CML HealthCare Income Fund Reports Fiscal 2006 Year End Financial Results



    Toronto Stock Exchange Symbol: CLC.UN

    MISSISSAUGA, ON, March 14 /CNW/ - CML HealthCare Income Fund (the
"Fund"), (TSX: CLC.UN) today reported its financial results for the three and
twelve-month periods ended December 31, 2006.

    
    2006 Highlights
    -   Revenue increased 6.0% to $288.9 million from $272.6 million for the
        year ended December 31, 2005
    -   Net earnings increased 16.1% to $92.4 million compared to
        $79.6 million in 2005
    -   EBITDA(xx) increased 8.1% to $117.0 million compared to
        $108.3 million in 2005
    -   The Fund generated distributable cash(*) of $98.8 million and
        declared distributions (including payments to non-controlling
        interest and Part VI.1 tax paid) totaling $85.1 million, representing
        a payout ratio of 86.2%
    -   Increased annualized unitholder distributions from $0.9468 per unit
        to $1.00 per unit, representing a 5.6% increase, effective as of the
        Fund's May 2006 distribution
    -   Senior management team strengthened with the appointments of: Paul
        Bristow as President and CEO; Tom Weber as CFO; and Cameron Duff as
        Vice President, Corporate Development
    -   New three-year funding agreement for community based laboratory
        services between the Ontario Association of Medical Laboratories
        ("OAML") and the Ontario Ministry of Health and Long-Term Care
        ("MOH")
    -   Completed acquisitions of seven medical imaging clinics in Ontario;
        pending acquisition of three additional clinics in Alberta expected
        to close in early 2007
    

    "Our continued revenue growth and strong EBITDA(xx) margins demonstrate
our commitment to growing our business while maintaining strong operating
efficiencies and financial discipline," said Paul Bristow, President and CEO
of CML HealthCare Income Fund. "Looking ahead, we remain focused on leveraging
our core assets, improving our business processes and increasing our capacity
utilization. Strategic initiatives in 2007 will include growing our non-capped
revenues; driving physician cross-referrals between our Lab and Imaging
services; elevating the national profile of CML HealthCare through an enhanced
brand awareness program; and adopting new cost-effective technologies.
Accretive acquisitions will also play a key role in our growth. We are
developing an acquisition pipeline in medical imaging and evaluating
opportunities to add complementary healthcare services to our network."

    Financial Results
    For the three months ended December 31, 2006, the Fund generated
distributable cash(*) of $29.3 million, and declared distributions (including
payments to non-controlling interest and Part VI.1 tax paid) totaling
$21.7 million, representing a payout ratio of 74.2%. For the year ended
December 31, 2006, the Fund generated distributable cash(*) of $98.8 million,
and declared distributions (including payments to non-controlling interest and
Part VI.1 tax paid) totaling $85.1 million, representing a payout ratio of
86.2%.
    Revenue for the Fund in the fourth quarter of 2006 increased 4.2% to
$72.0 million compared to revenue of $69.1 million in the fourth quarter of
2005. The Fund's increased revenue in the quarter reflects increased lab
services funding from the Ontario Ministry of Health and Long-Term Care
("MOH"), as well additional funding as set out in the agreement, and organic
growth of non-cap revenues. For the twelve months ended December 31, 2006,
revenue for the Fund increased 6.0% to $288.9 million compared to
$272.6 million for the year ended December 31, 2005. Increased revenue in 2006
resulted from: $2.5 million in previously unrecorded cap revenue representing
the 2% retroactive cap increase from April 1, 2005, to December 31, 2005; a
$5.8 million increase in MOH fiscal 2006 and fiscal 2007 cap revenues based on
the new funding agreement; $1.1 million in additional funding as set out in
the new MOH agreement for the period April 1, 2005, to December 31, 2005;
$1.4 million in additional funding as set-out in the new MOH agreement for the
period January 1, 2006, to December 31, 2006; a 2% price increase in certain
professional fee codes; and organic growth of non-cap revenues.

    
    -------------------------------------------------------------------------
                                                     October 1,    January 1,
                                                       2006 to       2006 to
            Distributable cash(*) ($000s)          December 31,  December 31,
                      (unaudited)                         2006          2006
    -------------------------------------------------------------------------
    Cash flow from operating activities                 30,109        98,942
    -------------------------------------------------------------------------
    Normalizing adjustments to non-cash
     working capital items(1)                              486         4,909
    -------------------------------------------------------------------------
    Discretionary/non-recurring expenses(2)                124         3,071
    -------------------------------------------------------------------------
    Capital Expenditures:
      Maintenance capital expenditures                  (2,178)       (4,961)
      Capital lease payments                              (285)       (1,122)
      Changes in maintenance capital expenditure
       notional reserve                                    838          (417)

    -------------------------------------------------------------------------
      Sub-total                                         (1,625)       (6,500)
    -------------------------------------------------------------------------
    Part VI.1 tax adjustment(3)                            194         1,889
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Cash available for distributions                    29,288       102,311
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Non-recurring revenue(4)                                 0        (3,550)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Distributable cash(*)                               29,288        98,761
    -------------------------------------------------------------------------
    Distributions to unitholders                        21,375        79,647
    -------------------------------------------------------------------------
    Payments to non-controlling interest                   159         3,549
    -------------------------------------------------------------------------
    Part VI.1 tax paid                                     194         1,889
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Total distributions/payments to non-controlling
     interest and Part VI.1 tax paid                    21,728        85,085
    -------------------------------------------------------------------------
    Total payouts as a percentage of
     distributable cash(*)                               74.2%         86.2%
    -------------------------------------------------------------------------

    ---------------------------
    (1) Comprised primarily of timing differences in respect of MOH cap
        revenue receivables, interest payments on long-term debt and
        corporate insurance. On a year to date basis, the amount also
        includes the reversal of taxes in respect of non-recurring revenue.
    (2) Comprised primarily of expenses paid in respect of a potential
        acquisition of $2.1 million, professional expenses paid in respect of
        non-recurring tax planning of $0.1 million during Q4 2006 and
        $0.5 million for the year ended December 31, 2006. This amount also
        includes a retirement bonus paid to the CEO of $0.5 million.
    (3) Adjustment to normalize the income tax expense which would not be
        payable if the Exchangeable Shares were converted to Trust units.
        Refer to the table for corresponding inclusion of Part VI.1 tax paid
        in total distributions/payments to non-controlling interest.
    (4) The amount represents revenue recognized from the MOH relating to
        2005.
    


    Operating, general and administrative ("OG&A") expenses for the fourth
quarter of 2006 were $45.6 million, or 63.3% of revenue, compared to OG&A
expenses of $43.1 million, or 62.4% of revenue, for the comparable period in
the prior year. Increased operating, general and administrative expenses
resulted from an incremental, non-cash LTIP (Long Term Incentive Plan) expense
and increased operating expenses in line with increased billings. OG&A
expenses for the twelve months ended December 31, 2006 totaled $171.9 million
or 59.5% of revenue, compared to $164.3 million or 60.3% of revenue in 2005.
The increase in OG&A expenses for the year ended December 31, 2006, was driven
primarily by increase in operating expenses (including salaries, professional
fees and supplies) to support the increased billings, and $1.1 million in
expenses related to the retirement of the former CEO.
    Earnings Before Interest, Taxes, Depreciation, Amortization,
Non-Controlling Interest, Other Expenses and Provisions (EBITDA)(xx) in the
fourth quarter of 2006 totaled $26.4 million, or 36.7% of revenue, compared to
EBITDA(xx) of $26.0 million, or 37.6% of revenue, for the fourth quarter of
2005. EBITDA(xx) for the year ended December 31, 2006, totaled $117.0 million
or 40.5% of revenue, compared to EBITDA(xx) of $108.3 or 39.7% of revenue for
the year ended December 31, 2005. The change in EBITDA(xx) for the year ended
December 31, 2006, was primarily attributable to items discussed in the
revenue and OG&A sections above.
    The Fund's net earnings for the fourth quarter of 2006 increased 25.3% to
$21.8 million or $0.27 per Fund unit (basic and diluted), compared to net
earnings of $17.4 million or $0.22 per Fund unit (basic and diluted) in the
fourth quarter of 2005. For the year ended December 31, 2006, the Fund's net
earnings increased 16.1% to $92.4 million or $1.14 per Fund unit (basic and
diluted), compared to $79.6 million or $1.00 per Fund unit (basic and diluted)
for the year ended December 31, 2005. During 2006, the Fund incurred and
expensed professional fees of $2.1 million in respect of a potential
acquisition that was not completed.
    As at December 31, 2006, the Fund had working capital of $72.9 million,
including cash and cash equivalents of $70.7 million, compared to working
capital of $68.6 million, including cash and cash equivalents of $68.2 million
as at December 31, 2005. Long-term debt of the Fund, including the current
portion, was $192.3 million as at December 31, 2006, compared to
$193.4 million as at December 31, 2005.
    As at December 31, 2006, 961,392 exchangeable shares of CML HealthCare
Inc. were issued and outstanding (excluding those held by the Fund and its
affiliates) and 85,681,012 Fund units were issued and outstanding. Subsequent
to year end, all of the outstanding exchangeable shares of CML HealthCare Inc.
were exchanged for Fund units on a one-for-one basis. There are now
approximately 86.6 million Fund units issued and outstanding.

    
    -------------------------------------------------------------------------
          Comparative Quarterly Financial Summary
            ($ millions, except per unit amounts)
                         (unaudited)                     Q4/06         Q4/05
    -------------------------------------------------------------------------
    Revenue                                               72.0          69.1
    -------------------------------------------------------------------------
    Operating, general and administrative                 45.6          43.1
    -------------------------------------------------------------------------
    EBITDA(xx)                                            26.4          26.0
    -------------------------------------------------------------------------
    Amortization                                           0.9           0.5
    -------------------------------------------------------------------------
    Provision for impairment of investments and
     other assets                                            -           1.7
    -------------------------------------------------------------------------
    Interest                                               3.0           3.0
    -------------------------------------------------------------------------
    Provision for income taxes                             0.5           1.8
    -------------------------------------------------------------------------
    Earnings before the following                         22.0          19.0
    -------------------------------------------------------------------------
    Non-controlling interest                               0.2           1.6
    -------------------------------------------------------------------------
    Net earnings for the period                           21.8          17.4
    -------------------------------------------------------------------------
    Basic and diluted earnings per unit                   0.27          0.22
    -------------------------------------------------------------------------
    


    On October 31, 2006 the Department of Finance (Canada) announced the "Tax
Fairness Plan" whereby the income tax rules applicable to publicly traded
trusts and partnerships will be significantly modified. In particular, certain
income of (and distributions made by) these entities will be taxed in a manner
similar to income earned by (and distributions made by) a corporation. These
proposals, if adopted, will be effective for the 2007 taxation year with
respect to trusts which commence public trading after October 31, 2006, but
the application of the rules will be delayed to the 2011 taxation year with
respect to trusts, such as CML HealthCare Income Fund, which were publicly
traded prior to November 1, 2006. The Fund is considering this announcement
and the possible impact of the proposed rules to the Fund. The proposed rules
may adversely affect the marketability of the Fund's units and the ability of
the Fund to undertake financings and acquisitions, and, at such time as the
proposed rules apply to the Fund, the distributable cash of the Fund may be
materially reduced. The Trustees of the Fund and senior management of CML
HealthCare continue to monitor this development.


    Notice of Conference Call
    Management of CML HealthCare Income Fund will host a conference call
today, March 14 at 10:00 am (EST) to discuss the Fund's 2006 year end
financial results. A live audio webcast of the call will be available at
www.cmlhealthcare.com. Webcast attendees are welcome to listen to the
conference in real-time or on-demand at your convenience. A taped replay of
the conference call will be available until March 21 at midnight at
1-877-289-8525 or 416-640-1917, reference number 21219834No..

    
    (*)  Distributable cash of the Fund is not a Canadian generally accepted
         accounting principle ("GAAP") measure but is generally used by
         Canadian open-ended trusts as an 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 as reported
         by other similar entities and, accordingly, may not be comparable
         to distributable cash as reported by such entities.

    (xx) EBITDA is not a recognized measure under Canadian generally accepted
         accounting principles (GAAP). Management believes that in addition
         to net income, EBITDA is a useful supplemental measure as it
         provides investors with an indication of the Fund's performance.
         Investors should be cautioned, however, that EBITDA should not be
         construed as an alternative to net income. The Fund's method of
         calculating EBITDA may differ from other companies' or income
         trusts' and, accordingly, EBITDA may not be comparable to measures
         used by other companies or income trusts.
    

    Caution concerning forward-looking statements
    ---------------------------------------------
    Statements made in this news release, other than those concerning
historical financial information, may be forward-looking and therefore subject
to various risks and uncertainties. Some forward-looking statements may be
identified by words like "may", "will", "anticipate", "estimate", "expect",
"intend", or "continue" or the negative thereof or similar variations. Readers
are cautioned not to place undue reliance on such statements, as actual
results may differ materially from those expressed or implied in such
statements. Factors that could cause results to vary include, but are not
limited to: dependence on government-based revenues; pending and proposed
legislative or regulatory developments including the impact of changes in
laws, regulations and the enforcement thereof; intensifying competition from
established competitors and new entrants in the businesses in which we
operate; technological change; interest rate fluctuations and general economic
conditions; insurance coverage of sufficient scope to satisfy any liability
claims; fluctuations in operating results; dependence on our operating
subsidiary to pay its interest obligations; fluctuations in cash distributions
and capital investment; management of credit, market, liquidity and funding
and operational risks; judicial judgments and legal proceedings; our ability
to complete strategic acquisitions and to integrate our acquisitions
successfully; changes in accounting policies and methods we use to report our
financial condition, including uncertainties associated with critical
accounting assumptions and estimates; operational and infrastructure risks
including possible equipment failure and performance of information technology
systems; fluctuations in total patient referrals; loss of services of key
senior management personnel; other factors that may affect future growth and
results including, timely development and introduction of new products and
services; changes in our estimates relating to reserves and allowances; future
sales of units; changes in tax laws; technological changes and obsolescence,
natural disasters, the possible impact on our businesses from public health
emergencies, international conflicts and other developments including those
relating to terrorism; and our success in anticipating and managing the
foregoing risks.
    We caution that the foregoing list of factors is not exhaustive and that
when reviewing our forward-looking statements, investors and others should
refer to the "Risk Factors" section of the Fund's Annual Information Form, the
"Risks and Uncertainties" and other sections of our Management's Discussion
and Analysis of Operating Results and Financial Position and our other
periodic filings with Canadian securities regulatory authorities. All
forward-looking statements presented herein should be considered in
conjunction with such filings. The Fund does not undertake to update any
forward-looking statements; such statements speak only as of the date made.

    About CML HealthCare Income Fund
    CML HealthCare Income Fund is an unincorporated open-ended trust that
owns CML HealthCare Inc., one of Canada's largest healthcare services
businesses. CML is a leading provider of laboratory testing services in
Ontario and the largest private provider of medical imaging services in
Canada. CML HealthCare Income Fund is publicly traded on the Toronto Stock
Exchange under the symbol "CLC.UN" and has approximately 86.6 million units
outstanding. To reach CML HealthCare Income Fund via the worldwide web log on
to www.cmlhealthcare.com.


    
    CML Healthcare Income Fund
    Consolidated Balance Sheets
    -------------------------------------------------------------------------

    (in thousands of dollars)                      December 31,  December 31,
                                                          2006          2005
                                                             $             $
    ASSETS (note 7)
    Current assets
    Cash and cash equivalents                           70,715        68,178
    Accounts receivable                                 29,772        27,590
    Income taxes receivable                              3,088         2,487
    Other current assets                                 2,097         1,778
    Future income taxes (note 12)                        1,383         1,113
    Due from related parties (note 14)                     123            56
                                                   --------------------------
                                                       107,178       101,202
    Property and equipment (note 5)                     23,318        19,375
    Licences                                           491,980       430,538
    Goodwill                                           195,437       153,678
    Investments and other assets (note 6)                1,551         1,261
    Restricted cash (note 7)                               912           912
                                                   --------------------------
    Total Assets                                       820,376       706,966
                                                   --------------------------
                                                   --------------------------

    LIABILITIES
    Current liabilities
    Accounts payable and accrued liabilities            26,022        25,231
    Distributions payable (note 10)                      7,125         6,284
    Current portion of long-term debt (note 7)           1,180         1,122
                                                   --------------------------
                                                        34,327        32,637
    Long-term debt (note 7)                            191,138       192,318
    Future income taxes (note 12)                       69,848        60,994
                                                   --------------------------

    Total Liabilities                                  295,313       285,949
                                                   --------------------------
                                                   --------------------------

    Non-controlling interest (notes 3 and 4)             7,902         9,622

    UNITHOLDERS' EQUITY
    Trust units (note 8)                               500,636       407,654
    Retained earnings (note 8)                          16,525         3,741
                                                   --------------------------
                                                       517,161       411,395
                                                   --------------------------
    Total Liabilities and Unitholders' equity          820,376       706,966
                                                   --------------------------
                                                   --------------------------

    Contingencies and commitments (note 11)

    The accompanying notes are an integral part of these consolidated
    financial statements.


    Approved by the Board of Trustees

    John D. Mull, M.D., F.R.C.P.(C)         Stephen R. Wiseman, C.A.
    Chairman                                Trustee
    -------------------------------------------------------------------------


    CML Healthcare Income Fund
    Consolidated Statements of Earnings
    -------------------------------------------------------------------------

    (in thousands of dollars,
     except for per unit amounts)                   Year ended    Year ended
                                                   December 31,  December 31,
                                                          2006          2005
                                                             $             $


    Revenue (notes 2, 16 and 18)                       288,894       272,605
                                                   --------------------------

    Expenses
    Operating, general and administrative (note 14)    171,883       164,345
    Amortization of property and equipment               3,275         2,830
    Other expenses (note 17)                             2,113             -
                                                   --------------------------
                                                       177,271       167,175
                                                   --------------------------

    Income before the undernoted                       111,623       105,430


    Provision for (recovery of) impairment of
     investments and other assets (note 6)                (553)        1,733

    Interest expense
      Long-term debt                                    11,452        11,414
                                                   --------------------------


    Earnings before income taxes                       100,724        92,283
                                                   --------------------------

    Provision for income taxes (note 12)
    Current taxes                                        3,186         2,534
    Future taxes                                        (1,286)        3,194
                                                   --------------------------
                                                         1,900         5,728

    Earnings before the following                       98,824        86,555

    Non-controlling interest (notes 3 and 4)             6,393         6,947

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

    Net earnings for the year                           92,431        79,608
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Basic and diluted earnings per unit (note 9)          1.14          1.00

    The accompanying notes are an integral part of these consolidated
    financial statements.
    -------------------------------------------------------------------------


    CML Healthcare Income Fund
    Consolidated Statements of Retained Earnings (Deficit)
    -------------------------------------------------------------------------

    (in thousands of dollars)                       Year ended    Year ended
                                                   December 31,  December 31,
                                                          2006          2005
                                                             $             $

    Retained earnings - Beginning of year
     as previously reported                              3,741         1,321

    Change in accounting policy (note 3)                     -        (1,775)
                                                   --------------------------

    Retained earnings (deficit) - Beginning of
     year as restated                                    3,741          (454)

    Distributions declared during the
     year to unitholders (note 10)                     (79,647)      (75,413)

    Net earnings for the year                           92,431        79,608
                                                   --------------------------

    Retained earnings - End of year                     16,525         3,741
                                                   --------------------------
                                                   --------------------------

    The accompanying notes are an integral part of these consolidated
    financial statements.
    -------------------------------------------------------------------------


    CML Healthcare Income Fund
    Consolidated Statements of Cash Flows
    -------------------------------------------------------------------------

    (in thousands of dollars)
                                                    Year ended    Year ended
                                                   December 31,  December 31,
                                                          2006          2005
                                                             $             $
    Cash provided by (used in)

    Operating activities

      Earnings from continuing operations               92,431        79,608
      Items not affecting cash
      Amortization of property and equipment             3,275         2,830
      Long-term incentive plan expense                   2,092         1,648
      Non-cash interest expense                            210           210
      Provision for (recovery of) impairment of
       investments and other assets                       (553)        1,733
      Future income taxes                               (1,286)        3,194
      Non-controlling interest                           6,393         6,947
    -------------------------------------------------------------------------
                                                       102,562        96,170
      Net change in non-cash working capital
       items (note 15)                                  (3,620)        6,362
    -------------------------------------------------------------------------
                                                        98,942       102,532
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Investing activities

      Proceeds of investments and other assets             553             -
      Purchase of property and equipment                (6,116)       (3,913)
      Deposit paid for future acquisition                 (500)          152
      Acquisition of licences                             (375)         (361)
      Business acquisitions (net of cash
       acquired of $205)                                (4,461)            -
    -------------------------------------------------------------------------
                                                       (10,899)       (4,122)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Financing activities

      Principal repayment of long-term debt             (1,122)       (1,147)
      Distributions paid                               (78,806)      (75,412)
      Payments to non-controlling interest (note 10)    (3,549)       (4,394)
      Treasury units acquired (notes 2 and 8)           (1,962)       (1,250)
      Decrease (increase) in due from
       related parties - net                               (67)          773
    -------------------------------------------------------------------------

                                                       (85,506)      (81,430)
    -------------------------------------------------------------------------

    Increase in cash and cash equivalents                2,537        16,980
    Cash and cash equivalents, beginning of year        68,178        51,198
                                                   --------------------------
    Cash and cash equivalents, end of year              70,715        68,178
                                                   --------------------------
                                                   --------------------------
    Supplementary information
    Interest paid                                    $  11,242     $  11,193
    Income taxes paid                                $   7,218     $   5,648


    The accompanying notes are an integral part of these consolidated
    financial statements.
    -------------------------------------------------------------------------


    CML Healthcare Income Fund
    Notes to Consolidated Financial Statements
    December 31, 2006 and December 31, 2005
    -------------------------------------------------------------------------

    1   Organization and nature of operations

        The CML Healthcare Income Fund (the "Fund") is a trust established
        under the laws of the Province of Ontario pursuant to a declaration
        of trust dated January 16, 2004. The Fund was created to invest in
        common shares and $729,207,000 of 12% unsecured subordinated notes of
        CML Healthcare Inc. ("CML"). Through its wholly-owned subsidiaries,
        the Fund provides medical laboratory services in Ontario and medical
        imaging services in the Provinces of Ontario, Quebec, Manitoba,
        Alberta and British Columbia.

    2   Summary of significant accounting policies

        These consolidated financial statements have been prepared in
        accordance with Canadian generally accepted accounting principles
        (Canadian GAAP).

        Basis of consolidation

        These consolidated financial statements include the accounts of the
        Fund and its subsidiaries and variable interest entities where the
        Fund is exposed to the expected losses or returns. Subsidiaries that
        are acquired during the year are consolidated from their respective
        dates of acquisition. The purchase method is used to account for
        business combinations. Intercompany transactions and balances are
        eliminated on consolidation.

        Significant accounting policies used in the preparation of these
        consolidated financial statements are as follows:

        Variable interest entity

        On July 18, 2005, the Fund created a Trust, administered by a third
        party, to act as trustee for the Fund's Long-Term Incentive Plan
        ("LTIP"). During 2006, the Fund paid $1,962,000 (2005 - $1,250,000)
        to the trust for exceeding certain 2005 defined distributable cash
        threshold amounts, subsequent to which the trustee acquired
        135,000 units (2005 - 87,254 units) of the Fund on the open market.
        The Fund units held by the trust will be distributed to the employees
        in accordance with the terms of the LTIP. As of December 31, 2006,
        109,416 units (2005 - 43,631 units) of the Fund that had vested were
        distributed to the employees.

        The Trust is considered a variable interest entity. The Fund holds a
        variable interest in the trust and has determined that it is the
        primary beneficiary of the trust and, therefore, the Fund has
        consolidated the trust in accordance with The Canadian Institute of
        Chartered Accountants' ("CICA") Accounting Guideline 15
        "Consolidation of Variable Interest Entities". The Fund has not
        guaranteed the value of the units held by the trust should the market
        value of the Fund's units decrease from the value at which the trust
        acquired the units. The Fund units held by the trust have been
        classified as treasury units in these consolidated financial
        statements. Distributions on the Fund units are paid to employees and
        recorded as compensation expense when declared.

        Translation of foreign currencies

        The functional currency of the Fund's subsidiaries is the Canadian
        dollar. Revenues and expenses of the Fund and its Canadian
        subsidiaries arising from foreign currency transactions are
        translated into Canadian dollars using the exchange rate in effect at
        the transaction date. Monetary assets and liabilities are translated
        using the rate in effect at the balance sheet dates. Related exchange
        gains and losses are included in the determination of earnings.

        Use of estimates

        The preparation of the consolidated financial statements requires
        management to make estimates and assumptions that could affect the
        reported amounts of assets and liabilities and the related
        disclosures of contingent assets and liabilities at the date of the
        financial statements and the reported amounts of revenue and expenses
        during the reporting periods presented. Actual results could
        materially differ from the estimates and assumptions.

        Cash and cash equivalents

        Cash and cash equivalents are defined as cash and short-term deposits
        with original maturities of three months or less.

        Property and equipment

        Property and equipment are recorded at cost, less accumulated
        amortization. Amortization is computed using the declining balance
        method and applies the following rates estimated to amortize the cost
        over the useful lives of the assets or lease terms.

        Laboratory and diagnostic equipment                        7% to 20%
        Computer equipment                                               20%
        Computer software                                              33.3%
        Furniture and fixtures                                           10%
        Leasehold improvements                                           20%

        Maintenance and repair costs are expensed as incurred.

        Government assistance

        Government assistance received for the purchase of diagnostic
        equipment is accounted for as a reduction in the cost of the related
        diagnostic equipment.

        Goodwill and licences

        Goodwill represents the excess of the costs of the investment in
        acquired businesses over the fair value of the underlying tangible
        and identifiable intangible net assets acquired. The Fund's licences
        are intangible assets with indefinite lives. The licences enable the
        Fund to perform health care diagnostic services in Canada. In
        accordance with the requirements of CICA handbook section 3062,
        Goodwill and Other Intangible Assets, the Fund does not amortize
        goodwill or indefinite-lived licences but subjects goodwill and
        indefinite-lived licences to an annual impairment test, or earlier,
        when circumstances indicate an impairment may exist. The need for any
        write-down of the goodwill and licences due to an impairment in their
        value is based on the assessment of the fair value of the individual
        business units and the related goodwill and licences. Any write-down
        of goodwill and licences arising from an impairment in value is
        recorded in the period in which the impairment is identified.

        Impairment of long-lived assets

        The Fund periodically reviews the useful lives and the carrying
        values of its long-lived assets. The Fund reviews for impairment in
        long-lived assets whenever events or changes in circumstances
        indicate that the carrying amount of the assets may not be
        recoverable. If the sum of the undiscounted expected future cash
        flows expected to result from the use and eventual disposition of an
        asset is less than its carrying amount, it is considered to be
        impaired. An impairment loss is measured at the amount by which the
        carrying amount of the asset exceeds its fair value, which is
        estimated as the expected future cash flows discounted at a rate
        proportionate with the risks associated with the recovery of the
        asset.

        Investments

        Long-term investments are recorded at cost and are written down to
        their estimated recoverable amount if there is evidence of
        impairment.

        Revenues

        Revenues are recorded as laboratory and imaging services are provided
        to customers.

        The vast majority of the Fund's laboratory services revenue is earned
        from the Ontario Ministry of Health and Long-Term Care ("MOH"). This
        revenue is recognized as services are performed, based on the
        industry cap funding agreement with the MOH.

        Laboratory revenue is recognized at the lower of corporate cap (pro
        rated on a monthly basis) and amounts based on services performed.

        The MOH has set certain limits on healthcare expenditures and set
        graduated limits on the amounts reimbursed for clinical laboratory
        services. To the extent that fees subject to a corporate cap are paid
        to private laboratories, and exceed the set limits, amounts received
        will have to be reimbursed. In addition, certain revenues under the
        corporate cap are not known until the MOH completes its annual
        industry reconciliation. Each year, the repayment amounts or
        additional revenues, if any, are not determined until after the
        completion of the fiscal year end of the Province of Ontario, which
        is March 31.

        The Fund has used the latest available information in estimating the
        amount of fees received that will have to be reimbursed. Assumptions
        were made with respect to the amount of reimbursement required and
        the volume and type of laboratory tests referred to the Fund. It is
        possible that changes in future conditions in the near term could
        require a change in the amount to be reimbursed, or received, and
        such changes could be material.

        Income taxes

        The fund legal entity is a unit trust for income tax purposes and, as
        such, the fund legal entity is only taxable on taxable income not
        distributed to unitholders. As substantially all taxable income of
        the fund legal entity is distributed to unitholders, no provision for
        income taxes has been made in respect of earnings of the fund legal
        entity.

        On December 21, 2006, the Minister of Finance of Canada released
        draft legislation relating to the federal income taxation of publicly
        traded income trusts commencing with the taxation years ending on or
        after 2011. If enacted, the Fund will be subject to income taxes on
        income earned from investments in its subsidiaries beginning in 2011.

        The Fund's subsidiaries follow the asset and liability method of
        accounting for income taxes whereby future income tax assets and
        liabilities are recognized based on the differences between the bases
        of assets and liabilities used for financial and income tax purposes.
        Future income tax assets are recognized only to the extent that
        management determines that it is more likely than not that the future
        income tax assets will be realized. Future income tax assets and
        liabilities are adjusted for the effects of changes in tax laws and
        rates on the date of enactment or substantive enactment. The income
        tax expense or benefit is the income tax payable or receivable for
        the year, plus or minus the change in future income tax assets and
        liabilities during the period.

        Stock-based compensation

        The Fund has adopted the CICA handbook section 3870, "Stock-Based
        Compensation and Other Stock-Based Payments". This standard requires
        the recognition of compensation expense for fair value of grants of
        stock, stock options and other equity instruments to employees
        subsequent to January 1, 2002.

    3   Change in accounting policy

        In January 2005, the Emerging Issues Committee issued EIC 151,
        Exchangeable Securities Issued by Subsidiaries of Income Trusts. The
        EIC was further clarified during February 2005. EIC 151 requires
        that, in certain circumstances such as those pertaining to the Fund,
        exchangeable shares issued by a subsidiary of an income trust be
        presented as non-controlling interest in the subsidiary and not as
        part of unitholders' equity. In accordance with the transitional
        provisions of EIC 151, during the quarter ended June 30, 2005, the
        Fund retroactively restated the consolidated financial statements to
        reclassify the exchangeable shares of CML Healthcare Inc. from
        unitholders' equity to non-controlling interest and to apply fair
        value accounting to the conversions of exchangeable shares into units
        of the Fund.

        The effect of this change in accounting policy on the consolidated
        balance sheet as at January 1, 2005 was as follows:

                                      Balance as
                                      previously                  Balance as
                                       reported     Adjustment     restated
        (in thousands of dollars)          $             $             $
        ---------------------------------------------------------------------
        Opening retained earnings
         (deficit)                         1,321        (1,775)         (454)
        ---------------------------------------------------------------------

    4   Acquisition of non-controlling interest

        Each exchangeable share of CML HealthCare Inc has the same economic
        rights (including the right to receive dividends on the exchangeable
        shares, and voting rights) with respect to the Fund as the Units of
        the Fund. In addition, holders of exchangeable shares have the right
        to exchange their exchangeable shares for Units.

        During 2006, 5,988,196 exchangeable shares (2005 - 57,600) of CML
        HealthCare Inc. were converted to 5,988,196 units of the Fund
        (2005 - 57,600). The conversion of the exchangeable shares has been
        accounted for as a step acquisition and has resulted in a reduction
        of the non-controlling interest. The 5,988,196 Units of the Fund were
        valued at $93,392,000 (2005 - 786,000)

        This amount less the excess of the purchase price over the carrying
        value of the non-controlling interest of $4,564,000 (2005 - $44,000)
        was allocated as follows:

                                                    Year ended    Year ended
                                                   December 31,  December 31,
                                                          2006          2005
        (in thousands of dollars)                            $             $
        Licences                                        57,624           448
        Goodwill                                        40,748           378
        Future tax liability                            (9,544)          (84)
                                                   --------------------------
                                                     $  88,828           742
                                                   --------------------------
                                                   --------------------------

        As at December 31, 2006, 961,392 (December 31, 2005 - 6,949,588)
        exchangeable shares of CML Healthcare Inc. are issued and outstanding
        (excluding those held by the Fund and its affiliates).

    5   Property and equipment

                                                                 December 31,
                                                                        2006
                                     ----------------------------------------
                                                   Accumulated
                                            Cost  Amortization           Net
        (in thousands of dollars)              $             $             $
        Laboratory and diagnostic
         equipment                        35,502        19,060        16,442
        Computer equipment                 7,833         5,655         2,178
        Computer software                  2,162         1,598           564
        Furniture and fixtures             2,288         1,707           581
        Leasehold improvements             8,848         5,295         3,553
                                                             -             -
                                     ----------------------------------------
                                          56,633        33,315        23,318
                                     ----------------------------------------
                                     ----------------------------------------


                                                                 December 31,
                                                                        2005
                                     ----------------------------------------
                                                   Accumulated
                                            Cost  Amortization           Net
        (in thousands of dollars)              $             $             $
        Laboratory and diagnostic
         equipment                        30,797        16,830        13,967
        Computer equipment                 6,526         5,342         1,184
        Computer software                  1,838         1,503           335
        Furniture and fixtures             2,224         1,656           568
        Leasehold improvements             8,030         4,709         3,321
                                     ----------------------------------------
                                          49,415        30,040        19,375
                                     ----------------------------------------
                                     ----------------------------------------


        Included in laboratory and diagnostic equipment is equipment under
        capital lease with a cost of $9,874,000 (2005 - $9,874,000 ) and a
        net book value of $3,500,000 (2005 - $4,357,000 ). During the year
        ended December 31, 2006, the Fund received $1, 300,000 from the MOH
        for expenditures on diagnostic et.

    6   Investments and other assets

                                                   December 31,  December 31,
                                                          2006          2005
        (in thousands of dollars)                            $             $
        Deferred financing fees (net of
         accumulated amortization of $508
         (December 31, 2005 - $298)) (note 7)              964         1,174
        Deposit on business acquisition (note 19)          500             -
        Other assets                                        87            87
                                                   --------------------------
                                                         1,551         1,261
                                                   --------------------------
                                                   --------------------------

        The Fund held a note receivable bearing interest at 6.0% per annum,
        repayable through quarterly payments of principal and interest of
        $112,000 (US$96,000) and was due June 1, 2007. During 2005, the Fund
        determined that the note receivable was impaired due to the
        uncertainty of the amounts and timing of repayments of this note
        receivable. Accordingly, an impairment charge of $1,733,000 was
        recorded to reduce the carrying value of the note receivable to its
        estimated fair value of $nil. During 2006, the Fund recovered
        $553,000 in respect of this note receivable upon settlement.

        The Fund holds 1,900,000 common shares of Genetic Diagnostic Inc. at
        December 31, 2006 and 2005. The amount of this investment is
        $2,750,000 and is accounted for on the cost basis of accounting.
        During the period ended December 31, 2004, a provision of $2,750,000
        was recorded against the investment in Genetic Diagnostic Inc.

    7   Long-term debt

                                                   December 31,  December 31,
                                                          2006          2005
        (in thousands of dollars)                            $             $
        Senior secured notes(a)                        190,000       190,000
        Obligations under capital lease due in
         monthly payments through 2008                   2,318         3,440
                                                   --------------------------
                                                       192,318       193,440
        Less current portion of long-term debt           1,180         1,122
                                                   --------------------------
                                                       191,138       192,318
                                                   --------------------------
                                                   --------------------------

        a) On August 6, 2004, the Fund issued $190,000,000 of senior secured
           notes to a syndicate of institutional investors in Canada and the
           United States. The senior secured notes bear a fixed interest rate
           of 5.754%, payable semi-annually and in arrears. The $190,000,000
           principal is fully due and payable on August 6, 2011.

           The Fund paid fees of $1,472,000 in respect of the senior secured
           notes. These financing fees have been deferred and are being
           amortized over the seven-year term of the notes.

        The notes are secured by:

        i)    a first security interest over all assets of the Fund subject
              to permitted liens;
        ii)   a leasehold mortgage over property;
        iii)  a share pledge agreement in respect of all of the issued and
              outstanding shares of each subsidiary owned by the Fund, other
              than inactive subsidiaries;
        iv)   an assignment of all intellectual property owned by the Fund;
              and
        v)    an assignment of all laboratory licences owned by the Fund to
              the extent permitted by law and provided that such assignment
              would not result in a default or revocation thereof.

        The Fund is required to maintain an amount of $912,000 on deposit to
        support the Ontario MRI/CT clinics.

        The effective rate of interest for the long-term debt outstanding
        during 2006 was 5.74% (2005 - 5.74%).

        The minimum principal repayments required in the next five years and
        thereafter are as follows:

        (in thousands of dollars)                                          $
        2007                                                           1,180
        2008                                                           1,138
        2009                                                               -
        2010                                                               -
        2011 and thereafter                                          190,000
                                                                -------------
                                                                     192,318
                                                                -------------
                                                                -------------

    8   Unitholders' equity

        The authorized capital of the Fund consists of an unlimited amount of
        trust units. Under the Arrangement, shareholders of CML transferred
        their common shares, directly or indirectly, to the Fund and received
        either four units of the Fund, or four exchangeable shares of CML
        AcquisitionCo, a wholly-owned subsidiary of the Fund. Exchangeable
        shares can be converted at the option of the holder on a one-to-one
        basis for units of the Fund. Any exchangeable shares still held
        (other than by the Fund) as of February 23, 2007 will be exchanged
        into one unit of the Fund on that date. In addition, if on any date,
        the aggregate number of issued and outstanding exchangeable shares is
        less than 7,409,000, then on that date or any date thereafter, the
        Fund has the option to convert these exchangeable shares into a
        corresponding number of units of the Fund.

        The following is a summary of changes in unitholders' equity from
        January 1, 2005 to December 31, 2006


        (in thousands)    Trust Units     Treasury  Units      Net Units

                       Number         $  Number         $   Number         $

        January 1,
         2005          79,635   407,492       -         -   79,635   407,492
        Exchangeable
         Shares
         exchanged
         for trust
         units             58       786                         58       786
        Trust units
         acquired                            87     1,250      (87)   (1,250)
        Trust units
         distributed
         to employees                       (43)     (626)      43       626
                       ------------------------------------------------------
        December 31,
         2005          79,693   408,278      44       624   79,649   407,654
                       ------------------------------------------------------
        Trust units
         acquired                           135     1,962     (135)   (1,962)
        Trust units
         distributed
         to employees                      (109)   (1,552)     109     1,552
        Exchangeable
         shares
         exchanged
         for trust
         units (note 4) 5,988    93,392       -         -    5,988    93,392
                       ------------------------------------------------------
        December 31,
         2006          85,681   501,669      70     1,034   85,611   500,636
                       ------------------------------------------------------
                       ------------------------------------------------------

        Long-Term Incentive Plan

        Effective February 23, 2004, the Fund created a Long-Term Incentive
        Plan "LTIP" for certain employees of the Fund. Pursuant to the LTIP,
        the Fund pays to the Trust amounts for exceeding certain defined
        distributable cash threshold amounts, as defined in the agreement,
        over the base distribution on an annual basis of $1.00 per unit. The
        Trust purchases units of the Fund in the open market on behalf of
        eligible employees. The units will be transferred to the employees
        over a three-year vesting period commencing November 30, each year.

        On July 18, 2005, the Fund created a Trust, administered by a third
        party, to act as trustee for the Fund's Long-Term Incentive Plan
        ("LTIP"). During 2006, the Fund paid $1,962,000 ($1,250,000 in 2005)
        to the trust for exceeding certain 2005 defined distributable cash
        threshold amounts, subsequent to which the trustee acquired 135,000
        units (87,254 units in 2005) of the Fund on the open market. The
        Fund units held by the trust will be distributed to the employees in
        accordance with the terms of the LTIP. As of December 31, 2006,
        109,416 units (2005 - 43,631 units) of the Fund that had vested
        were distributed to the employees. In addition, the Fund paid
        $280,000 to settle an LTIP liability in cash rather than units of the
        Fund.

        As at December 31, 2006, the Fund has recorded a liability of
        $1,670,000 (2005 -$1,410,000) relating to the LTIP and recognized
        compensation expense of $2,092,000 (2005 - $1,648,000) in respect of
        this LTIP.

        Phantom unit plan

        The Fund has a phantom unit plan that provides for the granting of
        stock appreciation rights ("SARs") to directors and certain employees
        (the "participants"). The SARs provide the holder with the
        opportunity to earn a cash benefit equal to the fair market value of
        the Fund's trust units less the price at which the SARs were issued.
        Compensation expense is measured based on the market price of the
        Fund's units at the end of each reporting period and recognized as an
        expense over the vesting period. The SARs outstanding under the plan
        have been granted at the average closing price of the Fund's trust
        units five days prior to the date of grant and vest at the end of the
        three-year period.

        During the year, the Fund granted 430,000 and 40,000 SARs which vest
        on August 11, 2009 and September 7, 2009, respectively. The
        participants will be entitled to a cash payment equal to the
        difference between the quoted market value of the Fund units and
        $14.97 and $14.95 respectively, the average market value of a Fund
        unit for the five days prior to the date of grant.

        As the market value of a Fund unit was $13.95 at the end of the year
        was below grant value, no compensation cost has been recognized in
        the financial statements for the year ended December 31, 2006.

        Retained earnings

        The following is a summary of the accumulated earnings and
        accumulated distributions:

                                                   December 31,  December 31,
                                                          2006          2005
        (in thousands of dollars)                            $             $
        Accumulated earnings                           419,291       326,860
        Accumulated distributions                     (402,766)     (323,119)
                                                   --------------------------
        Retained earnings                               16,525         3,741
                                                   --------------------------
                                                   --------------------------

    9   Earnings per unit

        Earnings per unit is calculated using the weighted average number of
        units outstanding, including the treasury units. The weighted average
        number of units outstanding for the year-ended December 31, 2006 was
        81,174,108 (2005 - 79,677,719).

        Diluted earnings per share reflects the effect of the conversion of
        the exchangeable shares of CML Healthcare Inc. for units of the Fund.
        The following table reconciles the basic and diluted weighted average
        number of Fund units outstanding and basic and diluted earnings per
        unit:

                                                   Adjustments
                                                           for
                                           Basic   conversions
                                        earnings            of       Diluted
        (in thousands of dollars,            per  exchangeable  earnings per
        except per unit amounts)       Fund unit        shares     Fund unit

                                                Year ended December 31, 2006
        Net earnings for the period  $    92,431   $     6,393   $    98,824
        Earnings per Fund unit       $      1.14   $         -   $      1.14
        Weighted average number of
         Fund units outstanding       81,174,108     5,468,296    86,642,404

                                                Year ended December 31, 2005
        Net earnings for the year    $    79,608   $     6,947   $    86,555
        Earnings per Fund unit       $      1.00   $         -   $      1.00
        Weighted average number of
         Fund units outstanding       79,677,719     6,949,588    86,627,307

    10  Distributions and payments to non-controlling interest declared

        During the year ended December 31, 2006, the Fund declared total
        distributions to unitholders of $79,647,000 and total dividends to
        non-controlling interest of  $3,549,000. The amounts and record dates
        of distributions and payments were as follows:

        (in thousands of dollars, except per unit and per share amounts)

                                 Trust Units        Non-controlling interest
                                          Amount                      Amount
        Record Date              $      per Unit             $     per Share
        ---------------------------------------------------------------------
        January 31, 2006     6,285        0.0789           365        0.0526
        February 28, 2006    6,285        0.0789           365        0.0526
        March 31, 2006       6,285        0.0789           365        0.0526
        April 30, 2006       6,285        0.0789           365        0.0526
        May 31, 2006         6,627        0.0833           386        0.0556
        June 30, 2006        6,627        0.0833           386        0.0556
        July 30, 2006        6,626        0.0833           386        0.0556
        August 31, 2006      6,626        0.0833           386        0.0556
        September 30, 2006   6,626        0.0833           386        0.0556
        October 31, 2006     7,125        0.0833            53        0.0556
        November 30, 2006    7,125        0.0833            53        0.0556
        December 31, 2006    7,125        0.0833            53        0.0556
        ---------------------------------------------------------------------
                            79,647        0.9820         3,549        0.6552
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        During the year ended December 31, 2005, the Fund declared total
        distributions to unitholders of  $75,413,000 and total dividends to
        non-controlling interest of  $4,394,000. The amounts and record dates
        of distributions and payments were as follows:

        (in thousands of dollars, except per unit and per share amounts)

                                 Trust Units        Non-controlling interest
                                          Amount                      Amount
        Record Date              $      per Unit             $     per Share
        ---------------------------------------------------------------------
        January 31, 2005     6,283        0.0789           368        0.0526
        February 28, 2005    6,286        0.0789           366        0.0526
        March 31, 2005       6,287        0.0789           366        0.0526
        April 30, 2005       6,287        0.0789           366        0.0526
        May 31, 2005         6,287        0.0789           366        0.0526
        June 30, 2005        6,287        0.0789           366        0.0526
        July 30, 2005        6,288        0.0789           366        0.0526
        August 31, 2005      6,281        0.0789           366        0.0526
        September 30, 2005   6,281        0.0789           366        0.0526
        October 31, 2005     6,281        0.0789           366        0.0526
        November 30, 2005    6,281        0.0789           366        0.0526
        December 31, 2005    6,284        0.0789           366        0.0526
        ---------------------------------------------------------------------
                            75,413        0.9468         4,394        0.6312
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    11  Contingencies and commitments

        Minimum lease commitments

        Minimum lease commitments under operating leases with respect to
        laboratory and diagnostic equipment and premises for each of the next
        five years and thereafter are as follows:

        (in thousands of dollars)                                          $
        2007                                                          17,151
        2008                                                          11,836
        2009                                                           5,508
        2010                                                           3,963
        2011                                                           2,070
        Thereafter                                                     5,208
                                                                -------------
                                                                      45,736
                                                                -------------
                                                                -------------

        Legal proceedings

        Various lawsuits and claims in the normal course of business are
        pending against the Fund. It is not possible to determine the merits
        of certain claims or to estimate the possible financial liability, if
        any, to the Fund. Accordingly, no provision has been made for these
        claims in these consolidated financial statements.

    12  Income taxes

        The effective income tax rate on consolidated earnings is influenced
        by items such as non-taxable income and non-deductible expenses:

                                                    Year-ended    Year-ended
                                                   December 31,  December 31,
                                                          2006          2005
        (in thousands of dollars)                            $             $
        Combined Canadian federal and provincial
         income tax at statutory rate of 36.12%
         (2005- 36.12%)                                 36,382        33,333
        Increase (decrease) in statutory income
         tax resulting from the following:
        Fund income not taxable                        (28,295)      (26,975)
        Change in enacted income tax rates              (6,271)            -
        Non-deductible expenses and other                   84          (630)
                                                   --------------------------
        Provision for income taxes                       1,900         5,728
                                                   --------------------------
                                                   --------------------------

        Future income tax assets (liabilities) of the Fund are as follows:

                                                   December 31,  December 31,
                                                          2006          2005
        (in thousands of dollars)                            $             $
        Differences in property and equipment and
         licences asset bases                          (68,380)     (64,246)
        Capital leases                                     800        1,242
        Accounting reserves not deducted for tax         1,383        1,059
        Capital and non-capital loss carryforwards         971        5,147
        Other                                              327        1,537
                                                   --------------------------
                                                       (64,899)     (55,261)
        Valuation allowance                             (3,566)      (4,620)
                                                   --------------------------
                                                       (68,465)     (59,881)
                                                   --------------------------
                                                   --------------------------

        Future income tax asset                          1,383        1,113
        Future income tax liability                    (69,848)     (60,994)
                                                   --------------------------
                                                       (68,465)     (59,881)
                                                   --------------------------
                                                   --------------------------

        The Fund has $1,579,000 in non-capital loss carryforwards as at
        December 31, 2006 (12,874,000 in 2005), which are available to reduce
        future years' taxable income. These loss carryforwards expire in
        varying amounts from 2007 to 2016. The Fund also has $2,218,000 of
        capital losses (2,750,000 in 2005), which can be used to offset
        future capital gains and which do not expire.

        A valuation allowance of $3,160,000 was primarily established in
        respect of certain future tax assets of a prior acquisition. The
        realization in the future of the benefit from these future assets
        will result in a reduction of licenses of the acquired company. The
        balance of the valuation allowance has been recorded to reduce the
        net benefit recorded in the financial statements relating to certain
        capital losses.

    13  Financial instruments

        Credit risk exposures

        Financial instruments that potentially subject the Fund to credit
        risk consist principally of cash and cash equivalents and accounts
        receivable. The Fund places its cash with high credit quality
        financial institutions. Credit risk with respect to accounts
        receivable is limited, as the majority of the receivable balance is
        due from the MOH and other government bodies.

        Interest rate exposures

        The Fund's long-term debt of $190,000,000 has a fixed interest rate.
        Accordingly, the fair value of the long-term debt will vary with
        changes in interest rates.

        Fair values of financial assets and liabilities

        The fair values of cash and cash equivalents, accounts receivable,
        accounts payable and accrued liabilities, amounts due from related
        parties, and distributions payable approximate their carrying amounts
        included in the consolidated balance sheets, due to the relatively
        short period of maturity of the instruments.

        The fair value of the capital lease obligations approximate their
        carrying values.

        The fair value of long-term debt is estimated to be $197,298,000
        ($193,000,000 in 2005) based on current interest rates adjusted for
        the Fund's credit rating. There is no formal market for the long-term
        debt and, therefore, the estimated fair market value may not be
        representative of the aggregate fair value of the securities.

    14  Related party balances and transactions

        Due from related parties balance comprises the following:

                                                   December 31,  December 31,
                                                          2006          2005
        (in thousands of dollars)                            $             $

        Cipher(a)                                          123            56
                                                   --------------------------
                                                           123            56
                                                   --------------------------
                                                   --------------------------
        a) On February 23, 2004, CML entered into an administrative services
           agreement with Cipher Pharmaceuticals Inc. "Cipher". Under this
           agreement, CML is to provide certain general and administrative
           services to Cipher including investor relations services,
           securities compliance, and certain administrative services. The
           other advances are amounts due from Cipher and its wholly-owned
           subsidiaries, in respect of the provision of administrative
           services by CML and certain other reimbursements to CML. During
           2006, CML charged Cipher $125,000 (12-month period ended
           December 31, 2005 - $171,000) in accordance with the
           administration agreement between CML and Cipher.

        b) In the normal course of business, the Fund leases facilities at
           market rates from companies that are subject to significant
           influence or are controlled by a unitholder and trustee of the
           Fund. Rent expense for the year ended December 31, 2006 of
           $1,151,000 (2005 - $1,328,000) relating to these leased
           facilities, measured at the exchange amount, as agreed to between
           the parties, has been included in operating, general and
           administrative expenses.

        c) On October 2, 2006, at the request of CML, the former CEO caused
           the exercise of retraction rights with respect to the Exchangeable
           Shares that were held by his personal holding company. The Fund
           exercised its right to purchase the 5,973,196 Exchangeable Shares
           held by this company in consideration for 5,973,196 Units.

        In addition, during the year, the Fund paid a retirement bonus of
        $450,000 to the former CEO.

    15  Statement of cash flows

                                                   December 31,  December 31,
                                                          2006          2005
        (in thousands of dollars)                            $             $
        Net change in non-cash working capital
         items comprises
          Accounts receivable                           (1,963)          579
          Other current assets                            (319)          100
          Accounts payable and accrued liabilities        (737)        1,493
          Income taxes receivable                         (601)        4,190
                                                   --------------------------
                                                        (3,620)        6,362
                                                   --------------------------
                                                   --------------------------

    16  Revenue

        For the period ended December 31, 2006, revenue from a major customer
        accounted for  87% (December 31, 2005 -90%) of the Fund's total
        revenues.

    17  Other Expenses

        During the year, the fund incurred and expensed professional fees of
        $2,113,000 in in respect of a potential acquisition that was not
        completed.

    18  Industry cap agreement

        On March 29, 2006, a new industry cap agreement was signed with the
        Ministry of Health and Long-Term Care ("MOH") which provides for an
        increase in the Fund's share of the funding of approximately
        $2,500,000 for the period of April 1, 2005 to December 31, 2005. This
        revenue has been recognized in the three-month period ended March 31,
        2006. In addition to base cap increases, the agreement provides
        additional funding if the industry meets certain conditions. The
        industry has met these conditions for the MOH fiscal year ended
        March 31, 2006 and accordingly the Fund has recorded the maximum
        amount of available additional revenue of $1,400,000, of which
        $1,100,000 relates to the year-ended December 31, 2005.

        During the fiscal year-ended December 31, 2006, the Fund recognized
        revenue of $1,100,000 in respect of the $4,800,000 additional funding
        available for the MOH year ending March 31, 2007. Due to the inherent
        uncertainties and the limited information on industry conditions
        available at the time these financial statements were prepared,
        further additional funding has not been recorded during the fiscal
        year-ended December 31, 2006. Revenue recognized during the year
        ended December 31, 2006 is based on management's best estimate of its
        share of the additional funding earned in the period based on
        information currently available.

    19  Business Acquisitions

        On July 11, 2006, CML acquired GTA Nuclear Cardiology Limited
        ("GTA"), a nuclear medicine imaging clinic in Toronto, Ontario. GTA
        is a nuclear medicine facility located in central Toronto. On
        October 2, 2006, CML acquired First Medical X-Ray and UltraSound Ltd
        ("First Medical"), a multi-modality medical imaging clinic in
        Ontario. First Medical operates a multi-modality clinic consisting of
        x-ray, ultrasound, mammography, fluoroscopy and bone densitometry. On
        December 4, 2006, CML purchased certain assets of Westminster Imaging
        and Associates Inc ("Westminster"), a multi-modality clinic based in
        Ontario. On December 21, 2006, CML acquired four Ontario-based
        medical clinics from Belex Management Limited.

        The total cash consideration paid for these acquisitions was
        $4,666,000. The purchase price relating to these acquisition was
        allocated as follows:

                                                    Total for the Year-ended
                                                           December 31, 2006
        (in thousands of dollars)                                          $
        Licences                                                       3,443
        Goodwill                                                       1,011
        Future tax liabilities                                          (449)
        Future tax assets                                                123
        Property and equipment                                         1,102
        Working capital items                                           (769)
        Cash                                                             205
        ---------------------------------------------------------------------
        Net assets acquired and cash consideration paid                4,666
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        Each of the acquisitions have been accounted for by the purchase
        method, with results from operations included in earnings from the
        date of acquisition. The purchase price has been allocated to the
        assets acquired and liabilities assumed based on management's best
        estimate of the fair values.

        In addition, during 2006, the Fund has made a deposit on one business
        acquisition in the amount of $500,000, which is expected to be
        completed in early 2007.

    20  Comparative figures

        Certain comparative figures have been reclassified to conform to the
        current year's financial statement presentation.

    21  Subsequent Events

        Subsequent to year end, the 961,392 of outstanding Exchangeable
        Shares were exchanged for Units on a one-for-one basis as required by
        the Exchangeable Share provisions. The conversion of the Exchangeable
        Shares will be accounted for as a step acquisition and will result in
        a reduction of non-controlling interest. The excess of the purchase
        price over the carrying value of the non-controlling interest will be
        allocated to licences, goodwill and future tax liability. The fair
        value of the 961,392 units of the Fund is approximately $13,728,000.
    
    %SEDAR: 00020333E




For further information:

For further information: Barry Hildred or Bruce Wigle, Investor
Relations, The Equicom Group Inc., (416) 815-0700 ext 224/ext 228, (416)
815-0080 fax, Email: bhildred@equicomgroup.com, or bwigle@equicomgroup.com;
Tom S. Weber, CA, Chief Financial Officer, CML HealthCare Income Fund, (905)
565-0043, (905) 565-1776 fax, Internet: www.cmlhealthcare.com

Organization Profile

CML HEALTHCARE INC. (FORMERLY CML HEALTHCARE INCOME FUND)

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