 11.7% in Fiscal 2005.

    EBITDA & Normalized EBITDA (See "Non-GAAP Measures")

    The following provides a reconciliation of net earnings (GAAP Measure) to
EBITDA and Normalized EBITDA:

    
    Reconciliation of Net Earnings to EBITDA & Normalized EBITDA
    -------------------------------------------------------------------------

                                              Fiscal Year Ended December 31,
                             293-days ended  --------------------------------
    ($ thousands)          December 31, 2006      2006(1)         2005(2)
    -------------------------------------------------------------------------
                                 (Fund)         (Combined)       (Pre-IPO)

    Net earnings                     1,542            3,460              793
    Provision for
     (recovery of income
     taxes)                              -                -             (243)
    Interest expense                 1,900            2,416            3,491
    -------------------------------------------------------------------------
    Earnings before
     interest expense and
     taxes (EBIT)                    3,442            5,876            4,041
    Amortization                    20,274           22,380           13,689
    (Loss) Gain on sale of
     capital assets                     (4)            (147)            (261)
    Share of earnings in
     significantly
     influenced companies             (219)            (219)            (138)
    -------------------------------------------------------------------------
    EBITDA(3)                       23,493           27,890           17,331
    Management bonuses and
     benefits                          n/a                -           13,373
    Shareholder & management
     compensation                      n/a              205              496
    Professional fees and
     other                             n/a               93              780
    Incremental rent
     expense(4)                        n/a             (389)          (1,973)
    Additional general &
     administrative
     expenses(4)                       n/a             (377)          (1,913)
    -------------------------------------------------------------------------
    Normalized EBITDA(3)            23,493           27,422           28,095
    Add: Equipment lease
     expense                        14,555           18,257           12,607
    -------------------------------------------------------------------------
    EBITDA before Lease
     expense (EBITDAR)              38,048           45,679           40,702
    % of Revenue                      14.2%            14.0%            14.8%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (1) Fiscal 2006 is comprised of the audited consolidated results of the
        Fund for the period of March 14, 2006 to December 31, 2006 and the
        combined unaudited interim results of Canada Cartage and Direct for
        the period from January 1, 2006 to March 13, 2006. See "Basis of
        Management's Discussion & Analysis".

    (2) Pre-IPO Results for Fiscal 2005 represents the combined unaudited
        interim results of Canada Cartage and Direct for the same period. See
        "Basis of Management's Discussion & Analysis".

    (3) See "Non-GAAP Measures" for a definition of EBITDA, Normalized EBITDA
        and Distributable Cash. See "Results of Operations - EBITDA and
        Normalized EBITDA" for a reconciliation of net earnings to EBITDA and
        Normalized EBITDA.

    (4) In order to facilitate the comparison of the Fund's results to prior
        periods, these expenses have been included in the calculation of
        Normalized EBITDA for the Pre-IPO Results. Incremental rent expense
        is in respect of the long term property leases the Fund entered into
        concurrent with the IPO, and is based on an annual estimate of $1,972
        as outlined in the Fund's final prospectus. Additional general &
        administrative expenses is in respect of public company costs and
        additional employee compensation and is based on an annual estimate
        of $1,913 as outlined in the Fund's final prospectus.
    

    Normalized EBITDA for Fiscal 2006 totaled $27.4 million compared to
$28.1 million in the same period in 2005. EBITDA was modestly lower in Fiscal
2006. Revenue growth was offset by an increase in direct costs and SG&A
expenses experienced, as explained previously, and higher expected equipment
lease expense.
    Management believes it is also relevant to consider EBITDA before
equipment lease expense (referred to as "EBITDAR") to help assess the Fund's
financial performance. This measure removes the impact on EBITDA of the
financing strategy to utilize operating and maintenance leases to finance
substantially all equipment purchases (See "Factors Impacting Comparability of
Financial Results - Transition to Leases").
    EBITDAR increased $5.0 million or 12.2% to $45.7 million in Fiscal 2006
compared to $40.7 million in Fiscal 2005. Expressed as a percentage of
revenue, EBITDAR in Fiscal 2006 was 14.0% compared to 14.8% in the comparative
period in 2005. Lower EBITDAR margins in Fiscal 2006 reflect the increase in
direct costs offset by lower SG&A expenses, both expressed as a percentage of
revenue.

    Amortization

    Amortization totaled $20.3 million for the 293-day period ended
December 31, 2006. Amortization of intangible assets and capital assets
represented $8.9 million and $11.1 million, respectively. The balance was
related to the amortization of deferred financing costs. Due to the change in
capital structure concurrent with the IPO, comparison of amortization to the
pre-IPO periods is not meaningful (See "Factors Impacting Comparability of
Financial Results - Change in Capital Structure").

    Interest Expense

    Interest expense for the 293-day period ended December 31, 2006 totaled
$1.9 million. Interest expense is primarily related to the interest incurred
on the $40.0 million term loan. The effective interest rate on the
$40.0 million term loan was 5.96% for Fiscal 2006. Interest expense was also
incurred in respect of capital leases and drawn amounts on the operating
facility offset by interest income earned on cash balances held throughout the
period. Due to the change in capital structure concurrent with the IPO,
comparison of interest expense to the pre-IPO periods is not meaningful (See
"Factors Impacting Comparability of Financial Results - Change in Capital
Structure").

    Income Taxes

    The Fund is a mutual fund trust for income tax purposes and therefore is
not currently subject to tax on income distributed to unitholders (See "Risks
& Uncertainties - Proposed Tax Changes"). The Fund's distributions are taxable
in the hands of the unitholders. The Fund's operating subsidiaries are
comprised of both limited partnerships (accounting for majority of operations)
and corporations. The Fund's corporate subsidiaries did not have a tax
liability in the periods and therefore, no tax expense was recorded for the
293-day period ended December 31, 2006.

    Net Earnings

    The Fund generated net earnings of $1.5 million, or $0.08 per unit (on a
fully diluted basis) for the 293-day period ended December 31, 2006. Positive
net earnings for Fiscal 2006 was primarily due to the revenue growth achieved
and was offset by higher operating and SG&A expenses and amortization. Due to
the change in capital structure concurrent with the IPO, comparison of net
earnings to pre-IPO periods is not meaningful (See "Factors Impacting
Comparability of Financial Results - Change in Capital Structure").

    SUMMARY OF QUARTERLY RESULTS

    
    The following provides a summary of unaudited financial results for the
eight most recently completed quarters:
                                 -------------------------------- -----------

                                               Fund               Combined(1)
    ($ thousands except          -------------------------------- -----------
     per Unit figures)             4Q 06       3Q 06       2Q 06       1Q 06
    -------------------------------------------------------------------------

    Operating revenue             77,955      79,623      78,898      69,884
    Fuel surcharge revenue         4,055       5,488       5,192       4,277
    -------------------------------------------------------------------------
    Revenue                       82,010      85,111      84,090      74,161
    Direct costs                  61,385      63,479      62,371      55,879
    Equipment lease expense        4,446       4,603       4,628       4,580
    -------------------------------------------------------------------------
    Operating expenses            65,831      68,082      66,999      60,459
    Selling, general &
     administrative expenses(3)    9,419       9,573       9,171       8,416
    -------------------------------------------------------------------------
    EBITDA(4) & Normalized
     EBITDA(4)                     6,760       7,456       7,920       5,286

    Net Earnings                    (260)        581       1,253         n/a
    Net Earnings per Unit
     (fully diluted basis)        ($0.01)      $0.03       $0.07        n/a

    Normalized EBITDA before
     lease expense (EBITDAR)      11,206      12,059      12,548       9,866
    % of Revenue                    13.7%       14.2%       14.9%       13.3%

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

                                                       Pre-IPO(2)
    ($ thousands except          --------------------------------------------
     per Unit figures)             4Q 05       3Q 05       2Q 05       1Q 05
    -------------------------------------------------------------------------

    Operating revenue             75,918      70,171      63,782      52,400
    Fuel surcharge revenue         4,855       3,879       2,619       1,633
    -------------------------------------------------------------------------
    Revenue                       80,772      74,050      66,401      54,033
    Direct costs                  59,907      54,467      48,195      39,832
    Equipment lease expense        3,946       3,268       2,874       2,519
    -------------------------------------------------------------------------
    Operating expenses            63,853      57,735      51,069      42,351
    Selling, general &
     administrative expenses(3)    8,487       8,321       8,147       7,198
    -------------------------------------------------------------------------
    EBITDA(4) & Normalized
     EBITDA(4)                     8,432       7,994       7,185       4,484

    Net Earnings                     n/a         n/a         n/a         n/a
    Net Earnings per Unit
     (fully diluted basis)           n/a         n/a         n/a         n/a

    Normalized EBITDA before
     lease expense (EBITDAR)      12,378      11,262      10,059       7,003
    % of Revenue                    15.3%       15.2%       15.1%       13.0%

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

    (1) Pre-IPO Results represents the combined unaudited interim results of
        Canada Cartage and Direct for the periods indicated. See "Basis of
        Management's Discussion & Analysis".

    (2) Combined results for the first quarter period ended March 31, 2006 is
        comprised of the unaudited interim results of the Fund for the period
        March 14, 2006 to March 31, 2006 and the combined unaudited interim
        results of Canada Cartage and Direct for the period from January 1,
        2006 to March 13, 2006. See "Basis of Management's Discussion &
        Analysis".

    (3) SG&A expenses in the Combined and Pre-IPO periods are normalized to
        include incremental rent expense in respect of the long term property
        leases the Fund entered into concurrent with the IPO, additional
        general & administrative expenses in respect of public company costs
        and exclude non-recurring professional fees and shareholder &
        management compensation.

    (4) See "Non-GAAP Measures" for a definition of EBITDA, Normalized EBITDA
        and Distributable Cash. See "Results of Operations - EBITDA and
        Normalized EBITDA" for a reconciliation of net earnings to EBITDA and
        Normalized EBITDA.
    

    The Fund's business tends to follow a seasonal pattern, with generally
higher customer demand for transportation services in the second half of the
year versus the first half. Historically, revenue is equally strong in the
second and third quarters, modestly lower in the fourth quarter, and typically
lowest in the first quarter. Fuel and maintenance costs tend to be higher in
the winter months. Equipment lease expense, occupancy costs, general and
administrative expenses, amortization and interest expense are relatively
stable throughout the year. This seasonal pattern can be effected by the
timing and financial impact of new business or contracts throughout the year.
2006 quarterly revenue is more representative of this seasonal pattern when
compared to the 2005 quarterly revenue, which was positively impacted by
several new contracts
    On October 27, 2006, the Fund, through CCD, completed the acquisition of
certain operating assets of All-Ontario Transport Limited ("All-Ontario").
All-Ontario, based in Mississauga, provides specialized dedicated trucking
services to a wide range of customers in the Greater Toronto Area and has
annual revenues of approximately $4.5 million.
    On February 2, 2007, the Fund, through CCD, completed the acquisition of
certain operating assets of MacCosham Inc. The acquired operating assets are
primarily based in Edmonton, Alberta and provide warehouse, distribution and
related high value transportation services to customers operating in various
industries and generates annual revenues of approximately $4.0 million.

    2006 FOURTH QUARTER - RESULTS OF OPERATIONS

    
    Selected Unaudited Financial & Operating Information

                                              Three months ended December 31,
    ($ thousands except                      --------------------------------
     per Unit figures)                              2006          2005(1)
    -------------------------------------------------------------------------
                                                   (Fund)        (Pre-IPO)

    Operating revenue                         77,955      -    75,918      -
    Fuel surcharge revenue                     4,055      -     4,855      -
    -------------------------------------------------------------------------
    Revenue                                   82,010  100.0%   80,772  100.0%
    Direct costs                              61,385   74.9%   59,907   74.2%
    Equipment lease expense                    4,446    5.4%    3,946    4.9%
    -------------------------------------------------------------------------
    Operating expenses                        65,831   80.3%   63,853   79.1%
    Selling, general & administrative
     expenses(2)                               9,419   11.5%    8,487   10.5%
    -------------------------------------------------------------------------
    EBITDA(3) & Normalized EBITDA(3)           6,760   8.2%     8,432   10.4%
    Amortization of capital assets             3,539              n/a
    Amortization of intangible assets          2,867              n/a
    Amortization of deferred financing
     charges                                      54              n/a
    Loss (gain) on sale of capital assets         85              n/a
    Share of loss (earnings) in
     significantly influenced companies          (62)             n/a
    -------------------------------------------------------------------------
    EBIT                                         277              n/a
    Interest expense                             537    7          n/a
    -------------------------------------------------------------------------
    Net Earnings                                (260)             n/a
    Net Earnings per Unit (fully diluted)     ($0.01)             n/a
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Other Selected Data:
    -------------------------------------

    Normalized EBITDA(3) before equipment
     lease expense (EBITDAR)                  11,206   13.7%   12,378   15.3%

    Revenue growth                               1.5%               -
    Operating revenue growth                     2.7%               -
    EBITDAR growth                              (9.5%)              -

    Distributable Cash per Unit                $0.26                -
    Cash distributions (declared)              $0.25                -
    Payout Ratio                                96.2%               -

    Total Assets                             238,320                -
    Total Debt (including capital lease
     obligations)                             45,498                -

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

    (1) Pre-IPO Results for the three months ended December 31, 2005
        represents the combined unaudited interim results of Canada Cartage
        and Direct for the same period. See "Basis of Management's Discussion
        & Analysis".

    (2) SG&A expenses in the Pre-IPO periods are normalized to include
        incremental rent expense in respect of the long term property leases
        the Fund entered into concurrent with the IPO, additional general &
        administrative expenses in respect of public company costs and
        exclude non-recurring professional fees and shareholder & management
        compensation.

    (3) See "Non-GAAP Measures" for a definition of EBITDA, Normalized EBITDA
        and Distributable Cash. See "Results of Operations - EBITDA and
        Normalized EBITDA" for a reconciliation of net earnings to EBITDA and
        Normalized EBITDA.
    

    Net earnings for the Pre-IPO Results have not been presented in the above
table as they are not comparable due to changes to the capital structure of
the Fund in connection with the IPO (See "Factors Impacting Comparability of
Financial Results - Change in Capital Structure").

    Revenue

    Revenue increased 1.5% to $82.0 million in the fourth quarter of 2006
compared to $80.8 million in the same period for 2005. Operating revenue
(excluding fuel surcharge revenue) increased 2.7% to $78.0 million in the
fourth quarter of 2006 compared to $75.9 million in the prior year period.
    Organic growth was nominal in the fourth quarter of 2006 as continued
growth in the West was offset by a modest decline in revenue in the East
(explained further below). The majority of the increase in operating revenue
was driven by organic growth. The acquisition of the operating assets of
All-Ontario Transport Limited contributed approximately $0.6 million to the
increase in revenue in the fourth quarter of 2006.

    
    The following table provides an overview of the Fund's revenue segmented
between East and West:

    Segmented Revenue
    -------------------------------------------------------------------------
                                      Three months Ended
                                          December 31,       Change   Change
                                     --------------------  ------------------
    ($ thousands)                        2006     2005(1)      $         %
    -----------------------------------------------------  ------------------
                                         (Fund) (Pre-IPO)

    East                                51,181    51,811      (630)    (1.2%)
    West                                30,829    28,961     1,868       6.5%
    -------------------------------------------------------------------------
    Revenue                             82,010    80,772     1,238       1.5%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Revenue in the East was $0.6 million or 1.2% lower in the fourth quarter
of 2006 compared to prior year. Growth from existing customers in the quarter
was negatively impacted by the softer economic environment. In addition, there
were no significant new contracts positively impacting the fourth quarter
revenue, whereas new contracts which began in 2005 are reflected in the
revenue for the comparative period. Revenue in the West increased $1.9 million
or 6.5% in the fourth quarter of 2006. The West is benefiting from the
increased business activity due to the strong economic conditions and from the
additional revenue contributed by the new warehouse facility in Calgary.

    
    Operating Expenses

                                      Three months Ended
                                          December 31,           Change
                                     --------------------  ------------------
    ($ thousands)                        2006     2005(1)      $         %
    -----------------------------------------------------  ------------------
                                         (Fund) (Pre-IPO)

    Direct costs                        61,385    59,907     1,478       2.5%
    Equipment lease expense              4,446     3,946       500      12.7%
    -------------------------------------------------------------------------
    Operating expenses                  65,831    63,853     1,978       3.1%
    Percentage of Revenue                 80.3%     79.1%        -         -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Operating expenses totaled $65.8 million (80.3% of revenue) in the fourth
quarter compared to $63.9 million (79.1% of revenue) in the prior year period.
The increase in operating expenses on an absolute basis and expressed as a
percentage of revenue is explained by the variances in direct costs and
equipment lease expense.

    
                                      Three months Ended
                                          December 31,           Change
                                     --------------------  ------------------
    ($ thousands)                        2006     2005(1)      $         %
    -----------------------------------------------------  ------------------
                                         (Fund) (Pre-IPO)

    Direct costs                        61,385    59,907     1,478       2.5%
    Percentage of Revenue                 74.9%     74.2%        -         -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Direct costs amounted to $61.4 million in the fourth quarter of 2006
compared to $59.9 million in the same period in 2005. On an absolute basis,
the modest increase reflects the higher direct costs required to support the
higher revenue. Expressed as a percentage of revenue, direct costs were 74.9%
in the fourth quarter of 2006 compared to 74.2% in the same period in 2005.
The increase in direct costs expressed as a percentage of revenue can be
attributed primarily to increased labour and owner-operator costs in the West,
as explained previously. These higher costs were offset by a decrease in
direct costs (expressed as a percentage of revenue) in the East, reflecting
operational improvements.

    
                                      Three months Ended
                                          December 31,           Change
                                     --------------------  ------------------
    ($ thousands)                        2006     2005(1)      $         %
    -----------------------------------------------------  ------------------
                                         (Fund) (Pre-IPO)

    Equipment lease expense              4,446     3,946       500      12.7%
    Percentage of Revenue                  5.4%      4.9%        -         -
    ------------------------------------------------------------------------
    ------------------------------------------------------------------------
    

    Equipment lease expense during the fourth quarter of 2006 totaled
$4.5 million (5.4% of revenue) compared to $3.9 million (4.9% of revenue) in
the 2005 comparative period. Consistent with management's strategy of
utilizing leases to finance substantially all equipment purchases, the
increase in lease expense reflects additional equipment leases to replace
existing owned equipment and to support new business.

    
    Selling, General & Administrative Expenses

                                      Three months Ended
                                          December 31,           Change
                                     --------------------  ------------------
    ($ thousands)                        2006     2005(1)      $         %
    -----------------------------------------------------  ------------------
                                         (Fund) (Pre-IPO)

    Selling, general &
     administrative expenses(1)          9,419     8,487       932      11.0%
    Percentage of Revenue                 11.5%     10.5%      n/a       n/a
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (2) SG&A expenses in the Combined and Pre-IPO periods are normalized to
        include incremental rent expense in respect of the long term property
        leases the Fund entered into concurrent with the IO, additional
        general & administrative expenses in respect of public company costs
        and exclude non-recurring professional fees and shareholder &
        management compensation.
    

    SG&A expenses during the fourth quarter of 2006 totaled $9.4 million
compared to $8.5 million in the prior year period. Higher SG&A expenses in the
fourth quarter can be attributed to increases in administrative salaries,
selling expenses, information technology related expenses and other general
operating expenses. Occupancy costs, included in SG&A, were higher compared to
2005 reflecting the rent and related expenses for the new warehouse facility
in Calgary. Expressed as a percentage of revenue, SG&A expenses increased to
11.5% in Fiscal 2006 compared to 10.5% in the same period in 2005.

    EBITDA & Normalized EBITDA (See "Non-GAAP Measures")

    
    Reconciliation of Net Earnings to EBITDA & Normalized EBITDA

                                              Three months ended December 31,
                                             --------------------------------
    ($ thousands)                                   2006          2005(1)
    -------------------------------------------------------------------------
                                                   (Fund)        (Pre-IPO)

    Net earnings                                       (260)             844
    Provision for (recovery of income taxes)              -              (61)
    Interest expense                                    537              873
    -------------------------------------------------------------------------
    Earnings before interest expense and
     taxes (EBIT)                                       277            1,655
    Amortization                                      6,460            4,150
    (Loss) Gain on sale of capital assets                85              (11)
    Share of earnings in significantly
     influenced companies                               (62)            (138)
    -------------------------------------------------------------------------
    EBITDA(2)                                         6,760            5,656
    Management bonuses and benefits                     n/a            3,280
    Shareholder & management compensation               n/a              124
    Professional fees and other                         n/a              344
    Incremental rent expense(4)                         n/a             (493)
    Additional general & administrative expenses(3)     n/a             (478)
    -------------------------------------------------------------------------
    Normalized EBITDA(2)                              6,760            8,432
    Add: Equipment lease expense                      4,446            3,946
    -------------------------------------------------------------------------
    EBITDA before Lease expense (EBITDAR)            11,206           12,378
    % of Revenue                                       13.7%            15.3%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (1) Pre-IPO Results for the three months ended December 31, 2005
        represents the combined unaudited interim results of Canada Cartage
        and Direct for the same period. See "Basis of Management's Discussion
        & Analysis".

    (2) See "Non-GAAP Measures" for a definition of EBITDA, Normalized EBITDA
        and Distributable Cash. See "Results of Operations - EBITDA and
        Normalized EBITDA" for a reconciliation of net earnings to EBITDA and
        Normalized EBITDA.

    (3) In order to facilitate the comparison of the Fund's results to prior
        periods, these expenses have been included in the calculation of
        normalized EBITDA for the Pre-IPO Results. Incremental rent expense
        is in respect of the long term property leases the Fund entered into
        concurrent with the IPO, and is based on an annual estimate of $1,972
        as outlined in the Fund's final prospectus. Additional general &
        administrative expenses is in respect of public company costs and
        additional employee compensation and is based on an annual estimate
        of $1,913 as outlined in the Fund's final prospectus.
    

    Normalized EBITDA in the fourth quarter totaled $6.8 million compared to
$8.4 million in the same period in 2005. EBITDA was lower in the fourth
quarter as the modest increase in revenue was offset by increases in direct
costs and SG&A expenses and higher expected equipment lease expense.
    EBITDAR totaled $11.3 million in the fourth quarter, compared to
$12.4 million in the same period in 2005. Expressed as a percentage of
revenue, EBITDAR in the fourth quarter of 2006 was 13.7% compared to 15.3% in
the comparative period in 2005. EBITDAR margins were lower in the quarter due
to the increase in direct costs and SG&A expenses as a percentage of revenue.

    Amortization

    Amortization totaled $6.5 million in the fourth quarter of 2006.
Amortization of intangible assets and capital assets represented $2.9 million
and $3.5 million, respectively. The balance was related to the amortization of
deferred financing costs. Due to the change in capital structure concurrent
with the IPO, comparison of amortization to the pre-IPO periods is not
meaningful (See "Factors Impacting Comparability of Financial Results - Change
in Capital Structure").

    Interest Expense

    Interest expense in the fourth quarter totaled $0.5 million. Interest
expense is primarily related to the interest incurred on the $40.0 million
term loan. The effective interest rate on the $40.0 million term loan was
5.85% in the quarter based on the fixed benchmark rate of 4.60% plus an
applicable spread of 1.25%. Interest expense was also incurred in respect of
capital leases and drawn amounts on the operating facility offset by interest
income earned on cash balances held throughout the period. Due to the change
in capital structure concurrent with the IPO, comparison of interest expense
to the pre-IPO periods is not meaningful (See "Factors Impacting Comparability
of Financial Results - Change in Capital Structure").

    Income Taxes

    The Fund is a mutual fund trust for income tax purposes and therefore is
not currently subject to tax on income distributed to unitholders (See "Risks
& Uncertainties - Proposed Tax Changes"). The Fund's distributions are taxable
in the hands of the unitholders. The Fund's operating subsidiaries are
comprised of both limited partnerships (accounting for majority of operations)
and corporations. The Fund's corporate subsidiaries did not have a tax
liability in the periods and therefore, no tax expense was recorded for the
three months ended December 31, 2006.

    Net Earnings

    The Fund generated a net loss of $0.3 million, or $0.01 per unit (on a
fully diluted basis) in the fourth quarter of 2006. Negative earnings in the
fourth quarter reflect the slower revenue growth, increase in operating and
SG&A expenses and amortization of intangible assets. Due to the change in
capital structure concurrent with the IPO, comparison of net earnings to
pre-IPO periods is not meaningful (See "Factors Impacting Comparability of
Financial Results - Change in Capital Structure").

    DISTRIBUTABLE CASH & DISTRIBUTIONS

    Distributable cash of the Fund is a non-GAAP measure generally used by
Canadian income funds as a supplementary indicator of financial performance
and should not be seen as a measure of liquidity or a substitute for
comparable metrics prepared in accordance with GAAP. The Fund's distributable
cash may differ from similar calculations reported by other income funds and,
accordingly, may not be comparable. See "Non-GAAP Measures".
    The Fund generated distributable cash of $17.5 million or $0.94 per unit
in the 293-day period ending December 31, 2006 and distributable cash of
$4.9 million or $0.26 per unit in the fourth quarter.

    
    Summary of Distributable Cash

    ($ thousands except             Three months ended  293-day period ended
     per unit figures)               December 31, 2006     December 31, 2006
    -------------------------------------------------------------------------

    Cash flow from operations
     (per Statement of Cash Flows)              12,583                17,597
    Less: Net change in non-cash
     working capital(1)                          6,327                (4,072)
    -------------------------------------------------------------------------
    Cash flow from operations before
     net change in non-cash working
     capital                                     6,256                21,669
    Maintenance & other capital
     expenditures(2)                            (1,363)               (4,153)
    -------------------------------------------------------------------------
    Distributable cash                           4,893                17,516
    Cash distributions (declared)                4,647                14,835
    -------------------------------------------------------------------------
    Cash remaining                                 246                 2,681

    Per Unit(3)
    -----------
    Distributable cash per Unit                  $0.26                 $0.94
    Cash distributions per Unit (declared)       $0.25                 $0.80
    -------------------------------------------------------------------------
    Cash remaining                               $0.01                 $0.14


    Payout Ratio(4)                               96.2%                 84.9%

    (1) Net change in non-cash working capital is not considered a source of
        Distributable Cash.

    (2) See "Maintenance & other capital expenditures".

    (3) Calculated based on 18,598,539 units outstanding.

    (4) Represents cash distributions declared per unit as a percentage of
        Distributable Cash per unit.

    Cash Distributions

    The following table summarizes the cash distributions declared during the
293-day period ending December 31, 2006:

    Summary of Cash Distributions
                                                                     Cash
                                                                Distribution
         Month            Record Date         Payment Date         Per Unit
    ---------------  --------------------  ------------------- --------------

    March 2006          March 31, 2006       April 13, 2006         $0.048
    April 2006          April 28, 2006        May 15, 2006          $0.083
    May 2006             May 31, 2006         June 15, 2006         $0.083
    June 2006           June 30, 2006         July 14, 2006         $0.083
    July 2006           July 31, 2006        August 15, 2006        $0.083
    August 2006        August 31, 2006      September 15, 2006      $0.083
    September 2006    September 29, 2006     October 13, 2006       $0.083
    October 2006      October 31, 2006      November 15, 2006       $0.083
    November 2006     November 30, 2006     December 15, 2006       $0.083
    December 2006     December 29, 2006      January 15, 2007       $0.083
    -------------------------------------------------------------------------
    Total                                                           $0.798
    -------------------------------------------------------------------------
    

    The monthly cash distribution for December, 2006 was paid subsequent to
year end on January 15, 2007. The cash distribution is included on the Fund's
interim consolidated balance sheet classified as distributions payable.
    The Fund intends to declare regular monthly cash distributions of
$0.083 per unit ($1.00 per unit on an annual basis), consistent with the level
of cash distributions outlined in the final prospectus. Cash distributions for
the month are declared on or about the 15th day of the month to unitholders of
record on the last business day of the month and paid on or about the 15th day
of the following month.  These cash distributions, however, are not assured
and may be reduced or suspended. See "Risks and Uncertainties" below for a
description of some of the factors that could affect the Fund's ability to
make cash distributions.

    Payout Ratio

    The payout ratio (cash distributions declared expressed as a percentage
of distributable cash) was 96.2% in the fourth quarter of 2006 and 84.9% for
the 293-day period ended December 31, 2006.
    Historically, the Fund's revenue and earnings have been lower in the
first quarter and fourth quarter relative to the second quarter and third
quarter. Distributable cash is expected to follow a similar pattern. This
pattern is impacted for 2006 as distributable cash of the Fund for the first
quarter of 2006 reflects only 18 days from the time of the IPO on March 14,
2006 to the end of the quarter on March 31, 2006.

    LIQUIDITY & CAPITAL RE

SOURCES Sources of Liquidity The Fund's primary sources of liquidity include: (i) cash flow from operating activities; (ii) cash balances on hand; (iii) amounts available under the secured credit facilities; and (iv) amounts available under leasing facilities. Management believes that these sources are sufficient to fund ongoing operations including working capital requirements, currently anticipated capital expenditures, organic growth and cash distributions at current levels. Secured Credit Facilities Concurrent with the IPO, CCD entered into a credit agreement providing for secured credit facilities as follows: - Operating facility of up to $15.0 million for general corporate purposes. The operating facility has a 364-day term expiring in March 2007 and may be extended annually upon obtaining written permission from the lenders. The operating facility has been extended for a further 364 day term expiring in March 2008. At December 31, 2006, approximately $1.9 million had been utilized and approximately $8.2 million of letters of credit had been issued. - Term loan of $40.0 million, maturing in March 2009 and may be renewed for one additional year upon obtaining written permission from the lenders. There are no scheduled repayments of principal required prior to maturity. The term loan was fully drawn at December 31, 2006. Amounts utilized under the secured credit facilities are repayable without any prepayment penalties and bear interest at a floating benchmark rate based on the Canadian dollar prime rate or the banker's acceptance rate plus, in each case, an applicable margin to those rates. On April 20, 2006, the Fund entered into an interest rate swap agreement that effectively fixes the benchmark rate on the $40 million term loan for the initial three year term at 4.60% plus an applicable spread ranging from 1.25% to 1.75% depending upon the Fund's funded debt to EBITDA as defined in the credit agreement. In addition to the operating facility and term loan, the secured credit facilities provide for an interest rate swap facility for the purposes of fixing the benchmark rate on the principal amount of the term facility, a foreign exchange facility for the purposes of hedging foreign currency exposure up to $2.0 million and a corporate credit card overdraft facility of up to $0.5 million. At December 31, 2006 the company utilized its interest rate swap facility and there were no amounts outstanding under the foreign exchange facility or corporate credit card overdraft facility. In respect of the secured credit facilities, substantially all of the assets of the Fund have been pledged as collateral. Under the terms of the secured credit facilities, CCD is required, amongst other conditions, to meet certain covenants all of which were met at December 31, 2006. As at December 31, 2006, the Fund had capital lease obligations totaling $5.5 million of which $2.3 million is current. Capital lease obligations primarily represent warehouse racking and other equipment. As at December 31, 2006, the Fund had an unsecured note totaling $0.455 million of which $0.25 million is current. The unsecured note, issued as partial consideration for the operating assets of All-Ontario, bears interest at a rate of 7% per annum and is payable in 22 equal monthly installments. On February 5, 2007, the Fund entered into a committed financing arrangement with its current lenders, HSBC Bank Canada and Bank of Montreal, to amend and restate its senior credit facility to provide for a $25.0 million acquisition facility and a $10.0 million letter of credit facility. The non-amortizing term facility and operating facility for working capital remain unchanged at $40.0 million and $15.0 million, respectively. The acquisition facility provides timely access to capital to finance the Fund's acquisition program. The commitment is subject to a number of conditions including the documentation of the credit agreement. Summary of Cash Flows For the three month and 293-day period ending December 31, 2006, the Fund utilized the net proceeds from the IPO (including the over-allotment option), cash from operations and amounts drawn on the secured credit facilities to fund: (i) the cash portion of the consideration paid for the trucking and transportation logistics assets of each of Canada Cartage and Direct; (ii) the repayment of assumed long term debt and certain capital lease obligations; (iii) transaction costs;(iv) operations including working capital requirements, capital expenditures and cash distributions; and (v) the cash consideration of the acquisition of the operating assets of All-Ontario Limited. The following table provides a summary of cash flow for the 293-day period ended December 31, 2006: 293-day Period Ended ($ thousands) December 31, 2006 ------------------------------------------------------------------------- Cash flow provided by (used in): Operations before net changes in non-cash working capital 21,669 Net change in non-cash working capital items (4,072) ------------------------------------------------------------------------- Operating activities 17,597 Investing activities (110,011) Distributions paid to Class A unitholders & advances to Class B unitholders (13,286) Financing activities 103,707 ------------------------------------------------------------------------- Net change in cash during the period (1,993) Cash Balance (Bank Indebtedness), beginning of period - Cash Balance (Bank Indebtedness), end of period (1,993) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operating Activities Cash flow from operating activities before the net change in non-cash working capital amounted to $21.7 million for the 293-day period ended December 31, 2006. The net change in non-cash working capital reduced operating cash flow by $4.1 million, resulting in cash from operating activities of $17.6 million in the 293-day period ended December 31, 2006, respectively. Investing Activities The Fund's investing activities (excluding cash distributions paid and advances to related parties in lieu of distributions on the Class B LP Units) used total cash flow of $110.0 million for the 293-day period ended December 31, 2006. This is comprised of capital expenditures, net of disposals, of $0.9 million (See "Capital Expenditures" for a further discussion) and $109.3 million for the consideration paid for the trucking and transportation logistics assets of each of Canada Cartage and Direct and All-Ontario Limited. Financing Activities Financing activities in the 293-day period ended December 31, 2006 provided total cash flow of $103.7 million. Net proceeds from the IPO (including the over-allotment option) totaling approximately $110.9 million together with the $40.0 million drawn on the term loan generated total cash flow of $150.9 million. These funds were used for the repayment of assumed debt and certain capital lease obligations of approximately $40.8 million, to fund the financing costs related to the secured credit facilities of approximately $0.8 million and to repurchase Class B LP units in connection with the exercise of the over-allotment option for approximately $5.6 million. Cash flow from financing activities was primarily used to fund acquisition of the trucking and transportation logistics assets of each of Canada Cartage and Direct included in Investing Activities. Capital Expenditures Capital expenditures are generally divided into three categories: - Non-trucking - comprise non-equipment related expenditures primarily for leasehold improvements, refurbishment of existing facilities and information technology investments; - Equipment (rolling stock) - comprise operating lease buyouts or capital improvements to existing equipment. It is important to note that capital requirements to maintain and grow the equipment base (trucks and trailers) are financed primarily with operating and maintenance leases, which are deducted in calculating EBITDA and net earnings; - Growth - to support new business initiatives (other than new contracts/business) or operational improvements that are expected to increase cash flow are considered growth capital expenditures. Equipment required to support new business/contracts are financed primarily with leases with the associated expense deducted from EBITDA and net earnings. The following provides a summary of capital expenditures for the three month and 293-day period ended December 31, 2006. Three months ended 293-day period ended ($ thousands) December 31, 2006 December 31, 2006 ------------------------------------------------------------------------- Non-trucking 116 598 Equipment (rolling stock) 111 662 Growth 156 1,087 ------------------------------------------------------------------------- Capital expenditures 383 2,347 Cash proceeds from disposal of capital assets (52) (1,438) ------------------------------------------------------------------------- Capital expenditures, net of disposals 331 909 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Capital expenditures totaled $0.4 million and $2.4 million in the three month and 293-day period ended December 31, 2006, respectively. Non-trucking capital expenditures totaled $0.1 million and $0.6 million, respectively, primarily related to leasehold improvements and information technology investments. Equipment capital expenditures amounted to $0.1 million and $0.7 million, respectively primarily for operating lease buyouts and capital improvements to existing equipment. Growth capital expenditures totaled $0.2 million and $1.1 million primarily related to warehouse equipment and racking for the warehouse & distribution facility in Calgary to accommodate growth from both existing and new customers. Maintenance & Other Capital Expenditures The Fund considers non-trucking and equipment capital expenditures, capital lease payments, cash proceeds from disposal and an equipment reserve as maintenance capital expenditures and appropriately deducts these amounts from cash from operating activities to determine distributable cash. Growth capital expenditures are typically financed with operating cash flow not deducted from distributable cash. The following table provides a summary of maintenance & other capital expenditures for the three month and 293-day period ended December 31, 2006: Three months ended 293-day period ended ($ thousands) December 31, 2006 December 31, 2006 ------------------------------------------------------------------------- Total capital expenditures 383 2,347 Less: Growth capital expenditures 156 1,087 ------------------------------------------------------------------------- Equipment & Non-trucking capital expenditures 227 1,260 Cash proceeds from disposal of capital assets (52) (1,438) Capital lease payments & buyouts (1) 174 1,559 Equipment reserve 1,014 2,772 ------------------------------------------------------------------------- Maintenance & other captial expenditures 1,363 4,153 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Excludes retirement of capital lease obligations of $18.9 million in connection with the IPO and related transactions. The equipment reserve is included to ensure that total equipment expenditures in the period adequately reflect the required amount to replace the existing equipment base over its useful life. This reserve is calculated quarterly and is based on several assumptions including replacement cost, useful life of the equipment, lease rates, and disposal proceeds. As the Fund has a higher proportion of owned versus leased equipment, the reserve reflects, among other things, the higher expected equipment lease expense to replace these owned units in the future. Management believes this is a conservative approach and appropriate in calculating distributable cash for the period. As at December 31, 2006, the equipment reserve totaled $2.8 million. Working Capital Payments To ensure sufficient working capital was provided to CCD on closing, Canada Cartage agreed to ensure that net working capital in the amount of $23.6 million was delivered by Canada Cartage and Direct to CCD. The Canada Cartage acquisition agreement required that excess working capital above the targeted amount be paid to Canada Cartage or be used to pay or reimburse it for a portion of its transaction expenses and, conversely, any working capital deficiency below the target be paid by Canada Cartage. The final working capital payments were finalized prior to December 31, 2006 with excess working capital above the targeted amount being paid to Canada Cartage in the amount of $5.6 million. Direct agreed to ensure that net working capital in the amount of $7.0 was delivered by Direct to CCD. The Direct acquisition agreement required that any working capital deficiency below the target be paid by Direct. The final working capital payments were finalized prior to December 31, 2006 with a working capital deficiency in the amount of $1.3 million being paid by Direct to CCD. Units Outstanding As at December 31, 2006 the following units and Class B LP units (exchangeable on a one-for-one basis into units of the Fund) were outstanding: Summary of Units Outstanding ------------------------------------------------------------------------- Issued & Outstanding % of Total ---------------------------- ------------------- Units 12,518,977 67.3% Class B LP Units 6,079,562 32.7% ------------------------------------------------------------------------- Total (Fully Diluted) 18,598,539 100.0% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Each unit entitles the holder to participate equally in all allocations and distributions of the Fund and to one vote at all meetings of unitholders. Class B LP units represent the retained interest of management and other insiders. Each Class B LP unit entitles the holder to participate equally in all allocations and distributions from CCD but does not entitle the holder to a vote. Each Class B LP unit may be exchanged for a unit of the Fund. The Class B LP units are classified under unitholders' equity in the Fund's consolidated balance sheet at December 31, 2006. Long Term Incentive Plan and Unit Option Plan The Fund has established a long term incentive plan ("LTIP"). The purpose of the LTIP is to provide eligible participants with compensation opportunities which will encourage the ownership of Units, enhance the Fund's ability to attract, retain and motivate key personnel, and to reward certain senior key employees for their significant performance and associated increases in distributable cash per unit of the Fund. Participation rights in the LTIP have been awarded to certain employees. The Fund met the distributable cash per unit levels as set out at the IPO, however, no accrual has been made for compensation expense in respect of the LTIP for the 293-day period ended December 31, 2006. The Fund has a unit option plan for designated senior executives of the Fund. The purpose of the option plan is to encourage ownership of the Fund by officers and key employees. Under the terms of the plan, 929,926 units (or approximately 5% of the outstanding units assuming conversion of all Class B LP units into units of the Fund) have been reserved by the Fund for issuance. On May 16, 2006, 675,000 unit options were granted to certain members of management and 33,750 unit options were granted to independent directors at an exercise price of $11.10. Subsequent to the initial grant, on September 13, 2006, an additional 10,258 options were granted at an exercise price of $10.80. On December 11, 2006 an additional 60,000 unit options were granted at an exercise price of $9.11 to two key executives that joined the Fund during the period. As at December 31, 2006, there were 789,008 unit options granted. Under the terms of the plan, options granted to management vest at the end of a four year period from the grant date subject to the distributable cash of the Fund exceeding the prescribed threshold of $26.6 million at December 31, 2009 while options granted to independent directors vest 25% annually from the date of grant. The terms of the options granted may be amended by the Fund. Options granted under the plan are settled in units. The option plan is subject to approval by unitholders of the Fund. During the 293-day period ended December 31, 2006, the Fund recorded compensation expense of approximately $0.1 million related to options granted, with a corresponding adjustment to contributed surplus. The fair value of each option granted was estimated on the date of the grant using the Black-Scholes option pricing model and certain assumptions outlined in the notes to the interim consolidated financial statements. OFF-BALANCE SHEET ARRANGEMENTS As at December 31, 2006, the Fund did not have any off-balance sheet arrangements other than those contractual obligations of CCD and its operating subsidiaries outlined below: Summary of Minimum Lease Payments ------------------------------------------------------------------------- 2012 & ($ thousands) Total 2007 2008 2009 2010 2011 Thereafter ------------------------------------------------------------------------- Premises 45,445 6,247 6,272 5,964 5,580 4,780 16,602 Equipment(1) 57,880 17,819 16,121 13,779 7,270 2,183 708 ------------------------------------------------------------------------- Total 103,325 24,066 22,393 19,743 12,850 6,963 17,310 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Represents future minimum lease payments under leases for equipment. The Fund has an interest rate swap agreement with its senior lenders for a three year term to effectively fix the interest rate on the $40 million term loan. The Fund utilizes hedge accounting and therefore the interest expense recorded is recognized as if the cash flow hedge and the hedged item were a single instrument. In the ordinary course of business, the Fund is involved in litigation primarily consisting of personnel matters and claims arising from vehicle accidents. It is management's opinion that the ultimate outcome of litigation is unlikely to have a material adverse effect on the Fund's financial position or operating results. As at December 31, 2006, the Fund has provided letters of credit and performance guarantees of approximately $8.2 million to some of its customers. As at December 31, 2006, the Fund had commitments totaling $3.0 million to purchase equipment (trucks and trailers) from various manufacturers. TRANSACTIONS WITH RELATED PARTIES The Fund defines related parties as individuals or companies under control by these individuals who can influence the direction or management of the Fund or any of its subsidiaries. Related parties include the trustees of the Fund and the directors and officers of the Fund's subsidiaries. Included in the Fund's consolidated statement of earnings and deficit are the following related party transactions for the 293-day period ended December 31, 2006: Summary of Related Party Transactions 293-day Period Ended ($ thousands) December 31, 2006 ---------------------- Revenue from company under significant influence 2,013 Rent charged by companies under control of certain officers & directors of a subsidiary of the Fund(1) 2,769 Management fees earned from company under significant influence 90 (1) Details about the related party rents are contained in the final prospectus of the Fund dated March 3, 2006 in the section titled "Interests of Management and Others in Material Transactions - Real Property Leases". In connection with the IPO and acquisition of Direct, the Fund entered into a consulting agreement with the then CEO and the then President of Direct for a period of two years following closing. The total fees pursuant to the consulting agreements were reserved at the IPO and therefore are not expensed by the Fund. For the 293-day period ended December 31, 2006 approximately $0.16 million in consulting fees were paid. As at December 31, 2006, approximately $0.34 million is included in accrued liabilities representing future consulting payments. On December 15, 2006, the working capital payments were paid and the amounts held in escrow were distributed to Canada Cartage and Direct (See "Working Capital Payment"). EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES CCD maintains disclosure controls and procedures designed to provide reasonable assurance that all public disclosures, including information required to be disclosed in our annual filings, interim filings and other reports filed or submitted by us, is collected, recorded, processed, summarized and reported within the time periods specified under Canadian securities legislation. Based on management's evaluation of our disclosure controls and procedures, as of the end of the period covered in this report, we believe the controls and procedures currently in place are operating effectively. These procedures ensure that material information is accumulated and communicated to the CEO and CFO as appropriate to allow for timely decisions regarding disclosure issues. INTERNAL CONTROL OVER FINANCIAL REPORTING CCD's management is responsible for establishing and maintaining effective internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting, and the preparation of financial statements for external purposes in accordance with Canadian GAAP. Management assessed the effectiveness of the design of internal control over financial reporting as at December 31, 2006, by utilizing criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on our evaluation, management, including the Chief Executive Officer and Chief Financial Officer, concluded that internal controls over financial reporting is designed effectively. The evaluation, however, highlighted a number of process improvement opportunities which the CCD will pursue. In management's opinion, these issues are not considered significant and, where applicable, mitigating controls are in place. It is management's opinion that these process improvement opportunities are inherently related to the size of the issuer and its recent transformation from a family private-owned Company to a publicly-traded issuer on March 14, 2006. Management is committed to a continuous program of strengthening the overall control environment. The foundation of this program revolves around four key initiatives: - Building on our sub-certification process by cascading the accountability for compliance to middle management; - Formalizing policies and procedures for our significant business processes; - Acquiring a versatile software solution to catalogue, monitor and report on the compliance elements; and - Recruiting appropriate staff and developing training programs to support the compliance process. There have been no significant changes to CCD's internal controls during the quarter ended December 31, 2006, which have materially affected, or are likely to materially affect, internal control over financial reporting. FINANCIAL INSTRUMENTS The Fund's financial instruments comprising accounts receivable, accounts payable and accrued liabilities, distributions payable and, amounts due to related parties are all short-term in nature and as such, their carrying values approximate fair values. The fair value of loans receivable, the term loan, and capital lease obligations all approximate their carrying value based on estimated future discounted cash flows. The Fund's exposure to interest rate risk is not considered to be significant. The Fund entered into an interest rate swap agreement to effectively fix the interest rate on the term loan. Amounts drawn on the operating facility ($1.9 million as at December 31, 2006) are subject to floating rates based on the bank's prime rate, however, this exposure is not considered to be significant. The Fund is exposed to credit risk with respect to its accounts receivable; however, this is minimized by the Fund's diverse and high quality customer base. Creditworthiness of customers is monitored continuously. The Fund also maintains a provision for potential credit losses, which is considered to be adequate. On April 20, 2006, the Fund entered into an interest rate swap agreement to minimize exposure to fluctuations in interest rates. These agreements require the periodic exchange of payments without the exchange of the notional principal amount on which the payments are based. These instruments are not recognized in the consolidated financial statements on inception. Payments and receipts under the interest rate swap contracts are recognized as adjustments to interest expense. The Fund formally assesses and documents all relationships between hedging instruments and hedged items to determine whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. The Fund's policy is not to utilize derivative financial instruments for trading or speculative purposes. At December 31, 2006, the aggregate fair market value of the interest rate swap agreements were ($0.368) million. CRITICAL ACCOUNTING POLICIES AND ESTIMATES In preparing its financial statements and accounting for the underlying transactions and balances, the Fund has applied the accounting policies as disclosed in the notes to the consolidated financial statements of the Fund. Preparation of the Fund's financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. The Fund evaluates estimates and judgments on an ongoing basis. Estimates are based on historical experience and various other factors believed to be reasonable under the circumstances. The Fund considers the policies discussed below as critical to an understanding of its financial statements because their application places the most significant demands on management's judgment, with financial reporting results relying on estimates about the effect of matters that are inherently uncertain. Specific risks for these critical accounting policies are described in the following paragraphs. The impact and any associated risks related to these policies on the Fund's business operations are discussed throughout this MD&A where such policies affect reported and expected financial results. For a detailed discussion of the application of these and other accounting policies, see "Significant Accounting Policies" in the notes to the Fund's interim consolidated financial statements. Basis of Presentation The interim consolidated financial statements of the Fund have been prepared in accordance with Canadian generally accepted accounting principles. Financial information prepared at interim dates inherently involves greater reliance on estimates than at year-end. In the opinion of management, the accompanying unaudited interim consolidated financial statements include all adjustments of a normal recurring nature to present fairly the consolidated financial position of the Fund as at December 31, 2006. Certain information and disclosures normally required to be included in the notes to the annual financial statements have been condensed or omitted. The interim consolidated financial statements should be read in conjunction with the information contained in the prospectus of the Fund dated March 3, 2006. Principles of Consolidation The interim consolidated financial statements include the accounts of the Fund, CCD and its wholly-owned subsidiaries including Canada Cartage Diversified Operating Trust, Canada Cartage Diversified GP Inc., Direct General Partner Corporation, Canada Cartage System Limited Partnership, Sonar Limited Partnership, Direct Limited Partnership, Mel Hall Transport Limited and Premier Truck Leasing Limited. All significant intercompany transactions and balances have been eliminated on consolidation. Capital Assets Capital assets are recorded at cost less accumulated amortization. The method of calculating amortization expense, as outlined in the notes to the interim unaudited consolidated statements, is an estimate. The Fund considers its method and rates of amortization reasonably reflect the annual decline in the fair value of its plant and equipment to ensure that the net book value of assets approximates fair market value. Repairs and maintenance expenditures are charged to operating expenses as incurred. Goodwill and Identifiable Intangible Assets The Fund's identifiable intangible assets are recorded at their fair value on the date of acquisition. Intangible assets are comprised of trademarks, which are considered to have an indefinite life, customer relationships, which are being amortized over 10 years on a straight-line basis, and information technology, which is being amortized over 5 years on a straight-line basis. Goodwill represents the excess of the purchase consideration over the fair value of the net tangible and intangible assets acquired at the date of acquisition. Goodwill is not amortized. The valuation of customer relationships is based on discounted cash flows expected to be generated from the acquired customer contracts over the estimated relationship period. Certain assumptions were used to determine the fair value of the customer relationships, the most sensitive of which include a discount rate applied to future cash flows equivalent to the Fund's average cost of capital and the projected revenue per existing customer based on historical revenue patterns. Any change in these assumptions could result in a different fair value allocated to customer relationships. Goodwill and intangible assets with indefinite useful lives are tested for impairment at least annually, by comparing their fair values with their book values. Leases Leases are classified as either capital or operating. Those leases which transfer substantially all the benefits and risks of ownership of property to the Fund are accounted for as capital leases. The capitalized lease obligations are included in long-term obligations and reflect the present value of future lease payments, discounted at an appropriate interest rate. Leases not classified as capital leases are accounted for as operating or maintenance leases with payments included in operating expenses in the period incurred. Revenue Recognition The Fund's services are provided based upon orders and contracts with the customers that include fixed or determinable prices based upon daily, hourly or job rates. Revenue is recognized as services are rendered, when collectability is reasonably assured and fees are considered fixed or determinable. RISKS & UNCERTAINTIES General Economic Conditions CCD's business is dependent, in part, on customer's demand for transportation services which is effected by national and regional economic conditions. Economic factors over which CCD has little or no control. Consequently, a decline in general economic growth may adversely impact CCD's performance. CCD cannot predict the impact of future economic conditions and there is no assurance that the operations of CCD will continue to be profitable. Labour Relations Future results are dependent on CCD's ability to hire and retain quality drivers and mechanics. In particular out West there has been a significant increase in demand for labour requiring additional effort by CCD to ensure an appropriate level of driver staffing. Any significant further increase in labour could materially impact our future results. Customer Relationships It has been assumed that CCD will maintain or grow its customer base. This is a reasonable assumption given CCD's historically high customer retention rate. However, most of CCD's customer contracts are renewed annually meaning customers are not locked in for the long term. Accordingly, there is a possibility that CCD's customer base could shrink over a short period of time. Fuel Costs Similar to labour costs, CCD has assumed it will be able to pass through increases in the costs of diesel fuel. However, if diesel fuel costs were to significantly increase, customers may be unwilling (or unable) to pay for such cost increases which could materially impact CCD's future results. Government Regulations Changes in regulations and laws applicable to CCD could increase operating costs and have a material adverse effect on CCD's operations and financial condition thereby reducing cash available for distribution to Unitholders. The right to continue to hold applicable licenses and permits is generally subject to maintaining satisfactory compliance with regulatory and safety guidelines, policies and laws. Although CCD is committed to compliance with laws and safety, there is no assurance that CCD will be in full compliance at all times with such guidelines, policies and laws. Consequently, at some future time, CCD could be required to incur significant costs to maintain or improve its compliance record. Accidents CCD is exposed to liabilities that are unique to the services that CCD provides. Such liabilities may relate to an accident or incident involving one of CCD's trucks, and could involve significant potential claims of injured employees and other third parties. Substantial claims resulting from an accident in excess of its related insurance coverage would harm CCD's financial condition and operating results. Moreover, any accident or incident involving CCD, even if CCD is fully insured or not held liable, could negatively affect CCD's reputation among customers and the public, thereby making it more difficult for CCD to compete effectively, and could significantly affect the cost and availability of insurance in the future. Availability of Future Financing CCD has assumed it has in place all necessary financing, or reasonable access to financing, to support its future business objectives. However, the recent "Tax Fairness Plan" announced by the Department of Finance (Canada) (see "Risk Factors - Income Tax Matters") is expected to make it more difficult to finance acquisitions through the use of Units. This could impact CCD's ability to make strategic accretive acquisitions in accordance with its business objectives. Labour Costs In connection with increased labour demands, there has been a rise in labour costs. CCD has assumed that these costs will be passed on (after a lag period) by CCD to its customers through changes in contract rates, which is typically the case. However, if labour costs increase, customers may be unwilling (or unable) to pay for such cost increases which could materially impact CCD's future results. Transition to Leases Historically, Canada Cartage and Direct financed equipment purchases (trucks and trailers) using a combination of operating and maintenance leases, capital leases and capital expenditures. As outlined in the Fund's final prospectus, management intends to finance substantially all equipment purchases required to replace existing equipment and to support new contracts using leases. As a result, equipment lease expense is expected to be higher than amounts historically reflected in the Pre-IPO Results. A discretionary reserve is deducted in the calculation of distributable cash to reflect the higher equipment lease expense. The reserve is based on various estimates and assumptions that could ultimately be inaccurate. Therefore, there is a risk that the reserve is inadequate and that an increase in equipment lease expense could reduce EBITDA and operating cash flow which in turn could impact the Fund's ability to make cash distributions. This could have a material adverse effect on the Fund's business, financial condition, liquidity and results of operations The foregoing risks and uncertainties should not be considered an exhaustive list. For further information relating to the risks and uncertainties of the Fund and its subsidiaries, see "Risk Factors" detailed in the Fund's final prospectus dated March 3, 2006 available from SEDAR at www.sedar.com. SUBSEQUENT EVENTS The Fund declared a cash distribution of $0.083 per unit for the months of January, February and March, 2007. The monthly cash distribution for March, 2007 will be paid on April 13, 2007 to unitholders of record at the close of business on March 31, 2007. This cash distribution covers the period commencing March 1, 2007 to March 31, 2007. On February 2, 2007, the Fund, through CCD, completed the acquisition of certain operating assets of MacCosham Inc. The acquired operating assets are primarily based in Edmonton, Alberta and provides warehouse, distribution and related high value transportation services to customers operating in various industries and in 2006 had annual revenue of approximately $4.0 million. OUTLOOK Management believes that cash flow from operations, cash balances, funds available under the secured credit facilities and funds available under various lease facilities will be sufficient to meet its currently anticipated ongoing requirements for capital expenditures, working capital, cash distributions at current levels and organic growth. The Fund's ability to satisfy its obligations will be dependent upon future financial performance, which in turn will be subject to financial and other factors, including elements beyond management's control. See "Risks & Uncertainties". Revenue growth opportunities in 2007 are expected to continue to be strong. The Fund's sales pipeline is healthy, with numerous opportunities to gain additional share of the $27 billion private fleet segment. As a result of the long sales cycle, which reflects the strategic nature of the decision to outsource, new business and contracts are difficult to forecast and the timing will ultimately impact revenue from new business in 2007. Organic growth from existing customers will continue as the west benefits from strong economic conditions together with more modest growth in the East. Contribution of recently completed acquisitions is also expected to have a positive impact on revenue. Operating expenses in 2007 are expected to increase modestly. The higher labour and owner-operator costs experienced in Alberta will continue to have an impact on margins. Management is focused on attaining price adjustments consistent with our "cost-plus" approach to recapture the increase in direct costs, the benefit of which will be seen in the first half of 2007. Equipment lease expense is expected to be higher as purchases to replace existing equipment and to support new business are financed with leases. Seasonal demand for the Fund's services will impact quarterly financial performance in 2007. Due to seasonality, revenue is typically weakest in the first quarter, followed by the fourth quarter, with the second and third quarter typically having the strongest revenue. Many of the Fund's costs, including equipment lease expense, occupancy costs, general and administrative expenses, amortization and interest expense, remain relatively stable throughout the year. Similarly, the payout ratio will reflect this seasonality and is expected to be higher in the first quarter relative to the remaining quarters. Management is focused on growing the business by: 1. Accelerating growth with existing customers by expanding our business into new regions across the country and/or offering new transportation-related services; 2. Winning new business from non-trucking companies seeking to outsource their transportation requirements to a dedicated provider such as Canada Cartage; and 3. Exploring opportunities to selectively acquire complementary businesses that expand geographically and/or broaden our service offering, such as our recent acquisitions of All-Ontario and the warehouse and high value transportation assets of MacCosham Inc. Execution of our three point growth strategy and continuing to focus on operational excellence will allow the Fund to continue to meet its objective of providing unitholders with stable monthly cash distributions and fulfill our commitment to create unitholder value over the long term. FORWARD LOOKING STATEMENTS This AIF contains forward-looking statements. Statements other than statements of historical fact contained in this AIF may be forward-looking statements. Readers can identify many of these statements by looking for words such as "anticipate", "should", "would", "could", "believe", "continue", "expect", "intend", "may", "will", "project" and "estimate" or similar words or the negative thereof. There can be no assurance that the plans, intentions or expectations upon which these forward-looking statements are based will occur. Forward-looking statements are subject to risks, uncertainties and assumptions and should not be read as guarantees or assurances of future performance. Accordingly, readers are cautioned not to place undue reliance on any forward-looking information contained in this AIF. Statements containing forward-looking information reflect Management's current beliefs and assumptions based on information in its possession on the date of this AIF. Although Management believes that the expectations represented in such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct. In particular, this AIF, and the documents incorporated by reference, contain forward-looking statements pertaining to the following: - CCD's future operating results; - CCD's future financial condition; - CCD's objectives and intended courses of action; and - Future cash distributions by CCD and the Fund. Statements containing forward-looking information by their nature involve numerous assumptions and significant known and unknown facts and uncertainties of both a general and a specific nature. The factors that are most likely to affect future results or could cause results to differ materially from those expressed in the forward-looking statements contained herein are outlined under "Risks & Uncertainties". These factors should not be construed as exhaustive. For further information relating to the risks and uncertainties of the Fund and its subsidiaries, see "Risk Factors" detailed in the Fund's final prospectus dated March 3, 2006 available from SEDAR at www.sedar.com. Although the forward-looking statements are based upon what Management believes to be reasonable assumptions, the Fund cannot assure investors that actual results will be consistent with these forward-looking statements. When relying on forward-looking statements to make decisions, investors should ensure the preceding information is carefully considered. The forward-looking statements contained herein are expressly qualified in their entirety by this cautionary statement. The forward-looking statements included in this AIF are made as of the date of this AIF and, subject to applicable laws neither the Fund nor any other party assumes any obligation to update or revise them to reflect new events, assumptions or circumstances that the Fund or CCD may become aware of after the date of this AIF. Undue reliance should not be placed on forward-looking statements. ADDITIONAL INFORMATION Additional information, including the Fund's final prospectus dated March 3, 2006 is from SEDAR at www.sedar.com or the Fund's investor relations website at www.canadacartageincomefund.com. CANADA CARTAGE DIVERSIFIED INCOME FUND CONSOLIDATED BALANCE SHEET (In thousands of Canadian dollars except number of units and per unit amounts) (unaudited) As at December 31, 2006 $ ------------------------------------------------------------------------- ASSETS Current Accounts receivable 51,013 Current portion of loan receivable (note 4) 300 Amounts due from related parties (note 5) 4,418 Prepaid expenses and sundry assets 3,742 ------------------------------------------------------------------------- Total current assets 59,473 Loan receivable (note 4) 1,225 Investments (note 6) 885 Capital assets (note 7) 35,543 Intangible assets (note 8) 107,679 Goodwill (note 3) 32,947 Deferred financing costs (note 9) 568 ------------------------------------------------------------------------- 238,320 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES AND UNITHOLDERS' EQUITY Current Bank indebtedness (note 9) 1,993 Distributions payable (note 11) 5,967 Accounts payable and accrued liabilities 24,903 Current portion of acquisition notes payable (note 10) 250 Current portion of obligations under capital leases (note 12) 2,301 ------------------------------------------------------------------------- Total current liabilities 35,414 Term loan (note 9) 40,000 Acquisition notes payable (note 10) 205 Obligations under capital leases (note 12) 3,197 ------------------------------------------------------------------------- Total liabilities 78,816 ------------------------------------------------------------------------- Commitments and contingencies (note 16) Unitholders' equity Units (note 11) 172,721 Contributed surplus (note 21) 76 Deficit (13,293) ------------------------------------------------------------------------- Total unitholders' equity 159,504 ------------------------------------------------------------------------- 238,320 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The accompanying notes form an integral part of the consolidated financial statements. CANADA CARTAGE DIVERSIFIED INCOME FUND CONSOLIDATED STATEMENT OF EARNINGS AND DEFICIT (In thousands of Canadian dollars except number of units and per unit amounts) (unaudited) March 14, 2006 to December 31, 2006 $ ------------------------------------------------------------------------- Revenue 267,090 ------------------------------------------------------------------------- Expenses Direct, general, selling and administrative (note 14) 243,597 Amortization of intangible assets 8,928 Amortization of capital assets 11,143 Amortization of deferred financing costs 203 Interest expense (net of interest income) 1,900 Gain on sale of capital assets (4) ------------------------------------------------------------------------- 265,767 ------------------------------------------------------------------------- Earnings before undernoted item 1,323 Share of earnings in significantly influenced companies 219 ------------------------------------------------------------------------- Net earnings for the period 1,542 Deficit, beginning of period - Distributions to Unitholders (note 11) (14,835) ------------------------------------------------------------------------- Deficit, end of period (13,293) ------------------------------------------------------------------------- Net earnings per unit Basic 0.08 Diluted 0.08 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Weighted average number of units outstanding (note 11) Basic (000's) 18,599 Diluted (000's) 19,310 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The accompanying notes form an integral part of the consolidated financial statements. CANADA CARTAGE DIVERSIFIED INCOME FUND CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands of Canadian dollars except number of units and per unit amounts) March 14, 2006 to December 31, 2006 $ ------------------------------------------------------------------------- OPERATING ACTIVITIES Net earnings for the period 1,542 Add (deduct) items not involving cash: Amortization of intangible assets 8,928 Amortization of capital assets 11,143 Amortization of deferred financing costs 203 Compensation expense (note 21) 76 Share of earnings in significantly influenced companies (219) Gain on sale of capital assets (4) ------------------------------------------------------------------------- 21,669 Net change in non-cash working capital items (note 18) (4,072) ------------------------------------------------------------------------- Cash from operating activities 17,597 ------------------------------------------------------------------------- INVESTING ACTIVITIES Capital expenditures (2,347) Proceeds from disposal of capital assets 1,438 Proceeds of loan receivable and other assets 214 Distributions paid and advances to related parties in lieu of distributions (note 11) (13,286) Acquisitions, net of cash acquired (note 3) (109,316) ------------------------------------------------------------------------- Cash used in investing activities (123,297) ------------------------------------------------------------------------- FINANCING ACTIVITES Bank indebtedness, net (note 9) 1,993 Issuance of Units, net of issuance costs 110,925 Repayment of debt assumed on acquisitions (20,366) Repayment of obligations under capital leases (20,476) Proceeds of term loan (note 9) 40,000 Repayment of acquisition notes payable (note 10) (45) Financing costs (771) Repurchase of Class B LP Units on exercise of overallotment (5,560) ------------------------------------------------------------------------- Cash provided by financing activities 105,700 ------------------------------------------------------------------------- Net change in cash during the period - Cash, beginning of period - ------------------------------------------------------------------------- Cash, end of period - ------------------------------------------------------------------------- ------------------------------------------------------------------------- Supplemental cash flow information (note 18) The accompanying notes form an integral part of the consolidated financial statements. CANADA CARTAGE DIVERSIFIED INCOME FUND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2006 (In thousands of Canadian dollars except number of units and per unit amounts) (unaudited) 1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION Canada Cartage Diversified Income Fund (the "Fund") is an open ended, limited purpose, trust established under and governed by the laws of the Province of Ontario pursuant to the Declaration of Trust dated January 30, 2006 (amended and restated on March 14, 2006). The Fund was established to indirectly acquire and hold all of the Class A LP Units of CCD Limited Partnership ("CCD" or "CCD LP"), a partnership formed under the laws of Manitoba and 100% of CCD's general partner, Canada Cartage Diversified GP Inc. (the "GP"). The Fund was inactive prior to completing an initial public offering (the "IPO") of trust units ("Units") and the acquisition, indirectly through CCD LP, of the trucking and transportation logistics assets of each of Canada Cartage System, Limited ("CCSL") and Direct Integrated Transportation Inc. ("Direct") on March 14, 2006 (note 3). The Fund is a national provider of transportation services, specializing in fully outsourced, customer-located, dedicated trucking services and offers a number of related services including warehousing and distribution, general cartage, logistics and moving services. The Fund's business tends to follow a seasonal pattern with increased activity in the second half of the year as compared to the first half reflecting customers' demand for transportation services. Operating leases, occupancy costs, general and administrative expenses, amortization and interest expense remain relatively stable throughout the year. Distributions to Unitholders of the Fund are made monthly. These distributions are entirely dependent on the cash flow of CCD and its operating subsidiaries and their ability to make distributions to the Fund. Each Unitholder participates pro rata in the distributions of net earnings. Income tax obligations related to the distributions of net earnings by the Fund are the obligations of the Unitholders. These consolidated financial statements reflect the results of operations for the period from March 14, 2006 to December 31, 2006. As the Fund commenced operations on March 14, 2006, comparative information relating to the previous year is not provided. 2. SIGNIFICANT ACCOUNTING POLICIES These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles and reflect the significant accounting policies summarized below: (a) Principles of consolidation The consolidated financial statements include the accounts of the Fund and its wholly-owned subsidiaries including Canada Cartage Diversified Operating Trust, Canada Cartage Diversified GP Inc., Direct General Partner Corporation, CCD Limited Partnership, Canada Cartage System Limited Partnership, Sonar Limited Partnership, Direct Limited Partnership, Mel Hall Transport Limited and Premier Truck Leasing Limited. All significant inter-group transactions and balances have been eliminated on consolidation. (b) Use of estimates The preparation of the consolidated financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, the Fund evaluates its estimates, including those related to allowance for doubtful accounts, impairment of identifiable intangible assets and goodwill, future income taxes, allocations of the purchase price consideration, and useful lives of tangible and intangible long-lived assets. The Fund relies on historical experience and on various other assumptions that are believed to be reasonable under the circumstances in making judgments about the carrying value of assets or liabilities that are not readily apparent from other sources. Actual results could differ from those estimates under different assumptions or conditions. (c) Deferred financing costs Financing costs related to the senior secured facilities are capitalized and amortized on a straight-line basis over the term of the term loan. Amortization of deferred financing costs has been separately classified in the consolidated statement of earnings and deficit. (d) Capital assets Capital assets are recorded at cost less accumulated amortization. Amortization is provided on the following basis over the assets' estimated useful lives: On the declining balance method Motor trucks and trailers between 30% and 40% Equipment 20% Computer hardware 30% Computer software 40% On the straight-line method Leasehold improvements Over the remaining term of the lease Repairs and maintenance expenditures are charged to operating expenses as incurred. Management reviews the carrying amount of capital assets if events or circumstances indicate that the carrying amount may not be recoverable. Recoverability is measured by comparing the carrying amounts of a group of assets to the future undiscounted net cash flows expected to be generated by that group of assets. If the carrying amount is not recoverable, the Fund would recognize an impairment loss equal to the amount by which the carrying value of a group of assets exceeds their fair value. (e) Investments The Fund follows the equity method of accounting for its investments in companies in which it exercises significant influence. Under this method, the Fund's investments are carried at cost plus the Fund's equity share in the investee's undistributed earnings or loss. The Fund follows the cost method of accounting for its investments in companies in which it does not exercise significant influence. (f) Intangible assets The Fund's intangible assets are recorded at their fair value on the date of acquisition. Intangible assets are comprised of: (i) trademarks, which are considered to have an indefinite life; (ii) customer relationships, which are being amortized on a straight-line basis over their useful life which is estimated at 10 years; and (iii) information technology, which is being amortized on a straight-line basis over its useful life which is estimated at 5 years. The valuation of the trademarks uses a relief-from-royalty approach and which is based upon the present value of an expected after-tax royalty stream through licensing arrangements. The royalty rate reflects the rate that the owner of the trademarks would expect to receive if the trademarks were licensed. The valuation of customer relationships is based on discounted cash flows expected to be generated from the acquired customer contracts over the estimated relationship period after providing for contributory asset charges for other significant tangible and intangible assets that contribute to the generation of the cash flow stream. The valuation of the information technology uses an income approach that reflects the present value of an expected royalty stream and the benefits of any below market rental rate. Certain assumptions were used to determine the fair value of the intangible assets including the discount rate applied to future cash flows which is estimated as being equivalent to the Fund's average cost of capital, projections of future cash flows and estimates of appropriate royalty rates. Any change in these assumptions could result in a different fair value allocated to trademarks, customer relationships and information technology. Management reviews the carrying amount of the intangible assets, which have a finite life, if events or circumstances indicate that the carrying amount may not be recoverable. Recoverability is measured by comparing the carrying amounts of a group of intangible assets to the future undiscounted net cash flows expected to be generated by that group of intangible assets. If the carrying amount is not recoverable, the Fund would recognize an impairment loss equal to the amount by which the carrying value of a group of intangible assets exceeds their fair value. Management reviews the carrying amount of intangible assets, which have an infinite life, for possible impairment by evaluating discounted cash flows. Intangible assets are written down to their estimated fair value as determined by discounted cash flows when a decline is identified. (g) Goodwill Goodwill represents the excess of the purchase consideration over the fair value of the net tangible and intangible assets acquired at the date of acquisition. Goodwill is not amortized and is tested for impairment annually. The impairment test is carried out in two steps. In the first step, the carrying amount of a reporting unit is compared with its fair value. When the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not to be impaired and the second step of the impairment test is not required. The fair value of the reporting unit is based on management's estimates of future discounted cash flows. The second step is carried out when the carrying amount of a reporting unit exceeds its fair value, in which case, the implied fair value of the reporting unit's goodwill is compared with its carrying amount to measure the amount of the impairment loss, if any. The implied fair value of goodwill is determined in the same manner as the amount of goodwill is determined in a business combination, using the fair value of the reporting unit as if it was the purchase consideration. When the carrying amount of a reporting unit's goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to the excess. The Fund is also required to evaluate goodwill for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Certain indicators of potential impairment that could impact a reporting unit include, but are not limited to, the following: (a) a significant long-term adverse change in the Canadian trucking services industry that is expected to cause a substantial decline in revenues and/or direct costs; and (b) the loss of major customer contracts. (h) Leases Leases are classified as either capital or operating. Those leases which transfer substantially all the benefits and risks of ownership of property to the Fund are accounted for as capital leases. The capitalized lease obligations are included in long-term obligations and reflect the present value of future lease payments, discounted at an appropriate interest rate. Leases not classified as capital leases are accounted for as operating leases with payments included in operating expenses in the period incurred. (i) Exchangeable securities The Fund has applied the recommendations of the CICA Emerging Issues Committee's EIC-151, which provides guidance on the presentation of exchangeable securities issued by a subsidiary of an income trust. In order to be presented as equity, the exchangeable securities must have distributions that are economically equivalent to distributions on units issued directly by the Fund and the exchangeable securities must also ultimately be exchanged for units of the Fund. The Class B LP units issued by a subsidiary of the Fund meet the above criteria and accordingly, have been presented as equity. (j) Revenue recognition The Fund's services are provided based upon orders and contracts with the customers that include fixed or determinable prices based upon daily, hourly or job rates. Revenue is recognized as services are rendered, when collectability is reasonably assured and fees are considered fixed or determinable. (k) Derivative financial instruments Interest rate swap contacts are designated as hedges of the cash flow relating to interest payments of the outstanding long-term debt or a portion thereof. The interest payments relating to swap contracts are recorded in net earnings over the life of the underlying transaction on an accrual basis as an adjustment to interest expense. (l) Income taxes Under the terms of the Income Tax Act (Canada), the Fund is not subject to income taxes to the extent that its taxable income in a year is paid or payable to a Unitholder. Accordingly, no provision for current income taxes for the Fund is made. In addition, the Fund is not subject to the recommendations of CICA section 3465 Income Taxes, as the Fund is contractually committed to distribute to its Unitholders all or virtually all of its taxable income and taxable capital gains that would otherwise be taxable in the Fund. The Fund intends to continue to meet the requirements under the Income Tax Act (Canada) applicable to such trusts, and there is no indication that the Fund will fail to meet those requirements. The Fund's operating subsidiaries, Mel Hall Transport Inc. and Premier Truck Leasing Inc., are subject to CICA section 3465 and to corporate income taxes as computed under the Income Tax Act (Canada). Mel Hall Transport Inc. and Premier Truck Leasing Inc. follow the liability method with respect to accounting for income taxes. Future tax assets and liabilities are determined based on differences between the carrying amount and the tax basis of assets and liabilities (temporary differences). Future income tax assets and liabilities are measured using the substantially enacted tax rates that will be in effect when these differences are expected to reverse. Future income tax assets, if any, are recognized only to the extent that, in the opinion of management, it is more likely than not that the assets will be realized. (m) Net earnings per unit Net earnings per unit is calculated by dividing net earnings by the weighted average number of units outstanding during the period. For purposes of the weighted average number of units calculation, units are determined to be outstanding from the date they are issued. (n) Foreign currency translation Accounts in foreign currency have been translated into Canadian dollars as follows: (i) Monetary items - at exchange rates in effect at the balance sheet date; (ii) Non-monetary items - at exchange rates in effect on the dates of the transactions; and (iii) Revenue and expenses - at average exchange rates prevailing during the period. Gains and losses arising from foreign currency translation are included in operations. 3. ACQUISITIONS Initial acquisitions On March 14, 2006, through a series of transactions, the Fund acquired certain assets of CCSL and Direct for cash consideration of $104,376, a payable of $3,520 relating to the net working capital adjustment and the issuance of 6,770,942 Class B LP Units. The acquisitions were completed in conjunction with the initial public offering of 12,418,977 Units, including the over-allotment of 591,380 Units. These acquisitions were accounted for under the purchase method of accounting with the purchase price being allocated to the fair value of the acquired assets and liabilities as follows: CCSL Direct Total $ $ $ ------------------------------------------------------------------------ Net assets acquired Net working capital 20,558 5,691 26,249 Capital assets 22,321 21,404 43,725 Other long-term assets 1,804 486 2,290 Trademarks 3,700 2,450 6,150 Customer relationships 64,083 43,557 107,640 Information technology 2,300 - 2,300 Goodwill - 32,268 32,268 Long-term debt (13,864) (6,502) (20,366) Obligations under capital leases (14,637) (10,093) (24,730) ------------------------------------------------------------------------ 86,265 89,261 175,526 ------------------------------------------------------------------------ ------------------------------------------------------------------------ Consideration Cash paid, net of cash acquired of $1,250 32,354 71,942 104,296 Working capital adjustment payable 4,800 (1,280) 3,520 Issuance of Class B LP Units 49,111 18,599 67,710 ------------------------------------------------------------------------ 86,265 89,261 175,526 ------------------------------------------------------------------------ ------------------------------------------------------------------------ As part of the acquisitions, the Fund settled long-term debt in the amount of $20,033 and obligations under capital leases in the amount of $18,759. The goodwill as determined in this transaction is not deductible for tax purposes. During the period ended December 31, 2006, the Fund physically verified the capital assets taken over from CCSL. The Fund engaged an independent valuator to undertake a valuation of the capital assets and intangible assets acquired on the acquisition. Based on the Fund's physical verification and the assessment by the independent valuators, the Fund increased the value of intangibles by approximately $4,100 and decreased the value of capital assets by approximately $4,100 . Subsequent Acquisitions On October 27, 2006, the Fund acquired selected assets of All-Ontario Transport Limited, a corporation existing under the laws of Ontario. These assets are comprised mainly of motor trucks and trailers, customer relationships and other intangible assets. Total $ ------------------------------------------------------------------------ Assets acquired Capital assets 804 Customer relationships 517 Goodwill 679 ------------------------------------------------------------------------ Consideration 2,000 ------------------------------------------------------------------------ ------------------------------------------------------------------------ Of the total consideration, cash consideration of $1,500 was paid at the closing date and the balance is payable in 24 equal monthly installments along with interest at 7% per annum (note 10). The purchase was funded through the operations of the Fund. The goodwill as determined in this transaction is deductible for tax purposes. 4. LOAN RECEIVABLE Loan receivable consists of the following: December 31, 2006 $ ------------------------------------------------------------------------ Interest bearing at prime plus 2%, with monthly repayments of $25 plus interest, receivable from Scott Woods Transport Inc., a company under significant influence, and collateralized by a general security agreement over all the assets of Scott Woods Transport Inc. 1,525 Less: current portion 300 ------------------------------------------------------------------------ 1,225 ------------------------------------------------------------------------ ------------------------------------------------------------------------ 5. AMOUNTS DUE FROM RELATED PARTIES The amounts due from certain Class B LP Unitholders are unsecured, non-interest bearing and due on demand. These amounts are advanced in lieu of the distributions payable to these Class B LP Unitholders of $4,418. An equivalent amount has been included in distributions payable (note 11). The amount due from related parties and the related distribution payable have been settled on first business day of 2007. 6. INVESTMENTS Investments consist of the following: December 31, 2006 $ ------------------------------------------------------------------------ Investment in significantly influenced companies The Logistics Alliance Inc. 1 Scott-Woods Transport Inc. 399 Investment in company not under significant influence United Van Lines (Canada) Ltd. 485 ------------------------------------------------------------------------ 885 ------------------------------------------------------------------------ ------------------------------------------------------------------------ 7. CAPITAL ASSETS Capital assets consist of the following: December 31, 2006 ------------------------------------------------------------------------ Net Accumulated carrying Cost amortization value $ $ $ ------------------------------------------------------------------------ Motor trucks and trailers 34,564 8,394 26,170 Motor trucks and trailers under capital leases 4,684 1,298 3,386 Equipment 4,833 666 4,167 Computer hardware 1,109 246 863 Computer software 593 304 289 Leasehold improvements 903 235 668 ------------------------------------------------------------------------ 46,686 11,143 35,543 ------------------------------------------------------------------------ ------------------------------------------------------------------------ Included in equipment are assets acquired under capital leases that have original cost of $1,244 and related accumulated amortization of $186. 8. INTANGIBLE ASSETS Intangible assets consist of the following: December 31, 2006 ------------------------------------------------------------------------ Net Accumulated carrying Cost amortization value $ $ $ ------------------------------------------------------------------------ Intangible assets with infinite life Trademarks 6,150 - 6,150 ------------------------------------------------------------------------ Intangible assets with finite life Customer relationships 108,157 8,561 99,596 Information technology 2,300 367 1,933 ------------------------------------------------------------------------ 110,457 8,928 101,529 ------------------------------------------------------------------------ 116,607 8,928 107,679 ------------------------------------------------------------------------ ------------------------------------------------------------------------ 9. SECURED CREDIT FACILITIES CCD LP has secured credit facilities as follows: (i) Operating facility of up to $15,000 for general corporate purposes. The operating facility has a 364-day term expiring in March 2007 and may be extended annually upon obtaining written permission from the lender; and (ii) Term loan of $40,000 maturing in March 2009 and may be renewed for one additional year upon obtaining written permission from the lender. There are no scheduled repayments of principal required prior to maturity. Amounts utilized under the secured credit facilities are repayable without any prepayment penalties and bear interest at a floating benchmark rate based on the Canadian dollar prime rate or the banker's acceptance rate plus, in each case, an applicable margin to those rates. Amounts drawn under the Operating facility and Term loan at December 31, 2006 are as follows: $ ------------------------------------------------------------------------ Operating facility 1,993 Term loan, weighted effective interest rate 5.96% 40,000 ------------------------------------------------------------------------ In addition to the Operating facility and Term loan, the secured credit facilities provide for an interest rate swap facility for the purposes of fixing the benchmark rate, which is the bankers acceptance rate as of the date of execution of the swap agreement, on the principal amount of the Term loan, a foreign exchange facility for the purposes of hedging foreign currency exposure up to $2,000 and a corporate credit card overdraft facility of up to $500. At December 31, 2006, the Fund utilized its interest rate swap agreement and there are no amounts outstanding under the foreign exchange facility or corporate credit card overdraft facility. In respect of the above credit facilities, substantially all of the assets of the Fund have been pledged as collateral. Under the terms of the secured credit facilities, CCD LP is required, amongst other conditions, to meet certain covenants all of which were met as at December 31, 2006. The interest related to the Term loan amounted to $1,915 for the period March 14, 2006 to December 31, 2006. This interest has been charged to the statement of earnings and deficit. The financing costs to arrange the secured credit facilities amounted to $771 and are being amortized over the initial term of the term loan. For the period March 14, 2006 to December 31, 2006, the amortization of deferred financing costs in the statement of earnings and deficit amounted to $203. 10. ACQUISITION NOTES PAYABLE Acquisition notes payable, as disclosed in note 3, consist of the following: December 31, 2006 $ ------------------------------------------------------------------------ All-Ontario Transport Limited Unsecured and payable in equal monthly installments of $21 along with interest at 7% per annum, maturing in October 2008. 455 Less: current portion 250 ------------------------------------------------------------------------ 205 ------------------------------------------------------------------------ ------------------------------------------------------------------------ The interest related to the acquisition notes payable amounted to $4 for the period March 14, 2006 to December 31, 2006. This interest has been charged to the statement of earnings and deficit. 11. UNITS Units consist of the following: Authorized Unlimited Units Each Unit represents a trust unit in the Fund that has an equal undivided beneficial interest in any distributions from the Fund. Each Unit is transferable, entitles the holder thereof to participate equally in distributions of the Fund, is not subject to future calls or assessments, has no conversion, retraction, or pre-emptive rights, is redeemable at any time on demand of the holder, and entitles the holder to one vote at all meetings of Unitholders that are required to be called and held annually. Unlimited Class B LP Units Each Class B LP Unit represents a Class B limited partnership unit in CCD LP. Each Class B LP Unit is exchangeable for one Unit, subject to adjustment in certain circumstances and entitles the holder thereof to participate equally in distributions of CCD LP. Issued and outstanding Fund Units Class B LP Units Total No. 000's $ No. 000's $ $ ------------------------------------------------------------------------ Balance, March 14, 2006 - 1 - - 1 Redemption of initial subscriber units(i) - (1) - - (1) Issuance of Units(ii) 12,419 110,925 - - 110,925 Issuance of Class B LP Units(iii) - - 6,771 67,710 67,710 Repurchase of Class B LP Units(iv) - - (591) (5,914) (5,914) Conversion of Class B LP Units(v) 100 1,000 (100) (1,000) - ------------------------------------------------------------------------ Balance, December 31, 2006 12,519 111,925 6,080 60,796 172,721 ------------------------------------------------------------------------ ------------------------------------------------------------------------ (i) The 100 initial subscriber units were redeemed for $1. (ii) On March 14, 2006, the Fund issued 11,827,597 Units and the over-allotment option was exercised on March 30, 2006 resulting in a further issuance of 591,380 Units. The total 12,418,977 Units were issued at the price of $10 per Unit for aggregate proceeds of $124,190, net of issuance costs of $13,265, resulting in net proceeds of $110,925. (iii) On March 14, 2006, CCD LP issued 6,770,942 Class B LP Units to acquire the operating businesses of CCSL and Direct (note 3). (iv) On March 30, 2006, the gross proceeds of exercising the over-allotment option, amounting to $5,914, were utilized to repurchase 591,380 of the Class B LP Units. (v) During the period ended December 31, 2006, 100,000 Class B units were converted into 100,000 Fund Units for $1,000. During the period March 14, 2006 to December 31, 2006, the Fund declared distributions to Class A and Class B unit holders as follows: Class A Unitholders Date of declaration Date paid $ ------------------------------------------------------------------------ March 14, 2006 April 13, 2006 596 April 13, 2006 May 15, 2006 1,034 May 15, 2006 June 15, 2006 1,034 June 15, 2006 July 15, 2006 1,034 July 15, 2006 August 15, 2006 1,034 August 15, 2006 September 15, 2006 1,034 September 15, 2006 October 13, 2006 1,034 October 13, 2006 November 15, 2006 1,034 November 15, 2006 December 15, 2006 1,034 December 15, 2006 January 12, 2007 1,042 ------------------------------------------------------------------------ Distributions for the period March 14, 2006 to December 31, 2006 9,910 ------------------------------------------------------------------------ ------------------------------------------------------------------------ Class B Unitholders Amount advanced in lieu of distributions Date loan up to advanced Amount December 31, 2006 in lieu of declared (See note 5) Date of declaration distributions $ $ ------------------------------------------------------------------------ March 14, 2006 April 13, 2006 298 298 April 13, 2006 May 15, 2006 515 515 May 15, 2006 June 15, 2006 515 515 June 15, 2006 July 15, 2006 515 515 July 15, 2006 August 15, 2006 515 515 August 15, 2006 September 15, 2006 515 515 September 15, 2006 October 13, 2006 515 515 October 13, 2006 November 15, 2006 515 515 November 15, 2006 December 15, 2006 515 515 December 15, 2006 January 12, 2007 507 - ------------------------------------------------------------------------ Distributions for the period March 14, 2006 to December 31, 2006 4,925 4,418 ------------------------------------------------------------------------ ------------------------------------------------------------------------ On January 1, 2007, the distributions payable to Class B Unitholders for 2006 were paid to the unitholders by offsetting the distributions payable against the advances given in 2006. 12. OBLIGATIONS UNDER CAPITAL LEASES Payments required under capital leases which expire between 2007 and 2012 are as follows: $ ------------------------------------------------------------------------ 2007 2,301 2008 1,311 2009 715 2010 704 2011 683 2012 260 ------------------------------------------------------------------------ 5,974 Less: amount representing interest (4.5%) 476 ------------------------------------------------------------------------ 5,498 Less: current portion 2,301 ------------------------------------------------------------------------ 3,197 ------------------------------------------------------------------------ ------------------------------------------------------------------------ Interest incurred for the period March 14, 2006 to December 31, 2006 amounted to $281. 13. PENSION PLAN The Fund has a defined contribution (money purchase) pension plan available to its employees. The contributions to the plan that were expensed by the Fund for the period March 14, 2006 to December 31, 2006 amounted to $254. 14. FOREIGN EXCHANGE Direct, general, selling and administrative expenses includes foreign exchange loss of $160. 15. INCOME TAXES None of the corporations within the Fund's structure have taxable income and as such no income taxed have been recorded in these financial statements. On October 31, 2006 the Canadian Department of Finance announced the "Tax Fairness Plan" whereby the income tax rules applicable to publicly traded trusts and partnerships will be significantly modified. This proposal also stated that certain income of (and distributions made by) these entities will be taxed in a manner similar to income earned by (and dividends paid by) a corporation. Under Canadian GAAP, income taxes are required to be accounted for using legislation which is enacted or at least "substantially enacted". As at December 31, 2006, the Finance Minister of Canada's proposed Plan does not meet the definition of "substantially enacted" legislation. The income tax impact of the proposed Plan has not been recognized in these consolidated financial statements. 16. COMMITMENTS AND CONTINGENCIES (i) The future minimum lease payments required over the next five years and thereafter under operating leases for motor trucks and trailers and the Fund's premises are as follows: Equipment Premises Total $ $ $ ------------------------------------------------------------------- 2007 17,819 6,247 24,066 2008 16,121 6,272 22,393 2009 13,779 5,964 19,743 2010 7,270 5,580 12,850 2011 2,183 4,780 6,963 2012 and thereafter 708 16,602 17,310 ------------------------------------------------------------------- (ii) In the ordinary course of business, the Fund is involved in litigation primarily consisting of personnel matters and claims arising from vehicle accidents. It is management's opinion that the ultimate outcome of litigation will not have a material adverse effect on the Fund's financial position or operating results. (iii) As at December 31, 2006, the Fund has provided letters of credit and performance guarantees of approximately $8,212 to some of its customers. (iv) As at December 31, 2006, the Fund has commitments totaling approximately $2,956 to purchase motor trucks and trailers from various manufacturers. 17. RELATED PARTY TRANSACTIONS The following table summarizes the Fund's related party transactions which are in the normal course of business and are measured at the exchange amount: March 14, 2006 to December 31, 2006 $ ------------------------------------------------------------------------ Revenue from: Companies under significant influence 2,013 Other transactions: Rent charged by company under control of an officer of the Fund 1,610 Rent charged by company under control of a Director of the Fund 1,159 Management fees earned from company under significant influence 90 ------------------------------------------------------------------------ ------------------------------------------------------------------------ Accounts receivable includes amounts receivable from companies under significant influence of $1,257. The predecessor owners of CCSL had agreed to pay consulting fees to the predecessor shareholders of Direct, one of whom is currently a Director of the GP. The predecessor owners of CCSL deposited the fees with the Fund. These fees are being paid from the monies given by the predecessor owners. These amounts are not being expensed and are being paid from the amount received from the predecessor owners. As at December 31, 2006, $341 has been included in accounts payable and accrued liabilities. 18. SUPPLEMENTAL CASH FLOW INFORMATION The net change in non-cash working capital items consists of the following: March 14, 2006 to December 31, 2006 $ ------------------------------------------------------------------------ Accounts receivable (5,660) Prepaid expenses and sundry assets (1,329) Accounts payable and accrued liabilities 2,917 ------------------------------------------------------------------------ (4,072) ------------------------------------------------------------------------ Interest paid 2,716 ------------------------------------------------------------------------ ------------------------------------------------------------------------ During the period from March 14, 2006 to December 31, 2006, the Fund paid no income taxes. 19. SEGMENTED INFORMATION The Fund operates in the transportation industry primarily in Eastern Canada and Western Canada. Geographic information for revenue, net earnings and long-lived assets is as follows: Earnings before share of earnings in significantly influenced Revenue companies $ $ ------------------------------------------------------------------------ Period from March 14, 2006 to December 31, 2006 Eastern 167,031 7,995 Western 100,059 6,983 Corporate - (13,655) ------------------------------------------------------------------------ Total 267,090 1,323 ------------------------------------------------------------------------ ------------------------------------------------------------------------ As at December 31, 2006 ------------------------------------------------------------------------ Eastern Western Total $ $ $ ------------------------------------------------------------------------ Capital assets 17,798 17,745 35,543 Intangible assets 65,165 42,514 107,679 Goodwill 679 32,268 32,947 ------------------------------------------------------------------------ ------------------------------------------------------------------------ 20. FINANCIAL INSTRUMENTS Fair value Accounts receivable, bank indebtedness, accounts payable and accrued liabilities, distributions payable and amounts due from related parties are all short-term in nature and as such, their carrying values approximate fair values. The fair values as at December 31, 2006 of the loan receivable in the amount of $1,525, term loan in the amount of $40,000, acquisition notes payable of $455 and obligations under capital leases in the amount of $5,499 approximate their carrying value. The fair values are based on the estimated future discounted cash flows using a comparable current market rate of interest. Credit risk The Fund is exposed to credit risk with respect to collectability of accounts receivable from its customers. Interest rate risk On April 20, 2006, the Fund entered into an interest rate swap agreement to minimize exposure to fluctuations in interest rates. This agreement requires the periodic exchange of payments without the exchange of the notional principal amount on which the payments are based. These instruments are not recognized in the consolidated financial statements on inception. Payments and receipts under the interest rate swap contracts are recognized as adjustments to interest expense. The Fund formally assesses and documents all relationships between hedging instruments and hedged items to determine whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. The Fund's policy is not to utilize derivative financial instruments for trading or speculative purposes. At December 31, 2006, the fair market value of the interest rate swap agreement was $(369). 21. LONG-TERM INCENTIVE PLAN AND UNIT-BASED COMPENSATION PLAN Long-term incentive plan The Fund has established a long-term incentive plan (the "LTIP") for designated senior executives of the Fund. The purpose of the LTIP is to provide eligible participants with compensation opportunities that will encourage ownership of Units and enhance the ability of the Fund to attract, retain and motivate key personnel and reward participants for performance and associated per Unit cash flow growth of the Fund. Pursuant to the LTIP, the Fund will set aside a pool of Funds based on the amount, if any, by which the Fund's distributions exceed certain distributed cash threshold amounts. The Fund, as a trustee under the LTIP, will then purchase Units in the market with such pool of Funds and will hold such Units until such time as ownership vests to each participant. The Compensation and Governance Committee of the Board of Directors has the power to, among other things, determine: (a) those individuals who participate in the LTIP; (b) the level of participation of each participant; and (c) the time or times when ownership of the Units vest for each participant. For the period ended December 31, 2006, $12 has been accrued for as a charge to compensation expense in respect of the LTIP. Unit-based compensation plan The Fund has a unit-based compensation plan, which is subject to approval by the Unitholders, for directors, officers and management of the Fund. The plan may issue options for a maximum of 929,926 units. Under the terms of the plan, options granted to management vest at the end of a four year period from the grant date subject to the distributable cash of the Fund exceeding the prescribed threshold of $26,596 as December 31, 2009 while options granted to independent directors vest 25% annually from the date of grant. The options expire ten years from the grant date. The terms of the options granted may be amended by the Fund. Unit options granted under the plan are settled in units. During the period ended December 31, 2006, 779,008 unit options have been granted under the plan. At December 31, 2006, there are 779,008 unit options outstanding at a weighted average exercise price of $10.94 per unit. At December 31, 2006, the weighted average remaining contractual life of these options is 9.42 years. During the period March 14, 2006 to December 31, 2006, the Fund recorded compensation expense of approximately $76 related to unit options granted to employees, with a corresponding adjustment to contributed surplus. The estimated fair value at the date of the grant for the period from March 14 to December 31, 2006 was $0.65 per unit. The fair value of each option granted was estimated on the date of the grant using the Black-Scholes option pricing model with the following assumptions: Period ended December 31, 2006 ------------------------------------------------------------------------ Risk-free interest rate 4.065% - 4.212% Dividend yield 9% Expected volatility 20% Expected option life 4 years ------------------------------------------------------------------------ 22. SALES TO MAJOR CUSTOMER In 2006, one customer represented 11.5% of the Fund's revenue. As at December 31, 2006, amounts due from this customer account for 8% of accounts receivable. 23. SUBSEQUENT EVENT Acquisitions On February 2, 2007, the Fund acquired selected divisions of the business of MacCosham Inc., a corporation existing under the laws of Alberta. These assets comprise mainly capital assets, lease rights, and customer relationships. The initial purchase price of $1,400 has been paid on closing. Additional consideration of $450 will be paid if predetermined levels of business are brought in by specified customers. The Fund has financed this acquisition from operations. The Fund expects to complete the allocation of the purchase price prior to the completion of the consolidated financial statements for the quarter ended March 31, 2007. %SEDAR: 00023289E

For further information:

For further information: James Rudyk, Chief Financial Officer, (905)
795-4241, jim_rudyk@canadacartage.com; Shawn Lanthier, Director, Corporate
Development, (905) 564-2115 (ext. 4362), shawn_lanthier@canadacartage.com

Organization Profile

CANADA CARTAGE DIVERSIFIED INCOME FUND

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